* | | Conventional mortgages constituted the majority of the mortgage loans as of September 30, 2010 and December 31, 2009 are reported in Note 17 — Fair Values of financial instruments.The FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers (See Note 1 — Significant Accounting Policies and Estimates). The first layer is typically 100 basis points but varies with the particular MPF program. The amount of the first layer, or First Loss Account or “FLA”, was estimated as $11.6 million and $13.9 million at September 30, 2010 and December 31, 2009. The FLA is not recorded or reported as a reserve for loan losses as it serves as a memorandum or information account. The FHLBNY is responsible for absorbing the first layer. The second layer is that amount of credit obligations that the Participating Financial Institution (“PFI”) has taken on which will equate the loan to a double-A rating. The FHLBNY pays a Credit Enhancement fee to the PFI for taking on this obligation. The FHLBNY assumes all residual risk. Credit Enhancement fees accrued were $0.4 million for the third quarters of 2010 and 2009, and $1.1 million and $1.2 million for the nine months ended September 30, 2010 and 2009, and were reported as a reduction to mortgage loan interest income. The amount of charge-offs in each period reported was insignificant and it was not necessary for the FHLBNY to recoup any losses from the PFIs.
The following provides roll-forward analysis1 of the allowance for credit losses (in thousands):
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 5,392 | | | $ | 2,760 | | | $ | 4,498 | | | $ | 1,406 | | Charge-offs | | | (97 | ) | | | — | | | | (131 | ) | | | (14 | ) | Recoveries | | | 11 | | | | — | | | | 33 | | | | — | | Provision for credit losses on mortgage loans | | | 231 | | | | 598 | | | | 1,137 | | | | 1,966 | | | | | | | | | | | | | | | Ending balance | | $ | 5,537 | | | $ | 3,358 | | | $ | 5,537 | | | $ | 3,358 | | | | | | | | | | | | | | |
| | held-for-portfolio. | 1 | | Disaggregation was deemed not necessary since the risk characteristics of loans within the MPF program are materially the same. |
As of September 30, 2010 and December 31, 2009, the FHLBNY had $25.1 million and $16.0 million of non-accrual conventional loans. Mortgage loans are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements. As of September 30, 2010 and December 31, 2009, the FHLBNY had no investment in impaired mortgage loans, other than the non-accrual loans.
The following table summarizes mortgage loans held-for-portfolio past due 90 days or more and still accruing interest (in thousands):
| | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | | | | Secured by 1-4 family | | $ | 668 | | | $ | 570 | | | | | | | | |
The past due loans still accruing were VA and FHA insured loans.
29
Note 8. Deposits.
The FHLBNY accepts demand, overnight and term deposits from its members, qualifying non-members and U.S. government instrumentalities.
The following table summarizes term deposits (in thousands):
| | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | | | | Due in one year or less | | $ | 60,400 | | | $ | 7,200 | | | | | | | | | | | | | | | | | | Total term deposits | | $ | 60,400 | | | $ | 7,200 | | | | | | | | |
Note 9. Borrowings.
Securities sold under agreements to repurchase
The FHLBNY did not have any securities sold under agreement to repurchase as of September 30, 2010 and December 31, 2009. Terms, amounts and outstanding balances of borrowings from other Federal Home Loan Banks are described under Note 19 — Related party transactions.
Note 10. Consolidated obligations.
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their fiscal agent. Consolidated bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. Discount notes sell at less than their face amount and are redeemed at par value when they mature.
The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. Although it has never occurred, to the extent that an FHLBank would make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its obligations, then 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.
Based on management’s review, the FHLBNY has no reason to record actual or contingent liabilities with respect to the occurrence of events or circumstances that would require the FHLBNY to assume an obligation on behalf of other FHLBanks. The par amounts of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations held by the FHLBanks, were approximately $0.8 trillion and $0.9 trillion as of September 30, 2010 and December 31, 2009.
Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located.
The FHLBNY met the qualifying unpledged asset requirements at each reporting dates as follows:
| | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | | | | Percentage of unpledged qualifying assets to consolidated obligations | | | 111 | % | | | 109 | % | | | | | | | |
General Terms
FHLBank consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices include the London Interbank Offered Rate (“LIBOR”), Constant Maturity Treasury (“CMT”), 11th District Cost of Funds Index (“COFI”), and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate bonds may also contain certain features that may result in complex coupon payment terms and call options.
When such consolidated obligations are issued, the FHLBNY may enter into derivatives containing offsetting features that effectively convert the terms of the bond to those of a simple variable- or fixed-rate bond. Consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also include Optional Principal Redemption Bonds (callable bonds) that the FHLBNY may redeem in whole or in part at its discretion on predetermined call dates, according to the terms of the bond offerings.
With respect to interest payment terms, consolidated bonds may also have step-up, or step-down terms. Step-up bonds generally pay interest at increasing fixed rates for specified intervals over the life of the bond. Step-down bonds pay interest at decreasing fixed rates. These bonds generally contain provisions enabling the FHLBNY to call bonds at its option on predetermined exercise dates at par.
30
The following summarizes consolidated obligations issued by the FHLBNY and outstanding (in thousands):
| | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | | | | Consolidated obligation bonds-amortized cost | | $ | 73,847,021 | | | $ | 73,436,939 | | Fair value basis adjustments | | | 1,060,537 | | | | 572,537 | | Fair value basis on terminated hedges | | | 1,099 | | | | 2,761 | | Fair value option valuation adjustments and accrued interest | | | 10,236 | | | | (4,259 | ) | | | | | | | | | | | | | | | | | Total Consolidated obligation-bonds | | $ | 74,918,893 | | | $ | 74,007,978 | | | | | | | | | | | | | | | | | | Discount notes-amortized cost | | $ | 17,784,192 | | | $ | 30,827,639 | | Fair value option valuation adjustments | | | 3,716 | | | | — | | | | | | | | | | | | | | | | | | Total Consolidated obligation-discount notes | | $ | 17,787,908 | | | $ | 30,827,639 | | | | | | | | |
Redemption Terms of consolidated obligation bonds
The following is a summary of consolidated bonds outstanding by year of maturity (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | Weighted | | | | | | | | | | | Weighted | | | | | | | | | | | Average | | | Percentage | | | | | | | Average | | | Percentage | | Maturity | | Amount | | | Rate1 | | | of total | | | Amount | | | Rate1 | | | of total | | | | | | | | | | | | | | | | | | | | | | | | | | | One year or less | | $ | 38,972,100 | | | | 1.10 | % | | | 52.86 | % | | $ | 40,896,550 | | | | 1.34 | % | | | 55.75 | % | Over one year through two years | | | 15,731,695 | | | | 1.13 | | | | 21.34 | | | | 15,912,200 | | | | 1.69 | | | | 21.69 | | Over two years through three years | | | 9,337,130 | | | | 2.24 | | | | 12.66 | | | | 7,518,575 | | | | 2.28 | | | | 10.25 | | Over three years through four years | | | 3,409,600 | | | | 2.99 | | | | 4.62 | | | | 3,961,250 | | | | 3.49 | | | | 5.40 | | Over four years through five years | | | 3,224,775 | | | | 3.12 | | | | 4.37 | | | | 2,130,300 | | | | 4.27 | | | | 2.90 | | Over five years through six years | | | 498,000 | | | | 3.71 | | | | 0.68 | | | | 644,350 | | | | 5.15 | | | | 0.88 | | Thereafter | | | 2,556,200 | | | | 4.33 | | | | 3.47 | | | | 2,294,700 | | | | 5.06 | | | | 3.13 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 73,729,500 | | | | 1.56 | % | | | 100.00 | % | | | 73,357,925 | | | | 1.87 | % | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bond premiums | | | 145,239 | | | | | | | | | | | | 112,866 | | | | | | | | | | Bond discounts | | | (27,718 | ) | | | | | | | | | | | (33,852 | ) | | | | | | | | | Fair value basis adjustments | | | 1,060,537 | | | | | | | | | | | | 572,537 | | | | | | | | | | Fair value basis adjustments on terminated hedges | | | 1,099 | | | | | | | | | | | | 2,761 | | | | | | | | | | Fair value option valuation adjustments and accrued interest | | | 10,236 | | | | | | | | | | | | (4,259 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 74,918,893 | | | | | | | | | | | $ | 74,007,978 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Weighted average rate represents the weighted average coupons of bonds, unadjusted for swaps. The weighted average coupon of bonds outstanding at September 30, 2010 and December 31, 2009 represent contractual coupons payable to investors. |
Amortization of bond premiums and discounts resulted in net reduction of interest expense of $8.3 million and $8.7 million for the 2010 third quarter and the same period in 2009, and $22.6 million and $22.5 million for the nine months ended September 30, 2010 and 2009. Amortization of basis adjustments from terminated hedges were $1.7 million and $1.8 million, and were recorded as an expense in the 2010 third quarter and the same period in 2009, and $4.9 million and $5.3 million for the nine months ended September 30, 2010 and 2009.
Debt extinguished
No debt was retired in the first or third quarter of 2010 or in all quarters in 2009. In the second quarter of 2010, the Bank extinguished $250.0 million of consolidated obligation bond at an insignificant gain.
Transfers of consolidated obligation bonds to other FHLBanks
The Bank may transfer certain bonds at negotiated market rates to other FHLBanks to meet the FHLBNY’s asset and liability management objectives. During the 2010 third quarter, the bank assumed debt from another FHLBank totaling $193.9 million (par amounts). There was no transfer of consolidated obligation bonds to other FHLBanks or assumption of debt in the prior two quarters of 2010. Generally, when debt is transferred in exchange for a cash price that represents the fair market values of the debt. No debt was transferred to the FHLBNY or assumed from another FHLBank for the first three quarters of 2009. For more information, also, see Note 19 — Related party transactions.
When debt is transferred, at trade date, the transferring bank notifies the Office of Finance of a change in primary obligor for the transferred debt.
Impact of callable bonds on consolidated obligation bond maturities
The Bank issues callable bonds to investors. With a callable bond, the Bank effectively purchases an option from the investor that allows the Bank to terminate the consolidated obligation bond at pre-determined option exercise dates, which is normally exercised when interest rates have decreased from those prevailing at the time the bonds were issued. Typically, the Bank will hedge callable bonds with cancellable interest rate swaps with matching terms and will sell the exercise option that will allow swap counterparties to terminate the swaps at the same predetermined exercise dates as the bonds. As of September 30, 2010 and December 31, 2009, the Bank had callable bonds totaling $8.5 billion and $11.7 billion, representing 11.5% and 15.9% of par amounts of consolidated bonds outstanding at those dates.
31
The following summarizes bonds outstanding by year of maturity or next call date (dollars in thousands):
| | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | Percentage | | | | | | | Percentage | | | | Amount | | | of total | | | Amount | | | of total | | Year of Maturity or next call date | | | | | | | | | | | | | | | | | Due or callable in one year or less | | $ | 45,488,400 | | | | 61.70 | % | | $ | 50,481,350 | | | | 68.82 | % | Due or callable after one year through two years | | | 14,465,695 | | | | 19.62 | | | | 11,352,200 | | | | 15.48 | | Due or callable after two years through three years | | | 6,537,130 | | | | 8.87 | | | | 4,073,575 | | | | 5.55 | | Due or callable after three years through four years | | | 2,659,600 | | | | 3.61 | | | | 3,606,250 | | | | 4.91 | | Due or callable after four years through five years | | | 2,579,775 | | | | 3.50 | | | | 1,325,800 | | | | 1.81 | | Due or callable after five years through six years | | | 232,700 | | | | 0.31 | | | | 529,050 | | | | 0.72 | | Thereafter | | | 1,766,200 | | | | 2.39 | | | | 1,989,700 | | | | 2.71 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 73,729,500 | | | | 100.00 | % | | | 73,357,925 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bond premiums | | | 145,239 | | | | | | | | 112,866 | | | | | | Bond discounts | | | (27,718 | ) | | | | | | | (33,852 | ) | | | | | Fair value basis adjustments | | | 1,060,537 | | | | | | | | 572,537 | | | | | | Fair value basis adjustments on terminated hedges | | | 1,099 | | | | | | | | 2,761 | | | | | | Fair value option valuation adjustments and accrued interest | | | 10,236 | | | | | | | | (4,259 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 74,918,893 | | | | | | | $ | 74,007,978 | | | | | | | | | | | | | | | | | | | | |
Discount notes
Consolidated obligation discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par when they mature.
The FHLBNY’s outstanding consolidated discount notes were as follows (dollars in thousands):
| | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | | | | Par value | | $ | 17,791,522 | | | $ | 30,838,104 | | | | | | | | | | | | | | | | | | Amortized cost | | $ | 17,784,192 | | | $ | 30,827,639 | | Fair value option valuation adjustments | | | 3,716 | | | | — | | | | | | | | | | | | | | | | | | Total | | $ | 17,787,908 | | | $ | 30,827,639 | | | | | | | | | | | | | | | | | | Weighted average interest rate | | | 0.19 | % | | | 0.15 | % | | | | | | | |
Note 11. Capital, Capital ratios, and Mandatorily redeemable capital stock.
Capital
The FHLBanks, including the FHLBNY, have a cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. The member’s stock requirement is generally based on its use of FHLBNY products, subject to a minimum membership requirement, as prescribed by the FHLBank Act and the FHLBNY Capital Plan. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. It is not publicly traded. An option to redeem capital stock that is greater than a member’s minimum requirement is held by both the member and the FHLBNY.
Under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and the Finance Agency’s capital regulations, the FHLBNY’s Capital Plan offers two sub-classes of Class B capital stock, Class B1 and Class B2. Class B1 stock is issued to meet membership stock purchase requirements. Class B2 stock is issued to meet activity-based requirements. The FHLBNY requires member institutions to maintain Class B1 stock based on a percentage of the member’s mortgage-related assets and Class B2 stock based on a percentage of advances and acquired member assets outstanding with the FHLBank and certain commitments outstanding with the FHLBank. Class B1 and Class B2 stockholders have the same voting rights and dividend rates.
Members can redeem Class A stock by giving six months’ notice, and redeem Class B stock by giving five year’s notice. Only “permanent” capital, defined as retained earnings and Class B stock, satisfies the FHLBank risk-based capital requirement. In addition, the GLB Act specifies a 5.0 percent minimum leverage ratio based on total capital and a 4.0 percent minimum capital ratio that does not include the 1.5 weighting factor applicable to the permanent capital that is used in determining compliance with the 5.0 percent minimum leverage ratio.
32
Acquisitions were not significant and no loans were transferred to the “loan-for-sale” category. From time-to-time, the Bank may request a PFI to purchase loans if the loan failed to comply with the MPF loan standards and these have been de minimis in all periods in this report. The FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers (See Note 1 — Significant Accounting Policies and Estimates in the Bank’s most recent Form 10-K filed on March 25, 2011). The first layer is typically 100 basis points but this varies with the particular MPF program. The amount of the first layer, or First Loss Account (“FLA”), was estimated as $12.3 million and $12.0 million at March 31, 2011 and December 31, 2010. The FLA is not recorded or reported as a reserve for loan losses as it serves as a memorandum or information account. The FHLBNY is responsible for absorbing the first layer. The second layer is that amount of credit obligations that the PFI has taken on which will equate the loan to a double-A rating. The FHLBNY pays a Credit Enhancement fee to the PFI for taking on this obligation. The FHLBNY assumes all residual risk. Credit Enhancement fees accrued were $0.3 million and $0.4 million for the three months ended March 31, 2011 and 2010, and reported as a reduction to mortgage loan interest income. The amount of charge-offs in each period reported was insignificant and it was not necessary for the FHLBNY to recoup any losses from the PFIs. Allowance methodology for loan losses. The Bank performs periodic reviews of individual impaired mortgage loans within the MPF loan portfolio to identify the potential for losses inherent in the portfolio and to determine the likelihood of collection of the principal and interest. Mortgage loans that are past due 90 days or more past due or classified under regulatory criteria (Sub-standard, doubtful or Loss) are evaluated separately on a loan level basis for impairment. The FHLBNY bases its provision for credit losses on its estimate of probable credit losses inherent in the impaired MPF loan. The FHLBNY computes the provision for credit losses without considering the private mortgage insurance and other accompanying credit enhancement features (except the “First Loss Account”) to provide credit assurance to the FHLBNY. If adversely classified, or past due 90 days or more, reserves for conventional mortgage loans, except FHA- and VA-insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses are fully reserved. When a loan is foreclosed and the Bank takes possession of real estate, the Bank will charge to the loan loss reserve account any excess of the carrying value of the loan over the net realizable value of the foreclosed loan. FHA- and VA- insured mortgage loans have minimal inherent credit risk. Risk of such loans generally arises from servicers defaulting on their obligations. If adversely classified, the FHLBNY will have reserves established only in the event of a default of a PFI, and reserves would be based on the estimated costs to recover any uninsured portion of the MPF loan. Classes of the MPF loan portfolio would be subject to disaggregation to the extent that it is needed to understand the exposure to credit risk arising from these loans. The FHLBNY has determined that no further disaggregation of portfolio segments is needed, other than the methodology discussed above. The FHLBNY does not evaluate MPF loans collectively. Allowance for loan losses have been recorded against the uninsured MPF loans. All other types of mortgage-loans were insignificant and no allowances were necessary. 20
Allowance for loan losses The following provides a roll-forward analysis of the allowance for credit losses1 (in thousands): | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | Allowance for credit losses: | | | | | | | | | Beginning balance | | $ | 5,760 | | | $ | 4,498 | | Charge-offs | | | (615 | ) | | | (33 | ) | Recoveries | | | 51 | | | | 5 | | Provision for credit losses on mortgage loans | | | 1,773 | | | | 709 | | | | | | | | | Ending balance | | $ | 6,969 | | | $ | 5,179 | | | | | | | | | Ending balance, individually evaluated for impairment | | $ | 6,969 | | | | | | | | | | | | | | Recorded investment, end of period: | | | | | | | | | Individually evaluated for impairment | | $ | 27,526 | | | | | | | | | | | | | |
| | | 1 | | The Bank does not assess impairment on a collective basis. |
Non-performing loans Non-accrual loans are reported in the table below. Mortgage loans are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements. As of March 31, 2011 and December 31, 2010, the FHLBNY had no investment in impaired mortgage loans, other than the non-accrual loans. The following table contrasts Non-performing loans and 90 day past due loans1 to total mortgage (in thousands): | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | Mortgage loans, net of provisions for credit losses | | $ | 1,270,891 | | | $ | 1,265,804 | | | | | | | | | | | | | | | | | | Non-performing mortgage loans | | $ | 27,526 | | | $ | 26,781 | | | | | | | | | | | | | | | | | | Insured MPF loans past due 90 days or more and still accruing interest | | $ | 526 | | | $ | 574 | | | | | | | | |
| | | 1 | | Includes loans classified as sub-standard, doubtful or loss under regulatory criteria. |
The following table summarizes the recorded investment, the unpaid principal balance and related allowance for impaired loans (individually assessed for impairment), and the average recorded investment of impaired loans1 & 2 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | | | | | | Unpaid | | | | | | | Average | | | Interest | | | | Recorded | | | Principal | | | Related | | | Recorded | | | Income | | | | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized2 | | With no related allowance: | | | | | | | | | | | | | | | | | | | | | Conventional MPF Loans1 | | $ | 4,218 | | | $ | 4,201 | | | $ | — | | | $ | 4,598 | | | $ | — | | | | | | | | | | | | | | | | | | | | $ | 4,218 | | | $ | 4,201 | | | $ | — | | | $ | 4,598 | | | $ | — | | | | | | | | | | | | | | | | | | With an allowance: | | | | | | | | | | | | | | | | | | | | | Conventional MPF Loans1 | | $ | 23,308 | | | $ | 23,324 | | | $ | 6,969 | | | $ | 22,861 | | | $ | — | | | | | | | | | | | | | | | | | | | | $ | 23,308 | | | $ | 23,324 | | | $ | 6,969 | | | $ | 22,861 | | | $ | — | | | | | | | | | | | | | | | | | | Total: | | | | | | | | | | | | | | | | | | | | | Conventional MPF Loans1 | | $ | 27,526 | | | $ | 27,525 | | | $ | 6,969 | | | $ | 27,459 | | | $ | — | | | | | | | | | | | | | | | | | | | | $ | 27,526 | | | $ | 27,525 | | | $ | 6,969 | | | $ | 27,459 | | | $ | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | | | | | Unpaid | | | | | | | Average | | | Interest | | | | Recorded | | | Principal | | | Related | | | Recorded | | | Income | | | | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized2 | | With no related allowance: | | | | | | | | | | | | | | | | | | | | | Conventional MPF Loans1 | | $ | 5,876 | | | $ | 5,856 | | | $ | — | | | $ | 4,867 | | | $ | — | | | | | | | | | | | | | | | | | | | | $ | 5,876 | | | $ | 5,856 | | | $ | — | | | $ | 4,867 | | | $ | — | | | | | | | | | | | | | | | | | | With an allowance: | | | | | | | | | | | | | | | | | | | | | Conventional MPF Loans1 | | $ | 20,909 | | | $ | 20,925 | | | $ | 5,760 | | | $ | 18,402 | | | $ | — | | | | | | | | | | | | | | | | | | | | $ | 20,909 | | | $ | 20,925 | | | $ | 5,760 | | | $ | 18,402 | | | $ | — | | | | | | | | | | | | | | | | | | Total: | | | | | | | | | | | | | | | | | | | | | Conventional MPF Loans1 | | $ | 26,785 | | | $ | 26,781 | | | $ | 5,760 | | | $ | 23,269 | | | $ | — | | | | | | | | | | | | | | | | | | | | $ | 26,785 | | | $ | 26,781 | | | $ | 5,760 | | | $ | 23,269 | | | $ | — | | | | | | | | | | | | | | | | | |
| | | 1 | | Based on analysis of the nature of risks of the Bank’s investments in MPF loans, including its methodologies for identifying and measuring impairment, the management of the FHLBNY has determined that presenting such loans as a single class is appropriate. | | 2 | | Insured loans were not considered impaired. The Bank does not recognize interest received as income from uninsured loans past due 90-days or greater. |
21
Mortgage loans — Interest on Non-performing loans The FHLBNY’s interest contractually due and actually received for non-performing loans were as follows (in thousands): | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | Interest contractually due1 | | $ | 407 | | | $ | 310 | | Interest actually received | | | 372 | | | | 279 | | | | | | | | | | Shortfall | | $ | 35 | | | $ | 31 | | | | | | | | |
| | | 1 | | The Bank does not recognize interest received as income from uninsured loans past due 90-days or greater. |
Recorded investments1 in MPF loans that were past due loans and real-estate owned are summarized below (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | Conventional | | | Insured | | | Other | | | Conventional | | | Insured | | | Other | | | | MPF Loans | | | Loans | | | Loans | | | MPF Loans | | | Loans | | | Loans | | Mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | Past due 30 - 59 days | | $ | 22,773 | | | $ | 767 | | | $ | — | | | $ | 19,651 | | | $ | 768 | | | $ | — | | Past due 60 - 89 days | | | 6,011 | | | | 112 | | | | — | | | | 6,437 | | | | 207 | | | | — | | Past due 90 days or more | | | 27,526 | | | | 530 | | | | — | | | | 26,785 | | | | 577 | | | | — | | | | | | | | | | | | | | | | | | | | | Total past due | | | 56,310 | | | | 1,409 | | | | — | | | | 52,873 | | | | 1,552 | | | | — | | | | | | | | | | | | | | | | | | | | | Total current loans | | | 1,220,268 | | | | 4,865 | | | | 279 | | | | 1,214,725 | | | | 4,119 | | | | 3,799 | | | | | | | | | | | | | | | | | | | | | Total mortgage loans | | $ | 1,276,578 | | | $ | 6,274 | | | $ | 279 | | | $ | 1,267,598 | | | $ | 5,671 | | | $ | 3,799 | | | | | | | | | | | | | | | | | | | | | Other delinquency statistics: | | | | | | | | | | | | | | | | | | | | | | | | | Loans in process of foreclosure, included above | | $ | 16,976 | | | $ | 325 | | | $ | — | | | $ | 14,615 | | | $ | 284 | | | $ | — | | | | | | | | | | | | | | | | | | | | | Serious delinquency rate | | | 2.21 | % | | | 8.40 | % | | | — | % | | | 2.14 | % | | | 10.11 | % | | | — | % | | | | | | | | | | | | | | | | | | | | Serious delinquent loans total used in calculation of serious delinquency rate | | $ | 28,214 | | | $ | 527 | | | $ | — | | | $ | 27,112 | | | $ | 573 | | | $ | — | | | | | | | | | | | | | | | | | | | | | Past due 90 days or more and still accruing interest | | $ | — | | | $ | 527 | | | $ | — | | | $ | — | | | $ | 573 | | | $ | — | | | | | | | | | | | | | | | | | | | | | Loans on non-accrual status | | $ | 27,526 | | | $ | — | | | $ | — | | | $ | 26,785 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | Troubled debt restructurings | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | Real estate owned | | $ | 670 | | | | | | | | | | | $ | 600 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Recorded investments include accrued interest receivable and would not equal reported carrying values. |
Certain comparative data were reclassified to conform to the presentation adopted as of March 31, 2011, and had no impact on the financial conditions, results of operations or cash flows since the reclassification impacted disclosures only. Note 8. Deposits. The FHLBNY accepts demand, overnight and term deposits from its members. A member that services mortgage loans may deposit in the FHLBNY funds collected in connection with the mortgage loans, pending disbursement of such funds to the owners of the mortgage loans. The following table summarizes term deposits (in thousands): | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | Due in one year or less | | $ | 43,800 | | | $ | 42,700 | | | | | | | | | | | | | | | | | | Total term deposits | | $ | 43,800 | | | $ | 42,700 | | | | | | | | |
Note 9. Borrowings. Securities sold under agreements to repurchase The FHLBNY did not have any securities sold under agreement to repurchase as of March 31, 2011 and December 31, 2010. Terms, amounts and outstanding balances of borrowings from other Federal Home Loan Banks are described under Note 18 — Related Party Transactions. Note 10. Consolidated Obligations. Consolidated obligations are the joint and several obligations of the FHLBanks and consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their fiscal agent. Consolidated bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. Discount notes sell at less than their face amount and are redeemed at par value when they mature. Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located. 22
The FHLBNY met the qualifying unpledged asset requirements as follows: | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | Percentage of unpledged qualifying assets to consolidated obligations | | | 110 | % | | | 110 | % | | | | | | | |
The following summarizes consolidated obligations issued by the FHLBNY and outstanding at March 31, 2011 and December 31, 2010 (in thousands): | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | | | | Consolidated obligation bonds-amortized cost | | $ | 68,050,887 | | | $ | 71,114,070 | | Fair value basis adjustments | | | 473,369 | | | | 622,593 | | Fair value basis on terminated hedges | | | 468 | | | | 501 | | FVO-valuation adjustments and accrued interest | | | 5,257 | | | | 5,463 | | | | | | | | | | | | | | | | | | Total Consolidated obligation-bonds | | $ | 68,529,981 | | | $ | 71,742,627 | | | | | | | | | | | | | | | | | | Discount notes-amortized cost | | $ | 19,504,022 | | | $ | 19,388,317 | | FVO-valuation adjustments and remaining accretion | | | 3,137 | | | | 3,135 | | | | | | | | | | | | | | | | | | Total Consolidated obligation-discount notes | | $ | 19,507,159 | | | $ | 19,391,452 | | | | | | | | |
Redemption Terms of consolidated obligation bonds The following is a summary of consolidated bonds outstanding by year of maturity (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | Weighted | | | | | | | | | | | Weighted | | | | | | | | | | | Average | | | Percentage | | | | | | | Average | | | Percentage | | Maturity | | Amount | | | Rate1 | | | of Total | | | Amount | | | Rate1 | | | of Total | | | One year or less | | $ | 32,657,200 | | | | 0.82 | % | | | 48.09 | % | | $ | 33,302,200 | | | | 0.91 | % | | | 46.91 | % | Over one year through two years | | | 13,108,225 | | | | 1.38 | | | | 19.30 | | | | 17,037,375 | | | | 1.12 | | | | 24.00 | | Over two years through three years | | | 10,607,250 | | | | 2.12 | | | | 15.62 | | | | 9,529,950 | | | | 2.21 | | | | 13.43 | | Over three years through four years | | | 4,060,080 | | | | 2.65 | | | | 5.98 | | | | 3,689,355 | | | | 2.82 | | | | 5.20 | | Over four years through five years | | | 3,777,300 | | | | 2.32 | | | | 5.56 | | | | 4,001,400 | | | | 2.36 | | | | 5.64 | | Over five years through six years | | | 573,700 | | | | 3.22 | | | | 0.85 | | | | 462,500 | | | | 3.34 | | | | 0.65 | | Thereafter | | | 3,121,315 | | | | 3.91 | | | | 4.60 | | | | 2,959,200 | | | | 4.04 | | | | 4.17 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 67,905,070 | | | | 1.49 | % | | | 100.00 | % | | | 70,981,980 | | | | 1.46 | % | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bond premiums | | | 176,028 | | | | | | | | | | | | 163,830 | | | | | | | | | | Bond discounts | | | (30,211 | ) | | | | | | | | | | | (31,740 | ) | | | | | | | | | Fair value basis adjustments | | | 473,369 | | | | | | | | | | | | 622,593 | | | | | | | | | | Fair value basis adjustments on terminated hedges | | | 468 | | | | | | | | | | | | 501 | | | | | | | | | | FVO-valuation adjustments and accrued interest | | | 5,257 | | | | | | | | | | | | 5,463 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 68,529,981 | | | | | | | | | | | $ | 71,742,627 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Weighted average rate represents the weighted average coupons of bonds, unadjusted for swaps. The weighted average coupon of bonds outstanding at March 31, 2011 and December 31, 2010 represent contractual coupons payable to investors. |
Amortization of bond premiums and discounts resulted in net reduction of interest expense of $12.7 million and $7.2 million for the three months ended March 31, 2011 and 2010. Amortization of basis adjustments from terminated hedges were $1.0 million and $1.6 million, and were recorded as an expense for the three months ended March 31, 2011 and 2010. In the three months ended March 31, 2011, the Bank transferred and retired $478.6 million of consolidated obligation bonds, resulting in a charge to Net income of $52.0 million. The transfers and retirements were at negotiated market rates. There were no retirements and transfers of debt in the same period in 2010. 23
Discount Notes Consolidated discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities of up to one year. These notes are issued at less than their face amount and redeemed at par when they mature. The FHLBNY’s outstanding consolidated discount notes were as follows (dollars in thousands): | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | | | | Par value | | $ | 19,509,575 | | | $ | 19,394,503 | | | | | | | | | | | | | | | | | | Amortized cost | | $ | 19,504,022 | | | $ | 19,388,317 | | Fair value option valuation adjustments | | | 3,137 | | | | 3,135 | | | | | | | | | | | | | | | | | | Total | | $ | 19,507,159 | | | $ | 19,391,452 | | | | | | | | | | | | | | | | | | Weighted average interest rate | | | 0.11 | % | | | 0.16 | % | | | | | | | |
Note 11. Capital Stock and Mandatorily Redeemable Capital Stock. The FHLBanks, including the FHLBNY, have a cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. A member’s stock requirement is generally based on its use of FHLBNY products, subject to a minimum membership requirement, as prescribed by the FHLBank Act and the FHLBNY Capital Plan. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. It is not publicly traded. An option to redeem capital stock that is greater than a member’s minimum requirement is held by both the member and the FHLBNY. Under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and the Finance Agency’s capital regulations, the FHLBNY’s Capital Plan offers two sub-classes of Class B capital stock, Class B1 and Class B2. Class B1 stock is issued to meet membership stock purchase requirements. Class B2 stock is issued to meet activity-based requirements. The FHLBNY requires member institutions to maintain Class B1 stock based on a percentage of the member’s mortgage-related assets and Class B2 stock-based on a percentage of advances and acquired member assets outstanding with the FHLBank and certain commitments outstanding with the FHLBank. Class B1 and Class B2 stockholders have the same voting rights and dividend rates. Members can redeem Class A stock by giving six months’ notice, and redeem Class B stock by giving five years notice. Only “permanent” capital, defined as retained earnings and Class B stock, satisfies the FHLBank risk-based capital requirement. In addition, the GLB Act specifies a 5.0 percent minimum leverage ratio based on total capital and a 4.0 percent minimum capital ratio. The latter ratio does not include the 1.5 weighting factor applicable to the permanent capital used in determining compliance with the 5.0 percent minimum leverage ratio. Capital Plan under GLB Act The FHLBNY implemented its current capital plan on December 1, 2005 through the issuance of Class B stock. The conversion was considered a capital exchange and was accounted for at par value. Members’ capital stock held immediately prior to the conversion date was automatically exchanged for an equal amount of Class B Capital Stock, comprised of Membership Stock (referred to as “Subclass B1 Stock”) and Activity-Based Stock (referred to as “Subclass B2 Stock”). Any member that withdraws from membership must wait five years from the divestiture date for all capital stock that is held as a condition of membership, unless the institution has cancelled its notice of withdrawal prior to that date and before being readmitted to membership in any FHLBank. Commencing in 2008, the Bank at its discretion may repay a non-member’s membership stock before the end of the five-year waiting period. The FHLBNY is subject to risk-based capital rules. Specifically, the FHLBNY is subject to three capital requirements under its capital plan. First, the FHLBNY must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, its market risk, and operations risk capital requirements calculated in accordance with the FHLBNY policy, rules, and regulations of the Finance Agency. Only permanent capital, defined as Class B stock and retained earnings, satisfies this risk-based capital requirement. The Finance Agency may require the FHLBNY to maintain a greateran amount of permanent capital greater than what is required as defined by the risk-based capital requirements. In addition, the FHLBNY is required to maintain at least a 4.0% total capital-to-asset ratio and at least a 5.0% leverage ratio at all times. The leverage ratio is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 time divided by total assets. The FHLBNY was in compliance with the aforementioned capital rules and requirements for all periods presented. The FHLBNY’s capital planCapital Plan allows the FHLBNYBank to recalculate the membership stock purchase requirement any time after 30 days subsequent to a merger. The planCapital Plan also permits the FHLBNY to use a zero mortgage asset base in performing the calculation, which recognizes the fact that the corporate entity that was once its member no longer exists. Under the plan,The Capital Plan would allow the FHLBNY couldto determine that all of the membership stock formerly held by the member becomes excess stock, which giveswould give the FHLBNY the discretion, but not the obligation, to repurchase that stock prior to the expiration of the five-year notice period.period. 24
Capital RatiosStandards The GLB Act specifies that the FHLBanks must meet certain minimum capital standards, including the maintenance of a minimum level of permanent capital sufficient to cover the credit, market, and operations risks to which the FHLBanks are subject. The FHLBNY must maintain: (1) a total capital ratio of at least 4.0%; (2) a leverage capital ratio of at least 5.0%; and (3) permanent capital in an amount equal to or greater than the “risk-based capital requirement” specified in the Finance Agency’s regulations. The capital requirements are described in greater detail below. The total capital ratio is the ratio of the FHLBNY’s total capital to its total assets. Total capital is the sum of: (1) capital stock; (2) retained earnings; (3) the general allowance for losses (if any); and (4) such other amounts (if any) that the Finance Agency may decide are appropriate to include. Finance Agency regulations require that the FHLBNY maintain a minimum total capital ratio of 4.0%. The leverage ratio is the weighted ratio of total capital to total assets. For purposes of determining this weighted average ratio, total capital is computed by multiplying the FHLBNY’s permanent capital by 1.5 and adding to this product all other components of total capital. Finance Agency regulations require that the FHLBNY maintain a minimum leverage ratio of 5.0%. The Finance Agency has established criteria for each of the following capital classifications, based on the amount and type of capital held by an FHLBank: adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. This regulation defines critical capital levels for the FHLBanks, establishes the criteria for each of the capital classifications identified in the Housing Act and implements the Finance Agency’s prompt correction action authority over the FHLBanks. On July 20, 2009, the Finance Agency published Advisory Bulletin 2009-AB-01, which identified preliminary FHLBank capital classifications as a form of supervisory correspondence that should be treated by an FHLBank as unpublished information. Under this Advisory Bulletin, preliminary FHLBank capital classifications should be publicly disclosed only if the information is material to that FHLBank’s financial condition and business operations, provided that the disclosure is limited to a recital of the factual content of the unpublished information. (See Note 14 to the audited financial statements filed on March 25, 2011). The FHLBNY met the “adequately capitalized” classification, which is the highest rating, under the Capital Rule. However, the Finance Agency has discretion to reclassify an FHLBank and to modify or add to the corrective action requirements for a particular capital classification. Risk-based capital The following table summarizes the Bank’s risk-based capital ratios (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Required4 | | Actual | | Required4 | | Actual | | | Required4 | | Actual | | Required4 | | Actual | | Regulatory capital requirements: | | | Risk-based capital1 | | $ | 473,275 | | $ | 5,432,169 | | $ | 606,716 | | $ | 5,874,125 | | | $ | 548,640 | | $ | 5,099,440 | | $ | 538,917 | | $ | 5,304,272 | | Total capital-to-asset ratio | | | 4.00 | % | | | 5.27 | % | | | 4.00 | % | | | 5.14 | % | | | 4.00 | % | | | 5.27 | % | | | 4.00 | % | | | 5.30 | % | Total capital2 | | $ | 4,123,742 | | $ | 5,437,706 | | $ | 4,578,436 | | $ | 5,878,623 | | | $ | 3,874,953 | | $ | 5,106,409 | | $ | 4,008,483 | | $ | 5,310,032 | | Leverage ratio | | | 5.00 | % | | | 7.91 | % | | | 5.00 | % | | | 7.70 | % | | | 5.00 | % | | | 7.90 | % | | | 5.00 | % | | | 7.95 | % | Leverage capital3 | | $ | 5,154,677 | | $ | 8,153,790 | | $ | 5,723,045 | | $ | 8,815,685 | | | $ | 4,843,692 | | $ | 7,656,129 | | $ | 5,010,604 | | $ | 7,962,168 | |
| | | 1 | | Actual “Risk-based capital” is capital stock and retained earnings plus mandatorily redeemable capital stock. Section 932.2 of the Finance Agency’s regulations also refers to this amount as “Permanent Capital.” | | 2 | | Required “Total capital” is 4%4.0% of total assets. Actual “Total capital” is Actual “Risk-based capital” plus allowance for credit losses. Does not include reserves for the Lehman Brothers receivable which is a specific reserve. | | 3 | | Actual “Leverage capital” is Actual “Risk-based capital” times 1.5 plus allowance for loan losses. | | 4 | | Required minimum. |
The Finance Agency has indicated that the accounting treatment for certain shares determined to be mandatorily redeemable will not be included in the definition of total capital for purposes of determining the Bank’s compliance with regulatory capital requirements, calculating mortgage securities investment authority (300 percent of total capital), calculating unsecured credit exposure to other GSEs (100 percent of total capital), or calculating unsecured credit limits to other counterparties (various percentages of total capital depending on the rating of the counterparty).
Mandatorily Redeemable Capital Stockredeemable capital stock Generally, the FHLBNY’s capital stock is redeemable at the option of either the member or the FHLBNY subject to certain conditions, and is subject toincluding the provisions under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. The FHLBNY is a cooperative whose member financial institutions own almost all of the FHLBNY’s capital stock. Member shares cannot be purchased or sold except between the Bank and its members at its $100 per share par value. Also, the FHLBNY does not have equity securities that trade in a public market. Future filingsIn accordance with the SEC will not be in anticipation of the sale of equity securities in a public market as the FHLBNY is prohibited by law from doing so, and the FHLBNY is not controlled by an entity that has equity securities traded or contemplated to be traded in a public market. Therefore, the FHLBNY is a nonpublic entity based on the definition given in the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. In addition, although the FHLBNY is a nonpublic entity, the FHLBanks issue consolidated obligations that are traded in the public market. Based on this factor, the FHLBNY complies with the provisions of the accounting guidance for certain financial instruments with characteristics of both liabilities and equity, as a nonpublic SEC registrant.
In accordance with the accounting guidance, the FHLBNY generally reclassifies the stock subject to redemption from equity to a liability once a member: irrevocably exercises a written redemption right; gives notice of intent to withdraw from membership; or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership. Under such circumstances, the member shares will then meet the definition of a mandatorily redeemable financial instrument and are reclassified to a liability at fair value. Dividends on member shares are accrued and also classified as a liability in the Statements of Condition and reported as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments, once settled, is reflected as financing cash outflows in the Statements of Cash Flows.
33
If a member cancels its notice of voluntary withdrawal, the FHLBNY will reclassify the mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense. 25
At September 30, 2010 and December 31, 2009, mandatorily redeemable capital stock of $67.3 million and $126.3 million were held by former members who had attained non-member status by virtue of being acquired by non-members. A small number of members had also become non-members by relocating their charters to outside the FHLBNY’s membership district.
Anticipated redemptions of mandatorily redeemable capital stock were as follows (in thousands): | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Redemption less than one year | | $ | 45,708 | | $ | 102,453 | | | $ | 37,418 | | $ | 27,875 | | Redemption from one year to less than three years | | 14,650 | | 16,766 | | | 4,959 | | 17,019 | | Redemption from three years to less than five years | | 2,037 | | 2,118 | | | 459 | | 2,035 | | Redemption after five years or greater | | 4,953 | | 4,957 | | | 16,290 | | 16,290 | | | | | | | | | | | | | | | | Total | | $ | 67,348 | | $ | 126,294 | | | $ | 59,126 | | $ | 63,219 | | | | | | | | | | | | |
Anticipated redemptions assume the Bank will follow its current practice of daily redemption of capital in excess of the amount required to support advances. Commencing January 1, 2008, the Bank mayhas exercised its discretionary authority provided under its Capital Plan to also redeem at its discretion, non-members’ membership stock. Note 12. Affordable Housing ProgramVoluntary withdrawal from membership— As of March 31, 2011, one member had formally notified the Bank of its intent to withdraw from membership and REFCORP.voluntarily redeem its capital stock. There was one termination from membership due to insolvency for the three months ended March 31, 2011. In the same period in 2010, two members became non-members due to insolvency.
The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidiesMembers acquired by non-members— No member became a non-member during the three months ended March 31, 2011 and in the form of direct grants and below-market interest rate advances to members who usesame period in 2010. When a member is acquired by a non-member, the funds to assist the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of regulatory defined income for the specific purpose of calculating AHP and REFCORP assessments. The FHLBNY charges the amount set aside for AHP to income and recognizes it as a liability. The FHLBNY relieves the AHP liability as members use the subsidies. If the resultreclassifies stock of the aggregate 10 percent calculation described above is less than $100 million for all twelve FHLBanks, then the FHLBank Act requires the shortfallmember to be allocated among the FHLBanks baseda liability on the ratio of each FHLBank’s income before AHP and REFCORP today the sum ofmember’s charter is dissolved. Under existing practice, the income before AHP and REFCORP of the twelve FHLBanks. There was no shortfall as of September 30, 2010 or at December 31, 2009.
Income for the purposes of calculating assessments is GAAP Net income before assessments, and before interest expense related to mandatorily redeemable capitalFHLBNY repurchases stock but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capitalheld by former members if such stock is a regulatory interpretationconsidered “excess” and is no longer required to support outstanding advances. Membership stock held by the Finance Agency. The AHPformer members is reviewed and REFCORP assessments are calculated simultaneously because of their interdependence on each other. Each FHLBank accrues this expense monthly based on its income before assessments. A FHLBank reduces its AHP liability as members use subsidies.repurchased annually.
The following table provides roll-forward information with respect to changes in Affordable Housing Programmandatorily redeemable capital stock liabilities (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | | | Beginning balance | | $ | 144,074 | | $ | 140,037 | | $ | 144,489 | | $ | 122,449 | | | $ | 63,219 | | $ | 126,294 | | Additions from current period’s assessments | | 8,852 | | 15,780 | | 21,350 | | 53,363 | | | Net disbursements for grants and programs | | | (14,931 | ) | | | (10,995 | ) | | | (27,844 | ) | | | (30,990 | ) | | Capital stock subject to mandatory redemption reclassified from equity | | | 98 | | 1,410 | | Redemption of mandatorily redeemable capital stock1 | | | | (4,191 | ) | | | (22,512 | ) | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 137,995 | | $ | 144,822 | | $ | 137,995 | | $ | 144,822 | | | $ | 59,126 | | $ | 105,192 | | | | | | | | | | | | | | | | | | | | Accrued interest payable | | | $ | 847 | | $ | 1,495 | | | | | | | | |
34
| | | 1 | | Redemption includes repayment of excess stock. (The annualized accrual rates were 5.80% for March 31, 2011 and 5.60% for March 31, 2010.) |
Note 13.12. Total comprehensive income.Comprehensive Income. Total comprehensive income is comprised of Net income and Accumulated other comprehensive income (loss) (“AOCI”), which includes unrealized gains and losses on available-for-sale securities, cash flow hedging activities, employee supplemental retirement plans, and the non-credit portion of OTTI on HTM securities. Changes in AOCI and total comprehensive income were as follows for the three and nine months ended September 30,March 31, 2011 and 2010 and 2009 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30 | | | | | | | | Non-credit | | | | | | | | | | | Accumulated | | | | | | | | | | | Available- | | | OTTI on HTM | | | Cash | | | Supplemental | | | Other | | | | | | | Total | | | | for-sale | | | securities, | | | flow | | | Retirement | | | Comprehensive | | | Net | | | Comprehensive | | | | securities | | | net of accretion | | | hedges | | | Plans | | | Income (Loss) | | | Income | | | Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, June 30, 2009 | | $ | (10,129 | ) | | $ | (77,159 | ) | | $ | (26,402 | ) | | $ | (6,550 | ) | | $ | (120,240 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net change | | | (5,956 | ) | | | (23,304 | ) | | | 1,898 | | | | — | | | | (27,362 | ) | | $ | 140,219 | | | $ | 112,857 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2009 | | $ | (16,085 | ) | | $ | (100,463 | ) | | $ | (24,504 | ) | | $ | (6,550 | ) | | $ | (147,602 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, June 30, 2010 | | $ | 20,182 | | | $ | (101,877 | ) | | $ | (19,614 | ) | | $ | (7,877 | ) | | $ | (109,186 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net change | | | 3,633 | | | | 5,834 | | | | 1,882 | | | | — | | | | 11,349 | | | $ | 78,792 | | | $ | 90,141 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2010 | | $ | 23,815 | | | $ | (96,043 | ) | | $ | (17,732 | ) | | $ | (7,877 | ) | | $ | (97,837 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-credit | | | Reclassification | | | | | | | | | | | Accumulated | | | | | | | | | | | Available- | | | OTTI on HTM | | | of Non-credit | | | Cash | | | Supplemental | | | Other | | | | | | | Total | | | | for-sale | | | Securities, | | | OTTI to | | | Flow | | | Retirement | | | Comprehensive | | | Net | | | Comprehensive | | | | Securities | | | Net of accretion | | | Net Income | | | Hedges | | | Plans | | | Income (Loss) | | | Income | | | Income | | Balance, December 31, 2009 | | | (3,409 | ) | | | (113,562 | ) | | | 2,992 | | | | (22,683 | ) | | | (7,877 | ) | | | (144,539 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net change | | | 14,930 | | | | 2,363 | | | | 1,595 | | | | 2,132 | | | | — | | | | 21,020 | | | $ | 53,640 | | | $ | 74,660 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2010 | | $ | 11,521 | | | $ | (111,199 | ) | | $ | 4,587 | | | $ | (20,551 | ) | | $ | (7,877 | ) | | $ | (123,519 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2010 | | | 22,965 | | | | (101,560 | ) | | | 8,634 | | | | (15,196 | ) | | | (11,527 | ) | | | (96,684 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net change | | | (7,986 | ) | | | 3,285 | | | | 370 | | | | 3,728 | | | | — | | | | (603 | ) | | $ | 70,981 | | | $ | 70,378 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2011 | | $ | 14,979 | | | $ | (98,275 | ) | | $ | 9,004 | | | $ | (11,468 | ) | | $ | (11,527 | ) | | $ | (97,287 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
26
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30 | | | | | | | | Non-credit | | | | | | | | | | | Accumulated | | | | | | | | | | | Available- | | | OTTI on HTM | | | Cash | | | Supplemental | | | Other | | | | | | | Total | | | | for-sale | | | securities, | | | flow | | | Retirement | | | Comprehensive | | | Net | | | Comprehensive | | | | securities | | | net of accretion | | | hedges | | | Plans | | | Income (Loss) | | | Income | | | Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2008 | | $ | (64,420 | ) | | $ | — | | | $ | (30,191 | ) | | $ | (6,550 | ) | | $ | (101,161 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net change | | | 48,335 | | | | (100,463 | ) | | | 5,687 | | | | — | | | | (46,441 | ) | | $ | 474,786 | | | $ | 428,345 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2009 | | $ | (16,085 | ) | | $ | (100,463 | ) | | $ | (24,504 | ) | | $ | (6,550 | ) | | $ | (147,602 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2009 | | $ | (3,409 | ) | | $ | (110,570 | ) | | $ | (22,683 | ) | | $ | (7,877 | ) | | $ | (144,539 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net change | | | 27,224 | | | | 14,527 | | | | 4,951 | | | | — | | | | 46,702 | | | $ | 189,097 | | | $ | 235,799 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2010 | | $ | 23,815 | | | $ | (96,043 | ) | | $ | (17,732 | ) | | $ | (7,877 | ) | | $ | (97,837 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note 14.13. Earnings per sharePer Share of capital.Capital. The following table sets forth the computation of earnings per share (dollars in thousands except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | | | Net income | | $ | 78,792 | | $ | 140,219 | | $ | 189,097 | | $ | 474,786 | | | $ | 70,981 | | $ | 53,640 | | | | | | | | | | | | | | | | | | | | Net income available to stockholders | | $ | 78,792 | | $ | 140,219 | | $ | 189,097 | | $ | 474,786 | | | $ | 70,981 | | $ | 53,640 | | | | | | | | | | | | | | | | | | | | Weighted average shares of capital | | 46,800 | | 53,233 | | 48,429 | | 54,505 | | | 44,733 | | 50,372 | | Less: Mandatorily redeemable capital stock | | | (685 | ) | | | (1,280 | ) | | | (910 | ) | | | (1,351 | ) | | | (592 | ) | | | (1,084 | ) | | | | | | | | | | | | | | | | Average number of shares of capital used to calculate earnings per share | | 46,115 | | 51,953 | | 47,519 | | 53,154 | | | 44,141 | | 49,288 | | | | | | | | | | | | | | | | | | | | Net earnings per share of capital | | $ | 1.71 | | $ | 2.70 | | $ | 3.98 | | $ | 8.93 | | | Basic earnings per share | | | $ | 1.61 | | $ | 1.09 | | | | | | | | | | | | | | | | |
Basic and diluted earnings per share of capital are the same. The FHLBNY has no dilutive potential common shares or other common stock equivalents. 35
Note 15.14. Employee retirement plans.Retirement Plans. The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (“DB Plan”). The DB Plan is a tax-qualified multiple-employer defined benefit pension plan that covers all officers and employees of the Bank. For accounting purposes, the DB Plan is a multi-employer plan and does not segregate its assets, liabilities, or costs by participating employer. The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The Bank’s contributions are a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. In addition, the Bank maintains a Benefit Equalization Plan (“BEP”) that restores defined benefits and contribution benefits to those employees who have had their qualified defined benefit and defined contribution benefits limited by IRS regulations. The contribution component of the BEP is a supplemental defined contribution plan. The plan’s liability consists of the accumulated compensation deferrals and accrued interest on the deferrals. The BEP is an unfunded plan. The Bank has established several grantor trustsa grantors trust to meet future benefit obligations and current payments to beneficiaries in the supplemental pension plans. The Bank also offers a Retiree Medical Benefit Plan, which is a postretirement health benefit plan. There are no funded plan assets that have been designated to provide postretirement health benefits. On January 1, 2009, the Bank offered a Nonqualified Deferred Compensation Plan to certain officer employees and to the members of the Board of Directors of the Bank. Participants in the plan would elect to defer all or a portion of their compensation earned for a minimum period of five years. This benefit plan and other nonqualified supplemental pension plans were terminated effective November 10, 2009. Plan terminations had no material effect on the Bank’s financial results, financial position or cash flows for all reported periods.
Retirement Plan Expenses—Summary The following table presents employee retirement plan expenses for the periodsthree months ended March 31, 2011 and 2010 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | | | Defined Benefit Plan | | $ | 4,000 | | $ | 1,441 | | $ | 6,623 | | $ | 4,324 | | | $ | 26,467 | | $ | 1,312 | | Benefit Equalization Plan (defined benefit) | | 570 | | 515 | | 1,710 | | 1,544 | | | 695 | | 570 | | Defined Contribution Plan and BEP Thrift | | 528 | | 582 | | 1,137 | | 1,366 | | | Defined Contribution Plan | | | 351 | | 235 | | Postretirement Health Benefit Plan | | 281 | | 251 | | 843 | | 753 | | | 285 | | 281 | | | | | | | | | | | | | | | | | | | | Total retirement plan expenses | | $ | 5,379 | | $ | 2,789 | | $ | 10,313 | | $ | 7,987 | | | $ | 27,798 | | $ | 2,398 | | | | | | | | | | | | | | | | |
The increase in 2010 expenses was primarily dueIn March 2011, the FHLBNY contributed $24.0 million to a short fall payment on theits Defined Benefit Plan.
Benefit Equalization Plan (BEP)
to eliminate a funding shortfall. Prior to the contribution, the DB Plan’s adjusted funding target attainment percentage (“AFTAP”) was 79.93% (80%). The plan’s liability consistedAFTAP equals DB Plan assets divided by plan liabilities. Under the Pension Protection Act of 2006 (“PPA”), if the accumulated compensation deferralsAFTAP in any future year is less than 80%, then the DB Plan will be restricted in its ability to provided increased benefits and accrued interest on/or lump sum distributions. If the deferrals. There were no plan assets that have been designatedAFTAP in any future year is less than 60%, then benefit accruals will be frozen. The contribution to the DB Plan was charged to Net income for the BEP plan.three months ended March 31, 2011. Subsequent to the contribution, the AFTAP was about 96%. Components of the net periodic pension cost for the defined benefit component of the BEP, an unfunded plan, were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | Service cost | | $ | 163 | | $ | 153 | | $ | 489 | | $ | 458 | | | $ | 165 | | $ | 163 | | Interest cost | | 279 | | 263 | | 837 | | 789 | | | 323 | | 279 | | Amortization of unrecognized prior service cost | | | (17 | ) | | | (36 | ) | | | (50 | ) | | | (108 | ) | | | (13 | ) | | | (17 | ) | Amortization of unrecognized net loss | | 145 | | 135 | | 434 | | 405 | | | 220 | | 145 | | | | | | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | 570 | | $ | 515 | | $ | 1,710 | | $ | 1,544 | | | $ | 695 | | $ | 570 | | | | | | | | | | | | | | | | |
27
Key assumptions and other information for the actuarial calculations to determine current period’s benefit obligations for the FHLBNY’s BEP plan were as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | | Discount rate * | | | 5.87 | % | | | 5.87 | % | | | 5.35 | % | | | 5.35 | % | Salary increases | | | 5.50 | % | | | 5.50 | % | | | 5.50 | % | | | 5.50 | % | Amortization period (years) | | 8 | | 8 | | | 8 | | 8 | | Benefits paid during the year | | $ | (739 | )** | | $ | (537 | ) | | Benefits paid during the period | | | $ | (1,006 | )** | | $ | (515 | ) |
| | | * | | The discount rate was based on the Citigroup Pension Liability Index at December 31, 20092010 and adjusted for duration. | | ** | | Forecast for the entire year. |
36
Postretirement Health Benefit Plan The FHLBNY has a postretirement health benefit plan for retirees called the Retiree Medical Benefit Plan. Employees over the age of 55 are eligible provided they have completed ten years of service after age 45. Components of the net periodic benefit cost for the postretirement health benefit plan were (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | | | | Service cost (benefits attributed to service during the period) | | $ | 157 | | $ | 139 | | $ | 470 | | $ | 417 | | | $ | 180 | | $ | 157 | | Interest cost on accumulated postretirement health benefit obligation | | 229 | | 217 | | 687 | | 651 | | | 221 | | 229 | | Amortization of loss | | 78 | | 78 | | 235 | | 234 | | | 67 | | 78 | | Amortization of prior service cost/(credit) | | | (183 | ) | | | (183 | ) | | | (549 | ) | | | (549 | ) | | | (183 | ) | | | (183 | ) | | | | | | | | | | | | | | | | | | | Net periodic postretirement health benefit cost | | $ | 281 | | $ | 251 | | $ | 843 | | $ | 753 | | | $ | 285 | | $ | 281 | | | | | | | | | | | | | | | | |
The measurement date used to determine current period’s benefit obligation was December 31, 2010. Key assumptions and other information to determine current period’s obligation for the FHLBNY’s postretirement health benefit plan were as follows: | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | Weighted average discount rate at the end of the year | | | 5.87 | % | | | 5.87 | % | | | | | Weighted average discount rate | | | | 5.35 | % | | | 5.35 | % | | | | Health care cost trend rates: | | | Assumed for next year | | | 10.00 | % | | | 10.00 | % | | | 9.00 | % | | | 9.00 | % | Pre 65 Ultimate rate | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | Pre 65 Year that ultimate rate is reached | | 2016 | | 2016 | | | 2016 | | 2016 | | Post 65 Ultimate rate | | | 6.00 | % | | | 6.00 | % | | | 6.00 | % | | | 6.00 | % | Post 65 Year that ultimate rate is reached | | 2016 | | 2016 | | | 2016 | | 2016 | | Alternative amortization methods used to amortize | | | Prior service cost | | Straight - line | | Straight - line | | | Straight - line | | Straight - line | | Unrecognized net (gain) or loss | | Straight - line | | Straight - line | | | Straight - line | | Straight - line | |
The discount rate was based on the Citigroup Pension Liability Index at December 31, 20092010 and adjusted for duration. 37
Note 16.15. Derivatives and hedging activities.Hedging Activities. General-— The FHLBNY may enter into interest-rate swaps, swaptions, and interest-rate cap and floor agreements to manage its exposure to changes in interest rates. The FHLBNY may also use callable swaps to potentially adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The FHLBNY uses derivatives in three ways: by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction that qualifies for hedge accounting treatment; by acting as an intermediary; or by designating the derivative as an asset-liability management hedge (i.e., an “economic hedge”). For example, the FHLBNY uses derivatives in its overall interest-rate risk management to adjust the interest-rate sensitivity of consolidated obligations to approximate more closely the interest-rate sensitivity of assets (both advances and investments), and/or to adjust the interest-rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest-rate sensitivity of liabilities. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, the FHLBNY also uses derivatives: to manage embedded options in assets and liabilities; to hedge the market value of existing assets and liabilities and anticipated transactions; to hedge the duration risk of prepayable instruments; and to reduce funding costs where possible. In an economic hedge, a derivative hedges specific or non-specific underlying assets, liabilities or firm commitments, but the hedge does not qualify for hedge accounting under the accounting standards for derivatives and hedging; it is, however, an acceptable hedging strategy under the FHLBNY’s risk management program. These strategies also comply with the Finance Agency’s regulatory requirements prohibiting speculative use of derivatives. An economic hedge introduces the potential for earnings variability due to the changes in fair value recorded on the derivatives that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. The FHLBNY will execute an interest rate swap to match the terms of an asset or liability that is elected under the Fair Value Option (“FVO”) and the swap is also considered as an economic hedge to mitigate the volatility of the FVO designated asset or liability due to change in the full fair value of the designated asset or liability. In the third quarter of 2008 and periodically thereafter, theThe FHLBNY elected to use the FVO for certain consolidated obligation debt and executed interest rate swaps to offset the fair value changes of the bonds. 28
The FHLBNY, consistent with Finance Agency’s regulations, enters into derivatives to manage the market risk exposures inherent in otherwise unhedged assets and funding positions. The FHLBNY utilizes derivatives in the most cost efficient manner and may enter into derivatives as economic hedges that do not qualify for hedge accounting under the accounting standards for derivatives and hedging. As a result, when entering into such non-qualified hedges, the FHLBNY recognizes only the change in fair value of these derivatives in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities with no offsetting fair value adjustments for the hedged asset, liability, or firm commitment. Hedging activities Consolidated Obligations-— The FHLBNY manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflows on the derivative with the cash outflow on the consolidated obligation. While consolidated obligations are the joint and several obligations of the FHLBanks, one or more FHLBanks may individually serve as counterparties to derivative agreements associated with specific debt issues. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for one or more FHLBanks, and each of those FHLBanks could simultaneously enter into a matching derivative in which the counterparty pays to the FHLBank fixed cash flows designed to mirror in timing and amount the cash outflows the FHLBank pays on the consolidated obligations. When such transactions qualify for hedge accounting they are treated as fair value hedges under the accounting standards for derivatives and hedging. The FHLBNY has also elected to use the Fair Value Option (“FVO”)FVO for certain consolidated obligation bonds and discount notes and these were measured under the accounting standards forat fair value measurements, as economic hedges, and tovalue. To mitigate the volatility resulting from changes in fair values of bonds and notes designated under the FVO, the Bank has also executed interest rate swaps.swaps as economic hedges of the bonds and notes. The FHLBNY hadhas issued variable-rate consolidated obligations bonds indexed to 1 month-LIBOR, the U.S. Prime rate, or Federal funds rate and simultaneously executeexecuted interest-rate swaps (“basis swaps”) to hedge the basis risk of the variable rate debt to 3-month LIBOR, the FHLBNY’s preferred funding base. The interest rate basis swaps were accounted for as economic hedges of the floating-rate bonds because the FHLBNY deemed that the operational cost of designating the hedges under accounting standards for derivatives and hedge accounting would outweigh the accounting benefits. The issuance of the consolidated obligation fixed-rate bonds to investors and the execution of interest rate swaps typically results in cash flow pattern in which the FHLBNY has effectively converted the bonds’ fixed cash flows to variable cash flows that closely match the interest payments it receives on short-term or variable-rate advances. From time-to-time, this intermediation between the capital and swap markets has permitted the FHLBNY to raise funds at a lower cost than would otherwise be available through the issuance of simple fixed- or floating-rate consolidated obligations in the capital markets. The FHLBNY does not issue consolidated obligations denominated in currencies other than U.S. dollars. Advances-—With a putable fixed-rate advance borrowed by a member, the FHLBNY may purchase from the member a put option that enables the FHLBNY to effectively convert an advance from fixed-rate to floating-rate by exercising the put option and terminating the advance at par on the pre-determined put exercise dates. Typically, the FHLBNY will exercise the option in a rising interest rate environment. The FHLBNY may hedge a putable advance by entering into a cancelable interest rate swap in which the FHLBNY pays to the swap counterparty fixed-rate cash flows and receives variable-rate cash flows. This type of hedge is treated as a fair value hedge under the accounting standards for derivatives and hedging. The swap counterparty can cancel the swap on the put date, which would 38
normally occur in a rising rate environment, and the FHLBNY can terminate the advance and extend additional credit to the member on new terms. The optionality embedded in certain financial instruments held by the FHLBNY can create interest-rate risk. When a member prepays an advance, the FHLBNY could suffer lower future income if the principal portion of the prepaid advance were reinvested in lower-yielding assets that would continue to be funded by higher-cost debt. To protect against this risk, the FHLBNY generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. When the Bank offers advances (other than short-term) that are prepayable by members may prepay without a prepayment fee, it usually finances such advances with callable debt. The Bank has not elected the FVO for any advances. Mortgage Loans-— The FHLBNY invests in mortgage assets. The prepayment options embedded in mortgage assets can result in extensions or reductions in the expected maturities of these investments, depending on changes in estimated prepayment speeds. Net income would decline if the FHLBNY replaced the mortgages with lower yielding assets and if the Bank’s higher funding costs were not reduced concomitantly. Finance Agency regulations limit this source of interest-rate risk by restricting the types of mortgage assets the Bank may own to those with limited average life that changes under certain interest-rate shock scenarios and by establishing limitations on duration of equity and changes in market value of equity. The FHLBNY may manage against prepayment and duration risk by funding some mortgage assets with consolidated obligations that have call features. In addition, the FHLBNY may use derivatives to manage the prepayment and duration variability of mortgage assets. Net income could be reduced if the FHLBNY replaces the mortgages with lower yielding assets and if the Bank’s higher funding costs are not reduced concomitantly. The FHLBNY manages the interest rate and prepayment risks associated with mortgages through debt issuance. The FHLBNY issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBNY analyzes the duration, convexity and earnings risk of the mortgage portfolio on a regular basis under various rate scenarios. 29
The Bank has not elected to use the FVO for any mortgage loans. No mortgage loan has been hedged with a derivative. The Bank considers a “delivery commitment” to purchase mortgage loans to be a derivative. See description below for the accounting of delivery commitments. Firm Commitment Strategies-— Mortgage delivery commitments are considered derivatives under the accounting standards for derivatives and hedging, and the FHLBNY accounts for them as freestanding derivatives, and recordsrecording the fair values of mortgage loan delivery commitments on the balance sheet with an offset to current period earnings. Fair values were de minimis for all periods reported. The FHLBNY may also hedge a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be added to the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance. If a hedged firm commitment no longer qualified as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings. There were no material amounts of gains and losses recognized due to disqualification of firm commitment hedges for the three and nine months ended September 30, 2010, or in 2009.any periods in this report. Forward Settlements-— There were no forward settled securities at September 30, 2010 and December 31, 2009 that would settle outside the shortest period of time for the settlement of such securities.securities in any period ends in this report. Anticipated Debt Issuance-— The FHLBNY enters into interest-rate swaps on the anticipated issuance of debt to “lock in” a spread between the earning asset and the cost of funding. The swap is terminated upon issuance of the debt instrument, and amounts reported in AOCI are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued. In the three months ended March 31, 2011, the Bank entered into an interest rate swap agreement with an unrelated swap dealer and designated it as a hedge of the variable quarterly interest payments on a 9-year discount note borrowing program expected to be accomplished by a series of issuances of $150.0 million discount notes with 91-day terms. The FHLBNY will continue issuing new 91-day discount notes over the next 9 years as each outstanding discount note matures. The interest on the FHLBank discount note is expected to be highly correlated with 3-month LIBOR and will be determined each time the note is issued. The interest rate swap requires a settlement every 91 days, and the variable rate, which is based on the 3-month LIBOR, is reset immediately following each payment. The swap is expected to eliminate the risk of variability of cash flows for each forecasted discount note issuances every 91 days. The FHLBNY performs prospective hedge effectiveness analysis every 91 days and a retrospective hedge effectiveness analysis every quarter. The fair value of the interest rate swap is recorded in AOCI and ineffectiveness, if any, is measured using the “hypothetical derivative method” and recorded in earnings. The effective portion remains in AOCI. The Bank monitors the credit standing of the derivative counterparty each quarter. Intermediation-— To meet the hedging needs of its members, the FHLBNY acts as an intermediary between the members and the other counterparties. This intermediation allows smaller members access to the derivatives market. The derivatives used in intermediary activities do not qualify for hedge accounting under the accounting standards for derivatives and hedging, and are separately marked-to-market through earnings. The net impact of the accounting for these derivatives does not significantly affect the operating results of the FHLBNY. Derivative agreements in which the FHLBNY is an intermediary may arise when the FHLBNY: (1) enters into offsetting derivatives with members and other counterparties to meet the needs of its members, and (2) enters into derivatives to offset the economic effect of other derivative agreements that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate swaps in which the FHLBNY was an intermediary was $550.0 million and $320.0 million as of September 30, 2010 and December 31, 2009. Fair values of the swaps sold to members net of the fair values of swaps purchased from derivative counterparties were not material at September 30, 2010 and December 31, 2009.any periods in this report. Collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBNY as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBNY. Economic hedges -—In the three and nine months ended September 30, 2010 and in 2009, economicEconomic hedges comprised primarily of: (1) Short- and medium-term interest rate swaps that hedged the basis risk (Prime rate, Fed fund rate, and the 1-month LIBOR index) of variable-rate bonds issued by the FHLBNY. These swaps were considered freestanding and changes in the fair values of the swaps were recorded through income. The FHLBNY believes the operational cost of designating the basis hedges in a qualifying hedge would outweigh the benefits of applying hedge accounting. (2) Interest rate caps acquired in the second quarter of 2008 to hedgehedging balance sheet risk, primarily certain capped floating-rate investment securities, were considered freestanding derivatives with fair value changes recorded through Other income (loss) as a Net realized and unrealized gain or loss on derivatives and hedging activities. (3) Interest rate swaps hedging balance sheet risk. (4) Interest rate swaps that had previously qualified as hedges under the accounting standards for derivatives and hedging, but had been subsequently de-designated from hedge accounting as they were assessed as being not highly effective hedges. (5)(4) Interest rate swaps executed to offset the fair value changes of bonds designated under the FVO. 39
The FHLBNY is not a derivatives dealer and does not trade derivatives for short-term profit. Credit Risk-— The FHLBNY is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The FHLBNY transacts most of its derivatives with major financial institutions. Some of these institutions or their affiliates buy, sell, and distribute consolidated obligations. The FHLBNY is also subject to operational risks in the execution and servicing of derivative transactions. The degree of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The FHLBNY manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Agency’s regulations. In determining credit risk, the FHLBNY considers accrued interest receivables and payables, and the legal right to offset assets and liabilities by counterparty. 30
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, but it does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors (“derivatives”) if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY. The FHLBNY uses collateral agreements to mitigate counterparty credit risk in derivatives. When the FHLBNY has more than one derivative transaction outstanding with a counterparty, and a legally enforceable master netting agreement exists with the counterparty, the exposure less(less collateral held,held) represents the appropriate measure of credit risk. Substantially all derivative contracts are subject to master netting agreements or other right of offset arrangements. At September 30, 2010March 31, 2011 and December 31, 2009,2010, the Bank’s credit exposure, representing derivatives in a fair value net gain position, was approximately $32.4$25.0 million and $8.3$22.0 million after the recognition of any cash collateral held by the FHLBNY. The credit exposureexposures at September 30, 2010March 31, 2011 and December 31, 20092010 included $25.0$19.2 million and $0.8$6.1 million in net interest receivable. Derivative counterparties are also exposed to credit losses resulting from potential nonperformance risk of FHLBNY with respect to derivative contracts. ExposureDerivative counterparties’ exposure to counterpartiesthe FHLBNY is measured by derivatives in a fair value loss position from the FHLBNY’s perspective, which from the counterparties’ perspective is a gain. At September 30, 2010March 31, 2011 and December 31, 2009,2010, derivatives in a net unrealized loss position, which represented the counterparties’ exposure to the potential non-performance risk of the FHLBNY, were $784.5$839.7 million and $746.2$954.9 million after deducting $3.8$1.9 billion and $2.2$2.7 billion of cash collateral pledged by the FHLBNY at those dates to the exposed counterparties. The FHLBNY is exposed to the risk of derivative counterparties defaulting on the terms of the derivative contracts and failing to return cash deposited with counterparties. If such an event were to occur, the FHLBNY would be forced to replace derivatives by executing similar derivative contracts with other counterparties. To the extent that the FHLBNY receives cash from the replacement trades that is less than the amount of cash deposited with the defaulting counterparty, the FHLBNY’s cash pledged is exposed to credit risk. Derivative counterparties holding the FHLBNY’s cash as pledged collateral were rated Single ASingle-A or better at September 30, 2010,March 31, 2011, and based on credit analyses and collateral requirements, the management of the FHLBNY does not anticipate any credit losses on its derivative agreements. Impact of rating downgrade —The FHLBNY transacts in derivative transactions directly with unaffiliated derivatives dealers under ISDA agreements. Each of the ISDA agreements also includes Credit Support Amount (“CSA”) provisions, which provide for collateral postings at various ratings and threshold levels and the continuation of the FHLBNY’s status as a government sponsored enterprise (“GSE”). The aggregate fair value of the FHLBNY’s derivative instruments that were in a net liability position at March 31, 2011 was approximately $839.7 million. Many of the CSA agreements stipulate that so long as the FHLBNY retains its GSE status, ratings downgrades would not result in the posting of additional collateral. Other CSA agreements would require the FHLBNY to post additional collateral based solely on an adverse change in the credit rating of the FHLBNY. On the assumption that the FHLBNY will retain its status as a GSE, the FHLBNY estimates that at March 31, 2011, a one-notch downgrade of FHLBNY’s credit rating (currently is assigned Triple-A by both Moody’s and S&P) to Aa by Moody’s Investor Services (Moody’s) and AA by Standard & Poor’s (S&P), would permit counterparties to make additional collateral calls of up to $440.3 million. Additional collateral postings upon downgrade are estimated based on the factors in the individual collateral posting provisions of the CSA with each counterparty and current exposure as of March 31, 2011. 4031
The following tables representedtable summarizes outstanding notional balances and estimated fair values of the derivatives outstanding at September 30, 2010 and December 31, 2009 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | March 31, 2011 | | | | Notional Amount of | | Derivative | | | Notional Amount of | | Derivative | | | | Derivatives | | Derivative Assets | | Liabilities | | | Derivatives | | Derivative Assets | | Liabilities | | Fair value of derivatives instruments | | | Derivatives designated in hedging relationships | | | Interest rate swaps-fair value hedges | | $ | 93,872,212 | | $ | 1,260,136 | | $ | (5,856,880 | ) | | $ | 91,722,304 | | $ | 853,120 | | $ | 3,590,893 | | Interest rate swaps-cash flow hedges | | | 205,000 | | 2,357 | | — | | | | | | | | | | | | | | | | | Total derivatives in hedging instruments | | $ | 93,872,212 | | $ | 1,260,136 | | $ | (5,856,880 | ) | | 91,927,304 | | 855,477 | | 3,590,893 | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | Interest rate swaps | | $ | 27,582,914 | | $ | 39,722 | | $ | (9,624 | ) | | 23,897,530 | | 22,248 | | 13,403 | | Interest rate caps or floors | | 1,900,000 | | 23,650 | | | (69 | ) | | 1,900,000 | | 38,290 | | 105 | | Mortgage delivery commitments | | 20,675 | | 28 | | | (24 | ) | | 25,197 | | 73 | | 29 | | Other* | | 550,000 | | 10,726 | | | (10,000 | ) | | 550,000 | | 6,265 | | 5,634 | | | | | | | | | | | | | | | | | Total derivatives not designated as hedging instruments | | $ | 30,053,589 | | $ | 74,126 | | $ | (19,717 | ) | | 26,372,727 | | 66,876 | | 19,171 | | | | | | | | | | | | | | | | | | | | Total derivatives before netting and collateral adjustments | | $ | 123,925,801 | | $ | 1,334,262 | | $ | (5,876,597 | ) | | $ | 118,300,031 | | 922,353 | | 3,610,064 | | | | | | | | | | | | | | | | | Netting adjustments | | $ | (1,301,837 | ) | | $ | 1,301,837 | | | | (897,389 | ) | | | (897,389 | ) | Cash collateral and related accrued interest | | — | | 3,790,262 | | | — | | | (1,872,965 | ) | | | | | | | | | | | | | | Total collateral and netting adjustments | | $ | (1,301,837 | ) | | $ | 5,092,099 | | | | (897,389 | ) | | | (2,770,354 | ) | | | | | | | | | | | | Total reported on the Statements of Condition | | $ | 32,425 | | $ | (784,498 | ) | | $ | 24,964 | | $ | 839,710 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | | December 31, 2010 | | | | Notional Amount of | | Derivative | | | Notional Amount of | | Derivative | | | | Derivatives | | Derivative Assets | | Liabilities | | | Derivatives | | Derivative Assets | | Liabilities | | | | | Fair value of derivatives instruments | | | Derivatives designated in hedging relationships | | | Interest rate swaps-fair value hedges | | $ | 98,776,447 | | $ | 854,699 | | $ | (3,974,207 | ) | | $ | 93,840,813 | | $ | 944,807 | | $ | 4,661,102 | | Interest rate swaps-cash flow hedges | | | — | | — | | — | | | | | | | | | | | | | | | | | Total derivatives in hedging instruments | | $ | 98,776,447 | | $ | 854,699 | | $ | (3,974,207 | ) | | 93,840,813 | | 944,807 | | 4,661,102 | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | Interest rate swaps | | $ | 33,144,963 | | $ | 147,239 | | $ | (73,450 | ) | | 24,400,547 | | 23,911 | | 12,543 | | Interest rate caps or floors | | 2,282,000 | | 77,999 | | | (7,525 | ) | | 1,900,000 | | 41,881 | | 107 | | Mortgage delivery commitments | | 4,210 | | — | | | (39 | ) | | 29,993 | | 9 | | 523 | | Other* | | 320,000 | | 1,316 | | | (956 | ) | | 550,000 | | 6,069 | | 5,392 | | | | | | | | | | | | | | | | | Total derivatives not designated as hedging instruments | | $ | 35,751,173 | | $ | 226,554 | | $ | (81,970 | ) | | 26,880,540 | | 71,870 | | 18,565 | | | | | | | | | | | | | | | | | | | | Total derivatives before netting and collateral adjustments | | $ | 134,527,620 | | $ | 1,081,253 | | $ | (4,056,177 | ) | | $ | 120,721,353 | | 1,016,677 | | 4,679,667 | | | | | | | | | | | | | | | | | Netting adjustments | | $ | (1,072,973 | ) | | $ | 1,072,973 | | | | (994,667 | ) | | | (994,667 | ) | Cash collateral and related accrued interest | | — | | 2,237,028 | | | — | | | (2,730,102 | ) | | | | | | | | | | | | | | Total collateral and netting adjustments | | $ | (1,072,973 | ) | | $ | 3,310,001 | | | | (994,667 | ) | | | (3,724,769 | ) | | | | | | | | | | | | Total reported on the Statements of Condition | | $ | 8,280 | | $ | (746,176 | ) | | $ | 22,010 | | $ | 954,898 | | | | | | | | | | | | |
| | | * | | Other: Comprised of swaps intermediated for members. |
The categories -“—“Fair value”, “Mortgage delivery commitment”, and “1Cash“Cash Flow” hedges — represent derivative transactions in hedging relationships. If any such hedges do not qualify for hedge accounting under the accounting standards for derivatives and hedging, they are classified as “Economic” hedges. Changes in fair values of economic hedges are recorded through the income statement without the offset of corresponding changes in the fair value of the hedged item. Changes in fair values of qualifying derivative transactions designated in fair value hedges are recorded through the income statement with the offset of corresponding changes in the fair values of the hedged items. The effective portion of changes in the fair values of derivatives designated in a qualifying cash flow hedge is recorded in AOCI.Accumulated other comprehensive income (loss). | | | 1 | | None outstanding at September 30, 2010 and December 31, 2009. |
4132
ImpactEarnings impact of derivatives and hedging activities on earnings
Net realized and unrealized gain (loss) on derivatives and hedging activities The FHLBNY carries all derivative instruments on the Statements of Condition at fair value as Derivative Assets and Derivative Liabilities. If derivatives meet the hedging criteria under hedge accounting rules, including effectiveness measures, changes in fair value of the associated hedged financial instrument attributable to the risk being hedged (benchmark interest-rate risk, which is LIBOR for the FHLBNY) may also be recorded so that some or all of the unrealized fair value gains or losses recognized on the derivatives are offset by corresponding unrealized gains or losses on the associated hedged financial assets and liabilities. The net differential between fair value changes of the derivatives and the hedged items represent hedge ineffectiveness. Hedge ineffectiveness results represents the amounts by which the changes in the fair value of the derivatives differ from the changes in the fair values of the hedged items or the variability in the cash flows of forecasted transactions. The net ineffectiveness from hedges that qualify under hedge accounting rules are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income. If derivatives do not qualify for the hedging criteria under hedge accounting rules, but are executed as economic hedges of financial assets or liabilities under a FHLBNY approvedFHLBNY-approved hedge strategy, only the fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income. When the FHLBNY elects to measure certain debt under the accounting designation for Fair Value Option (“FVO”),FVO, the Bank will typically execute a derivative as an economic hedge of the debt. Fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income. Fair value changes of the debt designated under the FVO isare also recorded in Other income (loss) as an unrealized (loss) or gain from Instruments held at fair value. The componentsComponents of hedging gains and losses from derivatives and hedging activities for the three months ended September 30, 2010 and 2009March 31, 2011 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | | | | | | | | | | | | | | | | | | 2010 | | 2009 | | | Three months ended March 31, 2011 | | | | Effect of | | Effect of | | | Effect of | | | | Derivatives on | | Derivatives on | | | Derivatives on | | | | Gain (Loss) on | | Gain (Loss) on | | Earnings | | Net Interest | | Gain (Loss) on | | Gain (Loss) on | | Earnings | | Net Interest | | | Gain (Loss) on | | Gain (Loss) on | | Earnings | | Net Interest | | | | Derivative | | Hedged Item | | Impact | | Income1 | | Derivative | | Hedged Item | | Impact | | Income1 | | | Derivative | | Hedged Item | | Impact | | Income1 | | | | | Derivatives designated as hedging instruments | | | Interest rate swaps | | | Advances | | $ | (880,233 | ) | | $ | 881,448 | | $ | 1,215 | | $ | (478,422 | ) | | $ | (582,983 | ) | | $ | 583,165 | | $ | 182 | | $ | (503,185 | ) | | $ | 551,846 | | $ | (495,509 | ) | | $ | 56,337 | | $ | (440,823 | ) | Consolidated obligations-bonds | | 206,540 | | | (208,047 | ) | | | (1,507 | ) | | 137,824 | | 98,668 | | | (98,501 | ) | | 167 | | 151,467 | | | Consolidated obligations-discount notes | | — | | — | | — | | — | | — | | — | | — | | — | | | Consolidated obligations | | | | (146,891 | ) | | 148,688 | | 1,797 | | 134,999 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net gain (loss) related to fair value hedge ineffectiveness | | | (673,693 | ) | | 673,401 | | | (292 | ) | | | (340,598 | ) | | | (484,315 | ) | | 484,664 | | 349 | | | (351,718 | ) | | Net gain (loss) related to fair value hedges | | | 404,955 | | | (346,821 | ) | | 58,134 | | | (305,824 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | Interest rate swaps | | | Advances | | | (1,203 | ) | | — | | | (1,203 | ) | | — | | | (1,475 | ) | | — | | | (1,475 | ) | | — | | | 683 | | — | | 683 | | — | | Consolidated obligations-bonds | | 6,753 | | — | | 6,753 | | — | | 28,420 | | — | | 28,420 | | — | | | | (211 | ) | | — | | | (211 | ) | | — | | Consolidated obligations-discount notes | | | (231 | ) | | — | | | (231 | ) | | — | | | (5,711 | ) | | — | | | (5,711 | ) | | — | | | — | | — | | — | | — | | Member intermediation | | 202 | | — | | 202 | | — | | | (16 | ) | | — | | | (16 | ) | | — | | | | (46 | ) | | — | | | (46 | ) | | — | | Balance sheet-macro hedges swaps | | — | | — | | — | | — | | 210 | | — | | 210 | | — | | | — | | — | | — | | — | | Accrued interest-swaps | | 2,381 | | — | | 2,381 | | — | | 18,362 | | — | | 18,362 | | — | | | 2,703 | | — | | 2,703 | | — | | Accrued interest-intermediation | | 42 | | — | | 42 | | — | | 20 | | — | | 20 | | — | | | 46 | | — | | 46 | | — | | Caps and floors | | | Advances | | | (19 | ) | | — | | | (19 | ) | | — | | | (305 | ) | | — | | | (305 | ) | | — | | | | (18 | ) | | — | | | (18 | ) | | — | | Balance sheet | | | (14,618 | ) | | — | | | (14,618 | ) | | — | | 19,196 | | — | | 19,196 | | — | | | | (3,589 | ) | | — | | | (3,589 | ) | | — | | Accrued interest-options | | — | | — | | — | | — | | | (1,786 | ) | | — | | | (1,786 | ) | | — | | | — | | — | | — | | — | | Mortgage delivery commitments | | 257 | | — | | 257 | | — | | 47 | | — | | 47 | | — | | | 169 | | — | | 169 | | — | | Swaps economically hedging instruments designated under FVO | | | Consolidated obligations-bonds | | 8,025 | | — | | 8,025 | | — | | 1,549 | | — | | 1,549 | | — | | | | (2,594 | ) | | — | | | (2,594 | ) | | — | | Consolidated obligations-discount notes | | 1,674 | | — | | 1,674 | | — | | — | | — | | — | | — | | | | (861 | ) | | — | | | (861 | ) | | — | | Accrued interest on swaps | | 5,473 | | — | | 5,473 | | — | | 779 | | — | | 779 | | — | | | 10,154 | | — | | 10,154 | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net gain (loss) related to derivatives not designated as hedging instruments | | 8,736 | | — | | 8,736 | | — | | 59,290 | | — | | 59,290 | | — | | | 6,436 | | — | | 6,436 | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | (664,957 | ) | | $ | 673,401 | | $ | 8,444 | | $ | (340,598 | ) | | $ | (425,025 | ) | | $ | 484,664 | | $ | 59,639 | | $ | (351,718 | ) | | $ | 411,391 | | $ | (346,821 | ) | | $ | 64,570 | | $ | (305,824 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
33
Components of hedging gains and losses from derivatives and hedging activities for the three months ended March 31, 2010 are summarized below (in thousands): | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2010 | | | | | | | | | | | | | | | | Effect of | | | | | | | | | | | | | | | | Derivatives on | | | | Gain (Loss) on | | | Gain (Loss) on | | | Earnings | | | Net Interest | | | | Derivative | | | Hedged Item | | | Impact | | | Income1 | | | | | | | | | | | | | | | | | | | Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | | | | | | | | | | | Advances | | $ | (152,087 | ) | | $ | 152,706 | | | $ | 619 | | | $ | (530,377 | ) | Consolidated obligations | | | 52,236 | | | | (48,232 | ) | | | 4,004 | | | | 172,777 | | | | | | | | | | | | | | | Net gain (loss) related to fair value hedges | | | (99,851 | ) | | | 104,474 | | | | 4,623 | | | | (357,600 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | | | | | | | | | | | Advances | | | (840 | ) | | | — | | | | (840 | ) | | | — | | Consolidated obligations-bonds | | | (13,309 | ) | | | — | | | | (13,309 | ) | | | — | | Consolidated obligations-discount notes | | | (2,332 | ) | | | — | | | | (2,332 | ) | | | — | | Member intermediation | | | (3 | ) | | | — | | | | (3 | ) | | | — | | Balance sheet-macro hedges swaps | | | 173 | | | | — | | | | 173 | | | | — | | Accrued interest-swaps | | | 29,469 | | | | — | | | | 29,469 | | | | — | | Accrued interest-intermediation | | | 23 | | | | — | | | | 23 | | | | — | | Caps and floors | | | | | | | | | | | | | | | | | Advances | | | (289 | ) | | | — | | | | (289 | ) | | | — | | Balance sheet | | | (30,427 | ) | | | — | | | | (30,427 | ) | | | — | | Accrued interest-options | | | (1,989 | ) | | | — | | | | (1,989 | ) | | | — | | Mortgage delivery commitments | | | 149 | | | | — | | | | 149 | | | | — | | Swaps economically hedging instruments designated under FVO | | | | | | | | | | | | | | | | | Consolidated obligations-bonds | | | 6,638 | | | | — | | | | 6,638 | | | | — | | Consolidated obligations-discount notes | | | — | | | | — | | | | — | | | | — | | Accrued interest on swaps | | | 7,751 | | | | — | | | | 7,751 | | | | — | | | | | | | | | | | | | | | Net gain (loss) related to derivatives not designated as hedging instruments | | | (4,986 | ) | | | — | | | | (4,986 | ) | | | — | | | | | | | | | | | | | | | Total | | $ | (104,837 | ) | | $ | 104,474 | | | $ | (363 | ) | | $ | (357,600 | ) | | | | | | | | | | | | | |
| | | 1 | | Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged — bonds, discount notes, and advances. |
42
The components of hedging gains and losses for the nine months ended September 30, 2010 and 2009 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | | | | | | | | | | | | | | Effect of | | | | | | | | | | | | | | | Effect of | | | | | | | | | | | | | | | | Derivatives on | | | | | | | | | | | | | | | Derivatives on | | | | Gain (Loss) on | | | Gain (Loss) on | | | Earnings | | | Net Interest | | | Gain (Loss) on | | | Gain (Loss) on | | | Earnings | | | Net Interest | | | | Derivative | | | Hedged Item | | | Impact | | | Income1 | | | Derivative | | | Hedged Item | | | Impact | | | Income1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Advances | | $ | (2,020,332 | ) | | $ | 2,020,771 | | | $ | 439 | | | $ | (1,519,392 | ) | | $ | 1,419,019 | | | $ | (1,424,126 | ) | | $ | (5,107 | ) | | $ | (1,252,775 | ) | Consolidated obligations-bonds | | | 492,043 | | | | (489,735 | ) | | | 2,308 | | | | 483,049 | | | | (418,734 | ) | | | 436,921 | | | | 18,187 | | | | 384,150 | | Consolidated obligations-discount notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 474 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net gain (loss) related to fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | hedge ineffectiveness | | | (1,528,289 | ) | | | 1,531,036 | | | | 2,747 | | | | (1,036,343 | ) | | | 1,000,285 | | | | (987,205 | ) | | | 13,080 | | | | (868,151 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Advances | | | (3,164 | ) | | | — | | | | (3,164 | ) | | | — | | | | 3,887 | | | | — | | | | 3,887 | | | | — | | Consolidated obligations-bonds | | | (29,762 | ) | | | — | | | | (29,762 | ) | | | — | | | | 101,662 | | | | — | | | | 101,662 | | | | — | | Consolidated obligations-discount notes | | | (4,331 | ) | | | — | | | | (4,331 | ) | | | — | | | | 409 | | | | — | | | | 409 | | | | — | | Member intermediation | | | 357 | | | | — | | | | 357 | | | | — | | | | (189 | ) | | | — | | | | (189 | ) | | | — | | Balance sheet-macro hedges swaps | | | 173 | | | | — | | | | 173 | | | | — | | | | 2,617 | | | | — | | | | 2,617 | | | | — | | Accrued interest-swaps | | | 46,900 | | | | — | | | | 46,900 | | | | — | | | | (37,772 | ) | | | — | | | | (37,772 | ) | | | — | | Accrued interest-intermediation | | | 91 | | | | — | | | | 91 | | | | — | | | | 64 | | | | — | | | | 64 | | | | — | | Caps and floors | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Advances | | | (418 | ) | | | — | | | | (418 | ) | | | — | | | | (1,056 | ) | | | — | | | | (1,056 | ) | | | — | | Balance sheet | | | (47,901 | ) | | | — | | | | (47,901 | ) | | | — | | | | 50,613 | | | | — | | | | 50,613 | | | | — | | Accrued interest-options | | | (2,598 | ) | | | — | | | | (2,598 | ) | | | — | | | | (3,731 | ) | | | — | | | | (3,731 | ) | | | — | | Mortgage delivery commitments | | | 811 | | | | — | | | | 811 | | | | — | | | | (49 | ) | | | — | | | | (49 | ) | | | — | | Swaps economically hedging instruments designated under FVO | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated obligations-bonds | | | 10,381 | | | | — | | | | 10,381 | | | | — | | | | (5,825 | ) | | | — | | | | (5,825 | ) | | | — | | Consolidated obligations-discount notes | | | 2,448 | | | | — | | | | 2,448 | | | | — | | | | — | | | | — | | | | — | | | | — | | Accrued interest on swaps | | | 20,922 | | | | — | | | | 20,922 | | | | — | | | | 903 | | | | — | | | | 903 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Net gain (loss) related to derivatives not designated as hedging instruments | | | (6,091 | ) | | | — | | | | (6,091 | ) | | | — | | | | 111,533 | | | | — | | | | 111,533 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | (1,534,380 | ) | | $ | 1,531,036 | | | $ | (3,344 | ) | | $ | (1,036,343 | ) | | $ | 1,111,818 | | | $ | (987,205 | ) | | $ | 124,613 | | | $ | (868,151 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged — bonds, discount notes, and advances. |
Cash Flow hedges For the three months ended March 31, 2011, the Bank entered into an interest rate swap agreement with an unrelated swap dealer and designated it as a hedge of the variable quarterly interest payments on a 9-year discount note borrowing program expected to be accomplished by a series of issuances of $150.0 million discount notes with 91-day terms. The FHLBNY will continue issuing new 91-day discount notes over the next 9 years as each outstanding discount note matures. The interest on the FHLBank discount note is expected to be highly correlated with 3-month LIBOR and will be determined each time the note is issued. The interest rate swap requires a settlement every 91 days, and the variable rate, which is based on the 3-month LIBOR, is reset immediately following each payment. The swap is expected to eliminate the risk of variability of in cash flows for each forecasted discount note issuances every 91 days. The FHLBNY performs prospective hedge effectiveness analysis every 91 days and a retrospective hedge effectiveness analysis every quarter. The fair value of the interest rate swap is recorded in AOCI and ineffectiveness, if any, is measured using the “hypothetical derivative method” and recorded in earnings. The effective portion remains in AOCI and is reclassified into earnings in the same period during which the hedged forecasted 91 day discount note expense affects earnings. The Bank monitors the credit standing of the derivative counterparty each quarter. The notional amount of the interest rate swap outstanding under this program was $150.0 million at March 31, 2011 and the fair value recorded in AOCI was an unrealized gain of $1.9 million. From time-to-time, the Bank executes interest rate swaps on the anticipated issuance of debt to “lock in” a spread between the earning asset and the cost of funding. The hedges are accounted under cash flow hedging rules and the effective portion of changes in the fair values of the swaps is recorded in AOCI. The ineffective portion is recorded through net income. The swap is terminated upon issuance of the debt instrument, and amounts reported in AOCI are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued. The maximum period of time that the Bank typically hedges its exposure to the variability in future cash flows for forecasted transactions is between three and six months. At March 31, 2011, the Bank had open contracts of $55.0 million of swaps to hedge the anticipated issuances of debt. The fair values of the open contracts recorded in AOCI was an unrealized gain $0.4 million at March 31, 2011. There were no open contracts at December 31, 2010. For any periods in this report, there were no material amounts for the three and nine months ended September 30, 2010 and 2009 that were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. The maximum length of time over which the Bank typically hedges its exposure to the variability in future cash flows for forecasted transactions is between three and six months. There were no derivatives designated as cash flow hedges at September 30, 2010 and December 31, 2009. 34
The effective portion of the gain or loss on swaps designated and qualifying as a cash flow hedging instrument is reported as a component of AOCI and reclassified into earnings in the same period during which the hedged forecasted bond expenses affect earnings. The balancesamounts in AOCI from terminated cash flow hedges representedrepresenting net realizedunrecognized losses of $17.7were $13.4 million and $22.7$15.2 million at September 30, 2010March 31, 2011 and December 31, 2009.2010. At September 30, 2010,March 31, 2011, it is expected that over the next 12 months about $5.3$3.7 million ($6.9 million at December 31, 2009) of net losses recorded in AOCI will be recognized as a charge to earnings as a yield adjustment to consolidated bond interest expense of consolidated bonds.and a charge to earnings. 43
The effect of cash flow hedge related derivative instruments for the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands): | | | | | | | | | | | | | | Three months ended March 31, 2011 | | | | | AOCI | | | | | Gains/(Losses) | | | | | Location: | | Amount | | Ineffectiveness | | | | | Recognized | | Reclassified to | | Reclassified to | | Recognized in | | | | | in AOCI1, 2 | | Earnings1 | | Earnings1 | | Earnings | | The effect of cash flow hedge related to Interest rate swaps | | | | | Advances | | | $ | — | | Interest Income | | $ | — | | $ | — | | Consolidated obligations-bonds | | | 772 | | Interest Expense | | 1,038 | | — | | Consolidated obligations-discount notes | | | 1,918 | | Interest Expense | | — | | — | | | | | | | | | | | | | Total | | | $ | 2,690 | | | | $ | 1,038 | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | | | 2010 | | 2009 | | | Three months ended March 31, 2010 | | | | OCI | | OCI | | | AOCI | | | | Gains/(Losses) | | Gains/(Losses) | | | Gains/(Losses) | | | | Location: | | Amount | | Ineffectiveness | | Location: | | Amount | | Ineffectiveness | | | Location: | | Amount | | Ineffectiveness | | | | Recorded in | | Reclassified to | | Reclassified to | | Recognized in | | Recorded in | | Reclassified to | | Reclassified to | | Recognized in | | | Recognized | | Reclassified to | | Reclassified to | | Recognized in | | | | OCI 1, 2 | | Earnings1 | | Earnings1 | | Earnings | | OCI 1, 2 | | Earnings1 | | Earnings1 | | Earnings | | | in AOCI1, 2 | | Earnings1 | | Earnings1 | | Earnings | | The effect of cash flow hedge related to Interest rate swaps | | | | | Advances | | $ | — | | Interest Income | | $ | — | | $ | — | | $ | — | | Interest Income | | $ | — | | $ | — | | | $ | — | | Interest Income | | $ | — | | $ | — | | Consolidated obligations-bonds | | — | | Interest Expense | | 1,882 | | — | | — | | Interest Expense | | 1,898 | | | 392 | | Interest Expense | | 1,740 | | — | | Consolidated obligations-discount notes | | | — | | Interest Expense | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | — | | $ | 1,882 | | $ | — | | $ | — | | $ | 1,898 | | $ | — | | | $ | 392 | | | | $ | 1,740 | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | | OCI | | | OCI | | | | Gains/(Losses) | | | Gains/(Losses) | | | | | | | | Location: | | | Amount | | | Ineffectiveness | | | | | | | Location: | | | Amount | | | Ineffectiveness | | | | Recorded in | | | Reclassified to | | | Reclassified to | | | Recognized in | | | Recorded in | | | Reclassified to | | | Reclassified to | | | Recognized in | | | | OCI 1, 2 | | | Earnings1 | | | Earnings1 | | | Earnings | | | OCI 1, 2 | | | Earnings1 | | | Earnings1 | | | Earnings | | The effect of cash flow hedge related to Interest rate swaps | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Advances | | $ | — | | | Interest Income | | | $ | — | | | $ | — | | | $ | — | | | Interest Income | | | $ | — | | | $ | — | | Consolidated obligations-bonds | | | (472 | ) | | Interest Expense | | | | 5,423 | | | | — | | | | — | | | Interest Expense | | | | 5,687 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | (472 | ) | | | | | | $ | 5,423 | | | $ | — | | | $ | — | | | | | | | $ | 5,687 | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Effective portion | | 2 | | Represents effective portion of basis adjustments to AOCI from cash flow hedging transactions.transactions recorded in AOCI. |
4435
Note 17.16. Fair Values of financial instruments.Financial Instruments. Items Measured at Fair Value on a Recurring Basis The following table presents for each hierarchy level (see note below), the FHLBNY’s assets and liabilities that were measured at fair value on its Statements of Condition at September 30, 2010 and December 31, 2009 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | March 31, 2011 | | | | Netting | | | Netting | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Adjustments | | | Total | | Level 1 | | Level 2 | | Level 3 | | Adjustments | | Assets | | | Available-for-sale securities | | | GSE issued MBS | | $ | 3,360,959 | | $ | — | | $ | 3,360,959 | | $ | — | | $ | — | | | GSE/U.S. agency issued MBS | | | $ | 3,708,872 | | $ | — | | $ | 3,708,872 | | $ | — | | $ | — | | Equity and bond funds | | 12,822 | | — | | 12,822 | | — | | — | | | 10,152 | | — | | 10,152 | | — | | — | | Derivative assets(a) | | | Interest-rate derivatives | | 32,397 | | — | | 1,334,234 | | — | | | (1,301,837 | ) | | 24,891 | | — | | 922,280 | | — | | | (897,389 | ) | Mortgage delivery commitments | | 28 | | — | | 28 | | — | | — | | | 73 | | — | | 73 | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets at fair value | | $ | 3,406,206 | | $ | — | | $ | 4,708,043 | | $ | — | | $ | (1,301,837 | ) | | $ | 3,743,988 | | $ | — | | $ | 4,641,377 | | $ | — | | $ | (897,389 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | Consolidated obligations: | | | Discount notes (to the extent SFAS 159 is elected) | | $ | (1,755,901 | ) | | $ | — | | $ | (1,755,901 | ) | | $ | — | | $ | — | | | Bonds (to the extent SFAS 159 is elected)(b) | | | (10,761,236 | ) | | — | | | (10,761,236 | ) | | — | | — | | | Discount notes (to the extent FVO is elected) | | | $ | (731,892 | ) | | $ | — | | $ | (731,892 | ) | | $ | — | | $ | — | | Bonds (to the extent FVO is elected)(b) | | | | (12,605,257 | ) | | — | | | (12,605,257 | ) | | — | | — | | Derivative liabilities(a) | | | Interest-rate derivatives | | | (784,474 | ) | | — | | | (5,876,573 | ) | | — | | 5,092,099 | | | | (839,681 | ) | | — | | | (3,610,035 | ) | | — | | 2,770,354 | | Mortgage delivery commitments | | | (24 | ) | | — | | | (24 | ) | | — | | — | | | | (29 | ) | | — | | | (29 | ) | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities at fair value | | $ | (13,301,635 | ) | | $ | — | | $ | (18,393,734 | ) | | $ | — | | $ | 5,092,099 | | | $ | (14,176,859 | ) | | $ | — | | $ | (16,947,213 | ) | | $ | — | | $ | 2,770,354 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | | Netting | | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Adjustments | | Assets | | | Available-for-sale securities | | | GSE/U.S. agency issued MBS | | | $ | 3,980,135 | | $ | — | | $ | 3,980,135 | | $ | — | | $ | — | | Equity and bond funds | | | 9,947 | | — | | 9,947 | | — | | — | | Derivative assets(a) | | | Interest-rate derivatives | | | 22,001 | | — | | 1,016,668 | | — | | | (994,667 | ) | Mortgage delivery commitments | | | 9 | | — | | 9 | | — | | — | | | | | | | | | | | | | | | | | | Total assets at fair value | | | $ | 4,012,092 | | $ | — | | $ | 5,006,759 | | $ | — | | $ | (994,667 | ) | | | | | | | | | | | | | | | | | Liabilities | | | Consolidated obligations: | | | Discount notes (to the extent FVO is elected) | | | $ | (956,338 | ) | | $ | — | | $ | (956,338 | ) | | $ | — | | $ | — | | Bonds (to the extent FVO is elected)(b) | | | | (14,281,463 | ) | | — | | | (14,281,463 | ) | | — | | — | | Derivative liabilities(a) | | | Interest-rate derivatives | | | | (954,375 | ) | | — | | | (4,679,144 | ) | | — | | 3,724,769 | | Mortgage delivery commitments | | | | (523 | ) | | — | | | (523 | ) | | — | | — | | | | | | | | | | | | | | | | | | Total liabilities at fair value | | | $ | (16,192,699 | ) | | $ | — | | $ | (19,917,468 | ) | | $ | — | | $ | 3,724,769 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | | | | | | | | | | | | | | | | | | | Netting | | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Adjustments | | Assets | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | GSE issued MBS | | $ | 2,240,564 | | | $ | — | | | $ | 2,240,564 | | | $ | — | | | $ | — | | Equity and bond funds | | | 12,589 | | | | — | | | | 12,589 | | | | — | | | | — | | Derivative assets(a) | | | | | | | | | | | | | | | | | | | | | Interest-rate derivatives | | | 8,280 | | | | — | | | | 1,081,253 | | | | — | | | | (1,072,973 | ) | Mortgage delivery commitments | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets at fair value | | $ | 2,261,433 | | | $ | — | | | $ | 3,334,406 | | | $ | — | | | $ | (1,072,973 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | Consolidated obligations: | | | | | | | | | | | | | | | | | | | | | Discount notes (to the extent SFAS 159 is elected) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Bonds (to the extent SFAS 159 is elected)(b) | | | (6,035,741 | ) | | | — | | | | (6,035,741 | ) | | | — | | | | — | | Derivative liabilities(a) | | | | | | | | | | | | | | | | | | | | | Interest-rate derivatives | | | (746,137 | ) | | | — | | | | (4,056,138 | ) | | | — | | | | 3,310,001 | | Mortgage delivery commitments | | | (39 | ) | | | — | | | | (39 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities at fair value | | $ | (6,781,917 | ) | | $ | — | | | $ | (10,091,918 | ) | | $ | — | | | $ | 3,310,001 | | | | | | | | | | | | | | | | | |
| | | | | Level 1 — Quoted prices in active markets for identical assets. | | | | Level 2 — Significant other observable inputs. | | | | Level 3 — Significant unobservable inputs. | | (a) | | Derivative assets and liabilities were interest-rate contracts, except forincluding de minimis amount of mortgage delivery contracts. Based on an analysis of the nature of the risk, the presentation of derivatives as a single class is appropriate. | | (b) | | Based on its analysis of the nature of risks of the FHLBNY’s debt measured at fair value, the FHLBNY has determined that presenting the debt as a single class is appropriate. |
Items Measured at Fair Value on a Nonrecurring Basis Certain assets and liabilities would be measured at fair value on a nonrecurring basis, and forbasis. For the FHLBNY, such items may include mortgage loans in foreclosure, or mortgage loans and held-to-maturity securities written down to fair value, and real estate owned. At September 30,March 31, 2011 and December 31, 2010, the Bank measured and recorded the fair values on a nonrecurring basis of HTM securities deemed to be OTTI;OTTI on a nonrecurring basis; that is, they arewere not measured at fair value on an ongoing basis but are subject to fair-valuefair value adjustments in certain circumstances (for example, when there is evidence of other-than-temporary impairment — OTTI) in accordance with the guidance on recognition and presentation of other-than-temporary impairment. The nonrecurring measurement basis related toAt December 31, 2010, certain private-label HTM mortgage-backedheld-to-maturity securities determined to bewere deemed OTTI at September 30, 2010, and weretheir carrying values written down and recorded at their fair values of $8.1 million and $42.9 millionon a nonrecurring basis. There were no held-to-maturity securities that had to be written down to their fair values at September 30, 2010 and DecemberMarch 31, 2009. For more information also see Note 4 — Held-to-maturity securities.2011. 4536
The following table summarizes the fair values of MBS for which a non-recurring1 change in fair value was recorded at September 30, 2010 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2010 | | | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Held-to-maturity securities | | | Home equity loans | | $ | 8,063 | | $ | — | | $ | — | | $ | 8,063 | | | Private-label residential mortgage-backed securities | | | $ | 15,827 | | $ | — | | $ | — | | $ | 15,827 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 8,063 | | $ | — | | $ | — | | $ | 8,063 | | | $ | 15,827 | | $ | — | | $ | — | | $ | 15,827 | | | | | | | | | | | | | | | | | | | | |
Note: Certain OTTI securities were written down to their fair values ($8.1 million) when it was determined that their carrying values prior to write-down ($8.6 million) were in excess of their fair values. For Held-to-maturity securities that were previously credit impaired but no additional credit impairment were deemed necessary at September 30, 2010, the securities were recorded at their carrying values and not re-adjusted to their fair values.
The following table summarizes the fair values of MBS for which a non-recurring change in fair value was recorded at December 31, 2009 (in thousands):
| | | | | | | | | | | | | | | | | | | December 31, 2009 | | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | Held-to-maturity securities | | | | | | | | | | | | | | | | | Home equity loans | | $ | 42,922 | | | $ | — | | | $ | — | | | $ | 42,922 | | | | | | | | | | | | | | | Total | | $ | 42,922 | | | $ | — | | | $ | — | | | $ | 42,922 | | | | | | | | | | | | | | |
The following table summarizes the fair values of MBS for which a non-recurring change in fair value was recorded at September 30, 2009 (in thousands):
| | | | | | | | | | | | | | | | | | | September 30, 2009 | | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | Held-to-maturity securities | | | | | | | | | | | | | | | | | Home equity loans | | $ | 125,771 | | | $ | — | | | $ | — | | | $ | 125,771 | | | | | | | | | | | | | | | Total | | $ | 125,771 | | | $ | — | | | $ | — | | | $ | 125,771 | | | | | | | | | | | | | | |
| | | Note: | | Certain OTTI securities were written down to their fair values ($15.8 million) when it was determined that their carrying values prior to write-down ($16.3 million) were in excess of their fair values. For Held-to-maturity securities that were previously credit impaired but no additional credit impairment were deemed necessary at December 31, 2010, the securities were recorded at their carrying values and not re-adjusted to their fair values. | | 1 | | March 31, 2011 — No non-recurring fair values were recorded. |
Estimated fair values — Summary Tables The carrying valuevalues and estimated fair values of the FHLBNY’s financial instruments as of September 30, 2010 and December 31, 2009 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Carrying | | Estimated | | Carrying | | Estimated | | | Carrying | | Estimated | | Carrying | | Estimated | | Financial Instruments | | Value | | Fair Value | | Value | | Fair Value | | | Value | | Fair Value | | Value | | Fair Value | | Assets | | | Cash and due from banks | | $ | 69,471 | | $ | 69,471 | | $ | 2,189,252 | | $ | 2,189,252 | | | $ | 2,953,801 | | $ | 2,953,801 | | $ | 660,873 | | $ | 660,873 | | Federal funds sold | | 4,095,000 | | 4,094,993 | | 3,450,000 | | 3,449,997 | | | 5,093,000 | | 5,092,998 | | 4,988,000 | | 4,987,976 | | Available-for-sale securities | | 3,373,781 | | 3,373,781 | | 2,253,153 | | 2,253,153 | | | 3,719,024 | | 3,719,024 | | 3,990,082 | | 3,990,082 | | Held-to-maturity securities | | | Long-term securities | | 8,221,246 | | 8,389,954 | | 10,519,282 | | 10,669,252 | | | 8,042,487 | | 8,152,867 | | 7,761,192 | | 7,898,300 | | Advances | | 85,697,171 | | 85,949,019 | | 94,348,751 | | 94,624,708 | | | 75,487,377 | | 75,600,168 | | 81,200,336 | | 81,292,598 | | Mortgage loans held-for-portfolio, net | | 1,267,687 | | 1,341,140 | | 1,317,547 | | 1,366,538 | | | 1,270,891 | | 1,325,914 | | 1,265,804 | | 1,328,787 | | Accrued interest receivable | | 305,763 | | 305,763 | | 340,510 | | 340,510 | | | 250,454 | | 250,454 | | 287,335 | | 287,335 | | Derivative assets | | 32,425 | | 32,425 | | 8,280 | | 8,280 | | | 24,964 | | 24,964 | | 22,010 | | 22,010 | | Other financial assets | | 3,390 | | 3,390 | | 3,412 | | 3,412 | | | 3,032 | | 3,032 | | 3,981 | | 3,981 | | | | | Liabilities | | | Deposits | | 3,730,257 | | 3,730,263 | | 2,630,511 | | 2,630,513 | | | 2,512,631 | | 2,512,635 | | 2,454,480 | | 2,454,488 | | Consolidated obligations: | | | Bonds | | 74,918,893 | | 75,261,195 | | 74,007,978 | | 74,279,737 | | | 68,529,981 | | 68,679,235 | | 71,742,627 | | 71,926,039 | | Discount notes | | 17,787,908 | | 17,788,224 | | 30,827,639 | | 30,831,201 | | | 19,507,159 | | 19,507,547 | | 19,391,452 | | 19,391,743 | | Mandatorily redeemable capital stock | | 67,348 | | 67,348 | | 126,294 | | 126,294 | | | 59,126 | | 59,126 | | 63,219 | | 63,219 | | Accrued interest payable | | 277,647 | | 277,647 | | 277,788 | | 277,788 | | | 230,109 | | 230,109 | | 197,266 | | 197,266 | | Derivative liabilities | | 784,498 | | 784,498 | | 746,176 | | 746,176 | | | 839,710 | | 839,710 | | 954,898 | | 954,898 | | Other financial liabilities | | 57,242 | | 57,242 | | 38,832 | | 38,832 | | | 52,178 | | 52,178 | | 58,818 | | 58,818 | |
4637
Fair Value Option Disclosures The following table summarizes the activity related to consolidated obligation bonds and discount notes for which the Bank elected the fair value optionFair Value Option (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended | | Nine months ended | | | | | September 30, | | September 30, | | | | | 2010 | | 2009 | | 2010 | | 2010 | | 2009 | | 2010 | | | | | | | | | | | | | | | | | | | | | | | | Bonds | | Discount notes* | | Bonds | | Discount notes* | | | Bonds | | Discount Notes * | | | | | March 31, 2011 | | December 31, 2010 | | March 31, 2010 | | March 31, 2011 | | December 31, 2010 | | Balance, beginning of the period | | $ | (9,763,246 | ) | | $ | (550,303 | ) | | $ | (1,753,688 | ) | | $ | (6,035,741 | ) | | $ | (998,942 | ) | | $ | — | | | $ | (14,281,463 | ) | | $ | (6,035,741 | ) | | $ | (6,035,741 | ) | | $ | (956,338 | ) | | $ | — | | New transaction elected for fair value option | | | (6,601,000 | ) | | | (1,835,000 | ) | | — | | | (17,771,000 | ) | | | (2,385,000 | ) | | | (1,752,185 | ) | | New transactions elected for fair value option | | | | (12,250,000 | ) | | | (25,471,000 | ) | | | (4,420,000 | ) | | — | | | (1,851,991 | ) | Maturities and terminations | | 5,600,000 | | — | | — | | 13,060,000 | | 983,000 | | — | | | 13,926,000 | | 17,235,000 | | 3,685,000 | | 224,448 | | 898,788 | | Change in fair value | | 576 | | 426 | | | (521 | ) | | | (11,118 | ) | | 8,653 | | | (1,494 | ) | | Change in accrued interest | | 2,434 | | | (1,091 | ) | | | (1,692 | ) | | | (3,377 | ) | | 6,321 | | | (2,222 | ) | | Changes in fair value | | | 316 | | | (2,556 | ) | | | (8,419 | ) | | 424 | | | (787 | ) | Changes in accrued interest/unaccreted balance | | | | (110 | ) | | | (7,166 | ) | | | (1,453 | ) | | | (426 | ) | | | (2,348 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, end of the period | | $ | (10,761,236 | ) | | $ | (2,385,968 | ) | | $ | (1,755,901 | ) | | $ | (10,761,236 | ) | | $ | (2,385,968 | ) | | $ | (1,755,901 | ) | | $ | (12,605,257 | ) | | $ | (14,281,463 | ) | | $ | (6,780,613 | ) | | $ | (731,892 | ) | | $ | (956,338 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | * | | Note: Discount notes were not designated under FVO at DecemberMarch 31, 20092010 |
The following table presents the change in fair value included in the Statements of Income for the consolidated obligation bonds and discount notes designated in accordance with the accounting standards on the fair value optionFair Value Option for financial assets and liabilities (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | | 2011 | | 2010 | | | | Interest | | Total change in fair | | Net gain(loss) | | Total change in | | | Net Gain(Loss) | | Total Change in Fair | | Net Gain(Loss) | | Total Change in Fair | | | | expense on | | Net gain(loss) | | value included in | | Interest expense | | due to | | fair value included | | | Due to | | Value Included in | | Due to | | Value Included in | | | | consolidated | | due to changes in | | current period | | on consolidated | | changes in | | in current period | | | Interest | | Changes in | | Current Period | | Interest | | Changes in | | Current Period | | | | obligations | | fair value | | earnings | | obligations | | fair value | | earnings | | | Expense | | Fair Value | | Earnings | | Expense | | Fair Value | | Earnings | | | | | Consolidated obligations-bonds | | $ | (10,926 | ) | | $ | 576 | | $ | (10,350 | ) | | $ | (1,091 | ) | | $ | 426 | | $ | (665 | ) | | $ | (13,838 | ) | | $ | 316 | | $ | (13,522 | ) | | $ | (8,522 | ) | | $ | (8,419 | ) | | $ | (16,941 | ) | Consolidated obligations-discount notes | | | (1,692 | ) | | | (521 | ) | | | (2,213 | ) | | — | | — | | — | | | | (981 | ) | | 424 | | | (557 | ) | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (12,618 | ) | | $ | 55 | | $ | (12,563 | ) | | $ | (1,091 | ) | | $ | 426 | | $ | (665 | ) | | $ | (14,819 | ) | | $ | 740 | | $ | (14,079 | ) | | $ | (8,522 | ) | | $ | (8,419 | ) | | $ | (16,941 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | | Interest | | | | | | | | | | | | | | | Net gain(loss) | | | Total change in | | | | expense on | | | Net gain(loss) | | | Total change in | | | Interest expense | | | due to | | | fair value included | | | | consolidated | | | due to changes in | | | fair value included in | | | on consolidated | | | changes in | | | in current period | | | | obligations | | | fair value | | | current period earnings | | | obligations | | | fair value | | | earnings | | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated obligations-bonds | | $ | (30,011 | ) | | $ | (11,118 | ) | | $ | (41,129 | ) | | $ | (2,380 | ) | | $ | 8,653 | | | $ | 6,273 | | Consolidated obligations-discount notes | | | (2,222 | ) | | | (1,494 | ) | | | (3,716 | ) | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | $ | (32,233 | ) | | $ | (12,612 | ) | | $ | (44,845 | ) | | $ | (2,380 | ) | | $ | 8,653 | | | $ | 6,273 | | | | | | | | | | | | | | | | | | | | |
47
The following table compares the aggregate fair value, and aggregate remaining contractual principal balance outstanding of consolidated obligation bonds and discount notes for which the fair value optionFair Value Option has been elected (in thousands): | | | | | | | | | | | | | | | September 30, 2010 | | | | Principal | | | | | | | Fair value | | | | Balance | | | Fair value | | | over/(under) | | Consolidated obligations-bonds | | $ | 10,751,000 | | | $ | 10,761,236 | | | $ | 10,236 | | Consolidated obligations-discount notes | | | 1,752,185 | | | | 1,755,901 | | | | 3,716 | | | | | | | | | | | | | | $ | 12,503,185 | | | $ | 12,517,137 | | | $ | 13,952 | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, 2009 | | | | Principal | | | | | | | Fair value | | | | Balance | | | Fair value | | | over/(under) | | Consolidated obligations-bonds | | $ | 6,040,000 | | | $ | 6,035,741 | | | $ | (4,259 | ) | Consolidated obligations-discount notes | | | — | | | | — | | | | — | | | | | | | | | | | | | | $ | 6,040,000 | | | $ | 6,035,741 | | | $ | (4,259 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | December 31, 2010 | | | | September 30, 2009 | | | Principal | | Fair Value | | Principal | | Fair Value | | | | Principal | | Fair value | | | Balance | | Fair Value | | Over/(Under) | | Balance | | Fair Value | | Over/(Under) | | | | Balance | | Fair value | | over/(under) | | | Consolidated obligations-bonds | | $ | 2,385,000 | | $ | 2,385,968 | | $ | 968 | | | $ | 12,600,000 | | $ | 12,605,257 | | $ | 5,257 | | $ | 14,276,000 | | $ | 14,281,463 | | $ | 5,463 | | Consolidated obligations-discount notes | | — | | — | | — | | | 728,755 | | 731,892 | | 3,137 | | 953,203 | | 956,338 | | 3,135 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,385,000 | | $ | 2,385,968 | | $ | 968 | | | $ | 13,328,755 | | $ | 13,337,149 | | $ | 8,394 | | $ | 15,229,203 | | $ | 15,237,801 | | $ | 8,598 | | | | | | | | | | | | | | | | | | | | | | |
Notes to Estimated Fair Values of financial instrumentsFinancial Instruments The fair value of a financial instrumentsinstrument that is an asset is defined as the price FHLBNY would receive to sell an asset in an orderly transaction between market participants at the measurement date. A financial liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair values are based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices are not available, valuation models and inputs are utilized. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or markets and the instruments’ complexity. The fair values of financial assets and liabilities reported in the tables above are discussed below. For additional information also see Significant Accounting Policies and Estimates in Note 1. The Fair Value Summary Tables above do not represent an estimate of the overall market value of the FHLBNY as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities. The estimated fair value amounts have been determined by the FHLBNY using procedures described below. Because an active secondary market does not exist for a portion of the FHLBNY’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. Cash and due from banks The estimated fair value approximates the recorded book balance. Interest-bearing deposits and Federal funds sold The FHLBNY determines estimated fair values of certain short-term investments by calculating the present value of expected future cash flows from the investments. The discount rates used in these calculations are the current coupons of investments with similar terms. 38
Investment securities In an effort to achieve consistency among all of the FHLBanks on the pricing of investments in mortgage-backed securities, in the third quarter of 2009 the FHLBanks formed the MBS Pricing Governance Committee, which was responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. Consistent with the guidance from the Governance Committee, the FHLBNY changed the methodology used to estimate the fair value of mortgage-backed securities as of September 30, 2009. Under the approved methodology, theThe Bank requests prices for all mortgage-backed securities from four specified third-party vendors, and depending on the number of prices received for each security, selectedselects a median or average price as defined by the methodology. If four prices are received by the FHLBNY from the pricing vendors, the average of the middle two prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is subject to additional validation.
48
The FHLBNY routinely performs a comparison analysis of pricing to understand pricing trends and to establish a means of validating changes in pricing from period-to-period.period to period. The computed prices are tested for reasonableness using tolerance thresholds. Prices within the established thresholds are generally accepted unless strong evidence suggests that using the median pricing methodology as described above would not be appropriate. Preliminary estimated fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis of all relevant facts and circumstances that a market participant would consider. The Bank also runs pricing through prepayment models to test the reasonability of pricing relative to changes in the implied prepayment options of the bonds. Separately, the Bank performs comprehensive credit analysis, including the analysis of underlying cash flows and collateral. The FHLBNY believes such methodologies — valuation comparison, review of changes in valuation parameters, and credit analysis have been designed to identify the effects of the credit crisis, which has tended to reduce the availability of certain observable market pricing or has caused the widening of the bid/offer spread of certain securities. Prior to the adoption of the new pricing methodology in the 2009 third quarter, the Bank used a similar process that utilized three third-party vendors and similar variance thresholds. This change in pricing methodology did not have a significant impact on the Bank’s estimated fair values of its mortgage-backed securities.
As of September 30, 2010, fourFour vendor prices were received for substantially all of the FHLBNY’s MBS holdings and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supported the FHLBNY’s conclusion that the final computed prices were reasonable estimates of fair value. While the FHLBNY adopted this common methodology, the fair values of mortgage-backed investment securities are still estimated by FHLBNY’s management which remains responsible for the selection and application of its fair value methodology and determining the reasonableness of assumptions and inputs used.
The four specialized pricing services use pricing models or quoted prices of securities with similar characteristics. The valuation techniques used by pricing services employ cash flow generators and option-adjusted spread models. Pricing spreads used as inputs in the models are based on new issue and secondary market transactions if the securities are traded in sufficient volumes in the secondary market. These pricing vendors typically employ valuation techniques that incorporate benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing, as may be deemed appropriate for the security. Such inputs into the pricing models employed by pricing services for most of the Bank’s investments are market based and observable and are considered Level 2 of the fair value hierarchy. The valuation of the FHLBNY’s private-label securities, all designated as held-to-maturity, may require pricing services to use significant inputs that are subjective and may be considered to be Level 3 of the fair value hierarchy because of the current lack of significant market activity so that the inputs may not be market based and observable. At September 30, 2010 and December 31, 2009,the reporting dates in this Form 10-Q, all private-label mortgage-backed securities were classified as held-to-maturity and were recorded in the balance sheet at their carrying values. Carrying value of a security is the same as its amortized cost unless the security is determined to be OTTI. In the period the security is determined to be OTTI, its carrying value is generally adjusted down to its fair value. In accordance with the amended guidance under the accounting standards for investments in debt and equity securities, certain held-to-maturity private-label mortgage-backed securities were written down to their fair value at September 30, 2010 and December 31, 20092010 (none at March 31, 2011) as a result of a recognition of OTTI. For such HTM securities, their carrying values arewere recorded in the balance sheet at their fair values. The fair values andfor such securities, are classified on a nonrecurring basis, aswere considered to be Level 3 financial instruments under the valuation hierarchy. This determination was made based on management’s view that the private-label instruments may not have an active market because of the specific vintage of the securities as well as inherent conditions surrounding the trading of private-label mortgage-backed securities. The fair value of housing finance agency bonds is estimated by management using information primarily from pricing services. Advances The fair values of advances are computed using standard option valuation models. The most significant inputs to the valuation model are (1) consolidated obligation debt curve (the “CO Curve”), published by the Office of Finance and available to the public, and (2) LIBOR swap curves and volatilities. The Bank considers both these inputs to be market basedmarket-based and observable as they can be directly corroborated by market participants. Mortgage loans The fair value of MPF loans and loans in the inactive CMA programs are priced using a valuation technique referred to as the “market approach”.approach.” Loans are aggregated into synthetic pass-through securities based on product type, loan origination year, gross coupon and loan term. Thereafter, these are compared against closing “TBA” prices extracted from independent sources. All significant inputs to the loan valuations are market basedmarket-based and observable. 39
Accrued interest receivable and payable The estimated fair values approximate the recorded book value because of the relatively short period of time between their origination and expected realization. 49
Derivative assets and liabilities The FHLBNY’s derivatives are traded in the over-the-counter market. Discounted cash flow analysis is the primary methodology employed by the FHLBNY’s valuation models to measure and record the fair values of its interest rate swaps. The valuation technique is considered as an “Income approach”.approach.” Interest rate caps and floors are valued under the “Market approach”.approach.” Interest rate swaps and interest rate caps and floors are valued in an industry-standard option adjustedoption-adjusted valuation models that utilize market inputs, which can be corroborated fromby widely accepted third-party sources. The Bank’s valuation model utilizes a modifiedBlack-Karasinskimodel that assumes that rates are distributed log normally. The log-normal model precludes interest rates turning negative in the model computations. Significant market basedmarket-based and observable inputs into the valuation model include volatilities and interest rates. These derivative positions are classified within Level 2 of the valuation hierarchy, and include interest rate swaps, swaptions, interest rate caps and floors, and mortgage delivery commitments. The FHLBNY employs control processes to validate the fair value of its financial instruments, including those derived from valuation models. These control processes are designed to ensure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews of the pricing model’s theoretical soundness and appropriateness by specialists with relevant expertise who are independent from the trading desks or personnel who were involved in the design and selection of model inputs. Additionally, groups that are independent from the trading desk or personnel involved in the design and selection of model inputs participate in the review and validation of the fair values generated from the valuation model. The FHLBNY maintains an ongoing review of its valuation models and has a formal model validation policy in addition to procedures for the approval and control of data inputs. The valuation of derivative assets and liabilities reflectreflects the value of the instrument including the values associated with counterparty risk and would also take into account the FHLBNY’s own credit standing and non-performance risk. The Bank has collateral agreements with all its derivative counterparties and enforces collateral exchanges at least weekly. The computed fair values of the FHLBNY’s derivatives took into consideration the effects of legally enforceable master netting agreements that allow the FHLBNY to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each derivative counterparty have bilateral collateral thresholds that take into account both the Bank’s and the counterparty’s credit ratings. As a result of these practices and agreements and the FHLBNY’s assessment of any change in its own credit spread, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was sufficiently mitigated to an immaterial level such that no credit adjustments were deemed necessary to the recorded fair value of derivative assets and derivative liabilities in the Statements of Condition at September 30, 2010 and December 31, 2009.Conditions in this Form 10-Q. Deposits The FHLBNY determines estimated fair values of deposits by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the current cost of deposits with similar terms. Consolidated obligations The FHLBNY estimates fair values based on the cost of raising comparable term debt and prices its bonds and discount notes off of the current consolidated obligations market curve, which has a daily active market. The fair values of consolidated obligation debt (bonds and discount notes) are computed using a standard option valuation model using market based and observable inputs: (1) consolidated obligation debt curve (the “CO Curve”) that is available to the public and published by the Office of Finance, and (2) LIBOR curve and volatilities. Model adjustments that are not observable are not considered significant. Mandatorily redeemable capital stock The FHLBNY considers the fair value of capital subject to mandatory redemption, as the redemption value of the stock, which is generally par plus accrued estimated dividend. The FHLBNY has a cooperative structure. Stock can only be acquired by members at par value and redeemed at par value. Stock is not traded publicly and no market mechanism exists for the exchange of stock outside the cooperative structure. Note 18.17. Commitments and contingencies.Contingencies. The FHLBanks have jointConsolidated obligations — Joint and several liabilityliability.Although the FHLBNY is primarily liable only for its portion of consolidated obligations (i.e. those consolidated obligations issued on its behalf and those that have been transferred/assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks.
The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on their behalf. Accordingly, should one or moreany consolidated obligation, regardless of whether there has been a default by the FHLBanksFHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be unableentitled to repay their participation inreimbursement from the consolidated obligations, each ofFHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the other FHLBanks could be called uponFHLBank providing assistance to repay all or partthe extent of such obligations, aspayment and other associated costs (including interest to be determined or approved by the Finance Agency. NeitherAgency). As discussed more fully in Note 20 to the FHLBNY nor any other FHLBank has ever had to assume or payaudited financial statements filed on March 25, 2011, the consolidated obligations of another FHLBank. The FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future. Accordingly, the FHLBNY has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at March 31, 2011 and December 31, 2010. 40
However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then 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 that the Finance Agency may determine. No FHLBank has ever failed to make a payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate among the other FHLBanks the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the 12 FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation. If principal or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the defaulting FHLBank may not pay dividends to, or repurchase shares of stock from, any shareholder of the defaulting FHLBank. The FHLBNY did not hold any consolidated obligations of another FHLBank as investments at March 31, 2011 and December 31, 2010. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock from, any member or non-member stockholder until the Finance Agency approves the FHLBNY’s consolidated obligation payment plan or another remedy, and until the FHLBNY pays all the interest and principal currently due under all its consolidated obligations. Because the FHLBNY is jointly and severally liable for debt issued by other FHLBanks, the FHLBNY has not identified consolidated obligations outstanding by primary obligor. The FHLBNY does not believe that the identification of particular banks as the primary obligors on these consolidated obligations is relevant, because all FHLBanks are jointly and severally obligated to pay all consolidated obligations. The identity of the primary obligor does not affect the FHLBNY’s investment decisions. The FHLBNY’s ownership of consolidated obligations in which other FHLBanks are primary obligors does not affect the FHLBNY’s “guarantee” on consolidated obligations, as there is no automatic legal right of offset. Even if the FHLBNY were to claim an “offset,” the FHLBNY would still be jointly and severally obligated for any debt service shortfall caused by the FHLBanks’ failure to pay. The par amounts of the outstanding consolidated obligations of all 12 FHLBanks were $0.8 trillion at March 31, 2011 and December 31, 2010. Under the provisions of accounting standard for guarantees, the Bank would have been required to recognize the fair value of the FHLBNY’s joint and several liability for all the consolidated obligations, as discussed above. However, the FHLBNY considers the joint and several liabilities as similar to a related party guarantee, which meets the scope exception under the accounting standard for guarantees. Accordingly, the FHLBNY has not recognized the fair value of a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at September 30, 2010March 31, 2011 and December 31, 2009. The par amount of the twelve FHLBanks’ outstanding consolidated obligations, including the FHLBNY’s, was approximately $0.8 trillion and $0.9 trillion at September 30, 2010 and December 31, 2009.2010. Standby letters of credit are executed for a fee on behalf of members to facilitate residential housing, community lending, and members’ asset/liability management or to provide liquidity. A standby letter of credit is a financing arrangement between the FHLBNY and its member. Members assume an unconditional obligation to reimburse the FHLBNY for value given by the FHLBNY to the beneficiary under the terms of the standby letter of credit. The FHLBNY may, in its discretion, permit the member to finance repayment of their obligation by receiving a collateralized advance. Outstanding standby letters of credit were approximately $1,865.4 million$2.4 billion and $697.9 million$2.3 billion as of September 30, 2010March 31, 2011 and December 31, 2009,2010, and had original terms of up to 15 years, with a final expiration in 2019. Standby letters of credit are fully collateralized. Unearned fees on standby letters of credit wereare recorded in Other liabilities, and were not significant as of September 30, 2010March 31, 2011 and December 31, 2009.2010. Based on management’s credit analyses and collateral requirements, the FHLBNY does not deem it necessary to have any provision for credit losses on these commitments and letters of credit. 50
Under the MPF program, the Bank was unconditionally obligated to purchase $20.7$25.2 million and $4.2$30.0 million of mortgage loans at September 30, 2010March 31, 2011 and December 31, 2009.2010. Commitments are generally for periods not to exceed 45 business days. Such commitments were recorded as derivatives at their fair value under the accounting standards for derivatives and hedging. In addition, the FHLBNY had entered into conditional agreements under “Master Commitments” with its members in the MPF program to purchase mortgage loans in aggregate of $605.9$785.5 million and $484.6$630.6 million as of September 30, 2010March 31, 2011 and December 31, 2009.2010. The FHLBNY executes derivatives with major financial institutions and enters into bilateral collateral agreements. When counterparties are exposed, the Bank would typically pledge cash collateral to mitigate the counterparty’s credit exposure. To mitigate the counterparties’ exposures, the FHLBNY deposited $3.8$1.9 billion and $2.2$2.7 billion in cash with derivative counterparties as pledged collateral at September 30, 2010March 31, 2011 and December 31, 2009,2010, and these amounts were reported as a deduction to Derivative liabilities. The FHLBNY was also exposed to credit risk associated with outstanding derivative transactions measured by the replacement cost of derivatives in net fair value gain positions of $32.4$25.0 million and $8.3$22.0 million at September 30, 2010March 31, 2011 and December 31, 2009.2010. At September 30,March 31, 2011 and December 31, 2010, counterparties had deposited $53.8$71.1 million and $9.3 million in cash as collateral to mitigate such an exposure. At December 31, 2009, the fair values of derivatives in a gain position were below the threshold and derivative counterparties pledged no cash to the FHLBNY. 41
The FHLBNY charged to operating expenses net rental costs of approximately $0.8 millionFuture benefit payments for the three months ended September 30, 2010BEP and 2009. The net rental cost for the nine months ended September 30, 2010 and 2009 was $2.5 million. Lease agreements for FHLBNY premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increasespostretirement health benefit plan are not expectedconsidered significant. The Bank expects to havefund $9.9 million over the next 12 months towards the Defined Benefit Plan, a material effect on the FHLBNY’s results of operations or financial condition.non-contributory pension plan. The following table summarizes contractual obligations and contingencies as of September 30, 2010March 31, 2011 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | March 31, 2011 | | | | Payments due or expiration terms by period | | | Payments Due or Expiration Terms by Period | | | | Less than | | One year | | Greater than three | | Greater than | | | | | Less Than | | One Year | | Greater Than Three | | Greater Than | | | | | | one year | | to three years | | years to five years | | five years | | Total | | | One Year | | to Three Years | | Years to Five Years | | Five Years | | Total | | Contractual Obligations | | | Consolidated obligations-bonds at par1 | | $ | 38,972,100 | | $ | 25,068,825 | | $ | 6,634,375 | | $ | 3,054,200 | | $ | 73,729,500 | | | $ | 32,657,200 | | $ | 23,715,475 | | $ | 7,837,380 | | $ | 3,695,015 | | $ | 67,905,070 | | Mandatorily redeemable capital stock1 | | 45,708 | | 14,650 | | 2,037 | | 4,953 | | 67,348 | | | 37,418 | | 4,959 | | 459 | | 16,290 | | 59,126 | | Premises (lease obligations)2 | | 3,060 | | 6,284 | | 4,748 | | 4,674 | | 18,766 | | | 3,060 | | 5,997 | | 4,674 | | 3,506 | | 17,237 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total contractual obligations | | 39,020,868 | | 25,089,759 | | 6,641,160 | | 3,063,827 | | 73,815,614 | | | 32,697,678 | | 23,726,431 | | 7,842,513 | | 3,714,811 | | 67,981,433 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other commitments | | | Standby letters of credit | | 1,824,089 | | 20,012 | | 17,472 | | 3,861 | | 1,865,434 | | | 2,366,166 | | 19,359 | | 41,777 | | 3,861 | | 2,431,163 | | Consolidated obligations-bonds/ discount notes traded not settled | | 774,322 | | — | | — | | — | | 774,322 | | | 4,522,000 | | — | | — | | — | | 4,522,000 | | Commitments to fund additional advances | | | 16,000 | | — | | — | | — | | 16,000 | | Open delivery commitments (MPF) | | 20,675 | | — | | — | | — | | 20,675 | | | 25,197 | | — | | — | | — | | 25,197 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other commitments | | 2,619,086 | | 20,012 | | 17,472 | | 3,861 | | 2,660,431 | | | 6,929,363 | | 19,359 | | 41,777 | | 3,861 | | 6,994,360 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total obligations and commitments | | $ | 41,639,954 | | $ | 25,109,771 | | $ | 6,658,632 | | $ | 3,067,688 | | $ | 76,476,045 | | | $ | 39,627,041 | | $ | 23,745,790 | | $ | 7,884,290 | | $ | 3,718,672 | | $ | 74,975,793 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Callable bonds contain exercise date or a series of exercise dates that may result in a shorter redemption period. Mandatorily redeemable capital stock is categorized by the dates at which the corresponding advances outstanding mature. Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock, under which stock may not be redeemed until the later of five years from the date the member becomes a nonmember or the related advance matures. | | 2 | | Immaterial amount of commitments for equipment leases are not included. |
The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses is required. Impact of the bankruptcy of Lehman Brothers As previously reported, onOn September 15, 2008, Lehman Brothers Holdings, Inc. (“LBHI”), the parent company of Lehman Brothers Special Financing Inc. (“LBSF”) and a guarantor of LBSF’s obligations, filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. LBSF filed for protection under Chapter 11 in the same court on October 3, 2008. LBSF was a counterparty to FHLBNY on multiple derivative transactions under an International Swap Dealers Association, Inc. master agreement with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF. The net amount that was due to the Bank after giving effect to obligations that were due
51
LBSF was approximately $65 million. The FHLBNY timely filed proofs of claim in the amount of approximately $65 million as creditors of LBSF and LBHI in connection with the bankruptcy proceedings. The Bank fully reserved the LBSF receivables as the bankruptcies of LBHI and LBSF make the timing and the amount of any recovery uncertain. As previously reported, the Bank received a Derivatives ADR Notice from LBSF dated July 23, 2010 making a Demand as of the date of the Notice of approximately $268 million owed to LBSF by the Bank. Subsequently, in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court dated September 17, 2009 (“Order”), the Bank responded to LBSF on August 23, 2010, denying LBSF’s Demand. LBSF served a reply on September 7, 2010, effectively reiterating its position. AThe mediation has been scheduledbeing conducted pursuant to the Order forcommenced on December 8, 2010. 2010 and concluded without settlement on March 17, 2011. Pursuant to the Order, positions taken by the parties in the ADR process are confidential. While the Bank believes that LBSF’s position is without merit, the amount the Bank actually recovers or pays will ultimately be decided in the course of the bankruptcy proceedings. The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses is required.
Note 19.18. Related party transactions.Party Transactions. The FHLBNY is a cooperative and the members own almost all of the stock of the Bank. Stock that isAny stock not owned by members is held by former members. The majority of the members of the Board of Directors of the FHLBNY are elected by and from the membership. The FHLBNY conducts its advances business almost exclusively with members. The Bank considers its transactions with its members and non-member stockholders as related party transactions in addition to transactions with other FHLBanks, the Office of Finance, and the Finance Agency. All transactions with all members, including those whose officers may serve as directors of the FHLBNY, are at terms that are no more favorable than comparable transactions with other members. The FHLBNY may from time to time borrow or sell overnight and term Federal funds at market rates to members. 42
Debt Transfers DuringFor the three months ended March 31, 2011 and 2010, third quarter, the bank assumedBank did not assume debt from another FHLBank totaling $193.9FHLBank. The Bank transferred $150.0 million (par amounts). There was no transfer of consolidated obligation bonds to other FHLBanks or assumption of debt in the prior two quarters of 2010. Generally, when debt is transferred in exchange for a cash price that represents the fair market values of the debt. No debt was transferred to the FHLBNY or assumed from another FHLBank for the first three quarters of 2009.months ended March 31, 2011. No bonds were transferred by the FHLBNY to another FHLBank in the same period in 2010.
When debt is transferred, atAt trade date, the transferring bank notifies the Office of Finance of a change in primary obligor for the transferred debt.
Advances sold or transferred No advances were transferred/sold to the FHLBNY or from the FHLBNY to another FHLBank in the first three quarters of 2010 orany periods in 2009.this report. MPF Program In the MPF program, the FHLBNY may participate out certain portions of its purchases of mortgage loans from its members. Transactions are at market rates. TheLoans participated by the FHLBNY to the FHLBank of Chicago the MPF provider’s cumulative share of interest in the FHLBNY’s MPF loanswas $75.0 million and $81.2 million at September 30, 2010March 31, 2011 and December 31, 2009 was $87.8 million and $101.2 million from inception of the program through mid-2004.2010 on a cumulative basis. Since 2004, the FHLBNY has not shared its purchases with the FHLBank of Chicago. Fees paid to the FHLBank of Chicago were $0.1 million in the third quarters of 2010 and 2009, and $0.4 million for the ninethree months end September 30, 2010ended March 31, 2011 and 2009.2010. Mortgage-backed Securities No mortgage-backed securities were acquired from other FHLBanks during the first three quarters of 2010 and 2009.periods in this report. Intermediation Notional amounts of $550.0 million and $320.0 million were outstanding both at September 30, 2010March 31, 2011 and December 31, 20092010 in which the FHLBNY acted as an intermediary to sell derivatives to members. The amountsnotionals include offsetting identical transactions with unrelated derivatives counterparties. Net fair value exposures of these transactions at September 30, 2010March 31, 2011 and December 31, 20092010 were not material. The intermediated derivative transactions were fully collateralized. Loans to and borrowings from other Federal Home Loan Banks In the current year first three quarters,months ended March 31, 2011, FHLBNY extended one overnight loan for a total of $100.0 million to another FHLBank. For the three months ended March 31, 2010, the FHLBNY extended one overnight loan for a total of $27.0 million to other FHLBanks and none in the same period of 2009.another FHLBank. Generally, loans made to other FHLBanks are uncollateralized. There was no outstanding balance as of September 30, 2010 or December 31, 2009. Interest income from such loans werewas not significant in any period in this report. 52
The following tables summarize outstanding balances with related parties at September 30, 2010March 31, 2011 and December 31, 2009,2010, and transactions for the three and nine months ended September 30,March 31, 2011 and 2010 and 2009 (in thousands): Related Party: Outstanding Assets, Liabilities and Capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Related | | Unrelated | | Related | | Unrelated | | | Related | | Unrelated | | Related | | Unrelated | | Assets | | | Cash and due from banks | | $ | — | | $ | 69,471 | | $ | — | | $ | 2,189,252 | | | $ | — | | $ | 2,953,801 | | $ | — | | $ | 660,873 | | Federal funds sold | | — | | 4,095,000 | | — | | 3,450,000 | | | — | | 5,093,000 | | — | | 4,988,000 | | Available-for-sale securities | | — | | 3,373,781 | | — | | 2,253,153 | | | — | | 3,719,024 | | — | | 3,990,082 | | Held-to-maturity securities | | | Long-term securities | | — | | 8,221,246 | | — | | 10,519,282 | | | — | | 8,042,487 | | — | | 7,761,192 | | Advances | | 85,697,171 | | — | | 94,348,751 | | — | | | 75,487,377 | | — | | 81,200,336 | | — | | Mortgage loans 1 | | — | | 1,267,687 | | — | | 1,317,547 | | | — | | 1,270,891 | | — | | 1,265,804 | | Accrued interest receivable | | 269,988 | | 35,775 | | 299,684 | | 40,826 | | | 220,672 | | 29,782 | | 256,617 | | 30,718 | | Premises, software, and equipment | | — | | 14,550 | | — | | 14,792 | | | — | | 14,919 | | — | | 14,932 | | Derivative assets2 | | — | | 32,425 | | — | | 8,280 | | | — | | 24,964 | | — | | 22,010 | | Other assets3 | | 208 | | 16,236 | | 179 | | 19,160 | | | 175 | | 16,742 | | 113 | | 21,393 | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 85,967,367 | | $ | 17,126,171 | | $ | 94,648,614 | | $ | 19,812,292 | | | $ | 75,708,224 | | $ | 21,165,610 | | $ | 81,457,066 | | $ | 18,755,004 | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and capital | | | Deposits | | $ | 3,730,257 | | $ | — | | $ | 2,630,511 | | $ | — | | | $ | 2,512,631 | | $ | — | | $ | 2,454,480 | | $ | — | | Consolidated obligations | | — | | 92,706,801 | | — | | 104,835,617 | | | — | | 88,037,140 | | — | | 91,134,079 | | Mandatorily redeemable capital stock | | 67,348 | | — | | 126,294 | | — | | | 59,126 | | — | | 63,219 | | — | | Accrued interest payable | | 15 | | 277,632 | | 16 | | 277,772 | | | 5 | | 230,104 | | 10 | | 197,256 | | Affordable Housing Program4 | | 137,995 | | — | | 144,489 | | — | | | 135,131 | | — | | 138,365 | | — | | Payable to REFCORP | | — | | 20,560 | | — | | 24,234 | | | — | | 18,735 | | — | | 21,617 | | Derivative liabilities2 | | — | | 784,498 | | — | | 746,176 | | | — | | 839,710 | | — | | 954,898 | | Other liabilities5 | | 50,339 | | 51,109 | | 29,330 | | 43,176 | | | 48,395 | | 49,830 | | 49,484 | | 54,293 | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | $ | 3,985,954 | | $ | 93,840,600 | | $ | 2,930,640 | | $ | 105,926,975 | | | $ | 2,755,288 | | $ | 89,175,519 | | $ | 2,705,558 | | $ | 92,362,143 | | | | | | | | | | | | | | | | | | | | | | | | Capital | | 5,266,984 | | — | | 5,603,291 | | — | | | 4,943,027 | | — | | 5,144,369 | | — | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and capital | | $ | 9,252,938 | | $ | 93,840,600 | | $ | 8,533,931 | | $ | 105,926,975 | | | $ | 7,698,315 | | $ | 89,175,519 | | $ | 7,849,927 | | $ | 92,362,143 | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Includes insignificant amounts of mortgage loans purchased from members of another FHLBank. | | 2 | | Derivative assets and liabilities include insignificant fair values due to intermediation activities on behalf of members. | | 3 | | Includes insignificant amounts of miscellaneous assets that are considered related party. | | 4 | | Represents funds not yet disbursed to eligible programs. | | 5 | | Related column includes member pass-through reserves at the Federal Reserve Bank. |
5343
Related Party: Income and Expense transactions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended | | | Three months ended | | | | September 30, 2010 | | September 30, 2009 | | | March 31, 2011 | | March 31, 2010 | | | | Related | | Unrelated | | Related | | Unrelated | | | Related | | Unrelated | | Related | | Unrelated | | Interest income | | | Advances | | $ | 173,459 | | $ | — | | $ | 240,573 | | $ | — | | | $ | 158,696 | | $ | — | | $ | 149,640 | | $ | — | | Interest-bearing deposits 1 | | — | | 1,699 | | — | | 1,014 | | | — | | 966 | | — | | 830 | | Federal funds sold | | — | | 2,253 | | — | | 1,864 | | | — | | 2,546 | | — | | 1,543 | | Available-for-sale securities | | — | | 7,580 | | — | | 6,590 | | | — | | 8,639 | | — | | 5,764 | | Held-to-maturity securities | | | Long-term securities | | — | | 84,242 | | — | | 111,232 | | | — | | 71,056 | | — | | 98,634 | | Certificates of deposit | | — | | — | | — | | 851 | | | Mortgage loans2 | | — | | 16,333 | | — | | 17,405 | | | — | | 15,486 | | — | | 16,741 | | Loans to other FHLBanks and other | | — | | — | | 1 | | — | | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | $ | 173,459 | | $ | 112,107 | | $ | 240,574 | | $ | 138,956 | | | $ | 158,696 | | $ | 98,693 | | $ | 149,640 | | $ | 123,512 | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | Consolidated obligations | | $ | — | | $ | 158,553 | | $ | — | | $ | 223,355 | | | $ | — | | $ | 122,093 | | $ | — | | $ | 164,570 | | Deposits | | 959 | | — | | 516 | | — | | | 470 | | — | | 892 | | — | | Mandatorily redeemable capital stock | | 879 | | — | | 1,807 | | — | | | 744 | | — | | 1,495 | | — | | Cash collateral held and other borrowings | | — | | 14 | | — | | — | | | — | | 9 | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | $ | 1,838 | | $ | 158,567 | | $ | 2,323 | | $ | 223,355 | | | $ | 1,214 | | $ | 122,102 | | $ | 2,387 | | $ | 164,570 | | | | | | | | | | | | | | | | | | | | | | | | Service fees | | $ | 1,297 | | $ | — | | $ | 1,101 | | $ | — | | | Service fees and other | | | $ | 1,256 | | $ | — | | $ | 1,045 | | $ | — | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Includes de minimis amounts of interest income from MPF service provider. | | 2 | | Includes de minimis amounts of mortgage interest income from loans purchased from members of another FHLBank. |
| | | | | | | | | | | | | | | | | | | Nine months ended | | | | September 30, 2010 | | | September 30, 2009 | | | | Related | | | Unrelated | | | Related | | | Unrelated | | Interest income | | | | | | | | | | | | | | | | | Advances | | $ | 477,303 | | | $ | — | | | $ | 1,094,089 | | | $ | — | | Interest-bearing deposits 1 | | | — | | | | 3,766 | | | | — | | | | 19,054 | | Federal funds sold | | | — | | | | 6,600 | | | | — | | | | 1,933 | | Available-for-sale securities | | | — | | | | 23,128 | | | | — | | | | 22,881 | | Held-to-maturity securities | | | | | | | | | | | | | | | | | Long-term securities | | | — | | | | 274,686 | | | | — | | | | 355,916 | | Certificates of deposit | | | — | | | | — | | | | — | | | | 1,392 | | Mortgage loans2 | | | — | | | | 49,689 | | | | — | | | | 54,679 | | Loans to other FHLBanks and other | | | — | | | | — | | | | 1 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | $ | 477,303 | | | $ | 357,869 | | | $ | 1,094,090 | | | $ | 455,855 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | | | | | | | | | | | | | | | Consolidated obligations | | $ | — | | | $ | 481,738 | | | $ | — | | | $ | 956,923 | | Deposits | | | 2,813 | | | | — | | | | 2,002 | | | | — | | Mandatorily redeemable capital stock | | | 3,051 | | | | — | | | | 5,478 | | | | — | | Cash collateral held and other borrowings | | | — | | | | 14 | | | | — | | | | 49 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | $ | 5,864 | | | $ | 481,752 | | | $ | 7,480 | | | $ | 956,972 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Service fees | | $ | 3,472 | | | $ | — | | | $ | 3,181 | | | $ | — | | | | | | | | | | | | | | |
| | | 1 | | Includes de minimis amounts of interest income from MPF service provider. | | 2 | | Includes de minimis amounts of mortgage interest income from loans purchased from members of another FHLBank. |
Note 20.19. Segment informationInformation and concentration.Concentration. The FHLBNY manages its operations as a single business segment. Management and the FHLBNY’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. Advances to large members constitute a significant percentage of FHLBNY’s advance portfolio and its source of revenues. The FHLBNY has a unique cooperative structure and is owned by member institutions located within a defined geographic district. The Bank’s market is the same as its membership district whichThis includes New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. Institutions that are members of the FHLBNY must have their principal places of business within this market, but may also operate elsewhere. The FHLBNY’s primary business is making low-cost, collateralized loans, known as “advances,” to its members. Members use advances as a source of funding to supplement their deposit-gathering activities. As a cooperative, the FHLBNY prices advances at minimal net spreads above the cost of its funding to deliver maximum value to members. Advances to large members constitute a significant percentage of FHLBNY’s advance portfolio and its source of revenues. 54
The FHLBNY’s total assets and capital could significantly decrease if one or more large members were to withdraw from membership or decrease business with the Bank. Members might withdraw or reduce their business as a result of consolidating with an institution that was a member of another FHLBank, or for other reasons. The FHLBNY has considered the impact of losing one or more large members. In general, a withdrawing member would be required to repay all indebtedness prior to the redemption of its capital stock. Under current conditions, the FHLBNY does not expect the loss of a large member to impair its operations, since the FHLBank Act of 1999 does not allow the FHLBNY to redeem the capital of an existing member if the redemption would cause the FHLBNY to fall below its capital requirements. Consequently, the loss of a large member should not result in an inadequate capital position for the FHLBNY. However, such an event could reduce the amount of capital that the FHLBNY has available for continued growth. This could have various ramifications for the FHLBNY, including a possible reduction in net income and dividends, and a lower return on capital stock for remaining members. 44
The top ten advance holders at September 30, 2010,March 31, 2011, December 31, 20092010 and September 30, 2009,March 31, 2010 and associated interest income for the periods then ended are summarized as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | | September 30, 2010 | | | Percentage of | | | | | | Percentage of | | | | | Par | | Total Par Value | | Three Months | | | | Par | | Total Par Value | | Interest Income | | | City | | State | | Advances | | of Advances | | Interest Income | | | | City | | State | | Advances | | of Advances | | Three months | | Nine months | | | | | | | Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,175,000 | | | 21.4 | % | | $ | 178,029 | | $ | 529,488 | | | Paramus | | NJ | | $ | 15,525,000 | | | 21.5 | % | | $ | 158,066 | | Metropolitan Life Insurance Company | | New York | | NY | | 13,230,000 | | 16.5 | | 75,674 | | 222,705 | | | New York | | NY | | 12,155,000 | | 16.8 | | 67,672 | | New York Community Bank* | | Westbury | | NY | | 7,593,167 | | 9.5 | | 77,416 | | 230,083 | | | Westbury | | NY | | 7,293,162 | | 10.1 | | 75,256 | | MetLife Bank, N.A. | | Bridgewater | | NJ | | 4,969,500 | | 6.2 | | 16,368 | | 40,514 | | | Convent Station | | NJ | | 4,284,500 | | 5.9 | | 19,864 | | The Prudential Insurance Co. of America | | | Newark | | NJ | | 2,500,000 | | 3.5 | | 15,027 | | Manufacturers and Traders Trust Company | | Buffalo | | NY | | 3,709,163 | | 4.6 | | 11,607 | | 34,369 | | | Buffalo | | NY | | 2,257,875 | | 3.1 | | 4,505 | | Valley National Bank | | | Wayne | | NJ | | 2,194,500 | | 3.0 | | 23,987 | | Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | 2,735,000 | | 3.4 | | 27,463 | | 83,763 | | | Lake Success | | NY | | 2,099,000 | | 2.9 | | 19,141 | | The Prudential Insurance Co. of America | | Newark | | NJ | | 2,500,000 | | 3.1 | | 17,971 | | 60,244 | | | Valley National Bank | | Wayne | | NJ | | 2,361,500 | | 2.9 | | 24,677 | | 73,885 | | | Doral Bank | | San Juan | | PR | | 1,531,420 | | 1.9 | | 16,471 | | 53,041 | | | Investors Savings Bank | | | Short Hills | | NJ | | 1,677,007 | | 2.3 | | 11,431 | | New York Life Insurance Company | | New York | | NY | | 1,500,000 | | 1.9 | | 4,274 | | 11,166 | | | New York | | NY | | 1,500,000 | | 2.1 | | 3,433 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | $ | 57,304,750 | | | 71.4 | % | | $ | 449,950 | | $ | 1,339,258 | | | | | | | $ | 51,486,044 | | | 71.2 | % | | $ | 398,382 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | * | | Officer of member bank also served on the Board of Directors of the FHLBNY. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | December 31, 2009 | | | Percentage of | | | | | | Percentage of | | | | | Par | | Total Par Value | | Twelve Months | | | | Par | | Total Par Value | | 12-months | | | City | | State | | Advances | | of Advances | | Interest Income | | | | City | | State | | Advances | | of Advances | | Interest Income | | | | | | | Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,275,000 | | | 19.0 | % | | $ | 710,900 | | | Paramus | | NJ | | $ | 17,025,000 | | | 22.1 | % | | $ | 705,743 | | Metropolitan Life Insurance Company | | New York | | NY | | 13,680,000 | | 15.1 | | 356,120 | | | New York | | NY | | 12,555,000 | | 16.3 | | 294,526 | | New York Community Bank* | | Westbury | | NY | | 7,343,174 | | 8.1 | | 310,991 | | | Westbury | | NY | | 7,793,165 | | 10.1 | | 307,102 | | MetLife Bank, N.A. | | | Convent Station | | NJ | | 3,789,500 | | 4.9 | | 61,036 | | Manufacturers and Traders Trust Company | | Buffalo | | NY | | 5,005,641 | | 5.5 | | 97,628 | | | Buffalo | | NY | | 2,758,000 | | 3.6 | | 42,979 | | The Prudential Insurance Co. of America | | Newark | | NJ | | 3,500,000 | | 3.9 | | 93,601 | | | Newark | | NJ | | 2,500,000 | | 3.3 | | 77,544 | | Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | 3,000,000 | | 3.3 | | 120,870 | | | Lake Success | | NY | | 2,391,000 | | 3.1 | | 107,917 | | Emigrant Bank | | New York | | NY | | 2,475,000 | | 2.7 | | 64,131 | | | Doral Bank | | San Juan | | PR | | 2,473,420 | | 2.7 | | 86,389 | | | MetLife Bank, N.A. | | Bridgewater | | NJ | | 2,430,500 | | 2.7 | | 46,142 | | | Valley National Bank | | Wayne | | NJ | | 2,322,500 | | 2.6 | | 103,707 | | | Wayne | | NJ | | 2,310,500 | | 3.0 | | 98,680 | | New York Life Insurance Company | | | New York | | NY | | 1,500,000 | | 2.0 | | 14,678 | | First Niagara Bank, National Association | | | Buffalo | | NY | | 1,473,493 | | 1.9 | | 24,911 | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | $ | 59,505,235 | | | 65.6 | % | | $ | 1,990,479 | | | | | | | $ | 54,095,658 | | | 70.3 | % | | $ | 1,735,116 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | * | | At December 31, 2009,2010, officer of member bank also served on the Board of Directors of the FHLBNY. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2010 | | | | September 30, 2009 | | | Percentage of | | | | | | Percentage of | | | | | Par | | Total Par Value | | Three Months | | | | Par | | Total Par Value | | Interest Income | | | City | | State | | Advances | | of Advances | | Interest Income | | | | City | | State | | Advances | | of Advances | | Three months | | Nine months | | | | | | | Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,325,000 | | | 18.9 | % | | $ | 178,896 | | $ | 532,100 | | | Paramus | | NJ | | $ | 17,275,000 | | | 20.3 | % | | $ | 174,759 | | Metropolitan Life Insurance Company | | New York | | NY | | 14,280,000 | | 15.6 | | 84,277 | | 279,360 | | | New York | | NY | | 13,555,000 | | 15.9 | | 72,407 | | New York Community Bank* | | Westbury | | NY | | 8,148,476 | | 8.9 | | 78,413 | | 233,129 | | | Westbury | | NY | | 7,343,172 | | 8.6 | | 75,913 | | Manufacturers and Traders Trust Company | | Buffalo | | NY | | 5,493,756 | | 6.0 | | 19,133 | | 83,856 | | | Buffalo | | NY | | 4,755,523 | | 5.6 | | 11,754 | | The Prudential Insurance Co. of America | | Newark | | NJ | | 3,500,000 | | 3.8 | | 22,448 | | 71,473 | | | Newark | | NJ | | 3,500,000 | | 4.1 | | 21,577 | | Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | 2,960,000 | | 3.2 | | 29,824 | | 91,226 | | | Lake Success | | NY | | 2,984,000 | | 3.5 | | 28,487 | | Emigrant Bank | | New York | | NY | | 2,475,000 | | 2.7 | | 16,127 | | 48,004 | | | Valley National Bank | | | Wayne | | NJ | | 2,271,500 | | 2.7 | | 24,716 | | Doral Bank | | San Juan | | PR | | 2,473,420 | | 2.7 | | 21,513 | | 65,825 | | | San Juan | | PR | | 2,119,420 | | 2.5 | | 19,258 | | New York Life Insurance Company | | | New York | | NY | | 2,000,000 | | 2.4 | | 3,075 | | MetLife Bank, N.A. | | Bridgewater | | NJ | | 2,382,000 | | 2.6 | | 12,854 | | 34,658 | | | Convent Station | | NJ | | 1,894,500 | | 2.2 | | 11,693 | | Valley National Bank | | Wayne | | NJ | | 2,338,500 | | 2.6 | | 25,608 | | 78,322 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | $ | 61,376,152 | | | 67.0 | % | | $ | 489,093 | | $ | 1,517,953 | | | | | | | $ | 57,698,115 | | | 67.8 | % | | $ | 443,639 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | * | | At September 30, 2009,March 31, 2010, officer of member bank also served on the Board of Directors of the FHLBNY. |
5545
The following table summarizes capital stock held by members who were beneficial owners of more than 5 percent of the FHLBNY’s outstanding capital stock as of September 30, 2010March 31, 2011 and December 31, 20092010 (shares in thousands): | | | | | | | | | | | | | | | | | | | | | | | Number | | Percent | | | Number | | Percent | | | | September 30, 2010 | | of shares | | of total | | | March 31, 2011 | | of Shares | | of Total | | Name of beneficial owner | | Principal Executive Office Address | | owned | | capital stock | | | Name of Beneficial Owner | | | Principal Executive Office Address | | Owned | | Capital Stock | | | | Hudson City Savings Bank, FSB* | | West 80 Century Road, Paramus, NJ 07652 | | 8,787 | | | 18.57 | % | | West 80 Century Road, Paramus, NJ 07652 | | | 8,044 | | | | 18.35 | % | Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | 7,339 | | 15.51 | | | 200 Park Avenue, New York, NY 10166 | | | 6,855 | | | | 15.64 | | New York Community Bank* | | 615 Merrick Avenue, Westbury, NY 11590 | | 4,002 | | 8.46 | | | 615 Merrick Avenue, Westbury, NY 11590-6644 | | | 3,868 | | | | 8.82 | | Manufacturers and Traders Trust Company | | One M&T Plaza, Buffalo, NY 14203 | | 2,415 | | 5.10 | | | MetLife Bank N.A | | 501 Route 22 Bridgewater, NJ 08807 | | 2,398 | | 5.07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 24,941 | | | 52.71 | % | | | | | 18,767 | | | | 42.81 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number | | Percent | | | | | December 31, 2010 | | of Shares | | of Total | | Name of Beneficial Owner | | | Principal Executive Office Address | | Owned | | Capital Stock | | | | Hudson City Savings Bank, FSB* | | | West 80 Century Road, Paramus, NJ 07652 | | 8,719 | | | 18.99 | % | Metropolitan Life Insurance Company | | | 200 Park Avenue, New York, NY 10166 | | 7,035 | | 15.32 | | New York Community Bank* | | | 615 Merrick Avenue, Westbury, NY 11590-6644 | | 4,093 | | 8.91 | | | | | | | | | | | | | | | 19,847 | | | 43.22 | % | | | | | | | |
| | | | | | | | | | | | | | | Number | | | Percent | | | | December 31, 2009 | | of shares | | | of total | | Name of beneficial owner | | Principal Executive Office Address | | owned | | | capital stock | | Hudson City Savings Bank, FSB* | | West 80 Century Road, Paramus, NJ 07652 | | | 8,748 | | | | 16.87 | % | Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | | 7,419 | | | | 14.31 | | New York Community Bank* | | 615 Merrick Avenue, Westbury, NY 11590 | | | 3,777 | | | | 7.28 | | Manufacturers and Traders Trust Company | | One M&T Plaza, Buffalo, NY 14203 | | | 2,952 | | | | 5.69 | | | | | | | | | | | | | | | | | | 22,896 | | | | 44.15 | % | | | | | | | | | |
| | | * | | Officer of member bank also served on the Board of Directors of the FHLBNY. |
Note 21.20. Subsequent events.Events. Under the final guidance issued by the FASB, in February 2010, subsequent events for the FHLBNY are events or transactions that occur after the balance sheet date but before financial statements are issued. There are two types of subsequent events: a. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events). b. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognizednon-recognized subsequent events). The FHLBNY has evaluated subsequent events through the date of this report and no significant subsequent events were identified. 5646
| | | ITEM 2. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.OPERATIONS |
Forward-Looking Statements Statements contained in this report, including statements describing the objectives, projections, estimates, or predictions of the Federal Home Loan Bank of New York (“FHLBNY” or “Bank”), may be “forward-looking statements.” All statements other than statements of historical fact are statements that could potentially be forward-looking statements. These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or other variations on these terms or their negatives. These statements may involve matters pertaining to, but not limited to: projections regarding revenue, income, earnings, capital expenditures, dividends, the capital structure and other financial items; statements of plans or objectives for future operations; expectations of future economic performance; and statements of assumptions underlying certain of the foregoing types of statements. The Bank cautions that, by their nature, forward-looking statements involve risks or uncertainties, and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, readers are cautioned not to place undue reliance on such statements, which are current only as of the date thereof. The Bank will not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Bank. These forward-looking statements may not be realized due to a variety of risks and uncertainties including, but not limited to risks and uncertainties relating to economic, competitive, governmental, technological and marketing factors, as well as other factors identified in the Bank’s filings with the Securities and Exchange Commission. 5747
Organization of Management’s Discussion and Analysis (“MD&A”). The FHLBNY’s MD&A is designed to provide information that will assist the readers in better understanding the FHLBNY’s financial statements, the changes in key items in the Bank’s financial statements from periodyear to period,year, the primary factors driving those changes as well as how accounting principles affect the FHLBNY’s financial statements. The MD&A is organized as follows: | | | | | | | Page | | | | | | | | | | 6049 | | | | | | | | | | 6049 | | | | | | | | | | 62 | | | | | | | | | | 6451 | | | | | | | | | | 6655 | | | | | | | | | | 6655 | | | | | | | | | | 6756 | | | | | | | | | | 6857 | | | | | | | | | | 6958 | | | | | | | | | | 7562 | | | | | | | | | | 7764 | | | | | | | | | | 7966 | | | | | | | | | | 8168 | | | | | | | | | | 8370 | | | | | | | | | | 8675 | | | | | | | | | | 90 | | | | | | | | | | 9182 | | | | | | | | | | 9184 | | | | | | | | | | 9790 | | | | | | | | | | 99 | | | | | | | | | | 102 | | | | | | | | | | 11592 | | | | | | | | | | 116 | | | | | | | | | | 12096 | | | | | | | | | | 12098 | |
MD&A TABLE REFERENCE | | | | | | | Table(s) | | Description | | Page(s) | | 1.1 – 1.15 | | Result of Operations | | | 55 – 66 | | 2.1 – 2.2 | | Assessments | | | 67 | | 3.1 – 3.3 | | Financial Condition | | | 68 – 69 | | 4.1 – 4.10 | | Advances | | | 70 – 75 | | 5.1 – 5.10 | | Investments | | | 76 – 81 | | 6.1 – 6.3 | | Mortgage Loans | | | 82 – 83 | | 7.1 – 7.10 | | Consolidated Obligations | | | 85 – 89 | | 8.1 – 8.2 | | Capital | | | 90 – 91 | | 9.1 – 9.5 | | Derivatives | | | 93 – 95 | | 10.1 – 10.4 | | Liquidity | | | 96 – 98 | |
58
MD&A TABLE REFERENCE
| | | | | | | | | Table | | Description | | Page | | | — | | | Selected Financial Data | | | 64 | | | 1 | | | Interest Income – Principal Sources | | | 67 | | | 2 | | | Impact of Interest Rate Swaps on Interest Income Earned from Advances | | | 67 | | | 3 | | | Interest Expenses – Principal Categories | | | 68 | | | 4 | | | Impact of Interest Rate Swaps on Consolidated Obligation Interest Expense | | | 68 | | | 5 | | | Components of Net Interest Income | | | 69 | | | 6 | | | Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps | | | 71 | | | 7 | | | GAAP Versus Economic Basis – Contrasting Net Interest Income, Net Income Spread and Return on Earning Assets | | | 72 | | | 8 | | | Spread and Yield Analysis | | | 73 | | | 9 | | | Rate and Volume Analysis | | | 74 | | | 10 | | | Provision for Credit Losses on Mortgage Loans and Other Income | | | 75 | | | 11 | | | Net Gains (Losses) from Derivatives and Hedging Activities | | | 77 | | | 12 | | | Gain/(Losses) Reclassified from AOCI to Current Period Income from Cash Flow Hedges | | | 79 | | | 13 | | | Operating Expenses | | | 80 | | | 14 | | | Statements of Condition | | | 81 | | | 15 | | | Advances by Product Type | | | 83 | | | 16 | | | Investments by Categories | | | 86 | | | 17 | | | Mortgage-Backed Securities – Held-to-Maturity by Issuer | | | 87 | | | 18 | | | Available-for-Sale Securities – Composition | | | 87 | | | 19 | | | External Rating of the Held-to-Maturity Portfolio | | | 88 | | | 20 | | | External Rating of the Available-for-Sale Portfolio | | | 88 | | | 21 | | | Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities | | | 88 | | | 22 | | | Mortgage Loans by Loan Type | | | 91 | | | 23 | | | Consolidated Obligation Bonds by Type | | | 94 | | | 24 | | | Discount Notes Outstanding | | | 97 | | | 25 | | | Roll-Forward Mandatorily Redeemable Capital Stock | | | 98 | | | 26 | | | Derivative Hedging Strategies | | | 100 | | | 27 | | | Derivatives Financial Instruments by Hedge Designation | | | 101 | | | 28 | | | Derivative Financial Instruments by Product | | | 101 | | | 29 | | | Advances and Mortgage Loan Portfolios | | | 102 | | | 30 | | | Collateral Supporting Advances to Members | | | 103 | | | 31 | | | Collateral Supporting Member Obligations Other Than Advances | | | 104 | | | 32 | | | Location of Collateral Held | | | 104 | | | 33 | | | Concentration analysis – Top Ten Advance Holders | | | 105 | | | 34 | | | Period-Over-Period Change in Investments | | | 105 | | | 35 | | | NRSRO Held-to-Maturity Securities | | | 106 | | | 36 | | | NRSRO Available-for-Sale Securities | | | 106 | | | 37 | | | Carrying Value Basis of Held-to-Maturity Mortgage-Backed Securities by Issuer | | | 107 | | | 38 | | | Non-Agency Private Label Mortgage Securities | | | 107 | | | 39 | | | OTTI in 2010 | | | 108 | | | 40 | | | Monoline Insurance of PLMBS | | | 108 | | | 41 | | | PLMBS by Year of Securitization and External Rating | | | 109 | | | 42 | | | Weighted-Average Market Price of MBS | | | 110 | | | 43 | | | Roll-Forward First Loss Account | | | 111 | | | 44 | | | Mortgage Loans – Past Due | | | 111 | | | 45 | | | Mortgage Loans – Interest Short-Fall | | | 112 | | | 46 | | | Mortgage Loans – Allowance for Credit Losses | | | 112 | | | 47 | | | Top Five Participating Financial Institutions – Concentration | | | 112 | | | 48 | | | Credit Exposure by Counterparty Credit Rating | | | 114 | | | 49 | | | Contractual Obligations and Other Commitments | | | 116 | | | 50 | | | Deposit Liquidity | | | 117 | | | 51 | | | Operational Liquidity | | | 117 | | | 52 | | | Contingency Liquidity | | | 118 | | | 53 | | | Consolidated Obligation – Original Maturities Less Than One Year | | | 119 | | | 54 | | | Unpledged Assets | | | 119 | | | 55 | | | FHFA MBS Limits | | �� | 119 | | | 56 | | | FHLBNY Ratings | | | 120 | |
5948
Executive Overview This overview of management’s discussion and analysis highlights and selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a more complete understanding of events, trends and uncertainties, as well as the liquidity, capital, credit and market risks, and critical accounting estimates, affecting the Federal Home Loan Bank of New York (“FHLBNY” or “Bank”), this Form 10-Q should be read in its entirety and in conjunction with the Bank’s most recent Form 10-K filed on March 25, 2010.2011. Cooperative business model. As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission and its ability to provide adequate returns on the capital supplied by its members. The FHLBNY achieves this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and by paying a dividend on the members’ capital stock. Reflecting the FHLBNY’s cooperative nature, the FHLBNY’s financial strategies are designed to enable the FHLBNY to expand and contract in response to member credit needs. The FHLBNY invests its capital in high quality, short- and medium-term financial instruments. This strategy allows the FHLBNY to maintain sufficient liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. The dividends paid by FHLBNY are largely the result of the FHLBNY’s earnings on invested member capital, net earnings on advances to members, mortgage loans and investments, offset in part by the FHLBNY’s operating expenses and assessments. FHLBNY’s board of directors and management determine the pricing of member credit and dividend policies based on the needs of its members and the cooperative. Historical Perspective. The fundamental business of the FHLBNY is to provide member institutions and housing associates with advances and other credit products in a wide range of maturities to meet their needs. Congress created the FHLBanks in 1932 to improve the availability of funds to support home ownership. Although the FHLBanks were initially capitalized with government funds, members have provided all of the FHLBanks’ capital for over 50 years. To accomplish its public purpose, the FHLBanks, including the FHLBNY, offer a readily available, low-cost source of funds, called advances, to member institutions and certain housing associates. Congress originally granted access to advances only to those institutions with the potential to make and hold long-term, amortizing home mortgage loans. Such institutions were primarily federally and state chartered savings and loan associations, cooperative banks, and state-chartered savings banks (thrift institutions). FHLBanks and its member thrift institutions are an integral part of the home mortgage financing system in the United States. However, a variety of factors, including a severe recession, record-high interest rates, and deregulation, resulted in significant financial losses for thrift institutions in the 1980s. In response to the significant cost borne by the American taxpayer to resolve the failed thrift institutions, Congress restructured the home mortgage financing system in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Through this legislation, Congress reaffirmed the housing finance mission of the FHLBanks and expanded membership eligibility in the FHLBanks to include commercial banks and credit unions with a commitment to housing finance. Different FHLBank Business Strategies. Each FHLBank is operated as a separate entity with its own management, employees and board of directors. In addition, all FHLBanks operate under the Finance Agency’s supervisory and regulatory framework. However, each FHLBank’s management and board of directors determine the best approach for meeting its business objectives and serving its members. As such, the management and board of directors of each FHLBank have developed different business strategies and initiatives to fulfill thatthe FHLBank’s mission, and they re-evaluate these strategies and initiatives from time to time. Business segment.The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations and the principal factor that impacts its operating results. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to Resolution Funding Corporation (“REFCORP”), and set aside a percentage of its income towards an Affordable Housing Program (“AHP”). Together they are referred to as assessments. Explanation of the use of certain non-GAAP measures of Interest Income and Expense, Net Interest income and margin.The FHLBNY has presented its results of operations in accordance with U.S. generally accepted accounting principles. The FHLBNY has also presented certain information regarding its Interest Income and Expense, Net Interest income and Net Interest spread that combines interest expense on debt with net interest paid on interest rate swaps associated with debt that were hedged on an economic basis. These are non-GAAP financial measures used by management that the FHLBNY believes are useful to investors and members of the FHLBNY in understanding the Bank’s operational performance and business and performance trends. Although the FHLBNY believes these non-GAAP financial measures enhance investor and members’ understanding of the Bank’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. When discussing non-GAAP measures, the Bank has provided GAAP measures in parallel. Third2011 First Quarter 2010 Highlights
Results of Operations The FHLBNY reported 2011 first quarter Net income of $78.8$71.0 million, or $1.71$1.61 per share for the 2010 third quarter compared with Net income of $140.2$53.6 million or $2.70$1.09 per share forin the same period in 2009.2010. The return on average equity, which is Net income divided by average Capital stock, Retained earnings, and Accumulated other comprehensive income (loss) (“AOCI”), was 6.03% for5.74% in the 2010 third quarter2011 period compared with 9.79% for3.99% in the same period in 2009.2010. 6049
Net income contracted duebenefited from member initiated prepayments which generated $42.7 million in prepayment fees and also contributed $52.0 million in derivative and hedging gains from termination of hedges associated with the prepayments. Two prominent charges to Net income were executed to benefit and protect future income. First, the significant declineBank absorbed $51.7 million in Netcharges when Management made tactical changes to its funding strategy and extinguished (or transferred) certain high-coupon debt to protect its future interest income. margin. Second, the Bank expensed $24.0 million to Compensation and benefits in order to reduce the funding shortfall in the defined benefit pension plan. The payment was made to reduce the likelihood of higher expenses in future periods and to avoid certain restrictions to plan participants. Net interest income was $125.2$134.1 million in the 2010 third2011 first quarter, downup from $153.9$106.2 million or a decline of 18.6% from the same period in 2009. The primary cause of the lower Net interest income was the decline in business volume as measured by average member advances outstanding. Average outstanding advances in the 2010 third quarter was $84.2 billion down from $96.7 billion in the same period in 2009. This adverse change2010, an increase of 26.3%. Although margins on advances were weaker relative to the 2010 first quarter and the cost of funding remained above historical levels, the increase in volume caused Net interest income was largely the result of $42.7 million in prepayment fees. In the 2011 first quarter, member-borrowers prepaid $7.1 billion of longer-term advances, in most instances, taking advantage of prevailing lower interest rates to declineborrow anew at the lower prevailing coupons. The FHLBNY records prepayment fees in interest income. Almost all of the prepaid advances were hedged, and as a result the amounts recorded as prepayment fees were after recovering the recorded fair values of those advances.
Lower margin was caused by $29.9run-off of higher yielding advances and mortgage-backed securities (“MBS”). Also, the Bank’s floating rate GSE-issued MBS are indexed to 3-month LIBOR which has remained at low levels in the 2011 first quarter. GSE-issued floating-rate MBS is a very significant component of the FHLBNY’s investment portfolio. The low LIBOR rate has also tended to compress margins. The FHLBNY attempts to execute interest rate swaps to convert fixed-rate debt to a sub-LIBOR spread, but when the LIBOR rate is low, there is very little “room” for achieving a spread that would be ascribed to the triple-A rating of the FHLBank debt. As a result, on a swapped funding level, the low LIBOR rate has effectively driven up the cost of FHLBank consolidated obligation bonds and this has narrowed the FHLBNY’s margins. Yields sought by investors for longer-term FHLBank bonds still remain expensive and the pricing is not economical for the FHLBNY to offer longer-term advances even if demand exists. The FHLBank discount notes, which have maturities from overnight to one year, were also priced at very narrow sub-LIBOR spreads. The FHLBNY has continued to use discount notes as an important funding tool because of their ease of issuance and continued investor demand at sub-LIBOR spreads. Credit related OTTI was insignificant in the 2011 first quarter, only $0.4 million overcompared with $3.4 million in the same period in 2009. Net interest spread, which is2010. No new MBS were impaired and the difference between yields on interest-earning assets and yields on interest-costing liabilities, contracted by 4 basis points in the 2010 third quarter over the same period in 2009. Net interest income and net interest spread contracted to levels more typical of the years before 2009,OTTI charges were primarily because the Bank’s funding advantage weakened in 2010.
While FHLBank discount note yield volatility may have stabilized in the current quarter, discount note spreads to LIBOR have narrowed, adversely impacting FHLBNY’s interest margins. In a declining interest rate environment, the Federal Reserve Board’s bill issuance strategy has been to create a steady supply of bills that prevented yields from falling further, appears to have created a “floor” for further declines in Treasury bill yields. In turn, it has also stabilized the FHLBank discount note yields but that has not prevented discount note spreads from narrowing. Asas a result of the spread compressionadditional credit losses recognized on previously impaired private-label MBS because of slight deterioration in the current quarter, discount note issuances were further reduced, and maturing notes were replaced by floating-rate debt and short lockout callable bonds with short maturities. In much of 2009, FHLBank discount notes were issued at wide advantageous spreads to LIBOR, and was one sourceperformance parameters of the funding advantage in 2009.
Earnings from investing members’ capital and net non-interest bearing liabilities in short-term interest-yielding assets were an important contributor tosecurities. The FHLBNY earnings. In the 2010 third quarter, $9.4 billion of deployed capital potentially could have earned a yield of 17-20 basis points, the weighted average yield on money market instruments in that period. In the same period in 2009, $8.8 billion in deployed capital could potentially have earned also about 17 basis points. Short-term rates were comparable in the current and prior year quarters. Relative contribution from deployed capital depends on (1) the absolute volume of deployed capital as measured by average capital stock, retained earnings, and net non-interest bearing liabilities, and, (2) the short-term investment yields.
In the 2010 third quarter, the FHLBNY increased the impairment of four private-label mortgage-backed securities. Cashmakes quarterly cash flow assessments of the expected credit performance of the securities resulted in the recognitionits entire portfolio of $3.1 million as other-than-temporary impairment (“OTTI”) with a charge to earnings. All four securities had been previously determined to be OTTI, and the additional impairment in the 2010 third quarter was due to further deterioration in the performance parameters of the securities. Although all four securities are insured by bond insurers, Ambac and MBIA, the Bank’s analysis of the two bond insurers concluded that future credit losses due to projected collateral shortfalls of the insured securities would not be fully supported by the bond insurers. In the same period in 2009, OTTI of $3.7 million in credit impairment was charged to earnings. For more information about impairment methodology and bond insurer analysis, see Note 1 – Significant Accounting Policies and Estimates and Note 4 – Held-to-maturity securities.private-label MBS.
In the 2010 third quarter, theThe FHLBNY recognized $8.4recorded $64.6 million of net gains from derivative and hedging activities. In contrast,activities in the same period2011 first quarter, largely benefitting from the recognition of realized gains from termination of hedges contemporaneous with the prepayments. Such hedge terminations contributed $52.0 million in 2009, net gains of $59.6 million were recognized. Net hedging gains were primarily unrealized market value adjustments that resulted from (1) hedge ineffectiveness — interest rate changes that affected the market values of interest rate swaps differently than the market values of the hedged risk, and (2) derivatives designated as economic hedges. When derivatives are designated as economic hedges, changes in the fair values of the derivatives are marked to fair value through earnings with no offsetting changes in fair values of the hedged financial instruments. This effect is sometimes referred to as “one-sided marks”. Hedging gains and losses included interest income or expense paid on swaps designated as economic hedges, in compliance with hedge accounting reporting guidance, which prescribes that such interest be included in the income statement as part of derivatives and hedging activities. Interest income or expense from swaps that qualify for hedge accounting are also included in the income statement but are reported as part of the income or expense of the hedged asset or liability as part of interest margin. See Note 16 to the unaudited financial statements and Table 11 in this MD&A for more information.realized gains. In general, the FHLBNY holds derivatives and associated hedged instruments and consolidated obligation debt under the Fair Value Option accounting (“FVO”), to their maturity, call, or put dates. When such financial instruments are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are recorded as unrealized will generally reverse over time, and fair value changes will sum to zero over time. In limited instances, when the FHLBNY may terminateterminates these instruments prior to maturity or prior to call or put dates which(such as when members request prepayments of their borrowed advances), it would result in a realized gain or loss.
Concurrent with the significant member initiated prepayments, the Bank also took the opportunity to extinguish and transfer $478.6 million of certain high-coupon debt at a cost that exceeded the carrying values of the debt by $51.7 million. The Bank will replace such debt by issuing new debt at the lower prevailing interest rate for similar maturities. This is expected to benefit margin in future periods. Operating Expenses of the FHLBNY were $21.7$7.5 million forin the 2010 third2011 first quarter, up from $17.8$6.3 million in the same period in 2009. The FHLBNY was also assessed for its share of2010. Compensation and benefits rose to $38.9 million in the operating expenses for the Finance Agency and the Office of Finance, and those totaled $2.0 million for the 2010 third quarter,2011 period, up slightly from $1.8$12.9 million in the same period in 2009. The 12 FHLBanks2010. In March 2011, the FHLBNY contributed $24.0 million to its Defined Benefit Plan to eliminate a funding shortfall and two other GSEs share the administrative cost of the Finance Agency.amount was charged to Compensation and benefits. REFCORP assessment payments totaled $19.7 million in the 2010 third quarter, down from $35.1 million in the same period in 2009. Affordable Housing Program (“AHP”) assessment set aside from income totaled $8.9$7.9 million in the 2010 third2011 first quarter, downup from $15.8$6.1 million in the same period in 2009.2010. REFCORP assessment payments totaled $17.7 million in the 2011 first quarter, up from $13.4 million in the same period in 2010. Assessments are calculated on Net income before assessments, and the decreasesincreases were due to the significant decreaseincrease in Net income in the 2010 third2011 first quarter Net income as compared to the same period in 2009. For more information about2010. Based on projected payments by the 12 FHLBanks through the second quarter of 2011, it is likely that the FHLBanks will have satisfied its obligation to REFCORP and AHP assessments seefurther payments would not be necessary thereafter. In anticipation of the section Assessments under Backgroundtermination of their REFCORP obligation, the FHLBanks have reached an agreement to set aside, once the obligation has ended, amounts that would have otherwise been paid to REFCORP as restricted retained earnings, with the objective of increasing the earnings reserves of the FHLBanks and enhancing the safety and soundness of the FHLBank system.
Cash dividends of $1.46 per share of capital stock (5.8% annualized return on capital stock) were paid to stockholders in this Form 10-Q, and Note 12 to the unaudited financial statements.2011 first quarter, up from $1.41, or 5.6% per share, paid in the same period in 2010. 6150
Cash dividendFinancial Condition
Net cash generated from operating activities was higher than Net income and the FHLBNY’s liquidity position remains in compliance with all regulatory requirements and Management does not foresee any changes to that position. Management also believes cash flows from operations, available cash balances and the FHLBNY’s ability to generate cash through the issuance of $1.15 per share of capital stock (4.60% annualized return on capital stock) was paidconsolidated obligation bonds and discount notes are sufficient to stockholders infund the 2010 third quarter. In the 2009 third quarter, cash dividend of $1.40 per share (5.60% annualized return on capital stock) was paid.FHLBNY’s operating liquidity needs. The FHLBNY continued to experience balance sheet contraction, as both its lending and funding steadily declined at March 31, 2011, a continuing trend through each of the 2010 third quarter.quarters in 2010. Principal amounts of Advances to member banks declined to $85.7$72.3 billion at September 30, 2010, a level more typical of that before the credit crisis, from a peak of approximately $109.2 billion in 2008 and $94.3March 31, 2011 compared to $76.9 billion at December 31, 2009.2010. The decline has occurred gradually as member banks may have taken advantage of the improved availability of alternate funding sources such as deposits and senior unsecured borrowings in a more liquid market. MemberDecline in demand for advances hasmay also declined, asbe due to lukewarm loan demand from theirmember’s own customers may have stayed lukewarm due to nationally weak economic conditions. Aside from advances, the FHLBNY’s primary earning assets are its investment securities portfolios, comprising mainly of GSE and U.S. agency issuedagency-issued mortgage-backed securities (“MBS”), and state and local government housing agency bonds. Such investmentInvestments in MBS and housing agency securities, which are classified as long-term investment portfolios,held-to-maturity and available-for-sale, totaled $11.6$11.8 billion, or 11.2%12.1% of Total assets at September 30, 2010,March 31, 2011, compared to $11.8 billion, or 11.7% of Total assets at December 31, 2010. GSE- and included $10.0 billionagency-issued MBS were 92.9% of GSE and agency issuedthe total balance sheet carrying value of all investments in MBS. Only $0.9$0.8 billion of private-label MBS remained outstanding. InvestmentGSE-issued investment security values have continued to improve, and previously recorded unrealized fair value losses in AOCI on GSE issued MBS reversed, and fair values were in a net unrealized gain position,improved as liquidity has gradually returned to the market.market, and fair values were generally in an unrealized gain position. The FHLBNY’s capital remains strong. At September 30, 2010,March 31, 2011, actual risk basedrisk-based capital was $5.4$5.1 billion, compared to required risk based capital of $0.5 billion. To support $103.1$96.9 billion of Total assets at September 30, 2010,March 31, 2011, the required minimum regulatory capital was $4.1$3.9 billion, or 4.0%4.0 percent of assets. The FHLBNY’s actual regulatory capital was $5.4$5.1 billion, exceeding required capital by $1.3$1.2 billion at September 30, 2010.March 31, 2011. Aggregate capital ratio was at 5.27%,5.3 percent, or 1.27%1.3 percent more than the 4.0%4.0 percent regulatory minimum. The FHLBNY has prudently retained capital through the period of credit turmoil. Retained earnings, excluding losses in AOCI, have grown to $701.2$716.7 million at September 30, 2010.March 31, 2011. Losses in AOCI losses declinedtotaled $97.3 million compared to $97.8 million at September 30, 2010 from $144.5$96.7 million at December 31, 2009 primarily because of the improvement in the pricing of mortgage-backed securities designated as available-for-sale. Shareholders’ equity, the sum of Capital stock, Retained earnings, and AOCI, was $5.3 billion at September 30, 2010, a decline of $336.3 million from December 31, 2009, primarily because of the decline in members’ Capital stock, which declined by $395.4 million. The decrease in Capital stock was consistent with the decrease in advances borrowed by members since members are required to purchase stock as a prerequisite to membership and to hold FHLBNY stock as a percentage of advances borrowed from the FHLBNY. The Bank’s current practice is to redeem stock in excess of the amount necessary to support advance activity on a daily basis. As a result, the amount of capital stock outstanding varies in line with members’ outstanding advance borrowings. For more information about changes in Capital, Retained earnings and AOCI, see Note 13 to the unaudited financial statements in this report.
Year-to-date 2010 Highlights
The FHLBNY reported year-to-date Net income of $189.1 million, or $3.98 per share, compared with $474.8 million, or $8.93 per share for the prior year period.
Net interest income was $347.6 million for the current year period, down $585.5 million from the prior year period. The primary causes were (1) decline in transaction volume in the current year period, (2) increases in debt costs relative to earnings from advances to members and investments, and (3) lower earnings from the deployment of members’ capital to fund interest earning-assets because of decline in member capital due to lower money-market investment yields.
Net realized and unrealized gain (loss) from derivatives and hedging activities was a loss of $3.3 million in the current year period. In contrast, the Bank recorded a gain of $124.6 million from derivatives and hedging activities in the prior year period.
Cash flow assessments of the expected credit performance of the securities resulted in the recognition of $7.7 million as OTTI charges to earnings. The non-credit component of OTTI recorded in AOCI through the third quarter was not significant. In the prior year period, credit related OTTI was $14.3 million. The non-credit component of OTTI recorded in AOCI through the prior year third quarter was $103.9 million.2010.
Business Outlook The following forward-looking statements are based upon the current beliefs and expectations of the FHLBNY’s management and are subject to risks and uncertainties which could cause the FHLBNY’s actual results to differ materially from those set forth in such forward-looking statements. The FHLBNY expects its full year 2011 earnings to continue to decline to ultimately reach levels more typical ofbelow the years before 2009, primarily as a result2010 earnings, because of lower net interest margins on the Bank’s core assets, primarily its advances and investments in mortgage-backed securities, assecurities. In the Bank expects continued erosion of its funding advantages. The Bank’s earnings will continue to be adversely impacted in 2011 in a low interest rate environment asprojected for the remainder of 2011, opportunities to invest in high-quality assets and earn a reasonable spread will be limited.limited, constraining earnings. The Bank’s core assets, primarily advances and investments in mortgage-backed securities, will yield lower interest margins as the Bank does not expect recovery of its funding advantage in 2011.
62
Advances- Management is unable to predict the timing and extent of the expected recovery in the U.S. economy, particularly the recovery in the housing market, or an expectation of continued stability in the financial markets. Against that backdrop, the management of the Bank believes it is also difficult to predict member demand for advances, which is the primary focus of the FHLBNY’s operations and the principal factor that impacts its operating results. Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and long-term funding driven by economic factors such as availability to the Bank’s members of alternative funding sources that are more attractive such as(e.g. consumer deposits,deposits), the interest rate environment, and the outlook for the economy. Members may choose to prepay advances, which may require prepayment fees, based on their expectations of interest rate changes and demand for liquidity. Demand for advances may also be influenced by the dividend payout rate to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership stock and activity-based stock. Members are required to purchase activity stock in order to borrow advances. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or a non-member, they no longer qualify for membership in the FHLBNY, which cannotcan neither renew outstanding advances or provide new advances to non-members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight advance lending if the former member borrowed such advances. Earnings–— As existing high-yielding fixed-rate MBS and some intermediate-term advances continue to pay down, mature or mature,be prepaid, it is unlikely they will be replaced by equivalent high yieldinghigh-yielding assets due to the low interest rate environment, and this will tend to lower the overall yield on total assets. The FHLBNY expects general advance demand from members to continue to decline, and specifically,decline. Specifically, the Bank expects limited demand for large intermediate-term advances because many members have adequate liquidity, and other members have significant amounts of intermediate-term advances that were borrowed from the FHLBNY several years ago. The FHLBNY anticipates that such members may be considering prepaying those borrowings, or to not replacing them at maturity. Members that have expressed interest in intermediate-term borrowing have not been significant borrowers in the past. The FHLBNY earns income from investing its members’ capital and non-interest bearing liabilities, together referred to as deployed capital, to fund interest-earning assets. The two principal factors that impact earnings from deployed capital are the average amount of capital outstanding in a period and the interest rate environment in the period, which in turn impacts yields on earning assets. These factors determine the potential earnings from deployed capital, and both factors are subject to change. The Bank cannot predict with certainty the level of earnings from capital. In a lower interest rate environment, deployed capital, which consists of capital stock, retained earnings, and net non-interest bearing liabilities, will provide relatively lower income. 51
The Bank’s earnings will be adversely impacted in 2011 in the low interest rate environment as opportunities to invest in high-quality assets and to earn a reasonable spread may be limited.
Demand for FHLBank debt- The FHLBNY’s primary source of funds is the sale of consolidated obligations in the capital markets, and the FHLBNY’s ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, which are beyond the FHLBNY’s control. The FHLBNY may not be able to obtain funding on acceptable terms given the extraordinary market conditions and structural changes in the debt market. If the FHLBNY cannot access funding when needed on acceptable terms, its ability to support and continue operations could be adversely affected, which could negatively affect its financial condition and results of operations. The pricing of the FHLBanks’ longer-term debt remains at levels that are still higher than historical levels, relative to LIBOR. To the extent the FHLBanks receive sub-optimal funding, the Bank’s member institutions in turn may experience higher costs for advance borrowings. To the extent the FHLBanks may not be able to issue long-term debt at economical spreads relative to the 3-month LIBOR rate, the FHLBNY’s members borrowing choices may also be limited. Credit Impairment of Mortgage-backed securities- OTTI charges of $7.7 million were recorded forinsignificant in the FHLBNY’s MBS portfolios through the current year2011 first quarter. However, without recovery in the near term such that liquidity returns to the mortgage-backed securities market, or if the credit losses of the underlying collateral within the mortgage-backed securities perform worse than expected, the FHLBNY could face additional credit losses. In addition, certain private-label MBS may be undergoing loan modification and forbearance proceedings at the loan level, and such processes may have an adverse impact on the amounts and timing of expected cash flows. REFCORP Assessments —Based on projected payments by the 12 FHLBanks through the second quarter of 2011, it is likely that the FHLBanks will have satisfied its obligation to REFCORP and further payments would not be necessary thereafter. In anticipation of the termination of their REFCORP obligation, the FHLBanks have reached an agreement to set aside, once the obligation has ended, amounts that would have otherwise been paid to REFCORP as restricted retained earnings, with the objective of increasing the earnings reserves of the FHLBanks and enhancing the safety and soundness of the FHLBank system. This would also benefit the FHLBNY’s Net income. Sovereign credit rating of the United States and impact on the FHLBanks- On April 19, 2011 Standard & Poor’s Ratings Services affirmed the ‘AAA’ rating of the FHLBank but revised its outlook on the debt issues of the Federal Home Loan Bank System to negative from stable. Concurrently, S&P revised its outlooks to negative from stable for the Federal Home Loan Banks in Atlanta, Boston, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka while affirming their ‘AAA’ issuer credit ratings. These rating actions reflect S&P’s revision on April 18, 2011 of the outlook on the long-term sovereign credit rating on The United States of America to negative from stable (AAA/Negative/A-1+). S&P will not raise the outlooks and ratings of the FHLB System and/or System Banks above the US sovereign rating as long as the ratings and outlook on the U.S. remain unchanged. Conversely, if the ratings on the U.S. were lowered, the ratings on the FHLB System and System Banks whose ratings are equalized to the sovereign rating could also be lowered. The FHLBNY cannot predict with certainty what impact, if any, these recent rating actions will have on the FHLBank debt and consequence of any further rating actions on the cost of debt for the FHLBNY. 6352
SELECTED FINANCIAL DATA (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | Statements of Condition | | September 30, | | | June 30, | | | March 31, | | | December 31, | | | September 30, | | (dollars in millions) | | 2010 | | | 2010 | | | 2010 | | | 2009 | | | 2009 | | | | | | | | | | | | | | | | | | | | | | | Investments (1) | | $ | 15,690 | | | $ | 14,971 | | | $ | 15,561 | | | $ | 16,222 | | | $ | 18,741 | | Interest bearing balance at FRB ** | | | — | | | | — | | | | — | | | | — | | | | — | | Advances | | | 85,697 | | | | 85,286 | | | | 88,859 | | | | 94,349 | | | | 95,945 | | Mortgage loans held-for-portfolio, net of allowance for credit losses (2) | | | 1,268 | | | | 1,283 | | | | 1,288 | | | | 1,318 | | | | 1,336 | | Total assets | | | 103,094 | | | | 105,183 | | | | 107,239 | | | | 114,461 | | | | 117,604 | | Deposits and borrowings | | | 3,730 | | | | 4,795 | | | | 7,977 | | | | 2,631 | | | | 2,276 | | Consolidated obligations, net | | | | | | | | | | | | | | | | | | | | | Bonds | | | 74,919 | | | | 66,247 | | | | 72,408 | | | | 74,008 | | | | 69,671 | | Discount notes | | | 17,788 | | | | 27,481 | | | | 19,816 | | | | 30,828 | | | | 38,385 | | Total consolidated obligations | | | 92,707 | | | | 93,728 | | | | 92,224 | | | | 104,836 | | | | 108,056 | | Mandatorily redeemable capital stock | | | 67 | | | | 70 | | | | 105 | | | | 126 | | | | 128 | | AHP liability | | | 138 | | | | 144 | | | | 146 | | | | 144 | | | | 145 | | REFCORP liability | | | 21 | | | | 14 | | | | 14 | | | | 24 | | | | 39 | | Capital | | | | | | | | | | | | | | | | | | | | | Capital stock | | | 4,664 | | | | 4,680 | | | | 4,828 | | | | 5,059 | | | | 5,142 | | Retained earnings | | | 701 | | | | 676 | | | | 672 | | | | 689 | | | | 666 | | Accumulated other comprehensive income (loss) | | | (98 | ) | | | (109 | ) | | | (124 | ) | | | (145 | ) | | | (147 | ) | Total capital | | | 5,267 | | | | 5,247 | | | | 5,376 | | | | 5,603 | | | | 5,661 | | Equity to asset ratio (3) | | | 5.11 | % | | | 4.99 | % | | | 5.01 | % | | | 4.90 | % | | | 4.81 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Statements of Condition | | | | | | | | | | | | | (dollars in millions) | | | March 31, 2011 | | December 31, 2010 | | September 30, 2010 | | June 30, 2010 | | March 31, 2010 | | | | | Investments1 | | | $ | 16,855 | | $ | 16,739 | | $ | 15,690 | | $ | 14,971 | | $ | 15,561 | | Advances | | | 75,487 | | 81,200 | | 85,697 | | 85,286 | | 88,859 | | Mortgage loans held-for-portfolio, net of allowance for credit losses2 | | | 1,271 | | 1,266 | | 1,268 | | 1,283 | | 1,288 | | Total assets | | | 96,874 | | 100,212 | | 103,094 | | 105,183 | | 107,239 | | Deposits and borrowings | | | 2,513 | | 2,454 | | 3,730 | | 4,795 | | 7,977 | | Consolidated obligations, net | | | Bonds | | | 68,530 | | 71,743 | | 74,919 | | 66,247 | | 72,408 | | Discount notes | | | 19,507 | | 19,391 | | 17,788 | | 27,481 | | 19,816 | | Total consolidated obligations | | | 88,037 | | 91,134 | | 92,707 | | 93,728 | | 92,224 | | Mandatorily redeemable capital stock | | | 59 | | 63 | | 67 | | 70 | | 105 | | AHP liability | | | 135 | | 138 | | 138 | | 144 | | 146 | | REFCORP liability | | | 19 | | 22 | | 21 | | 14 | | 14 | | Capital | | | Capital stock | | | 4,323 | | 4,529 | | 4,664 | | 4,680 | | 4,828 | | Retained earnings | | | 717 | | 712 | | 701 | | 676 | | 672 | | Accumulated other comprehensive income (loss) | | | | (97 | ) | | | (97 | ) | | | (98 | ) | | | (109 | ) | | | (124 | ) | Total capital | | | 4,943 | | 5,144 | | 5,267 | | 5,247 | | 5,376 | | Equity to asset ratio3 | | | | 5.10 | % | | | 5.13 | % | | | 5.11 | % | | | 4.99 | % | | | 5.01 | % | | | Three months ended | | Nine months ended | | | Statements of Condition | | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | | September 30, | | September 30, | | | Three months ended | | Averages(dollars in millions) | | 2010 | | 2010 | | 2010 | | 2009 | | 2009 | | 2010 | | 2009 | | | March 31, 2011 | | December 31, 2010 | | September 30, 2010 | | June 30, 2010 | | March 31, 2010 | | | | | Investments (1) | | $ | 16,996 | | $ | 18,757 | | $ | 17,711 | | $ | 18,650 | | $ | 19,764 | | $ | 17,811 | | $ | 5,053 | | | Interest-bearing balance at FRB ** | | — | | — | | — | | — | | — | | — | | 8,062 | | | Investments1 | | | $ | 19,127 | | $ | 17,343 | | $ | 16,996 | | $ | 18,757 | | $ | 17,711 | | Advances | | 84,164 | | 85,609 | | 91,415 | | 94,193 | | 96,704 | | 87,036 | | 100,574 | | | 78,406 | | 82,562 | | 84,164 | | 85,609 | | 91,415 | | Mortgage loans | | 1,274 | | 1,281 | | 1,299 | | 1,333 | | 1,357 | | 1,285 | | 1,403 | | | 1,270 | | 1,272 | | 1,274 | | 1,281 | | 1,299 | | Total assets | | 106,179 | | 108,325 | | 113,116 | | 117,289 | | 120,754 | | 109,181 | | 128,215 | | | 101,662 | | 104,891 | | 106,179 | | 108,325 | | 113,116 | | Interest-bearing deposits and other borrowings | | 5,062 | | 5,212 | | 5,050 | | 2,361 | | 2,083 | | 5,108 | | 2,006 | | | 2,401 | | 3,290 | | 5,062 | | 5,212 | | 5,050 | | Consolidated obligations, net | | | Bonds | | 69,817 | | 71,738 | | 74,297 | | 73,264 | | 69,604 | | 71,934 | | 71,388 | | | 72,417 | | 72,734 | | 69,817 | | 71,738 | | 74,297 | | Discount notes | | 21,317 | | 22,354 | | 24,555 | | 31,741 | | 39,521 | | 22,730 | | 44,783 | | | 17,765 | | 18,754 | | 21,317 | | 22,354 | | 24,555 | | Total consolidated obligations | | 91,134 | | 94,092 | | 98,852 | | 105,005 | | 109,125 | | 94,664 | | 116,171 | | | 90,182 | | 91,488 | | 91,134 | | 94,092 | | 98,852 | | Mandatorily redeemable capital stock | | 68 | | 96 | | 108 | | 143 | | 128 | | 91 | | 135 | | | 59 | | 58 | | 68 | | 96 | | 108 | | AHP liability | | 141 | | 144 | | 144 | | 144 | | 139 | | 143 | | 132 | | | 137 | | 137 | | 141 | | 144 | | 144 | | REFCORP liability | | 10 | | 7 | | 9 | | 15 | | 23 | | 9 | | 23 | | | 10 | | 11 | | 10 | | 7 | | 9 | | Capital | | | Capital stock | | 4,611 | | 4,719 | | 4,929 | | 5,030 | | 5,195 | | 4,752 | | 5,315 | | | 4,414 | | 4,543 | | 4,611 | | 4,719 | | 4,929 | | Retained earnings | | 679 | | 661 | | 658 | | 666 | | 611 | | 666 | | 522 | | | 701 | | 687 | | 679 | | 661 | | 658 | | Accumulated other comprehensive income (loss) | | | (106 | ) | | | (120 | ) | | | (141 | ) | | | (136 | ) | | | (125 | ) | | | (122 | ) | | | (95 | ) | | | (103 | ) | | | (94 | ) | | | (106 | ) | | | (120 | ) | | | (141 | ) | Total capital | | 5,184 | | 5,260 | | 5,446 | | 5,560 | | 5,681 | | 5,296 | | 5,742 | | | 5,012 | | 5,136 | | 5,184 | | 5,260 | | 5,446 | |
6453
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Results and other data | | | | | | | | | (dollars in millions) | | Three months ended | | Nine months ended | | | | | (except earnings, headcount, | | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | | September 30, | | September 30, | | | and dividends per share) | | 2010 | | 2010 | | 2010 | | 2009 | | 2009 | | 2010 | | 2009 | | | (except earnings and dividends per | | | Three months ended | | share, and headcount) | | | March 31, 2011 | | December 31, 2010 | | September 30, 2010 | | June 30, 2010 | | March 31, 2010 | | | | Net interest income (4) | | $ | 125 | | $ | 116 | | $ | 106 | | $ | 116 | | $ | 154 | | $ | 348 | | $ | 585 | | | Net interest income4 | | | $ | 134 | | $ | 108 | | $ | 125 | | $ | 116 | | $ | 106 | | Net income | | 79 | | 57 | | 54 | | 97 | | 140 | | 189 | | 475 | | | 71 | | 86 | | 79 | | 57 | | 54 | | Dividends paid in cash (7) | | 54 | | 52 | | 71 | | 74 | | 74 | | 177 | | 191 | | | Dividends paid in cash7 | | | 66 | | 76 | | 54 | | 52 | | 71 | | AHP expense | | 9 | | 6 | | 6 | | 10 | | 16 | | 21 | | 53 | | | 8 | | 10 | | 9 | | 6 | | 6 | | REFCORP expense | | 20 | | 14 | | 13 | | 24 | | 35 | | 47 | | 119 | | | 18 | | 21 | | 20 | | 14 | | 13 | | Return on average equity* (5) | | | 6.03 | % | | | 4.32 | % | | | 3.99 | % | | | 6.85 | % | | | 9.79 | % | | | 4.77 | % | | | 11.06 | % | | Return on average equity*5 | | | | 5.74 | % | | | 6.68 | % | | | 6.03 | % | | | 4.32 | % | | | 3.99 | % | Return on average assets* | | | 0.29 | % | | | 0.21 | % | | | 0.19 | % | | | 0.32 | % | | | 0.46 | % | | | 0.23 | % | | | 0.50 | % | | | 0.28 | % | | | 0.33 | % | | | 0.29 | % | | | 0.21 | % | | | 0.19 | % | Net OTTI impairment losses | | | (3 | ) | | $ | (1 | ) | | $ | (3 | ) | | $ | (7 | ) | | $ | (4 | ) | | | (8 | ) | | $ | (14 | ) | | — | | | (1 | ) | | | (3 | ) | | | (1 | ) | | | (3 | ) | Other non-interest income (loss) | | 9 | | | (15 | ) | | | (8 | ) | | 48 | | 61 | | | (13 | ) | | 137 | | | 14 | | 38 | | 9 | | | (15 | ) | | | (8 | ) | Total other income (loss) | | 6 | | | (16 | ) | | | (11 | ) | | 41 | | 57 | | | (21 | ) | | 123 | | | 14 | | 37 | | 6 | | | (16 | ) | | | (11 | ) | Operating expenses | | 22 | | 20 | | 19 | | 22 | | 18 | | 61 | | 54 | | | Finance Agency and Office of Finance | | 2 | | 2 | | 3 | | 2 | | 2 | | 6 | | 6 | | | Operating expenses8 | | | 46 | | 24 | | 22 | | 20 | | 19 | | Finance Agency and Office of Finance expenses | | | 3 | | 4 | | 2 | | 2 | | 3 | | Total other expenses | | 24 | | 22 | | 22 | | 24 | | 20 | | 67 | | 60 | | | 49 | | 28 | | 24 | | 22 | | 22 | | Operating expenses ratio* (6) | | | 0.08 | % | | | 0.08 | % | | | 0.07 | % | | | 0.07 | % | | | 0.06 | % | | | 0.07 | % | | | 0.06 | % | | Operating expenses ratio*6 | | | | 0.19 | % | | | 0.09 | % | | | 0.08 | % | | | 0.08 | % | | | 0.07 | % | Earnings per share | | $ | 1.71 | | $ | 1.20 | | $ | 1.09 | | $ | 1.94 | | $ | 2.70 | | $ | 3.98 | | $ | 8.93 | | | $ | 1.61 | | $ | 1.90 | | $ | 1.71 | | $ | 1.20 | | $ | 1.09 | | Dividend per share | | $ | 1.15 | | $ | 1.05 | | $ | 1.41 | | $ | 1.42 | | $ | 1.40 | | $ | 3.60 | | $ | 3.54 | | | $ | 1.46 | | $ | 1.64 | | $ | 1.15 | | $ | 1.05 | | $ | 1.41 | | Headcount (Full/part time) | | 269 | | 270 | | 266 | | 264 | | 259 | | 269 | | 259 | | | 269 | | 271 | | 269 | | 270 | | 266 | |
| | | (1)1 | | Investments include held-to-maturity securities, available for-sale securities, Federal funds, loans to other FHLBanks, and other interest bearing deposits. | | (2)2 | | Allowances for credit losses were $7.0 million, $5.8 million, $5.5 million, $5.4 million, $5.2 million, $4.5 million, and $3.4$5.2 million at the periods ended March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010, December 31, 2009 and September 30, 2009.2010. | | (3)3 | | Equity to asset ratio is capital stock plus retained earnings and Accumulated other comprehensive income (loss) as a percentage of total assets. | | (4)4 | | Net interest income is net interest income before the provision for credit losses on mortgage loans. | | (5)5 | | Return on average equity is net income as a percentage of average capital stock plus average retained earnings and average Accumulated other comprehensive income (loss). | | (6)6 | | Operating expenses as a percentage of total average assets. | | (7)7 | | Excludes dividends accrued to non-members classified as interest expense under the accounting standards for certain financial instruments with characteristics of both liabilities and equity. | | *8 | | Annualized.Operating expenses include Compensation and Benefits. | | ** | | FRB program commenced in October 2008. On July 2, 2009, the Bank was no longer eligible to collect interest on excess balances.Annualized. |
6554
Results of Operations The following section provides a comparative discussion of the FHLBNY’s results of operations for the current yearthree months ended March 31, 2011 and prior year third quarter and year-to-date periods.2010. For a discussion of the significantCritical accounting estimates used by the FHLBNY that affect the results of operations, see Significant Accounting Policies and Estimates in Note 1 to this Form 10-Q and in the Bank’s most recent Form 10-K filed on March 25, 2010. The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations, and are the principal factor that impacts its operating results. Interest income from advances is the principal source of revenue. The primary expenses are interest paid on consolidated obligations debt, operating expenses, principally administrative and overhead expenses, and “assessments” on net income. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to REFCORP and set aside funds from its income towards an Affordable Housing Program (“AHP”), together referred to as assessments. Other significant factors affecting the Bank’s Net income include the volume and timing of investments in mortgage-backed securities, debt repurchases and associated losses, and earnings from shareholders’ capital.2011.
Net Income The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations, and are the principal factor that impacts its operating results. Interest income from advances is the principal source of revenue. The primary expenses are interest paid on consolidated obligations debt, operating expenses, principally administrative and overhead expenses, and “assessments” on net income. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to REFCORP and set aside funds from its income towards an Affordable Housing Program (“AHP”), together referred to as assessments. Other significant factors affecting the Bank’s Net income include the volume and timing of investments in mortgage-backed securities, debt repurchases and associated losses, gains and losses from hedging activities, and earnings from shareholders’ capital. Summarized below are the principal components of Net income (in thousands): Table 1.1: Principal Components of Net Income | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | | | | | | | | Total interest income | | $ | 257,389 | | | $ | 273,152 | | Total interest expense | | | 123,316 | | | | 166,957 | | | | | | | | | Net interest income before provision for credit losses | | | 134,073 | | | | 106,195 | | Provision for credit losses on mortgage loans | | | 1,773 | | | | 709 | | | | | | | | | Net interest income after provision for credit losses | | | 132,300 | | | | 105,486 | | Total other income (loss) | | | 14,303 | | | | (10,656 | ) | Total other expenses | | | 49,908 | | | | 21,654 | | | | | | | | | Income before assessments | | | 96,695 | | | | 73,176 | | | | | | | | | Total assessments | | | 25,714 | | | | 19,536 | | | | | | | | | Net income | | $ | 70,981 | | | $ | 53,640 | | | | | | | | |
Net income — 2011 first quarter compared to 2010 first quarter. The FHLBNY reported current year third2011 first quarter Net income of $78.8$71.0 million, or $1.71$1.61 per share, compared to prior year period Net income of $140.2with $53.6 million, or $2.70$1.09 per share. Current year-to-dateshare for the same period in 2010. Net income was $189.1 million, or $3.98 per share, compared to prior year period after the deduction of AHP and REFCORP assessments, which are a fixed percentage of the FHLBNY’s pre-assessment income. Net income of $474.8 million, or $8.93 per share. grew due to the increase in Net interest income, a key metric for the FHLBNY and the primary contributor to Net income, was adversely affected in 2010. Net interest income in the current year quarter was $125.2 million, down by $28.7 million from the prior year period, and was the primary cause of the decline in Net income. Net interest income was $347.6 million for the current year-to-date period, down by $237.9 million from the prior year period. The Bank’s cost of debt has become more expensive in 2010 relative to prior year periods. Additionally, the volume of advance business has contracted. Another factor was the decline in member capital stock, which declined in line with advances borrowed by members. The FHLBNY typically invests member capital to fund short-term interest-earning investments and decline in capital stock reduced the potential for earning additional interest income. Hedging activities resulted in a small loss in 2010, in contrast to significant gains, mainly unrealized, that enhanced earnings in the prior year periods. In the current year quarter, four held-to-maturity private-label MBS were credit impaired and to deemed to be OTTI and $3.1 million was recorded as a charge to Other income (loss), compared to $3.7$134.1 million in the prior year period. On a year-to-date basis, credit impairment charge of $7.7 million was recorded in the current year, compared to $14.32011 first quarter, up from $106.2 million in the prior year.same period in 2010, an increase of 26.3%. Although margins on advances were weaker and the cost of funding remained above historical pricing, the increase was largely the result of $42.7 million in prepayment fees recorded to Net interest income. In the 2011 first quarter, member-borrowers prepaid $7.1 billion of longer-term advances and, for the most part, took advantage of prevailing lower interest rates to borrow anew at the lower prevailing coupons.
Reported Net realizedThe FHLBNY recorded $64.6 million of net gains from derivative and unrealized loss from hedging activities was a gain of $8.4 million in the current year2011 first quarter, compared to gainlargely benefitting from the recognition of $59.6 million inrealized gains from termination of hedges contemporaneous with the prior year period. On a year-to-date basis, the Bank recorded a loss of $3.3 million in the current year period, in contrast to a gain of $124.6 million in the prior year period. In order to manage the FHLBNY’s interest rate risk profile, the FHLBNY routinely uses derivatives to manage the interest rate risk inherent in the Bank’s assets and liabilities. The hedging losses and gains were primarily due to (1) Fair value changes of interest rate swaps and options designated as economic hedges of debt issued by the FHLBNY, and (2) Reversal of fair value changes recorded in the prior year periods. Hedging losses are net of interest received or paid on swaps designated as economic hedges, in compliance withprepayments. Such hedge accounting reporting guidance, which prescribes that such interest is included in the income statement as part of derivatives, and hedging activities. Interest income or expense from swaps that qualify under hedge accounting are also included in the income statement but are reported as part of the income or expense of the hedged asset or liability. See Note 16 to the unaudited financial statements and Table 11 in this MD&A for more information.
The Bank recorded fair value net losses of $12.6 million on consolidated obligation debt that were designated under the Fair Value Option (“FVO”) in the 2010 year-to-date period, compared to a gain of $8.7 million in the prior year period. The debt was economically hedged by interest rate swaps, and gains and losses were largely offset by recorded fair value changes on the swaps by $12.8 million in the 2010 year-to-date period, and $5.8 million in the prior year period. In the current and prior year third quarters, gains were de minimis.
terminations contributed $52.0 million. In general, the FHLBNY holds derivatives and associated hedged instruments and consolidated obligation debt at fair values under the FVO,Fair Value Option accounting (“FVO”), to thetheir maturity, call, or put dates. When such financial instruments are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are recorded as unrealized will generally reverse over time, and fair value changes will sum to zero.zero over time. In limited instances, when the FHLBNY may terminateterminates these instruments prior to maturity or prior to call or put dates which(such as when members request prepayments of their borrowed advances), it would result in a realized gain or loss. TotalThe remaining net gain of $12.6 million from derivatives and hedging activities was due to three factors: (1) Hedge ineffectiveness from hedges qualifying under hedge accounting rules resulted in net unrealized fair value gains (2) Net interest income associated with interest-rate swaps designated in economic hedges, including those matching debt under the FVO and (3) Interest rate caps, also designated as economic hedges, reported fair value losses in a declining interest rate environment. The impact of derivatives and hedging activities in the same period in 2010 was insignificant. In order to manage the FHLBNY’s interest rate risk profile, the FHLBNY routinely uses derivatives to manage the interest rate risk inherent in the Bank’s assets and liabilities. The FHLBNY will typically attempt to hedge an advance or consolidated obligation debt under hedge qualifying rules. Hedge ineffectiveness, the difference between changes in the fair value of the interest rate swap and the hedged advance or debt, will not be significant because under the Bank’s conservative hedging policies, the terms of the derivatives match very closely the terms of the hedged debt or advance. When it is operationally difficult to qualify for hedge accounting or when the hedge cannot be assured to be highly effective, the FHLBNY will economically hedge an advance or debt with an interest-rate derivative. Such hedges make the Bank economically hedged but also result in P&L volatility because changes in the fair values of the derivatives are not offset by offsetting changes in the fair values of hedged advances and debt. P&L volatility may arise from derivatives that are designated as economic hedges and typically would exhibit greater marked-to-market volatility when interest rates are also volatile. Also, in the course of a derivative’s existence, the derivative loses all of its fair value (gains or losses) if it is held to maturity or to its put/call exercise dates, and that can be a source of intra-period P&L volatility. The impact from changes in fair values of derivatives designated as economic hedges were not significant in the 2011 first quarter or the same period in 2010.
55
The Bank accounted for certain consolidated obligation bonds and discount notes under the FVO accounting rules. Under the FVO, the designated debt is recorded at fair values based on the cost of issuing comparable term FHLBank debt. Changes in the fair values of debt are recorded through non-interest Other income (loss) with an offset recorded to the basis of the debt in the Bank’s balance sheet. Changes in the fair values of such debt resulted in an insignificant gain of $0.7 million in the 2011 first quarter. In contrast, changes in the fair values of such debt resulted in losses of $8.4 million in the same period in 2010. In both periods, the bonds and notes were economically hedged by interest rate swaps, and gains and losses were largely offset by recorded fair value changes on the swaps. In the 2011 first quarter, credit related OTTI was insignificant, only $0.4 million, compared with $3.4 million in the same period in 2010. No new mortgage-backed securities were impaired and the OTTI charges were primarily as a result of additional credit losses recognized on previously impaired private-label MBS because of further deterioration in the performance parameters of the securities. The FHLBNY makes quarterly cash flow assessments of the expected credit performance of its entire portfolio of private-label MBS. Concurrent with the member initiated prepayments in the 2011 first quarter, the Bank also took the opportunity to re-align its future debt profile by extinguishing and transferring $478.6 million of certain high-coupon debt, at a cost that exceeded the carrying values of the debt by $51.7 million. This was recorded as a loss in non-interest Other income (loss). Debt will be replaced by new issuances at the lower costing debt, which will benefit Net interest income in future periods. Operating Expenses of the FHLBNY were $7.5 million in the 2011 first quarter, up from $6.3 million in the same period in 2010. Compensation and benefits rose to $38.9 million in the 2011 period, up from $12.9 million in the same period in 2010. In March 2011, the FHLBNY contributed $24.0 million to its Defined Benefit Plan to eliminate a funding shortfall this amount was charged to Net income. The FHLBNY was also assessed for its share of the operating expenses comprised of Operating expenses and Assessments paid tofor the Finance Agency and the Office of finance, were $23.7 million for the current year quarter, up by $4.0 million from the prior year period. On a year-to-date basis, Other expenses were $67.7 million, up by $8.1 million from the prior year period. REFCORP assessments were $19.7 million in current year quarter, down $15.4 million from the prior year period. AHP assessments were $21.4 million, down $32.0 million from the prior year period. On a year-to-date basis, the combined REFCORPFinance, and AHP assessment was $68.6those totaled $3.4 million in the current year2011 first quarter, up from $2.4 million in the same period down $103.4in 2010. The 12 FHLBanks and two other GSEs share the administrative cost of the Finance Agency.
Affordable Housing Program (“AHP”) assessment set aside from income totaled $7.9 million in the 2011 first quarter, up from $6.1 million in the prior year period.same period in 2010. REFCORP assessment payments totaled $17.7 million in the 2011 first quarter, up from $13.4 million in the same period in 2010. Assessments are calculated on Net income before assessments, and the decreasesincreases were due to lowerthe increase in Net income in current year periodsthe 2011 first quarter as compared to prior year periods.the same period in 2010. 66
Interest Income — 2011 first quarter compared to 2010 first quarter Interest income from advances and investments in mortgage-backed securities are the principal sources of income for the FHLBNY. Changes in both rate and intermediation volume (average interest-yielding assets) explain the change in the current year periodsperiod from the prior year periods.period. The principal categories of Interest Income are summarized below (dollars in thousands): Table 1:1.2: Interest Income — Principal Sources | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | | | | Percentage | | Percentage | | | Percentage | | | | 2010 | | 2009 | | Variance | | 2010 | | 2009 | | Variance | | | 2011 | | 2010 | | Variance | | Interest Income | | | Advances | | $ | 173,459 | | $ | 240,573 | | | (27.90 | )% | | $ | 477,303 | | $ | 1,094,089 | | | (56.37 | )% | | $ | 158,696 | | $ | 149,640 | | | 6.05 | % | Interest-bearing deposits | | 1,699 | | 1,014 | | 67.55 | | 3,766 | | 19,054 | | | (80.24 | ) | | Interest-bearing deposits1 | | | 966 | | 830 | | 16.39 | | Federal funds sold | | 2,253 | | 1,864 | | 20.87 | | 6,600 | | 1,933 | | NM | | | 2,546 | | 1,543 | | 65.00 | | Available-for-sale securities | | 7,580 | | 6,590 | | 15.02 | | 23,128 | | 22,881 | | 1.08 | | | 8,639 | | 5,764 | | 49.88 | | Held-to-maturity securities | | | Long-term securities | | 84,242 | | 111,232 | | | (24.26 | ) | | 274,686 | | 355,916 | | | (22.82 | ) | | 71,056 | | 98,634 | | | (27.96 | ) | Certificates of deposit | | — | | 851 | | | (100.00 | ) | | — | | 1,392 | | | (100.00 | ) | | Mortgage loans held-for-portfolio | | 16,333 | | 17,405 | | | (6.16 | ) | | 49,689 | | 54,679 | | | (9.13 | ) | | 15,486 | | 16,741 | | | (7.50 | ) | Loans to other FHLBanks and other | | — | | 1 | | | (100.00 | ) | | — | | 1 | | | (100.00 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | $ | 285,566 | | $ | 379,530 | | | (24.76 | )% | | $ | 835,172 | | $ | 1,549,945 | | | (46.12 | )% | | $ | 257,389 | | $ | 273,152 | | | (5.77 | )% | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Primarily from cash collateral deposited with swap counterparties. |
Reported Interest income in the Statements of Incomefrom advances was adjusted for the cash flows associated with interest rate swaps (designated in accounting hedges) in which theswaps. The Bank generally pays fixed-rate cash flows to derivative counterparties, which typically mirrors the fixed-rate coupons received from advances borrowed by members. Inand in exchange, the Bank receives variable-rate LIBOR-indexed cash flows.flows fixed-rate cash flows, which typically mirror the fixed-rate coupon received from advances borrowed by members. The 2011 first quarter Interest income, which included $42.7 million of prepayment fees, declined compared to the same period in 2010. The primary causes were (1) lower coupons and yields from advances and investments in a declining interest rate environment, (2) lower volume of advance business, and (3) run-offs of higher yielding assets which were being replaced by assets with lower coupons. See Table 1.10 Rate and Volume Analysis for more information. 56
Impact of hedging advances- The FHLBNY executes interest rate swaps to modify the effective interest rate terms of many of its fixed-rate advance products and typically all of its putable advances. In these swaps, the FHLBNY effectively converts a fixed-rate stream of cash flows from its fixed-rate advances to a floating-rate stream of cash flows, typically indexed to LIBOR. These cash flow patterns from derivatives were in line with the Bank’s interest rate risk management practices and effectively converted fixed-rate cash flows of hedged advances to LIBOR indexedLIBOR-indexed cash flows. Derivative strategies are used to manage the interest rate risk inherent in fixed-rate advances and are designed to protect future interest income. The table below summarizes interest income earned from advances and the impact of interest rate derivatives (in thousands): Table 2:1.3: Impact of Interest Rate Swaps on Interest Income Earned from Advances | | | | | | | | | | | | | | | | | | | | Three months ended | | Nine months ended | | | | | | | | | | | | September 30, | | September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | Advance Interest Income | | | Advance interest income before adjustment for interest rate swaps | | $ | 651,672 | | $ | 743,687 | | $ | 1,996,172 | | $ | 2,345,699 | | | $ | 597,304 | | $ | 679,921 | | Net interest adjustment from interest rate swaps1 | | | (478,213 | ) | | | (503,114 | ) | | | (1,518,869 | ) | | | (1,251,610 | ) | | | | | | | | | | | | | Net interest adjustment from interest rate swaps | | | | (438,608 | ) | | | (530,281 | ) | | | | | | | | Total Advance interest income reported | | $ | 173,459 | | $ | 240,573 | | $ | 477,303 | | $ | 1,094,089 | | | $ | 158,696 | | $ | 149,640 | | | | | | | | | | | | | | | | |
In the current year periods,2011 first quarter, the FHLBNY paid swap counterparties fixed-rate cash flows, which typically mirrored the coupons on hedged advance.advances. In return, the swap counterparties paid the FHLBNY a pre-determined spread plus the prevailing 3-month LIBOR, which resets generally every three months. In the table above, the unfavorable cash flow patterns of the interest rate swaps were indicative of the declining LIBOR rates (obligation of the swap counterparty) compared to fixed-rate obligation of the FHLBNY. The Bank is generally indifferent to changes in the cash flow patterns as it typically hedges its fixed-rate consolidated obligation debt, which is the Bank’s primary funding base, and achieves its overall net interest spread objective. Under GAAP, net interest adjustments from derivatives (as described in Table 2the table above) may be offset against the net interest accruals of the hedged financial instrument (e.g. advance) only if the derivative is in a hedge qualifyinghedge-qualifying relationship. If the hedge does not qualify forunder hedge accounting rules, and the Bank designates the hedge as an economic hedge, the net interest adjustments from derivatives would not be recorded with the advance interest revenues. Instead, the net interest adjustments from swaps would be recorded in Other income (loss) as a Net realized and unrealized gain (loss) from derivatives and hedging activities. Thus, the accounting designation of a hedge may have a significant impact on reported Interest income from advances. There were no material amounts of net interest adjustments from interest rate swaps designated as economic hedges of advances that were reported in Other income (loss) in the current year or prior year periods related to swaps associated with advances. 67
Interest Expense — 2011 first quarter compared to 2010 first quarter The FHLBNY’s primary source of funding is through the issuance of consolidated obligation bonds and discount notes in the global debt markets. Consolidated obligation bonds are medium- and long-term bonds, while discount notes are short-term instruments. To fund its assets, the FHLBNY considers its interest rate risk and liquidity requirements in conjunction with consolidated obligation buyers’ preferences and capital market conditions when determining the characteristics of debt to be issued. Typically the Bank has used fixed-rate callable and non-callable bonds to fund mortgage-related assets and advances. Discount notes are issued to fund advances and investments with shorter-interestshorter interest rate reset characteristics. The principal categories of Interest expense are summarized below.below (dollars in thousands). Changes in both rate and intermediation volume (average interest-costing liabilities), the mix of debt issuances between bonds and discount notes, and the impact of hedging strategies explain the changes in interest expense (dollars in thousands):expense. Table 3:1.4: Interest Expenses — Principal Categories | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | | | | Percentage | | Percentage | | | Percentage | | | | 2010 | | 2009 | | Variance | | 2010 | | 2009 | | Variance | | | 2011 | | 2010 | | Variance | | Interest Expense | | | Consolidated obligations-bonds | | $ | 147,097 | | $ | 191,708 | | | (23.27 | )% | | $ | 448,669 | | $ | 783,695 | | | (42.75 | )% | | $ | 114,277 | | $ | 154,913 | | | (26.23 | )% | Consolidated obligations-discount notes | | 11,456 | | 31,647 | | | (63.80 | ) | | 33,069 | | 173,228 | | | (80.91 | ) | | 7,816 | | 9,657 | | | (19.06 | ) | Deposits | | 959 | | 516 | | 85.85 | | 2,813 | | 2,002 | | 40.51 | | | 470 | | 892 | | | (47.31 | ) | Mandatorily redeemable capital stock | | 879 | | 1,807 | | | (51.36 | ) | | 3,051 | | 5,478 | | | (44.30 | ) | | 744 | | 1,495 | | | (50.23 | ) | Cash collateral held and other borrowings | | 14 | | — | | NM | | 14 | | 49 | | | (71.43 | ) | | 9 | | — | | NM | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | $ | 160,405 | | $ | 225,678 | | | (28.92 | )% | | $ | 487,616 | | $ | 964,452 | | | (49.44 | )% | | $ | 123,316 | | $ | 166,957 | | | (26.14 | )% | | | | | | | | | | | | | | | | | | | | | |
Reported Interest expense in the Statements of Incomefor consolidated obligation bonds is adjusted for the cash flows associated with interest rate swaps in which theswaps. The Bank generally pays variable-rate LIBOR-indexed cash flows to derivative counterparties and, in exchange, the Bank receives fixed-rate cash flows, which typically mirror the fixed-rate coupon payments to investors holding the debt.FHLBank bonds. The Bank generally hedges its long-term fixed-rate bonds and almost all fixed-rate callable bonds with swaps that generally qualify for hedge accounting. In the current year periods and the same periods in the prior year, theThe Bank economically hedged certain floating-rate bonds that were not indexed to 3-month LIBOR and certain short-term fixed-rate debt and discount notes because itnotes. The Bank believed that the hedges would not be highly effective in offsetting changes in the fair values of the debt and the swap, and would not therefore qualify for hedge accounting. 57
Reported Interest expense in the 2011 first quarter declined compared to the same period in 2010 because of (1) lower cost of coupons paid on consolidated obligation bonds and discount notes, and (2) lower volume of debt issued because of decline in funding requirements as balance sheet assets declined, specifically advances borrowed by members. See Table 1.10, Rate and Volume Analysis for more information. Impact of hedging debt- — The FHLBNY issues both fixed-rate callable and non-callable debt. Typically, the Bank issues callable debt with the simultaneous execution of cancellable interest rate swaps to modify the effective interest rate terms and the effective durations of its fixed-rate callable debt. A substantial percentage of non-callable fixed-rate debt is also swapped to “plain vanilla” LIBOR-indexed cash flows. These hedging strategies benefit the Bank in two principal ways: (1) fixed-rate callable bond, in conjunction with interest rate swap containing a call feature that mirrors the option embedded in the callable bond, enables the FHLBNY to meet its funding needs at yields not otherwise directly attainable through the issuance of callable debt; and, (2) the issuance of fixed-rate debt and the simultaneous execution of an interest rate swap converts the debt to an adjustable-rate instrument tied to an index, typically 3-month LIBOR. Derivative strategies are used to manage the interest rate risk inherent in fixed-rate debt, and certain floating-rate debt that are not indexed to 3-month LIBOR rates. The strategies are designed to protect future interest income. The economic hedge of debt tied to indices other than 3-month LIBOR (Prime, Federal funds rate, and 1-month LIBOR) is designed to effectively convert the cash flows of the debt to 3-month LIBOR. The table below summarizes interest expense paid on consolidated obligation bonds and discount notes and the impact of interest rate swaps (in thousands): Table 4:1.5: Impact of Interest Rate Swaps on Consolidated Obligation Interest Expense | | | | | | | | | | | | | | | | | | | | Three months ended | | Nine months ended | | | | | | | | | | | | September 30, | | September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | Consolidated bonds and discount notes-Interest expense | | | Bonds-Interest expense before adjustment for swaps | | $ | 285,874 | | $ | 343,175 | | $ | 933,744 | | $ | 1,167,845 | | | $ | 249,744 | | $ | 328,657 | | Discount notes-Interest expense before adjustment for swaps | | 11,456 | | 31,647 | | 33,069 | | 173,702 | | | 7,816 | | 9,657 | | Net interest adjustment for interest rate swaps1 | | | (138,777 | ) | | | (151,467 | ) | | | (485,075 | ) | | | (384,624 | ) | | | | | | | | | | | | | Net interest adjustment for interest rate swaps | | | | (135,467 | ) | | | (173,744 | ) | | | | | | | | Total Consolidated bonds and discount notes-interest expense reported | | $ | 158,553 | | $ | 223,355 | | $ | 481,738 | | $ | 956,923 | | | $ | 122,093 | | $ | 164,570 | | | | | | | | | | | | | | | | |
68
Funding environment— Pricing of FHLBank bonds and discount notes have remained at very narrow sub-LIBOR spreads, and cost of funding has remained well above historical cost of FHLBank debt. Investor demand appears to be for shorter maturity bonds and notes. The prevailing investor belief seems to be that rates will eventually rise over the next 12 months, and investors are temporarily “parking” their cash in short maturity instruments. If such sentiments continue, discount note pricing should be most attractive for notes that mature within a month. The FHLBNY has generally increased the proportion of discount notes, relative to bonds, to fund its balance sheet. Issuance of long- and medium-term FHLBank bonds has remained at all-time lows as the pricing of bonds longer than 3-4 years have been uneconomical to issue.
Net Interest Income — 2011 first quarter compared to 2010 first quarter Net interest income is the principal source of revenue for the Bank, and represents the difference between interest income from interest-earning assets and interest expense paid on interest-costing liabilities. Net interest income is impacted by a variety of factors: Net interest income is directly impacted by transaction volumes, as measured by average balances of interest earning assets, and by the prevailing balance sheet yields, as measured by coupons on earning assets minus yields paid on interest-costing liabilities net of the cash flows paid or received on interest rate derivatives that qualified under hedge accounting rules. Member demand for advances and investment activity, the yields from advances and investments, and the cost of consolidated obligation debt that is issued by the Bank to fund advances and investments. The volatility of the 3-month LIBOR rate and its absolute level has a profound impact on the Bank’s cost of funding and earning assets. A stable spread between the FHLBank issued-debt and LIBOR is also an important element in the Bank’s funding tactics and also impacts the pricing of advances offered to members. The execution of interest rate swaps in the derivative market at a constant spread to LIBOR, in effect converting fixed-rate advances and fixed-rate debt to conventional adjustable-rate instruments indexed to LIBOR, results in an important intermediation for the Bank between the capital markets and the swap market. The intermediation has typically permitted the Bank to raise funds at lower costs than would otherwise be available through the issuance of simple fixed- or floating-rate debt in the capital markets. The FHLBNY deploys hedging strategies to protect future net interest income, butincome. These strategies may reduce income in the short-run, althoughbut the FHLBNY expects them to benefit future periods. Income earned from assets funded by member capital and retained earnings, referred to as “deployed capital”, which areis non-interest bearing, is another important contributor for the FHLBNY. All of these factors may fluctuate based on changes in interest rates, demand by members for advances, investor demand for debt issued by the FHLBNY, the change in the spread between the yields on advances and investments, and the cost of financing these assets by the issuance of debt to investors. 58
The following table summarizes key changes in the components of Net interest income (dollars in thousands): Table 5: Components of1.6: Net Interest Income | | | | | | | | | | | | | | | Three months ended September 30, | | | | | | | | | | | | Percentage | | | | 2010 | | | 2009 | | | Variance | | Interest Income | | | | | | | | | | | | | Advances | | $ | 173,459 | | | $ | 240,573 | | | | (27.90 | )% | Interest-bearing deposits | | | 1,699 | | | | 1,014 | | | | 67.55 | | Federal funds sold | | | 2,253 | | | | 1,864 | | | | 20.87 | | Available-for-sale securities | | | 7,580 | | | | 6,590 | | | | 15.02 | | Held-to-maturity securities | | | | | | | | | | | | | Long-term securities | | | 84,242 | | | | 111,232 | | | | (24.26 | ) | Certificates of deposit | | | — | | | | 851 | | | | (100.00 | ) | Mortgage loans held-for-portfolio | | | 16,333 | | | | 17,405 | | | | (6.16 | ) | Loans to other FHLBanks and other | | | — | | | | 1 | | | | (100.00 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | | 285,566 | | | | 379,530 | | | | (24.76 | ) | | | | | | | | | | | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | Consolidated obligations-bonds | | | 147,097 | | | | 191,708 | | | | (23.27 | ) | Consolidated obligations-discount notes | | | 11,456 | | | | 31,647 | | | | (63.80 | ) | Deposits | | | 959 | | | | 516 | | | | 85.85 | | Mandatorily redeemable capital stock | | | 879 | | | | 1,807 | | | | (51.36 | ) | Cash collateral held and other borrowings | | | 14 | | | | — | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | | 160,405 | | | | 225,678 | | | | (28.92 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net interest income before provision for credit losses | | $ | 125,161 | | | $ | 153,852 | | | | (18.65 | )% | | | | | | | | | | |
| | | | | | | | | | | | | | | Nine months ended September 30, | | | | | | | | | | | | Percentage | | | | 2010 | | | 2009 | | | Variance | | Interest Income | | | | | | | | | | | | | Advances | | $ | 477,303 | | | $ | 1,094,089 | | | | (56.37 | )% | Interest-bearing deposits | | | 3,766 | | | | 19,054 | | | | (80.24 | ) | Federal funds sold | | | 6,600 | | | | 1,933 | | | | 241.44 | | Available-for-sale securities | | | 23,128 | | | | 22,881 | | | | 1.08 | | Held-to-maturity securities | | | | | | | | | | | | | Long-term securities | | | 274,686 | | | | 355,916 | | | | (22.82 | ) | Certificates of deposit | | | — | | | | 1,392 | | | | (100.00 | ) | Mortgage loans held-for-portfolio | | | 49,689 | | | | 54,679 | | | | (9.13 | ) | Loans to other FHLBanks and other | | | — | | | | 1 | | | | (100.00 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | | 835,172 | | | | 1,549,945 | | | | (46.12 | ) | | | | | | | | | | | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | Consolidated obligations-bonds | | | 448,669 | | | | 783,695 | | | | (42.75 | ) | Consolidated obligations-discount notes | | | 33,069 | | | | 173,228 | | | | (80.91 | ) | Deposits | | | 2,813 | | | | 2,002 | | | | 40.51 | | Mandatorily redeemable capital stock | | | 3,051 | | | | 5,478 | | | | (44.30 | ) | Cash collateral held and other borrowings | | | 14 | | | | 49 | | | | (71.43 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | | 487,616 | | | | 964,452 | | | | (49.44 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net interest income before provision for credit losses | | $ | 347,556 | | | $ | 585,493 | | | | (40.64 | )% | | | | | | | | | | |
69
In the 2010 current quarter and year-to-date periods, Net interest income declined from the same periods in 2009. Net interest income is directly impacted by transaction volumes, as measured by average balances of interest earning assets, and by the prevailing balance sheet yields, as measured by coupons on earning assets minus yields paid on interest costing liabilities net of the cash flows paid or received on interest rate derivatives that qualified under hedge accounting rules. | | | | | | | | | | | | | | | Three months ended March 31, | | | | | | | | | | | | Percentage | | | | 2011 | | | 2010 | | | Variance | | Total interest income | | $ | 257,389 | | | $ | 273,152 | | | | (5.78 | )% | Total interest expense | | | 123,316 | | | | 166,957 | | | | (26.14 | ) | | | | | | | | | | | Net interest income before provision for credit losses | | $ | 134,073 | | | $ | 106,195 | | | | 26.25 | % | | | | | | | | | | |
Net interest income a key metric forbenefited from prepayment fees of $42.7 million. Without the FHLBNY and the primary contributor to Net income, was adversely affected in 2010, and contracted to levels more typicalpositive impact of the years before 2009, primarily because (1) business volume as measured by advances to membersfees, Net interest income would have declined in the current year relative2011 first quarter compared to 2009, and (2) the Bank’s funding advantages experienced in 2009 weakened in 2010. Funding environment– Pricing of FHLBank issued discount notes has deterioratedsame period in 2010, relative to 2009. In muchprimarily because of 2009, discount notes had been successfully utilized when such debt could be issued at wide advantageous spreads to LIBOR, and was one source of the funding advantage in 2009. With the easing of the credit crises and market normalization appearing to have set in, FHLBank discount note spread advantage to LIBOR seems to have returned to pre-crises ranges. At those levels, as a funding tool, discount notes were not as attractive as short-term callable bonds or floating rate debt and the FHLBNY reduced its reliance on discount notes in 2010. Discount note pricing has been relatively stable, driven by (1) increased investor demand (primarily from the money market funds) for the 60-day maturity discount notes. Demand for this particular maturity notes was due to the amendment to SEC’s Rule 2a-7 that impacted the money market industry, a major investor group for the FHLBank discount notes, and (2) Federal Reserve Board’s (“FRB”) action to support Treasury bills by issuing enough Treasury bills each week to replace maturing bills, and has tended to stabilize yield volatility, or yields to collapse to zero for bills, and has also reduced yield volatility for FHLB discount notes.
The 3-month LIBOR index is a vital indicator as the FHLBNY attempts to execute interest rate swaps to synthetically convert fixed-rate cash flows to sub-LIBOR cash flows, earning the FHLBNY a spread. The FHLBNY uses interest rate swaps to effectively change the repricing characteristics of a significant portion of its fixed-rate advances and consolidated obligation debt to match shorter-term LIBOR rates that reprice at intervals of three-months or less. When the Bank executes an interest rate swap to change the fixed payments on its debt to a LIBOR rate, the spread between the fixed payments and the LIBOR cash receipts results in the FHLBNY’s effective funding cost. Consequently, the current level of spread between the 3-month LIBOR rate and the swap rate for a fixed-rate FHLBank debt has an impact on the FHLBNY’s profitability. Also, the change in the absolute level of the index tends to impact the sub-LIBOR spread, which in turn, impacts interest margin and profitability.
Both the absolute level of the 3-month LIBOR index and the discount note spreads to swap rates have been uneven during 2010, and have caused the FHLBNY to shift its funding mix to accommodate changing circumstances. The 3-month LIBOR index declined to 29 basis points at September 30, 2010, down from 53 basis points at June 30, 2010, causing adverse spread compression in the 2010 third quarter. In response to changing interest rate market conditions, the FHLBNY made tactical changes to its funding mix by reducing issuances of discount notes in the 2010 third quarter. In mid-2010 second quarter, the increase in the 3-month LIBOR had benefited the pricing of short- and intermediate-term FHLBank bonds as well as discount notes. In the 2010 first quarter, the very low LIBOR level provided very little opportunity for FHLBank bonds and discount notes to yield their historic sub-LIBOR spreads.
Spreads on intermediate-term FHLBank issued bonds have improved in 2010 from the height of the credit crises and appear to have stabilized, although spreads have not returned to the pre-crises levels. Spreads on longer-term bonds have remained at disadvantageous levels well above the historic ranges.
Callable FHLBank issued bonds have declined to their all time lows as the low interest rate environment is fueling increased redemption, which has driven up investor liquidity in an environment in which there is already a shortage of high quality, high yielding assets. This has caused further tightening of spreads for the FHLBank callable debt. Short lockout callable bonds are an exception and have benefited from the relatively attractive funding afforded by inexpensive optionality.
Impact of business volume- Decline in member driven advancelower business volume as measured by average advances outstanding, was the contributing factor to the declineborrowed by members, and (2) prepayments, paydowns and maturities of Net interest income in the 2010 third quarter and year-to-date periods. Average outstanding advances in the 2010 third quarter was $84.2 billion down from $96.7 billion in the same period in 2009. Balance sheet contraction caused Net interest income to decline by $29.9 million over the same period in 2009. The impact of balance sheet contraction was even more significant on a year-to-date basis, and caused Net interest income to compress by $101.0 million in 2010 relative to the same period in 2009. For more information, see Table 9, Rate & Volume Analysis.
Additionally, in 2010, certain higher-yielding intermediate-term advances matured, andassets that were replaced bywith assets with lower yielding advances, and that too has tended to lower Net interest income.spreads.
Impact of lower interest income from investing member capital —The FHLBNY earns significant interest income from investing its members’ capital to fund interest-earning assets. Such earnings are sensitive to the changes in short-term interest rates (Rate effects), as well asand to changes in the average outstanding capital and non-interest bearing liabilities (Volume effects). In the 2010 year-to-date period,2011 first quarter, the FHLBNY earned less interest income from investing members’ capital and net non-interest assets compared to the same period in the prior year. The primary cause2010. This was caused by the decline in stockholders capital stock, which has declined in parallel with the lower volume of advances borrowed by members. As capital declines, the FHLBNY has lower amounts of deployed capital to invest and enhance interest income. Typically, members’ capital is invested in short-term liquid investments, and the Bank earned very low income because of much lower yields in both periods. For more information, see Table 8:1.9: Spread and Yield Analysis and Table 9:1.10: Rate and Volume Analysis. 70
Impact of qualifying hedges on Net interest income- The Bank deploys hedging strategies to protect future net interest income that may reduce income in the short-term. Net interest accruals of derivatives designated in a fair value or cash flow hedge qualifying under hedge accounting rules are recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities. They can have a significant impact on Net interest income. On a GAAP basis, the impact of derivatives was to reduce Net interest income for the current quarter and year-to-date basis over the same periods in 2009.income. For more information, see Table 6, below:the table below. The following table summarizes the impact of net interest adjustments from hedge qualifying interest-rate swaps (in thousands): Table 6:1.7: Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps1 | | | | | | | | | | | | | | | | | | | | Three months ended | | Nine months ended | | | | | | | | | | | | September 30, | | September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | | | | Interest Income | | $ | 763,779 | | $ | 882,644 | | $ | 2,354,041 | | $ | 2,801,555 | | | $ | 695,997 | | $ | 803,433 | | Net interest adjustment from interest rate swaps | | | (478,213 | ) | | | (503,114 | ) | | | (1,518,869 | ) | | | (1,251,610 | ) | | | (438,608 | ) | | | (530,281 | ) | | | | | | | | | | | | | | | | Reported interest income | | 285,566 | | 379,530 | | 835,172 | | 1,549,945 | | | 257,389 | | 273,152 | | | | | | | | | | | | | | | | | | | | Interest Expense | | 299,182 | | 377,145 | | 972,691 | | 1,349,076 | | | 258,783 | | 340,701 | | Net interest adjustment from interest rate swaps | | | (138,777 | ) | | | (151,467 | ) | | | (485,075 | ) | | | (384,624 | ) | | | (135,467 | ) | | | (173,744 | ) | | | | | | | | | | | | | | | | Reported interest expense | | 160,405 | | 225,678 | | 487,616 | | 964,452 | | | 123,316 | | 166,957 | | | | | | | | | | | | | | | | | | | | Net interest income (Margin) | | $ | 125,161 | | $ | 153,852 | | $ | 347,556 | | $ | 585,493 | | | $ | 134,073 | | $ | 106,195 | | | | | | | | | | | | | | | | | | | | Net interest adjustment — interest rate swaps | | $ | (339,436 | ) | | $ | (351,647 | ) | | $ | (1,033,794 | ) | | $ | (866,986 | ) | | $ | (303,141 | ) | | $ | (356,537 | ) | | | | | | | | | | | | | | | |
| | | Net interest accruals of derivatives designated in a fair value or cash flow hedge qualifying under the derivatives and hedge accounting rules were recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities, and had a significant impact on net interest income. As reported in the table above, the FHLBNY paid to swap counterparties increasing amounts of interest payments over the last three years, because the cash flow interest exchanges between the swap dealer and the FHLBNY have been such that the hedges of fixed-rate advances resulted in a significantly greater amounts of cash out-flows than the cash in-flows from hedges of fixed-rate consolidated obligation debt. In a hedge of a fixed-rate advance, the FHLBNY pays the swap dealer fixed-rate interest payment (which typically mirrors the coupon of the hedged advance), and in return the swap counterparties pay the FHLBNY a pre-determined spread plus the prevailing LIBOR, which resets generally every three months. In a hedge of a fixed-rate consolidated obligation bond, the FHLBNY pays the swap dealer a LIBOR-indexed interest payment, and in return the swap dealer pays fixed-rate interest payments (which typically mirrors the coupon paid to investors holding the FHLBank debt). As reported in the table above, the unfavorable cash flow patterns of the interest rate swaps were indicative of the declining LIBOR rates (obligation of the swap counterparty) compared to fixed-rate obligation of the FHLBNY. The Bank is generally indifferent to changes in the cash flow patterns, as it achieves its overall net interest spread objective and remains indifferent for the most part to the volatility of interest rates. 59
| | Net interest accruals of derivatives designated in a fair value or cash flow hedge qualifying under the derivatives and hedge accounting rules were recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities, and had a significant impact on Net interest income. |
Impact of economic hedges on Net interest income —2011 first quarter compared to 2010 first quarter-The FHLBNY executes certain transactions designated as economic hedges, primarily as hedges of FHLBNY debt. Under existing accounting rules, the interest income or expense generated from the derivatives designated as economic hedges areis not reported as a component of Net interest income, although they have an economic impact on Net interest income. Under GAAP, interest income or expense from such derivatives are recorded as derivative gains and losses in Other income (loss). In the 2010 current quarter, on an economic basis, the economic impact of derivatives would have been to increase GAAP Net interest income by $7.9 million. In the same period in 2009, on an economic basis, the impact would have been to decrease GAAP Net interest expense by $19.1 million. On a year-to-date basis, 2010 GAAP Net interest income would have increased by $67.8 million. In contrast, 2009 GAAP Net interest income would have declined by $36.9 million. The reporting classification of interest income or expense associated with swaps designated as economic hedges has no impact on Net income, as these adjustments are either reported as a component of Net interest income or as a component of Other income as gains or losses from hedging activities. See Table 7 for additional information.Interest rate swaps designated as economic hedges have declined as much of the swaps executed in prior years have matured. In prior years, significant amounts of swaps were designated as economic hedges of consolidated obligation debt, in a hedging strategy that converted floating-rate debt indexed to 1-month LIBOR, the Prime rate, and the Federal funds rate to 3-month LIBOR cash flows.
71
The following table contrasts Net interest income, Net income spread and Return on earning assets between GAAP and economic basis (dollar amounts in thousands): Table 7:1.8: GAAP Versus Economic Basis — Contrasting Net Interest Income, Net Income Spread and Return on Earning Assets2 | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, 2010 | | | Three months ended September 30, 2009 | | | | Amount | | | ROA | | | Net Spread | | | Amount | | | ROA | | | Net Spread | | | | | | | | | | | | | | | | | | | | | | | | | | | GAAP net interest income | | $ | 125,161 | | | | 0.47 | % | | | 0.41 | % | | $ | 153,852 | | | | 0.51 | % | | | 0.45 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Interest income (expense) | | | | | | | | | | | | | | | | | | | | | | | | | Swaps not designated in a hedging relationship | | | 7,854 | | | | 0.03 | | | | 0.03 | | | | 19,141 | | | | 0.06 | | | | 0.07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Economic net interest income | | $ | 133,015 | | | | 0.50 | % | | | 0.44 | % | | $ | 172,993 | | | | 0.57 | % | | | 0.52 | % | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, 2010 | | Nine months ended September 30, 2009 | | | Three months ended March 31, 2011 | | Three months ended March 31, 2010 | | | | Amount | | ROA | | Net Spread | | Amount | | ROA | | Net Spread | | | Amount | | ROA | | Net Spread | | Amount | | ROA | | Net Spread | | | | | GAAP net interest income | | $ | 347,556 | | | 0.43 | % | | | 0.38 | % | | $ | 585,493 | | | 0.61 | % | | | 0.53 | % | | $ | 134,073 | | | 0.54 | % | | | 0.49 | % | | $ | 106,195 | | | 0.38 | % | | | 0.33 | % | | | | Interest income (expense) | | | Swaps not designated in a hedging relationship | | 67,822 | | 0.08 | | 0.09 | | | (36,869 | ) | | | (0.03 | ) | | | (0.05 | ) | | 12,857 | | 0.05 | | 0.06 | | 37,220 | | 0.14 | | 0.15 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Economic net interest income | | $ | 415,378 | | | 0.51 | % | | | 0.47 | % | | $ | 548,624 | | | 0.58 | % | | | 0.48 | % | | $ | 146,930 | | | 0.59 | % | | | 0.55 | % | | $ | 143,415 | | | 0.52 | % | | | 0.48 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Explanation of the use of certain non-GAAP measures of Interest Income and Expense, Net Interest income and margin. The FHLBNY has presented its results of operations in accordance with U.S. generally accepted accounting principles. The FHLBNY has also presented certain information regarding its Interest Income and Expense, Net Interest income and Net Interest spread that combines interest expense on debt with net interest paid on interest rate swaps associated with debt that were hedged on an economic basis. These are non-GAAP financial measures used by management that the FHLBNY believes are useful to investors and members of the FHLBNY in understanding the Bank’s operational performance as well as business and performance trends. Although the FHLBNY believes these non-GAAP financial measures enhance investor and members’ understanding of the Bank’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. When discussing non-GAAP measures, the Bank has provided GAAP measures in parallel. | | | 2 | | In the 2010 quarters and in the same periods in 2009, significant amounts of swaps were designated as economic hedges of consolidated obligation debt in a hedging strategy that converted floating-rate debt indexed to 1-month LIBOR, the Prime rate, and the Federal Funds Effective rate to 3-month LIBOR cash flows. The Bank also economically hedged certain short-term fixed-rate debt and discount notes that it also believed would not be highly effective in offsetting changes in the fair values of the debt and the swap. Aggregate swap accruals for economic hedges represented cash in-flows and out-flows. In compliance with accounting standards for derivatives and hedging, interest income and expense from derivatives that did not qualify under hedge accounting were recorded as derivative gains and losses in Other income (loss) as a Net realized and unrealized gain (loss) from derivatives and hedging activities. |
7260
Spread and Yield Analysis Average balance sheet information is presented below, as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average was calculated for the period. When daily weighted average balance information was not available, a simple monthly average balance was calculated. Average yields were derived by dividing income by the average balances of the related assets, and average costs are derived by dividing expenses by the average balances of the related liabilities. Table 8:1.9: Spread and Yield Analysis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Three months ended March 31, | | | | 2010 | | 2009 | | | 2011 | | 2010 | | | | Interest | | Interest | | | | | Interest | | Interest | | | | | | Average | | Income/ | | Average | | Income/ | | | | | Average | | Income/ | | Average | | Income/ | | | | (Dollars in thousands) | | Balance | | Expense | | Rate1 | | Balance | | Expense | | Rate1 | | | Balance | | Expense | | Rate1 | | Balance | | Expense | | Rate1 | | Earning Assets: | | | Advances | | $ | 84,163,767 | | $ | 173,459 | | | 0.82 | % | | $ | 96,703,710 | | $ | 240,573 | | | 0.99 | % | | $ | 78,406,209 | | $ | 158,696 | | | 0.82 | % | | $ | 91,414,698 | | $ | 149,640 | | | 0.66 | % | Certificates of deposit and other | | 3,297,811 | | 1,699 | | 0.20 | | 4,105,978 | | 1,866 | | 0.18 | | | 2,368,320 | | 966 | | 0.17 | | 2,261,163 | | 830 | | 0.15 | | Federal funds sold and other overnight funds | | 5,339,728 | | 2,253 | | 0.17 | | 5,105,043 | | 1,864 | | 0.14 | | | 7,347,356 | | 2,546 | | 0.14 | | 5,371,946 | | 1,543 | | 0.12 | | Investments | | 11,633,953 | | 91,822 | | 3.13 | | 12,907,450 | | 117,822 | | 3.62 | | | 11,762,592 | | 79,695 | | 2.75 | | 12,412,612 | | 104,398 | | 3.41 | | Mortgage and other loans | | 1,273,893 | | 16,333 | | 5.09 | | 1,360,907 | | 17,405 | | 5.07 | | | 1,270,681 | | 15,486 | | 4.94 | | 1,299,588 | | 16,741 | | 5.22 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | $ | 105,709,152 | | $ | 285,566 | | | 1.07 | % | | $ | 120,183,088 | | $ | 379,530 | | | 1.25 | % | | $ | 101,155,158 | | $ | 257,389 | | | 1.03 | % | | $ | 112,760,007 | | $ | 273,152 | | | 0.98 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funded By: | | | Consolidated obligations-bonds | | $ | 69,817,290 | | $ | 147,097 | | 0.84 | | $ | 69,604,012 | | $ | 191,708 | | 1.09 | | | $ | 72,417,536 | | $ | 114,277 | | 0.64 | | $ | 74,296,820 | | $ | 154,913 | | 0.85 | | Consolidated obligations-discount notes | | 21,316,412 | | 11,456 | | 0.21 | | 39,520,933 | | 31,647 | | 0.32 | | | 17,764,760 | | 7,816 | | 0.18 | | 24,555,640 | | 9,657 | | 0.16 | | Interest-bearing deposits and other borrowings | | 5,089,995 | | 973 | | 0.08 | | 2,084,189 | | 516 | | 0.10 | | | 2,424,583 | | 479 | | 0.08 | | 5,051,351 | | 892 | | 0.07 | | Mandatorily redeemable capital stock | | 68,498 | | 879 | | 5.09 | | 127,964 | | 1,807 | | 5.60 | | | 59,197 | | 744 | | 5.10 | | 108,396 | | 1,495 | | 5.59 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | 96,292,195 | | 160,405 | | | 0.66 | % | | 111,337,098 | | 225,678 | | | 0.80 | % | | 92,666,076 | | 123,316 | | | 0.54 | % | | 104,012,207 | | 166,957 | | | 0.65 | % | | | | | | | | | | | | | | | Capital and other non-interest- bearing funds | | 9,416,957 | | — | | 8,845,990 | | — | | | 8,489,082 | | — | | 8,747,800 | | — | | | | | | | | | | | | | | | | | | | | | | | | Total Funding | | $ | 105,709,152 | | $ | 160,405 | | $ | 120,183,088 | | $ | 225,678 | | | $ | 101,155,158 | | $ | 123,316 | | $ | 112,760,007 | | $ | 166,957 | | | | | | | | | | | | | | | | | | | | | | | | Net Interest Income/Spread | | $ | 125,161 | | | 0.41 | % | | $ | 153,852 | | | 0.45 | % | | $ | 134,073 | | | 0.49 | % | | $ | 106,195 | | | 0.33 | % | | | | | | | | | | | | | | | | | | | | | | | Net Interest Margin (Net interest income/Earning Assets) | | | 0.47 | % | | | 0.51 | % | | Net Interest Margin | | | (Net interest income/Earning Assets) | | | | 0.54 | % | | | 0.38 | % | | | | | | | | | | | |
| | | 1 | | Reported yields with respect to advances and debt may not necessarily equal the coupons on the instruments as derivatives are extensively used to change the yield and optionality characteristics of the underlying hedged items. When fixed-rate debt is issued by the Bank and hedged with an interest rate derivative, it effectively converts the debt into a simple floating-rate bond. Similarly, the Bank makes fixed-rate advances to members and hedges the advance with a pay-fixed, receive-variable interest rate derivative that effectively converts the fixed-rate asset to one that floats with prevailing LIBOR rates. Average balance sheet information is presented as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average balance is calculated for the period. When daily weighted average balance information is not available, a simple monthly average balance is calculated. Average yields are derived by dividing income by the average balances of the related assets and average costs are derived by dividing expenses by the average balances of the related liabilities. Yields and rates are annualized. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | | | | | | Interest | | | | | | | | | | | Interest | | | | | �� | | Average | | | Income/ | | | | | | | Average | | | Income/ | | | | | (Dollars in thousands) | | Balance | | | Expense | | | Rate1 | | | Balance | | | Expense | | | Rate1 | | Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | Advances | | $ | 87,036,068 | | | $ | 477,303 | | | | 0.73 | % | | $ | 100,573,968 | | | $ | 1,094,089 | | | | 1.45 | % | Certificates of deposit and other | | | 2,619,259 | | | | 3,766 | | | | 0.19 | | | | 3,244,842 | | | | 20,447 | | | | 0.84 | | Federal funds sold and other overnight funds | | | 5,682,315 | | | | 6,600 | | | | 0.16 | | | | 9,640,541 | | | | 1,933 | | | | 0.03 | | Investments | | | 12,116,261 | | | | 297,814 | | | | 3.29 | | | | 12,660,109 | | | | 378,797 | | | | 4.00 | | Mortgage and other loans | | | 1,284,879 | | | | 49,689 | | | | 5.17 | | | | 1,404,958 | | | | 54,679 | | | | 5.20 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | $ | 108,738,782 | | | $ | 835,172 | | | | 1.03 | % | | $ | 127,524,418 | | | $ | 1,549,945 | | | | 1.62 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funded By: | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated obligations-bonds | | $ | 71,934,296 | | | $ | 448,669 | | | | 0.83 | | | $ | 71,387,598 | | | $ | 783,695 | | | | 1.47 | | Consolidated obligations-discount notes | | | 22,730,205 | | | | 33,069 | | | | 0.19 | | | | 44,783,185 | | | | 173,228 | | | | 0.52 | | Interest-bearing deposits and other borrowings | | | 5,119,117 | | | | 2,827 | | | | 0.07 | | | | 2,040,807 | | | | 2,051 | | | | 0.13 | | Mandatorily redeemable capital stock | | | 90,964 | | | | 3,051 | | | | 4.48 | | | | 135,084 | | | | 5,478 | | | | 5.42 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | | 99,874,582 | | | | 487,616 | | | | 0.65 | % | | | 118,346,674 | | | | 964,452 | | | | 1.09 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital and other non-interest- bearing funds | | | 8,864,200 | | | | — | | | | | | | | 9,177,744 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Funding | | $ | 108,738,782 | | | $ | 487,616 | | | | | | | $ | 127,524,418 | | | $ | 964,452 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Interest Income/Spread | | | | | | $ | 347,556 | | | | 0.38 | % | | | | | | $ | 585,493 | | | | 0.53 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Interest Margin (Net interest income/Earning Assets) | | | | | | | | | | | 0.43 | % | | | | | | | | | | | 0.61 | % | | | | | | | | | | | | | | | | | | | | | | | |
7361
Rate and Volume Analysis The Rate and Volume Analysis presents changes in interest income, interest expense, and net interest income that are due to changes in volumes and rates. The following tables present the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected the FHLBNY’s interest income and interest expense (in thousands). Table 9:1.10: Rate and Volume Analysis | | | | | | | | | | | | | | | For the three months ended | | | | September 30, 2010 vs. September 30, 2009 | | | | Increase (decrease) | | | | Volume | | | Rate | | | Total | | Interest Income | | | | | | | | | | | | | Advances | | $ | (28,893 | ) | | $ | (38,221 | ) | | $ | (67,114 | ) | Certificates of deposit and other | | | (397 | ) | | | 230 | | | | (167 | ) | Federal funds sold and other overnight funds | | | 89 | | | | 300 | | | | 389 | | Investments | | | (10,962 | ) | | | (15,038 | ) | | | (26,000 | ) | Mortgage loans and other loans | | | (1,115 | ) | | | 43 | | | | (1,072 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | | (41,278 | ) | | | (52,686 | ) | | | (93,964 | ) | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | Consolidated obligations-bonds | | | 586 | | | | (45,197 | ) | | | (44,611 | ) | Consolidated obligations-discount notes | | | (11,780 | ) | | | (8,411 | ) | | | (20,191 | ) | Deposits and borrowings | | | 597 | | | | (140 | ) | | | 457 | | Mandatorily redeemable capital stock | | | (777 | ) | | | (151 | ) | | | (928 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | | (11,374 | ) | | | (53,899 | ) | | | (65,273 | ) | | | | | | | | | | | | | | | | | | | | | | | | Changes in Net Interest Income | | $ | (29,904 | ) | | $ | 1,213 | | | $ | (28,691 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | For the nine months ended | | | | September 30, 2010 vs. September 30, 2009 | | | | Increase (decrease) | | | | Volume | | | Rate | | | Total | | Interest Income | | | | | | | | | | | | | Advances | | $ | (131,680 | ) | | $ | (485,106 | ) | | $ | (616,786 | ) | Certificates of deposit and other | | | (3,334 | ) | | | (13,347 | ) | | | (16,681 | ) | Federal funds sold and other overnight funds | | | (1,094 | ) | | | 5,761 | | | | 4,667 | | Investments | | | (15,709 | ) | | | (65,274 | ) | | | (80,983 | ) | Mortgage loans and other loans | | | (4,645 | ) | | | (345 | ) | | | (4,990 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | | (156,462 | ) | | | (558,311 | ) | | | (714,773 | ) | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | Consolidated obligations-bonds | | | 5,957 | | | | (340,983 | ) | | | (335,026 | ) | Consolidated obligations-discount notes | | | (61,827 | ) | | | (78,332 | ) | | | (140,159 | ) | Deposits and borrowings | | | 2,019 | | | | (1,243 | ) | | | 776 | | Mandatorily redeemable capital stock | | | (1,586 | ) | | | (841 | ) | | | (2,427 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | | (55,437 | ) | | | (421,399 | ) | | | (476,836 | ) | | | | | | | | | | | | | | | | | | | | | | | | Changes in Net Interest Income | | $ | (101,025 | ) | | $ | (136,912 | ) | | $ | (237,937 | ) | | | | | | | | | | |
74
Provision for Credit Losses and Analysis of Other Income (Loss)
The following table sets forth (1) changes in Provisions for credit losses, and (2) the main components of Other income (loss) (in thousands):
Table 10: Provision for Credit Losses on Mortgage Loans and Other Income
| | | | | | | | | | | | | | | | | | | Three months ended | | | Nine months ended | | | | September 30, | | | September 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | Provision for credit losses on mortgage loans | | $ | (231 | ) | | $ | (598 | ) | | $ | (1,137 | ) | | $ | (1,966 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income (loss): | | | | | | | | | | | | | | | | | Service fees | | $ | 1,297 | | | $ | 1,101 | | | $ | 3,472 | | | $ | 3,181 | | Instruments held at fair value-Unrealized (loss) gain | | | 55 | | | | 426 | | | | (12,612 | ) | | | 8,653 | | | | | | | | | | | | | | | | | | | Total OTTI losses | | | (498 | ) | | | (30,169 | ) | | | (4,573 | ) | | | (118,160 | ) | Net amount of impairment losses reclassified (from) to Accumulated other comprehensive loss | | | (2,569 | ) | | | 26,486 | | | | (3,164 | ) | | | 103,884 | | | | | | | | | | | | | | | Net impairment losses recognized in earnings | | | (3,067 | ) | | | (3,683 | ) | | | (7,737 | ) | | | (14,276 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net realized and unrealized (loss) gain on derivatives and hedging activities | | | 8,444 | | | | 59,639 | | | | (3,344 | ) | | | 124,613 | | Net realized gain from sale of available-for-sale securities | | | — | | | | — | | | | 708 | | | | 721 | | Other | | | (624 | ) | | | (39 | ) | | | (1,493 | ) | | | 59 | | | | | | | | | | | | | | | Total other income (loss) | | $ | 6,105 | | | $ | 57,444 | | | $ | (21,006 | ) | | $ | 122,951 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the three months ended | | | | March 31, 2011 vs. March 31, 2010 | | | | Increase (Decrease) | | | | Volume | | | Rate | | | Total | | Interest Income | | | | | | | | | | | | | Advances | | $ | (23,186 | ) | | $ | 32,242 | | | $ | 9,056 | | Certificates of deposit and other | | | 40 | | | | 96 | | | | 136 | | Federal funds sold and other overnight funds | | | 643 | | | | 360 | | | | 1,003 | | Investments | | | (5,241 | ) | | | (19,462 | ) | | | (24,703 | ) | Mortgage loans and other loans | | | (367 | ) | | | (888 | ) | | | (1,255 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | | (28,111 | ) | | | 12,348 | | | | (15,763 | ) | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | Consolidated obligations-bonds | | | (3,829 | ) | | | (36,807 | ) | | | (40,636 | ) | Consolidated obligations-discount notes | | | (2,892 | ) | | | 1,051 | | | | (1,841 | ) | Deposits and borrowings | | | (508 | ) | | | 95 | | | | (413 | ) | Mandatorily redeemable capital stock | | | (629 | ) | | | (122 | ) | | | (751 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | | (7,858 | ) | | | (35,783 | ) | | | (43,641 | ) | | | | | | | | | | | | | | | | | | | | | | | | Changes in Net Interest Income | | $ | (20,253 | ) | | $ | 48,131 | | | $ | 27,878 | | | | | | | | | | | |
Analysis of Allowances for Credit Losses, and Non-Interest Income (Loss)
The principal components are described below:
Allowance for Credit Losses — 2011 first quarter compared to 2010 first quarter Mortgage loans held-for-portfolio- The Bank evaluates mortgage loans at least quarterly on an individual loan-by-loan basis and compares the fair values of collateral (net of liquidation costs) to recorded investment values in order to measure credit losses on impaired loans. Based on the analysis performed, a provision of $0.2$1.8 million was recorded in the 2010 third2011 first quarter and $0.6compared with $0.7 million in the same period in 20092010. Increase in the Statementsprovision was due to increase in haircut values of Income based on identification of inherent losses under a policy described more fully in Note – 1 Significant Accounting Policies and Estimates to the unaudited financial statements in this report.collateral for evaluating impaired loans. Charge offs were insignificant in all periods, and were substantially recovered through the credit enhancement provisions of MPF loans. Cumulatively, the allowance for credit losses recorded in the Statements of Condition have grown to $5.5 million at September 30, 2010, compared to $4.5 million at December 31, 2009. The FHLBNY believes the allowance for loan losses is adequate to cover the losses inherent in the FHLBNY’s mortgage loan portfolio at September 30, 2010 and December 31, 2009.portfolio. Advances- The FHLBNY’s credit risk from advances at September 30, 2010March 31, 2011 and December 31, 20092010 were concentrated in commercial banks, savings institutions and insurance companies. All advances were fully collateralized during their entire term. In addition, borrowing members pledged their stock in the FHLBNY as additional collateral for advances. The FHLBNY has not experienced any losses on credit extended to any member since its inception. Based on the collateral held as security and prior repayment history, no allowance for losses is currently deemed necessary. The principal components of non-interest income (loss) are summarized below (in thousands): Table 1.11: Analysis of Non-Interest Income (Loss) — 2011 first quarter compared to 2010 first quarter | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | | | | | | | | Other income (loss): | | | | | | | | | Service fees and other | | $ | 1,256 | | | $ | 1,045 | | Instruments held at fair value — Unrealized gains (losses) | | | 740 | | | | (8,419 | ) | | | | | | | | | | Total OTTI losses | | | — | | | | (3,873 | ) | Net amount of impairment losses reclassified (from) to | | | | | | | | | Accumulated other comprehensive loss | | | (370 | ) | | | 473 | | | | | | | | | Net impairment losses recognized in earnings | | | (370 | ) | | | (3,400 | ) | | | | | | | | Net realized and unrealized gains (losses) on derivatives and hedging activities | | | 64,570 | | | | (363 | ) | Net realized gains from sale of available-for-sale securities and redemption of held-to-maturity securities | | | — | | | | 708 | | Losses from extinguishment of debt and other | | | (51,893 | ) | | | (227 | ) | | | | | | | | Total other income (loss) | | $ | 14,303 | | | $ | (10,656 | ) | | | | | | | |
62
Service fees Service fees are derived primarily from providing correspondent banking services to members and fees earned on standby letters of credit. The Bank does not consider income from such services asto be a significant element of its operations. Redemption of financial instruments and extinguishment of debt
The Bank retires debt principally to reduce future debt costs when the associated asset is either prepaid or terminated early, and less frequently from prepayments of mortgage-backed securities. When assets are prepaid ahead of their expected or contractual maturities, the Bank also attempts to extinguish debt (consolidated obligation bonds) in order to realign asset and liability cash flow patterns. Bond retirement typically requires a payment of a premium resulting in a loss. The Bank typically receives prepayment fees when assets are prepaid, and the FHLBNY typically remains economically indifferent.
Net impairment losses recognized in earnings on held-to-maturity securities — Other-than-temporary impairment (“OTTI”) InCredit-related OTTI was insignificant in the 2010 third2011 first quarter, just $0.4 million compared with $3.4 million in the same period in 2010. No new MBS were impaired and the OTTI charges were primarily as a result of additional credit losses caused by slight deterioration in the performance parameters of certain previously impaired private-label MBS. The FHLBNY identified credit re-impairment on four of its private-label mortgage-backed securities that had been previously impaired. Cashmakes quarterly cash flow assessments of the expected credit performance of the securities resulted in the recognitionits entire portfolio of $3.1 million ($3.7 million in the prior year period) as credit OTTI which was a charge to earnings. The re-impairment in the 2010 third quarter was due to further deterioration in certain credit parameters of the securities. On a year-to-date basis, credit related OTTI of $7.7 million was charged to earnings, compared to $14.3 million in the prior year period.private-label MBS.
75
Net realized and unrealized gain (loss) on derivatives and hedging activities and Earnings impact of derivatives and hedging activities The Bank may designate a derivative as either a hedge of (1) the fair value of a recognized fixed-rate asset or liability or an unrecognized firm commitment (fair value hedge); (2) a forecasted transaction; or (3) the variability of future cash flows of a floating-rate asset or liability (cash flow hedge). The Bank may also designate a derivative as an economic hedge, which does not qualify for hedge accounting under the accounting standards for derivatives and hedging. Changes in the fair value of a derivative that qualifies as a fair value hedge under the accounting standards for derivatives and hedging and the offsetting gain or loss on the hedged asset or liability that is attributable to the hedged risk are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. To the extent that changes in the fair value of the derivative isare not entirely offset by changes in the fair value of the hedged asset or liability, the net impact from hedging activities represents hedge ineffectiveness. Net interest accruals of derivatives designated in qualifying fair value or cash flow hedges under the accounting standards for derivatives and hedging are recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities. Net interest accruals of derivatives that do not qualify for hedge accounting under the accounting standards for derivatives and hedging and interest received from “in-the-money” options are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The effective portion of changes in the fair value of a derivative that is designated and qualifies as a “cash flow” hedge under the accounting standards for derivatives and hedging are recorded in AOCI. For all qualifying hedge relationships under the accounting standards for derivatives and hedging, hedge ineffectiveness resulting from differences between changes in fair values or cash flows of the hedged item and changes in fair value of the derivatives are recognized in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. Net realized and unrealized gains and losses from qualifying hedging activities under the accounting standards for derivatives and hedging are typically impacted by changes in the benchmark interest rate (designated as LIBOR by the FHLBNY) and the degree of ineffectiveness of hedging relationships between the change in the fair value of derivatives and the changechanges in the fair value of the hedged assets and liabilities attributable to changes in benchmark interest rate. Typically, such gains and losses represent hedge ineffectiveness between changes in the fair value of the hedged item and changes in the fair value of the derivative. Earnings impact of Instruments held at fair value under the Fair Value Option Under the accounting standards for the fair value option (“FVO”) for financial assets and liabilities, the FHLBNY elected to carry certain consolidated obligation bonds and discount at fair value in the Statements of Condition. The Bank records changes in the unrealized fair value gains and losses on these liabilities in Other income.income (loss). In general, transactions elected for the fair value option are in economic hedge relationships by the execution of interest rate swaps to offset the fair value volatility of consolidated obligation debt elected under the FVO. The recorded P&L impact of fair value adjustments onchanges of consolidated obligation debt carried at fair value inbonds and discount notes under the 2010 third quarter and year-to-date period resulted in net unrealized fair value gains and losses as reported in Table 10 above. Such debt wasFVO are primarily unrealized. Debt under the FVO designation consisted primarily of intermediate term bonds and discount notes. Gains are recorded when the debt’s market observable yields (with appropriate consideration for credit standing) are higher thenthan the contractual coupons or yields of the designated debt.debt as of the balance sheet dates. Conversely, if market interest rates fall below the contractual coupons or yields, a fair value loss is recorded. Losses and gains would also resultbe recorded in the quarter when designatedperiod the debt under the FVO matures, andcausing previously recorded unrealized gains and losses to reverse in that period. WhenSaid another way, when bonds and discount notes are recorded at fair value and are held to maturity, their cumulative fair value changes sum to zero at maturity. The Bank hedges debt designated under the FVO on an economic basis by executing interest rate swaps with terms that match such debt. Unrealized gains and losses in the 2010 quarters and in the same periods in 2009 were almost entirely offset by fair value changes on derivatives that economically hedged the debt. For more information, see Table 111.12 below and Note 17 –16 — Fair Values of financial instruments to the unaudited financial statements in this report.Financial Instruments. 7663
Earnings Impact of Derivatives and Hedging Activities The FHLBNY reported the following net gains (losses) from derivatives and hedging activities (in thousands):
Table 11: Net Gains (Losses) from Derivatives and Hedging Activities
| | | | | | | | | | | | | | | | | | | Three months ended | | | Nine months ended | | | | September 30, | | | September 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | Gain (Loss) | | | Gain (Loss) | | | Gain (Loss) | | | Gain (Loss) | | Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | | | | | | | | | | | Advances | | $ | 1,215 | | | $ | 182 | | | $ | 439 | | | $ | (5,107 | ) | Consolidated obligations-bonds | | | (1,507 | ) | | | 167 | | | | 2,308 | | | | 18,187 | | | | | | | | | | | | | | | Net gain (loss) related to fair value hedge ineffectiveness | | | (292 | ) | | | 349 | | | | 2,747 | | | | 13,080 | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | Economic hedges | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | | | | | | | | | | | Advances | | | (1,203 | ) | | | (1,475 | ) | | | (3,164 | ) | | | 3,887 | | Consolidated obligations-bonds | | | 6,753 | | | | 28,420 | | | | (29,762 | ) | | | 101,662 | | Consolidated obligations-discount notes | | | (231 | ) | | | (5,711 | ) | | | (4,331 | ) | | | 409 | | Member intermediation | | | 202 | | | | (16 | ) | | | 357 | | | | (189 | ) | Balance sheet-macro hedges swaps | | | — | | | | 210 | | | | 173 | | | | 2,617 | | | | | | | | | | | | | | | Fair Values | | | 5,521 | | | | 21,428 | | | | (36,727 | ) | | | 108,386 | | Accrued interest-swaps | | | 2,381 | | | | 18,362 | | | | 46,900 | | | | (37,772 | ) | Accrued interest-intermediation | | | 42 | | | | 20 | | | | 91 | | | | 64 | | | | | | | | | | | | | | | Interest accrual | | | 2,423 | | | | 18,382 | | | | 46,991 | | | | (37,708 | ) | | | | | | | | | | | | | | Total swaps | | | 7,944 | | | | 39,810 | | | | 10,264 | | | | 70,678 | | | | | | | | | | | | | | | Caps and floors | | | | | | | | | | | | | | | | | Advances | | | (19 | ) | | | (305 | ) | | | (418 | ) | | | (1,056 | ) | Balance sheet | | | (14,618 | ) | | | 19,196 | | | | (47,901 | ) | | | 50,613 | | | | | | | | | | | | | | | Fair Values | | | (14,637 | ) | | | 18,891 | | | | (48,319 | ) | | | 49,557 | | Accrued interest-options | | | — | | | | (1,786 | ) | | | (2,598 | ) | | | (3,731 | ) | | | | | | | | | | | | | | Total caps and floors | | | (14,637 | ) | | | 17,105 | | | | (50,917 | ) | | | 45,826 | | | | | | | | | | | | | | | Mortgage delivery commitments | | | 257 | | | | 47 | | | | 811 | | | | (49 | ) | | | | | | | | | | | | | | Swaps economically hedging instruments designated under FVO | | | | | | | | | | | | | | | | | Consolidated obligations-bonds | | | 8,025 | | | | 1,549 | | | | 10,381 | | | | (5,825 | ) | Consolidated obligations-discount notes | | | 1,674 | | | | — | | | | 2,448 | | | | — | | | | | | | | | | | | | | | Fair values | | | 9,699 | | | | 1,549 | | | | 12,829 | | | | (5,825 | ) | Accrued interest on swaps | | | 5,473 | | | | 779 | | | | 20,922 | | | | 903 | | | | | | | | | | | | | | | Swaps hedging insturments designated under FVO | | | 15,172 | | | | 2,328 | | | | 33,751 | | | | (4,922 | ) | | | | | | | | | | | | | | Net gain (loss) related to derivatives not designated as hedging instruments | | | 8,736 | | | | 59,290 | | | | (6,091 | ) | | | 111,533 | | | | | | | | | | | | | | | Net realized and unrealized (loss) gain on derivatives and hedging activities | | $ | 8,444 | | | $ | 59,639 | | | $ | (3,344 | ) | | $ | 124,613 | | | | | | | | | | | | | | |
Key components of hedging gains and losses were primarily due to:
Hedge ineffectiveness from fair value hedges of advances and consolidated obligation liabilities that qualified for hedge accounting treatment. Hedge ineffectiveness is typically the difference between changes in fair values of hedged consolidated obligation bonds and advances due to changes in the benchmark rate (adopted as the 3-month LIBOR rate) and changes in the fair value of the associated derivatives.
Fair value changes of interest rate swaps designated in economic hedges of consolidated obligation debt, without the offsetting benefit of fair value changes of the hedged debt.
Fair value changes of interest rate caps designated in economic hedges of GSE issued capped floating-rate MBS. Market pricing of the tenor and strikes of caps owned by the FHLBNY has fallen steeply since December 31, 2009 primarily because of lower volatilities for such caps. As a result, purchased caps are exhibiting fair value losses. The fair values of the caps, which stood at $23.6 million at September 30, 2010, will ultimately decline to zero if the caps are held to their contractual maturities.
Swap income or expense, primarily swap interest accruals, associated with swaps designated as economic hedges.
Qualifying hedges under the accounting standards for derivatives and hedging- Hedge ineffectiveness occurs when changes in the fair value of the derivative and the associated hedged financial instrument generally(generally debt or an advance,advance) do not perfectly offset each other. Hedge ineffectiveness is associated with changes in the benchmark interest rate and volatility, and the extent of the mismatch of the structures of the derivative and the hedged financial instrument. 77
Relatively stable interest rates and volatilitiesKey components of $58.1 million in the 2010 third quarter and in the same period in 2009 kept hedge ineffectiveness to insignificant levels. On a year-to-date basis, in 2010 net ineffectivenesshedging gains from qualifying hedges resultedwere primarily due to:
Net gains from hedges of advances were $56.3 million in a gainthe 2011 first quarter, largely benefitting from the recognition of $2.7realized gains from termination of hedges contemporaneous with the prepayments of hedged advances. Such hedge terminations contributed $52.0 million. Net gains from hedges of debt and advances and other instruments were not material in the 2011 first quarter, contributing $6.1 million. In the same period in 2009, fair value ineffectiveness resulted in significant net gains2010, a gain of $13.1$4.6 million in part due to the reversal of fair value losses of debt hedges that had matured in the prior year first two quarters (or were effectively matured when call options were exercised), and in part as a result of market volatility of interest rates causing fair values of hedged bonds to diverge from the swap fair values. was recorded. Typically, the FHLBNY hedges its advances and bonds with structures that are almost identical, and gains and losses representedrepresent hedge ineffectiveness caused by the asymmetrical impact of interest rate volatility on hedged debt and advances and associated swaps. Besides market volatility of interest rates, gains and losses are also caused by the timing of the maturity of swaps, because all gains and losses are unrealized and reverse as swaps mature or approach maturity. Thus, a fair value loss in a reported period may be followed by a gain in the period the swap matures. Economic hedges —– An economic hedge represents derivative transactions that are an approved risk management hedge but may not qualify for hedge accounting treatment under the accounting standards for derivatives and hedging. When derivatives are designated as economic hedges, the fair value changes due to changes in the interest rate and volatility of rates are recorded through earnings without the offsetting change in the fair values of the hedged advances and debt as would be afforded under the derivatives and hedge accounting rules. In general, the FHLBNY’s derivatives are held to maturity or to their call or put dates. At inception, the fair value is “at market” and is generally zero. Until the derivative matures or is called or put on pre-determined dates, fair values will fluctuate with changes in the interest rate environment and volatility observed in the swap market. At maturity or scheduled call or put dates, the fair value will generally reverse to zero as the Bank’s derivatives settle at par. Therefore, nearly all of the cumulative net gains and losses that are unrealized at a point in time will reverse over the remaining contractual terms so that the cumulative gains or losses will sum to zero over the contractual maturity, scheduled call, or put dates. However, interest income and expense have economic consequences since they are the result of exchanges of cash payments or receipts. Additionally, if a derivative isderivatives are prepaid prior to maturity or at predetermined call and put dates, they are settled at the then existing fair values in cash. Under hedge accounting rules, net swap interest expense and income associated with swaps in economic hedges of assets and liabilities are recorded as hedging losses and gains. On the other hand, when swaps qualify for hedge accounting treatment, interest income and interest expense from interest rate swaps are reported as a component of Net interest income together with interest on the instrument being hedged. Economic hedges
Interest rate swaps—Fair value changes– The principalKey components of changes in the fair values of interest rate swaps inhedging gains from derivatives designated as economic hedges often referred to as “one-sided marks” were:were primarily due to:
Consolidated bond economicEconomic hedges –of consolidated obligation bonds — Unrealized gains were not significant and losses were generated primarily by: (1) Basis swaps that synthetically converted floating-rate debt (based on non- 3-month LIBOR: Prime rate, Federal funds rate, and 1-month LIBOR rate)LIBOR) to 3-month LIBOR cash flows, and (2) Short-term callable debt swapped by mirror image interest rate swaps. The “pay-leg” of the basis swaps floats with changes to the 3-month LIBOR index. The “receive-leg” floats with changes to indices other than 3-month LIBOR. In 2010, a significant percentage of basis swaps matured, or the swaps were nearing maturity and unrealized gains at December 31, 2009 reversed. When swaps mature, all previously recorded fair value gains and losses reverse. In the 2010 third quarter, recorded gains were reversal of previously recorded net unrealized losses, primarily due to maturing short-term cancellable swaps in economic
Economic hedges of callable bonds. Consolidatedconsolidated obligation discount note economic hedges –notes — The FHLBNY hedges the principal amounts of certain term discount notes to convert fixed cash flows to LIBOR indexed cash flows. Fair value losses are all unrealizedTheir impact was not material.
Economic hedges of balance sheet parameters, primarily hedging GSE-issued capped floating-rate mortgage-backed securities. The Bank has an inventory of $1.9 billion of interest-rate caps with final maturities in 2018 and will reverse over time. In a declining interest rate environment, the pay-fixed, receive floating swaps are exhibiting fair value losses. Interest rate swaps — Cash flows (Net interest accruals)– Swap interest accruals are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities if the swap is designated as an economic hedge. If the swap qualifies for hedge accounting treatment, cash flows are recorded as a component of Net interest income.strikes ranging from 6.20% to 6.75% indexed mainly to 1-month LIBOR. The classification of swap accruals, either as a component of Net interest income or derivatives and hedging activities, has no impact on Net income.
In the 2010 third quarter and year-to-date period, net interest accrual income represented the net cash in-flows primarily from basis swaps hedging the basis risk of changes in floating-rate debt that were indexed to rates other than 3-month LIBOR. Under the contractual terms of the basis swaps the FHLBNY is receiving cash flows indexed to an agreed upon spread to the daily Federal funds effective rate, the 1-month LIBOR rate, and the Prime rate, and in return paying cash flows indexed to an agreed upon spread to the 3-month LIBOR rate.
Interest rate caps– Unfavorable fair values changes of purchased caps resulted in net unrealized fair value losses in 2010. In a declining interest rate environment at September 30, 2010, relative to December 31, 2009 and June 30, 2010, fair values of purchased caps are exhibiting fair value losses. Fair values of interest rate caps were $23.6 million, down from $38.2 millionpurchased at June 30, 2010, and $71.0 million at December 31, 2009.a cost of $46.9 million. The fair values of the caps will exhibit unrealized gains and losses in line with volatility and direction of interest rates, but will ultimately decline to zero over the contractual life of the caps if held to maturity. In a declining interest rate environment at March 31, 2011, relative to December 31, 2010, fair values of purchased caps were exhibiting fair value losses. At March 31, 2011, fair values of interest rate caps were $38.3 million, down from $41.9 million at December 31, 2010.
Swaps economically hedging instruments designated under the FVO –—The Bank hedges consolidated obligation bonds and discount notes under the FVO. In a declining interest rate environment, the interest rate swaps that were economic hedges of debt under the FVO were in fair value gain positions. Such swaps are structured for the Bank to receive fixed rate cash flows and pay float (indexedfloating rate (LIBOR-indexed) cash flows to LIBOR) wereswap counterparties. In a declining interest rate environment, the fair values of the swaps would be in an unrealized fair value gain position. Such gains will also decline to zero if held to maturity or to their call dates. In the 2011 first quarter, net unrealized gains were $6.7 million, compared to $14.4 million in the same period in 2010. 7864
The following tables summarize the impact of hedging activities on earnings (in thousands): Table 1.12: Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2011 | | | | | | | | | | | | Consolidated | | | Consolidated | | | | | | | | | | | | | | | | | MPF | | | Obligation | | | Obligation | | | Balance | | | Intermediary | | | | | Earnings Impact | | Advances | | | Loans | | | Bonds | | | Discount Notes | | | Sheet | | | Positions1 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization/accretion of hedging activities reported in net interest income | | $ | (2,215 | ) | | $ | 24 | | | $ | (468 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (2,659 | ) | | | | | | | | | | | | | | | | | | | | | | | Net realized and unrealized gains (losses) on derivatives and hedging activities | | | 56,337 | | | | — | | | | 1,797 | | | | — | | | | — | | | | — | | | | 58,134 | | Net gains (losses) derivatives-FVO | | | — | | | | — | | | | 6,604 | | | | 95 | | | | — | | | | — | | | | 6,699 | | Gains (losses)-economic hedges1 | | | 62 | | | | 169 | | | | 3,095 | | | | — | | | | (3,589 | ) | | | — | | | | (263 | ) | | | | | | | | | | | | | | | | | | | | | | | Net realized and unrealized (losses) gains on derivatives and hedging activities | | | 56,399 | | | | 169 | | | | 11,496 | | | | 95 | | | | (3,589 | ) | | | — | | | | 64,570 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 54,184 | | | $ | 193 | | | $ | 11,028 | | | $ | 95 | | | $ | (3,589 | ) | | $ | — | | | $ | 61,911 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2010 | | | | | | | | | | | | Consolidated | | | Consolidated | | | | | | | | | | | | | | | | | MPF | | | Obligation | | | Obligation | | | Balance | | | Intermediary | | | | | Earnings Impact | | Advances | | | Loans | | | Bonds | | | Discount Notes | | | Sheet | | | Positions | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization/accretion of hedging activities reported in net interest income | | $ | (96 | ) | | $ | 21 | | | $ | (966 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (1,041 | ) | | | | | | | | | | | | | | | | | | | | | | | Net realized and unrealized gains (losses) on derivatives and hedging activities | | | 619 | | | | — | | | | 4,004 | | | | — | | | | — | | | | — | | | | 4,623 | | Net gains (losses) derivatives-FVO | | | — | | | | — | | | | 14,389 | | | | — | | | | — | | | | — | | | | 14,389 | | Gains (losses)-economic hedges | | | (3,643 | ) | | | 149 | | | | 13,296 | | | | 1,296 | | | | (30,493 | ) | | | 20 | | | | (19,375 | ) | | | | | | | | | | | | | | | | | | | | | | | Net realized and unrealized (losses) gains on derivatives and hedging activities | | | (3,024 | ) | | | 149 | | | | 31,689 | | | | 1,296 | | | | (30,493 | ) | | | 20 | | | | (363 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | (3,120 | ) | | $ | 170 | | | $ | 30,723 | | | $ | 1,296 | | | $ | (30,493 | ) | | $ | 20 | | | $ | (1,404 | ) | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Includes de minimis amount of fair value for intermediary positions for three months ended March 31, 2011 |
Cash Flow Hedges From time-to-time, the Bank executes interest rate swaps on the anticipated issuance of debt to “lock in” a spread between the earning asset and the cost of funding. The hedges are accounted under cash flow hedging rules and the effective portion of changes in the fair values of the swaps is recorded in AOCI. The ineffective portion is recorded through net income. The swap is terminated upon issuance of the debt instrument, and amounts reported in AOCI are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued. The maximum period of time that the Bank typically hedges to exposure to the variability in future cash flows for forecasted transactions is between three and six months. At March 31, 2011, the Bank had open contracts of $55.0 million of swaps to hedge the anticipated issuances of debt. The fair values of the open contracts recorded in AOCI amounted to an unrealized gain of $0.4 million at March 31, 2011. No amounts were reclassified from AOCI into earnings as a result of the discontinuance of cash flow hedges, because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter in any periods in this report. Ineffectiveness from hedges designated as cash flow hedges was not material in any periods reported in this Form 10-Q. Over the next 12 months, it is expected that $3.7 million of net losses recorded in AOCI will be recognized as an interest expense. In the 2011 first quarter, the Bank executed long-term pay-fixed receive 3-month LIBOR-indexed interest rate swap that was designated as cash flow hedges of a rollover financing program involving the sequential issuances of fixed-rate 3-month term discount notes over the same period as the term of the swap. The objective of the hedge is to offset the variability of cash flows, attributable to changes in benchmark interest rate (3-month LIBOR), due to the rollover of its fixed-rate 91 day discount notes issued in parallel with the cash flow payments of the swap every 91 days through till the maturity of the swap. Changes in the cash flows of the interest rate swap are expected to be highly effective at offsetting the changes in the interest element of the cash flows related to the forecasted issuance of the 91 day discount note. The maximum period of time that the Bank hedged exposure to the variability in future cash flows in this program is three months. At March 31, 2011, the Bank had open contracts of $150.0 million of swaps to hedge the anticipated issuances of discount notes under this program. The fair values of the open contracts recorded in AOCI amounted to an unrealized gain of $1.9 million at March 31, 2011. 65
Derivative gains and losses reclassified from Accumulated other comprehensive income (loss) to current period income —The following table summarizes changes in derivative gains and (losses) and reclassifications into earnings from AOCI in the Statements of Condition (in thousands): Table 12: Gains/(Losses) Reclassified from AOCI1.13: Accumulated Other Comprehensive Income (Loss) to Current Period Income from Cash Flow Hedges | | | | | | | | | | | | | | | | | | | Three months ended | | | Nine months ended | | | | September 30, | | | September 30, | | Accumulated other comprehensive income/(loss) from cash flow hedges | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | | | | | | | | | | | | | | | | Beginning of period | | $ | (19,614 | ) | | $ | (26,402 | ) | | $ | (22,683 | ) | | $ | (30,191 | ) | Net hedging transactions | | | — | | | | — | | | | (472 | ) | | | — | | Reclassified into earnings | | | 1,882 | | | | 1,898 | | | | 5,423 | | | | 5,687 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | End of period | | $ | (17,732 | ) | | $ | (24,504 | ) | | $ | (17,732 | ) | | $ | (24,504 | ) | | | | | | | | | | | | | |
Cash Flow Hedges
In the 2010 current quarter and year-to-date period, fair value basis were reclassified from AOCI as interest expense in parallel with the recognition of interest expense of the debt that had been hedged by “cash flow hedges” in prior years. Fair value basis from settled hedges in the 2010 current quarter and year-to-date periods were not material.
In 2010 and 2009 no material amounts were reclassified from AOCI into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. Ineffectiveness from hedges designated as cash flow hedges was not material in any periods reported in this Form 10-Q. Over the next twelve months, it is expected that $5.3 million of net losses recorded in AOCI will be recognized as an interest expense.
There were no open anticipatory cash flow hedges at the current quarter end. | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | Accumulated other comprehensive income/(loss) from cash flow hedges | | | | | | | | | Beginning of period | | $ | (15,196 | ) | | $ | (22,683 | ) | Net hedging transactions | | | 2,690 | | | | 392 | | Reclassified into earnings | | | 1,038 | | | | 1,740 | | | | | | | | | | | | | | | | | | End of period | | $ | (11,468 | ) | | $ | (20,551 | ) | | | | | | | |
Debt extinguishment and salessale of available-for-saleinvestment securities InThe Bank retires debt principally to reduce future debt costs when the second quarterassociated asset is either prepaid or terminated early, and less frequently from prepayments of 2010,mortgage-backed securities. When assets are prepaid ahead of their expected or contractual maturities, the Bank retired $250.0 millionalso attempts to extinguish debt (consolidated obligation bonds) in order to realign asset and liability cash flow patterns. Bond retirement typically requires a payment of consolidated obligation bond ata premium resulting in a loss. The Bank typically receives prepayment fees when assets are prepaid, and the FHLBNY typically remains economically indifferent. From time to time, the bank may sell investment securities classified as available-for-sale, or on an insignificant gain. No debt was retired inisolated basis may be asked by the first quarter or the third quarterissuer of 2010. In the first quarter of 2010,a security which the Bank sold mortgage-backed securities from its AFS portfolio at a gainhas classified as held-to-maturity (“HTM”) to redeem the investment security.
The following table summarizes such activities (in thousands): Table 1.14: Gains (Losses) on Sale and Extinguishment of $0.7 million. No securities were sold in the 2010 second and third quarters.Financial Instruments | | | | | | | | | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | Carrying Value | | | Gains/(Losses) | | | Carrying Value | | | Gains/(Losses) | | Extinguishment of CO Bonds | | $ | 327,345 | | | $ | (34,409 | ) | | $ | — | | | $ | — | | Transfer of CO Bonds to Other FHLBanks | | $ | 150,049 | | | $ | (17,332 | ) | | $ | — | | | $ | — | |
Non-Interest ExpenseOperating Expenses, Compensation and Benefits, and Other Expenses — 2011 first quarter compared to 2010 first quarter
Operating expenses included the administrative and overhead costs of operating the Bank, andas well as the operating costs of providing advances and managing collateral associated with the advances, managing the investment portfolios, and providing correspondent banking services to members. Operating Expenses of the FHLBNY were $7.5 million in the 2011 first quarter, up from $6.3 million in the same period in 2010. Compensation and benefits rose to $38.9 million in the 2011 period, up from $12.9 million in the same period in 2010. In March 2011, the FHLBNY contributed $24.0 million to its Defined Benefit Plan to eliminate a funding shortfall and this amount was charged to Net income. The FHLBNY was also assessed for its share of the operating expenses for the Finance Agency and the Office of Finance, and those totaled $3.4 million in the 2011 first quarter, up from $2.4 million in the same period in 2010. The 12 FHLBanks and two other GSEs share the administrative cost of the Finance Agency. 79
Operating Expenses The following table sets forth the major categories of operating expenses (dollars in thousands): Table 13:1.15: Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Three months ended March 31, | | | | Percentage of | | Percentage of | | | Percentage of | | Percentage of | | | | 2010 | | total | | 2009 | | total | | | 2011 | | Total | | 2010 | | Total | | | | | Salaries and employee benefits | | $ | 15,648 | | | 72.25 | % | | $ | 12,075 | | | 67.80 | % | | Temporary workers | | 30 | | 0.14 | | 3 | | 0.02 | | | $ | 47 | | | 0.62 | % | | $ | 39 | | | 0.61 | % | Occupancy | | 1,131 | | 5.22 | | 1,128 | | 6.33 | | | 1,113 | | 14.78 | | 1,062 | | 16.75 | | Depreciation and leasehold amortization | | 1,444 | | 6.67 | | 1,369 | | 7.69 | | | 1,399 | | 18.58 | | 1,366 | | 21.54 | | Computer service agreements and contractual services | | 1,666 | | 7.69 | | 1,395 | | 7.83 | | | 2,575 | | 34.20 | | 1,901 | | 29.97 | | Professional and legal fees | | 385 | | 1.78 | | 356 | | 2.00 | | | 798 | | 10.60 | | 542 | | 8.55 | | Other * | | 1,353 | | 6.25 | | 1,484 | | 8.33 | | | 1,598 | | 21.22 | | 1,432 | | 22.58 | | | | | | | | | | | | | | | | | | | | | Total operating expenses | | | $ | 7,530 | | | 100.00 | % | | $ | 6,342 | | | 100.00 | % | | | | | | | | | | | | Total operating expenses | | $ | 21,657 | | | 100.00 | % | | $ | 17,810 | | | 100.00 | % | | | | Salaries | | | $ | 7,559 | | | 19.39 | % | | $ | 6,963 | | | 54.00 | % | Employee benefits | | | 31,422 | | 80.61 | | 5,931 | | 46.00 | | | | | | | | | | | | | Total Compensation and Benefits | | | $ | 38,981 | | | 100.00 | % | | $ | 12,894 | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | Finance Agency and Office of Finance | | $ | 2,036 | | $ | 1,834 | | | $ | 3,397 | | $ | 2,418 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Nine months ended September 30, | | | | | | | | Percentage of | | | | | | | Percentage of | | | | 2010 | | | total | | | 2009 | | | total | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | $ | 41,458 | | | | 67.69 | % | | $ | 36,036 | | | | 66.77 | % | Temporary workers | | | 86 | | | | 0.14 | | | | 128 | | | | 0.24 | | Occupancy | | | 3,270 | | | | 5.34 | | | | 3,273 | | | | 6.06 | | Depreciation and leasehold amortization | | | 4,201 | | | | 6.86 | | | | 4,020 | | | | 7.45 | | Computer service agreements and contractual services | | | 6,018 | | | | 9.83 | | | | 4,670 | | | | 8.65 | | Professional and legal fees | | | 1,983 | | | | 3.24 | | | | 1,144 | | | | 2.12 | | Other * | | | 4,229 | | | | 6.90 | | | | 4,699 | | | | 8.71 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total operating expenses | | $ | 61,245 | | | | 100.00 | % | | $ | 53,970 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance Agency and Office of Finance | | $ | 6,447 | | | | | | | $ | 5,663 | | | | | | | | | | | | | | | | | | | | |
| | | * | | Other primarily represents audit fees, director fees and expenses, insurance and telecommunications. |
66
Staff increasesAssessments — 2011 first quarter compared to 2010 first quarter Each FHLBank is required to set aside a portion of earnings to fund its Affordable Housing Program (“AHP”) and additional payments towardsto satisfy its Resolution Funding Corporation assessment (“REFCORP”). For more information, see “Affordable Housing Program and Other Mission Related Programs” and “Assessments” under ITEM 1 BUSINESS in Form 10-K filed on March 25, 2011. Affordable Housing Program obligations- The Bank fulfills its AHP obligations primarily through direct grants to members, who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBNY sets aside 10 percent from its pre-assessment regulatory net income for the Affordable Housing Program. Regulatory net income is defined as GAAP net income before interest expense on mandatorily redeemable capital stock and the assessment for AHP, but after the assessment for REFCORP. The amounts set aside are considered as the Bank’s Defined Benefit Pension plan caused increasesliability towards its Affordable Housing Program obligations. AHP grants and subsidies are provided to members out of this liability. The following table provides roll-forward information with respect to changes in operating expensesAffordable Housing Program liabilities (in thousands): Table 2.1: Affordable Housing Program Liabilities | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | | | | | | | | Beginning balance | | $ | 138,365 | | | $ | 144,489 | | Additions from current period’s assessments | | | 7,969 | | | | 6,126 | | Net disbursements for grants and programs | | | (11,203 | ) | | | (4,955 | ) | | | | | | | | | | | | | | | | | Ending balance | | $ | 135,131 | | | $ | 145,660 | | | | | | | | |
REFCORP— The following table provides roll-forward information with respect to changes in 2010.REFCORP liabilities (in thousands): Table 2.2: REFCORP | | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | | | | | | | | Beginning balance | | $ | 21,617 | | | $ | 24,234 | | Additions from current period’s assessments | | | 17,745 | | | | 13,410 | | Net disbursements to REFCORP | | | (20,627 | ) | | | (16,027 | ) | | | | | | | | Ending balance | | $ | 18,735 | | | $ | 21,617 | | | | | | | | |
8067
Financial Condition: Assets, Liabilities, Capital, Commitments and Contingencies:Condition(dollars in thousands): Table 14: 3.1:Statements of Condition — Period-Over-Period Comparison | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net change in | | Net change in | | | Net change in | | Net change in | | (Dollars in thousands) | | September 30, 2010 | | December 31, 2009 | | dollar amount | | percentage | | | March 31, 2011 | | December 31, 2010 | | dollar amount | | percentage | | Assets | | | Cash and due from banks | | $ | 69,471 | | $ | 2,189,252 | | $ | (2,119,781 | ) | | | (96.83) | % | | $ | 2,953,801 | | $ | 660,873 | | $ | 2,292,928 | | | 346.95 | % | Federal funds sold | | 4,095,000 | | 3,450,000 | | 645,000 | | 18.70 | | | 5,093,000 | | 4,988,000 | | 105,000 | | 2.11 | | Available-for-sale securities | | 3,373,781 | | 2,253,153 | | 1,120,628 | | 49.74 | | | 3,719,024 | | 3,990,082 | | | (271,058 | ) | | | (6.79 | ) | Held-to-maturity securities Long-term securities | | 8,221,246 | | 10,519,282 | | | (2,298,036 | ) | | | (21.85 | ) | | Held-to-maturity securities | | | Long-term securities | | | 8,042,487 | | 7,761,192 | | 281,295 | | 3.62 | | Advances | | 85,697,171 | | 94,348,751 | | | (8,651,580 | ) | | | (9.17 | ) | | 75,487,377 | | 81,200,336 | | | (5,712,959 | ) | | | (7.04 | ) | Mortgage loans held-for-portfolio | | 1,267,687 | | 1,317,547 | | | (49,860 | ) | | | (3.78 | ) | | 1,270,891 | | 1,265,804 | | 5,087 | | 0.40 | | Accrued interest receivable | | 305,763 | | 340,510 | | | (34,747 | ) | | | (10.20 | ) | | Premises, software, and equipment | | 14,550 | | 14,792 | | | (242 | ) | | | (1.64 | ) | | Derivative assets | | 32,425 | | 8,280 | | 24,145 | | NM | | | 24,964 | | 22,010 | | 2,954 | | 13.42 | | Other assets | | 16,444 | | 19,339 | | | (2,895 | ) | | | (14.97 | ) | | 282,290 | | 323,773 | | | (41,483 | ) | | | (12.81 | ) | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 103,093,538 | | $ | 114,460,906 | | $ | (11,367,368 | ) | | | (9.93) | % | | $ | 96,873,834 | | $ | 100,212,070 | | $ | (3,338,236 | ) | | | (3.33 | )% | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | Deposits | | | Interest-bearing demand | | $ | 3,660,132 | | $ | 2,616,812 | | $ | 1,043,320 | | | 39.87 | % | | $ | 2,465,860 | | $ | 2,401,882 | | $ | 63,978 | | | 2.66 | % | Non-interest bearing demand | | 9,725 | | 6,499 | | 3,226 | | 49.64 | | | 2,971 | | 9,898 | | | (6,927 | ) | | | (69.98 | ) | Term | | 60,400 | | 7,200 | | 53,200 | | NM | | | 43,800 | | 42,700 | | 1,100 | | 2.58 | | | | | | | | | | | | | | | | | | | | | | | | Total deposits | | 3,730,257 | | 2,630,511 | | 1,099,746 | | 41.81 | | | 2,512,631 | | 2,454,480 | | 58,151 | | 2.37 | | | | | | | | | | | | | | | | | | | | | | | | Consolidated obligations | | | Bonds | | 74,918,893 | | 74,007,978 | | 910,915 | | 1.23 | | | 68,529,981 | | 71,742,627 | | | (3,212,646 | ) | | | (4.48 | ) | Discount notes | | 17,787,908 | | 30,827,639 | | | (13,039,731 | ) | | | (42.30 | ) | | 19,507,159 | | 19,391,452 | | 115,707 | | 0.60 | | | | | | | | | | | | | | | | | | | | | Total consolidated obligations | | 92,706,801 | | 104,835,617 | | | (12,128,816 | ) | | | (11.57 | ) | | 88,037,140 | | 91,134,079 | | | (3,096,939 | ) | | | (3.40 | ) | | | | | | | | | | | | | | | | | | | | | | | Mandatorily redeemable capital stock | | 67,348 | | 126,294 | | | (58,946 | ) | | | (46.67 | ) | | 59,126 | | 63,219 | | | (4,093 | ) | | | (6.47 | ) | | | | Accrued interest payable | | 277,647 | | 277,788 | | | (141 | ) | | | (0.05 | ) | | Affordable Housing Program | | 137,995 | | 144,489 | | | (6,494 | ) | | | (4.49 | ) | | Payable to REFCORP | | 20,560 | | 24,234 | | | (3,674 | ) | | | (15.16 | ) | | Derivative liabilities | | 784,498 | | 746,176 | | 38,322 | | 5.14 | | | 839,710 | | 954,898 | | | (115,188 | ) | | | (12.06 | ) | Other liabilities | | 101,448 | | 72,506 | | 28,942 | | 39.92 | | | 482,200 | | 461,025 | | 21,175 | | 4.59 | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | 97,826,554 | | 108,857,615 | | | (11,031,061 | ) | | | (10.13 | ) | | 91,930,807 | | 95,067,701 | | | (3,136,894 | ) | | | (3.30 | ) | | | | | | | | | | | | | | | | | | | | | | | Capital | | 5,266,984 | | 5,603,291 | | | (336,307 | ) | | | (6.00 | ) | | 4,943,027 | | 5,144,369 | | | (201,342 | ) | | | (3.91 | ) | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and capital | | $ | 103,093,538 | | $ | 114,460,906 | | $ | (11,367,368 | ) | | | (9.93) | % | | $ | 96,873,834 | | $ | 100,212,070 | | $ | (3,338,236 | ) | | | (3.33 | )% | | | | | | | | | | | | | | | | | | | |
Balance sheet overviewoverview- March 31, 2011 compared to December 31, 2010 The FHLBNY continued to experienceexperienced steady balance sheet contraction in the 2010 third quarter.2011 first quarter, in parallel with the decline in Advances to member banks have remained steady at September 30, 2010, after two quarters of decline. Reported Advances stood at $85.7$75.5 billion at September 30, 2010, compared to $85.3 billion at June 30, 2010, and $94.3March 31, 2011 from $81.2 billion at December 31, 2009, from a peak of approximately $109.1 billion in 2008.2010. Reported balances include fair value basis of hedged advances. The decline from the balances at December 31, 2009in demand for member borrowings has occurred as member banks have taken advantage of improved availability of alternate funding sources such as deposits and senior unsecured borrowings in a more liquid market. Member demand for borrowed advances havehas also declined, as loan demand from members’ customers may have stayed lukewarm due to nationally weak economic conditions. 81
Advances-— At September 30, 2010,March 31, 2011, the FHLBNY’s Total assets were $103.1$96.9 billion, a decrease of 9.9%3.3%, or $11.4$3.3 billion from December 31, 2009.2010. The Bank’s balance sheet management strategy has been to keep balance sheet growth or decline in line with the changes in member demand for advances, which declined 9.2%7.0%. Table 3.2:Advance Graph68
Investments-— The FHLBNY’s investment strategies continue to be restrained, and acquisitions were limited to investments in mortgage-backed securities (“MBS”) issued by GSEs and U.S. government agencies. Acquisitions even in such securities have been made when they justified the Bank’s risk-reward preferences. No MBS acquisitions were made in the held-to-maturity (“HTM”) securities portfolio in the 2010-second and third quarters. In the 2010 first quarter, the Bank added $174.0 million of GSE issued fixed-rate MBS. Floating-rate GSE and U.S. government issued MBS were acquired for the Bank’s available-for-sale (“AFS”) portfolio in 2010 that kept acquisitions ahead of paydowns. Market pricing of GSE issuedGSE-issued MBS improved at September 30, 2010 as liquidity appeared to return to the market place, andwas substantially all of MBS in the AFS portfolio were in net unrealized fair value gain positions. Fair values of the Bank’s private-label securities continuealso improved at March 31, 2011 relative to beDecember 31, 2010, but were still depressed, as market conditions for such securities remained uncertain. For more information about fair values of AFS and HTM securities, see Note 17 to the unaudited financial statements in this report.16 Fair Values of Financial Instruments.
Leverage-— At September 30, 2010,March 31, 2011, balance sheet leverage was 19.6 times shareholders’ equity, compared to 20.419.5 times capital at December 31, 2009.2010. The Bank’s balance sheet management strategy is to keep the balance sheet change in line with the changes in member demand for advances, although from time-to-timetime to time the Bank may maintain excess liquidliquidity investments to meet unexpected member demand for funds. Increases or decreases in investments have a direct impact on leverage, but generally growth in or shrinkage of advances does not significantly impact balance sheet leverage under existing capital stock management practices. This is because changes in shareholders’ capital are in line with changes in advances, and the ratio of assets to capital generally remains unchanged. Under existing capital management practices, members are required to purchase capital stock to support their borrowings from the Bank, and when capital stock is in excess of the amount that is required to support advance borrowings, the Bank redeems the excess capital stock immediately. Therefore, stockholders’ capital increases and decreases with members’ advance borrowings, and the capital to asset ratios remainsremain relatively unchanged. As capital increases or declines in line with higher or lower volumes of advances, the Bank may also adjust its assets by increasing or decreasing holdings of short-term investments in certificates of deposit, and, to some extent, its positions in Federal funds sold, which it inventories to accommodate unexpected member needs for liquidity. Debt- In the 2010 third quarter and in the same period in 2009, the— The primary source of funds for the FHLBNY continued to be fromthe issuance of consolidated obligation bonds and discount notes. Discount notes are consolidated obligations with maturities up to one year, and consolidated bonds have maturities of one year or longer. The mix between the use of discount notes and bonds has fluctuated during the 2010 first three quarters and through 2009, partly because of fluctuations in the market pricing of discount notes relative to the pricing of fixed-rate bonds with similar maturities, and partly because of the price attractiveness of short-term callable and non-callable bonds that could be swapped back to 3-month LIBOR rates, as an alternative to discount notes. In the 2010 first quarter, the Bank decreased its issuances of discount notes mainly because of unfavorable pricing relative to alternative funding, primarily short-term callable bonds. On an option adjusted basis, the effective duration of such callable bonds was shorter than its contractual maturities and achievedfinance the Bank’s asset/liability management profile. Inbalance sheet assets has remained almost unchanged at March 31, 2011 from December 31, 2010. Liquidity and Short-term Debt— The following table summarizes the second quarter, discount note pricing became favorableFHLBNY’s short-term debt (in thousands). Also see Tables 7.1 — 7.10 and 10.4 for additional information. Table 3.3: Short—term debt | | | | | | | | | | | Short Term Liquidity | | | | March 31, 2011 | | | December 31, 2010 | | | Consolidated Obligations-Discount Notes1 | | $ | 19,507,159 | | | $ | 19,391,452 | | | Consolidated Obligations-Bonds With Original Maturities of One Year or Less2 | | $ | 9,635,000 | | | $ | 12,410,000 | |
| | | 1 | | Outstanding at end of the period — carrying value | | 2 | | Outstanding at end of the period — par value |
The FHLBNY’s liquid assets included cash at the FRB, federal funds sold, and a portfolio of highly rated GSE securities that were available-for-sale. The FHLBanks’ GSE status enables the FHLBanks, including FHLBNY, to fund its consolidated obligation debt at tight margins to U.S. Treasury. These are discussed in more detail under “Debt Financing and Consolidated Obligations” in this MD&A. The FHLBNY’s internal source of liquidity position remains strong, and was in compliance with the rise in the 3-month LIBOR index, and the Bank increased its usage of discount notes, which replaced maturing/called bonds. In the 2010 third quarter, the 3-month LIBOR index declined, spreads narrowed, andall regulatory requirements. Management does not foresee any changes to that position. Among other liquidity measures, the FHLBNY reduced issuancesis required to maintain sufficient liquidity, through short-term investments, in an amount at least equal to that Bank’s anticipated cash outflows under two different scenarios. The first scenario assumes that the FHLBNY cannot access the capital markets for 15 days and that during that time, members do not renew their maturing, prepaid and called advances. The second scenario assumes that the FHLBNY cannot access the capital market for five days and that during that period, members renew maturing and called advances. The FHLBNY was in compliance within these scenarios. The FHLBNY also has in place other liquidity measures — Deposit Liquidity and Operational Liquidity indicated that the FHLBNY’s liquidity buffers were in excess of discount notes.required reserves. For more information about the FHLBNY’s liquidity measures and see section “Liquidity, Short-term borrowings and Short-term Debt” in this MD&A. 8269
Advances The FHLBNY’s primary business is making collateralized loans, known as “advances”,“advances,” to members. Par amounts of advances outstanding had beenMember demand for advance borrowings has steadily declining through the four quarters in 2009 and through to the 2010 second quarter. That trend was halteddeclined in the 2010 third2011 first quarter, as borrowed advances held steady, with new borrowings that replaced maturing advances, and outstanding member advances at September 30, 2010 remained almost unchangeda continuing trend from 2010. Member prepayments were significant but were largely concentrated on the balance at June 30, 2010.
Reported book valueprepayments of advances was $85.7 billion at September 30, 2010, slightly up from $85.3 billion at June 30, 2010, compared to $94.3 billion at December 31, 2009. Advance book value included fair value basis adjustments of $5.6 billion at September 30, 2010, compared to $4.7 billion at June 30, 2010 and $3.6 billion at December 31, 2009. Fair value basis adjustments of hedged advances are recorded under the hedge accounting provisions. When medium- and long-term interest rates rise or fall, the fair values ofputable fixed-rate advances, move inwhich were replaced almost immediately by medium and short-term fixed-rate advances without the opposite direction.put option.
Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and term funding driven by economic factors such as availability to the Bank’s members of alternative funding sources that are more attractive, or by the interest rate environment and the outlook for the economy. Members may choose to prepay advances (which may generate prepayment penalty fees) based on their expectations of interest rate changes and demand for liquidity. Demand may also be influenced by the dividend payout to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership and activity stock. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or a non-member, the former members no longer qualify for membership and the FHLBNY may not offer renewals or additional advances to the former members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight lending if the former member borrowed short-term and overnight advances. Advances — Product Types The following table summarizes par values of advances by product type (dollars in thousands): Table 15:4.1: Advances by Product Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Percentage | | Percentage | | | Percentage | | Percentage | | | | Amounts | | of total | | Amounts | | of total | | | Amounts | | of Total | | Amounts | | of Total | | | | | Adjustable Rate Credit — ARCs | | $ | 9,190,500 | | | 11.47 | % | | $ | 14,100,850 | | | 15.54 | % | | $ | 8,016,000 | | | 11.09 | % | | $ | 8,121,000 | | | 10.56 | % | Fixed Rate Advances | | 67,148,859 | | 83.83 | | 71,943,468 | | 79.29 | | | 58,304,095 | | 80.64 | | 64,557,112 | | 83.91 | | Short-Term Advances | | 1,343,150 | | 1.68 | | 2,173,321 | | 2.39 | | | 3,489,700 | | 4.83 | | 1,357,300 | | 1.76 | | Mortgage Matched Advances | | 539,479 | | 0.67 | | 606,883 | | 0.67 | | | 466,114 | | 0.64 | | 479,934 | | 0.62 | | Overnight & Line of Credit (OLOC) Advances | | 905,786 | | 1.13 | | 926,517 | | 1.02 | | | 1,024,295 | | 1.42 | | 1,402,696 | | 1.82 | | All other categories | | 975,037 | | 1.22 | | 986,661 | | 1.09 | | | 1,000,067 | | 1.38 | | 1,021,497 | | 1.33 | | | | | | | | | | | | | | | | | | | | | | | | Total par value | | 80,102,811 | | | 100.00 | % | | 90,737,700 | | | 100.00 | % | | 72,300,271 | | | 100.00 | % | | 76,939,539 | | | 100.00 | % | | | | | | | | | | | | | | | Discount on AHP Advances | | | (50 | ) | | | (260 | ) | | | | (36 | ) | | | (42 | ) | | Hedging adjustments | | 5,594,410 | | 3,611,311 | | | 3,187,142 | | 4,260,839 | | | | | | | | | | | | | | | | Total | | $ | 85,697,171 | | $ | 94,348,751 | | | $ | 75,487,377 | | $ | 81,200,336 | | | | | | | | | | | | |
Member demand for advance products Fixed-rate advance products declined at March 31, 2011 primarily because of the prepayment of fixed-rate putable advances. Borrowers have also remained reluctant to borrow long-term advances. Much of the prepayments were immediately replaced by medium- and short-term advances, and Adjustable-rate advances (“ARCs”) have beenwhich also explains the more significant products that have declinedincrease in 2010 relative to the balances at December 31, 2009.Short-Term fixed rate advances. Adjustable Rate Advances (“ARC Advances”)-— Demand for ARC advances declined steadilyhas stabilized after a declining trend in 2009 and that trend has continued through the 2010 third quarter, as demand has remained weak.most of 2010. Generally, the FHLBNY’s larger members have been the more significant borrowers of ARCs. ARC advances are medium- and long-term loans that can be linked to a variety of indices, such as 1-month LIBOR, 3-month LIBOR, the Federal funds rate, or Prime. Members use ARC advances to manage interest rate and basis risks by efficiently matching the interest rate index and repricing characteristics of floating-rate assets. The interest rate is set and reset (depending upon the maturity of the advance and the type of index) at a spread to that designated index. Principal is due at maturity and interest payments are due at each reset date, including the final payment date. 83
Fixed-rate Advances- Fixed-rate advances, comprising putable and non-putable advances, remain the largest category of advances. Member demand for fixed-rate advances has remained steady thus farbeen soft in 2010.the 2011 first quarter and borrowings have declined. Prepayments have been heavily concentrated in the fixed-rate putable advance. On aggregate, maturing and prepaid advances have been replaced by new borrowings. Demand has been concentrated aroundshort- and medium-term advances, as members remain uncertain about locking into long-term advances perhaps because of unfavorable pricing of longer-term advances or an uncertain outlook overon the direction and timing of interest rate changes, or lukewarm demand from members’ customer base for longer-term fixed-rate loans. Fixed-rate advances are flexible funding tools that can be used by members to meet short- to long-term liquidity needs. Terms vary from two days to 30 years. 70
A significant componentcomposition of Fixed-rate advances is consists of advances with a “put” option feature (“putable advances.advance”). Historically, Fixed-rate putable advances have been more competitively priced relative to fixed-rate “bullet” advances (without put option) because of the “put” feature that the Bank purchases from the member, driving down the coupon on the advance. The price advantage of a putable advance increases with the numbers of puts sold and the length of the term of a putable advance. With a putable advance, the FHLBNY has the right to exercise the put option and terminate the advance at predetermined exercise date (s)date(s), which the FHLBNY normally would exercise when interest rates rise, and the borrower may then apply for a new advance at the then prevailing coupon and terms. In the present interest rate environment, the price advantage has not been significant because of constraints in offering longer-term-advances. The price advantage of a putable advance increases with In the numbers of puts sold2011 first quarter, maturing and the length of the term of a putable advance. Fixed-rate advances are flexible funding tools that can be used by members to meet short- to long-term liquidity needs. Terms vary from two days to 30 years.
Member demand for the competitively priced putable advances had remained steady through the third quarter in 2009, contracted somewhat in the fourth quarter of 2009, and declined steadily through the 2010 second quarter as maturingprepaid putable advances were either not replaced or replaced by bullet advance (without the put feature). Putable advances stood at $36.7 billion at September 30, 2010, slightly below $37.4 billion at June 30, 2010 and $38.6 billion at March 31, 2010. The amount outstanding at December 31, 2009 was $41.4 billion.
Short-term Advances-— Demand for Short-term fixed-rate advances hashad remained very weak insteady through most of the 2010 three quarters, a continuing trend from 2009. Borrowed amounts stood at $1.3 billion, slightly up from $1.0 billion at June 30, 2010, but down from $2.2 billion at December 31, 2009. By way2011 first quarter and grew because borrowing member replaced some of contrast, the outstanding balance was $7.8 billion at December 31, 2008.prepaid putable advances with short-term advances to take advantage of the current low coupons. Overnight advances -—Overnight borrowings also remained lackluster in 2010,soft, a continuation of the trend seen in 2009.2010. Member demand for the overnight Advances may also reflect the seasonal needs of certain member banks for their short-term liquidity requirements. Some large members also use overnight advances to adjust their balance sheet in line with their own leverage targets. The overnight advances program gives members a short-term, flexible, readily accessible revolving line of credit for immediate liquidity needs. Overnight Advances mature on the next business day, at which time the advance is repaid. Merger Activity Merger activity is an important factor and, if significant, would contribute to an uneven pattern in advance balances. Merger activity may result in the loss of new business if thea member is acquired by a non-member. The FHLBank Act does not permit new advances to replace maturing advances to former members. Advances held by members who are acquired by non-members may remain outstanding until their contractual maturities. Merger activity may also result in a decline in the advance book if the acquired member decides to prepay existing advances partially or in full depending on the post-merger liquidity needs. One member was acquired by a non-member financial institution thus far The following table summarizes merger activity (dollars in 2010. thousands): Table 4.2: Merger Activity | | | | | | | | | | | Merger Activity | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | | | | | | | | Number of Non-Members1 | | | 9 | | | | 11 | | | | | | | | | | | Non-member advances outstanding at period end | | $ | 833,928 | | | $ | 1,840,960 | | | | | | | | |
| | | 1 | | Members who became non-members because of mergers. |
The former member ismembers are not considered to have a significant borrowing potential. Early Prepayment of Advances
Early prepaymentPrepayment initiated by members andor former members is another important factor that impacts advances to members.advances. The FHLBNY charges a member a prepayment fee when the member or a former member prepays certain advances before the original maturity. Member initiated prepayments in the 2010 third quarter was $0.5 billion (par amount of advances). In the prior year third quarter, prepayments were only $92.0 million. On a year-to-date basis, prepayments totaled $3.0 billion in 2010, compared to $3.2 billion in the same period in 2009.
The following table summarizes prepayment activity (in thousands): Table 4.3: Prepayment fees recorded to Interest income were $3.7 million in the 2010 third quarter, compared to $0.2 million in the same period in 2009. On a year-to-date basis, prepayment fees were $9.7 million in 2010, compared to $21.2 million in the same period in 2009.Activity | | | | | | | | | | | Prepayment Activity | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | | | | | | | | Advances pre-paid at par | | $ | 7,107,367 | | | $ | 180,000 | | | | | | | | | | | | | | | | | | Prepayment fees | | $ | 42,743 | | | $ | 701 | | | | | | | | |
For advances that are prepaid and hedged under hedge accounting rules, the FHLBNY generally terminates the hedging relationship upon prepayment and adjusts the prepayment fees received for the associated fair value basis of the hedged prepaid advance. 71
Advances — Interest Rate Terms The following table summarizes interest-rate payment terms for advances (dollars in thousands): Table 4.4: Advances by Interest-Rate Payment Terms | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | Percentage | | | | | | | Percentage | | | | Amount | | | of Total | | | Amount | | | of Total | | | | | | | | | | | | | | | | | | | Fixed-rate | | $ | 64,284,271 | | | | 88.91 | % | | $ | 68,818,343 | | | | 89.44 | % | Variable-rate | | | 8,008,000 | | | | 11.08 | | | | 8,113,000 | | | | 10.55 | | Variable-rate capped | | | 8,000 | | | | 0.01 | | | | 8,000 | | | | 0.01 | | Overdrawn demand deposit accounts | | | — | | | | — | | | | 196 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total par value | | | 72,300,271 | | | | 100.00 | % | | | 76,939,539 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount on AHP Advances | | | (36 | ) | | | | | | | (42 | ) | | | | | Hedging basis adjustments | | | 3,187,142 | | | | | | | | 4,260,839 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 75,487,377 | | | | | | | $ | 81,200,336 | | | | | | | | | | | | | | | | | | | | |
Fixed-rate borrowings remained popular with members but amounts borrowed have declined in line with the overall decline in member demand for advances. The product is popular with members as reflected by an increasing percentage of total advances outstanding. Variable-rate advances outstanding declined in percentage terms and amounts outstanding. Member demand for adjustable-rate LIBOR-based funding has been weak, as members may perceive the risk of a combination of an unsettled interest rate environment and a steepening yield curve to make variable-rate borrowing relatively unattractive from an interest-rate risk management perspective. Variable-rate capped advances also declined in a declining interest rate environment. Typically, capped ARCs are in demand by members only in a rising rate environment, as they would purchase cap options from the FHLBNY to limit borrowers’ interest rate exposure. With a capped variable rate advance, the FHLBNY had offsetting purchased cap options that mirrored the terms of the caps sold to members, offsetting the FHLBNY’s exposure on the advance. The following table summarizes variable-rate advances by reference-index type (in thousands): Table 4.5: Variable-Rate Advances | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | | | | LIBOR indexed | | $ | 8,016,000 | | | $ | 8,121,000 | | Overdrawn demand deposit accounts | | | — | | | | 196 | | Prime | | | — | | | | — | | | | | | | | | | | | | | | | | | Total | | $ | 8,016,000 | | | $ | 8,121,196 | | | | | | | | |
The following table summarizes maturity and yield characteristics of par amounts of advances (dollars in thousands): Table 4.6: Advances by Maturity and Yield Type | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | Percentage | | | | | | | Percentage | | | | Amount | | | of Total | | | Amount | | | of Total | | | | | | | | | | | | | | | | | | | Fixed-rate | | | | | | | | | | | | | | | | | Due in one year or less | | $ | 14,762,800 | | | | 20.42 | % | | $ | 14,384,651 | | | | 18.70 | % | Due after one year | | | 49,521,471 | | | | 68.50 | | | | 54,433,692 | | | | 70.75 | | | | | | | | | | | | | | | Total Fixed-rate | | | 64,284,271 | | | | 88.92 | | | | 68,818,343 | | | | 89.45 | | | | | | | | | | | | | | | | | | | Variable-rate | | | | | | | | | | | | | | | | | Due in one year or less | | | 2,353,000 | | | | 3.25 | | | | 2,488,196 | | | | 3.23 | | Due after one year | | | 5,663,000 | | | | 7.83 | | | | 5,633,000 | | | | 7.32 | | | | | | | | | | | | | | | Total Variable-rate | | | 8,016,000 | | | | 11.08 | | | | 8,121,196 | | | | 10.55 | | | | | | | | | | | | | | | Total par value | | | 72,300,271 | | | | 100.00 | % | | | 76,939,539 | | | | 100.00 | % | | | | | | | | | | | | | | | | Discount on AHP Advances | | | (36 | ) | | | | | | | (42 | ) | | | | | Hedging adjustments | | | 3,187,142 | | | | | | | | 4,260,839 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 75,487,377 | | | | | | | $ | 81,200,336 | | | | | | | | | | | | | | | | | | | | |
72
Impact of Derivatives and hedging activities to the balance sheet carrying values of Advances Advance book values included fair value basis adjustments (“hedging adjustments”), which are recorded under the hedge accounting provisions on hedged advances. When medium- and long-term interest rates rise or fall, the fair values of fixed-rate advances move in the opposite direction. The Bank hedges certain advances by the use of both cancellable and non-cancellable interest rate swaps. These qualify as fair value hedges under the derivatives and hedge accounting rules. Recorded fair value basis adjustments to advances in the Statements of Condition were a result of these hedging activities. The Bank hedges the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR and is also the discounting basis for computing changes in fair values of hedged advances. Fair value changes of qualifying hedged advances under the derivatives and hedge accounting rules are recorded in the Statements of Income as a Net realized and unrealized gain (loss) on derivative and hedging activities, a component of Other income (loss). An offset is recorded as a fair value basis adjustment to the carrying amount of the advances in the Statements of Condition. 84
Derivative transactions are employed to hedge fixed-rate advances in the following manner and to achieve the following principal objectives: objectives. The FHLBNY: Makes extensive use of the derivatives to restructure interest rates on fixed-rate advances, both putable and non-putable (“bullet”), to better match the FHLBNY’s cash flows, to enhance yields, and to manage risk from a changing interest rate environment. Converts at the time of issuance, certain simple fixed-rate bullet and putable fixed-rate advances into synthetic floating-rate advances by the simultaneous execution of interest rate swaps that convert the cash flows of the fixed-rate advances to conventional adjustable rate instruments tied to an index, typically 3-month LIBOR. Uses derivatives to manage the risks arising from changing market prices and volatility of a fixed coupon advance by matching the cash flows of the advance to the cash flows of the derivative, and making the FHLBNY indifferent to changes in market conditions. Putable advances are typically hedged by an offsetting derivative with a mirror-image call option with identical terms. Adjusts the reported carrying value of hedged fixed-rate advances for changes in their fair value (“fair value basis” or “fair value”) that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for advances in the Statements of Condition include fair value hedge basis adjustments. The most significant element that impacts balance sheet reporting of advances is the recording of fair value basis adjustments to the carrying value of advances in the Statements of Condition. In addition, when putable advances are hedged by cancellable swaps, the possibility of exercise of the call shortens the expected maturity of the advance. The impact of derivatives to the Bank’s income is discussed in this MD&A under “Results of Operations”.Operations.” Fair value basis adjustments as measured under the hedging rules are impacted by hedge volume, the interest rate environment, and the volatility of the interest rates. Hedge volume-— The Bank primarily hedges putable advances and certain “bullet” fixed-rate advances that qualify under the hedging provisions of the accounting standards for derivatives and hedging, and as economic hedges when the hedge accounting provisions are operationally difficult to establish or a high degree of hedge effectiveness cannot be asserted. At September 30, 2010, $61.6 billionThe following table summarizes hedged advances by type of interest rate swaps hedged fixed-rate advances, compared to $66.0 billion at December 31, 2009 (See option features (in thousands):
Table 28: Derivative Financial Instruments4.7: Hedged Advances by Product). Type | | | | | | | | | | | Advances | | Par Amount | | March 31, 2011 | | | December 31, 2010 | | Qualifying Hedges | | | | | | | | | Fixed-rate bullets | | $ | 29,590,412 | | | $ | 26,562,821 | | Fixed-rate putable | | | 26,877,062 | | | | 33,612,162 | | Fixed-rate callable | | | 305,000 | | | | 150,000 | | | | | | | | | Total Qualifying Hedges | | $ | 56,772,474 | | | $ | 60,324,983 | | | | | | | | | Aggregate par amount of advances hedged1 | | $ | 56,866,249 | | | $ | 60,461,327 | | | | | | | | | Fair value basis (Qualifying hedging adjustments) | | $ | 3,187,142 | | | $ | 4,260,839 | | | | | | | | |
| | | 1 | | Either hedged economically or qualified under a hedge accounting rules |
Except for an insignificant notional amount of derivatives that were designated as economic hedges of advances, the swapshedged advances were in a qualifying hedging relationship under the accounting standards for derivatives and hedging. Decline in(See Tables 9.1 — 9.5). No advances were designated under the use of derivatives was consistent with the contraction ofFVO. The FHLBNY typically hedges fixed-rate advances which the FHLBNY typically hedgesin order to convert fixed-rate cash flows to LIBOR-indexed cash flows through the use of interest rate swaps. The largest component of interest rate swaps hedging advances at September 30, 2010 and December 31, 2009 was comprised of cancellable swaps that hedged a significant percentage of the $36.7 billion and $41.4 billion ofFHLBNY has allowed its fixed-rate putable advances at those dates (See Table 26: Derivative Hedging Strategies). Typically, the Bank hedgesto decline, and since almost all putable advances with a cancellable interest rate swap.put or call features are hedged, the decline in hedged advances was consistent with the contraction of fixed-rate putable advances. The put option in the advance is ownedpurchased by the FHLBNY from the borrowing member and mirrors the cancellable swap option terms owned by the swap counterparty. The Bank’s putable advance contains a put option purchased by the Bank from the member. Under the terms of the put option, the Bank has the right to terminate the advance at agreed uponagreed-upon dates. The period until the option is exercisable is known as the lockout period. If the advance is put by the FHLBNY at the end of the lockout period, the member can borrow an advance product of the member’s choice at the then prevailingthen-prevailing market rates and at the then existingthen-existing terms and conditions. Notional amounts of non-cancellable swaps were $27.1 billion at September 30, 2010, compared to $26.0 billion at December 31, 2009. 73
Fair value basis adjustments- The Bank uses interest rate derivatives to hedge the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR, and is also the discounting basis for computing changes in fair values of hedged advances. Recorded fair value basis adjustments in the Statements of Condition were associated with hedging activities under the hedge accounting provisions. Advances designated at inception as economic hedges do not have any basis adjustments, and were insignificant. The reported carrying values of advances at September 30, 2010 included net unrealized fair value basis gains of $5.6 billion up from $3.6 billion at December 31, 2009 associated with hedged advances that qualified under hedge accounting rules at those dates. Fair value gains were consistent with the downward sloping forward yield curvehigher contractual coupons of hedged long-and medium-term fixed-rate advances. These advances had been issued at September 30, 2010 and December 31, 2009prior years at the then-prevailing higher interest rate environment compared to the lower interest rate environment at the balance sheet dates that were projecting forward rates below the contractual coupons of hedged fixed-rate advances. Hedged-fixed rateFixed-rate advances, had been issued in prior periods at the then prevailing higher interest-rate environment, and since hedged advances are typically fixed-rate, in a lower interest rate environment relative to the coupons of the advances, fixed-rate advances will exhibit net unrealized fair value basis gains. The increaseperiod-over-period decrease in net fair value basis adjustments of hedged Advances was primarily caused by (1) the flatteningupward shift (albeit small) of the forward swap interest rates at September 30, 2010, relativethe current period end compared to December 31, 2009, with2010, as displayed below. As future swap rates increase, the forward rates well belowhigher contractual coupons of the same yields projected at December 31, 2009. At September 30, 2010, the yield curve was forecasting 0.64%, 1.29%,advances become less “valuable” and 1.92% on the 3-year, 5-yearfair value gains decline, and 7-year swap curves, compared to 1.67%, 2.68% and 3.38% at December 31, 2009. Fair values(2) lower amounts (volume effects) of hedged fixed-rate advances typically gain value when interest rates decline.advances. 85
Unrealized gains from fair value basis adjustments to advances were almost entirely offset by net fair value unrealized losses of the derivatives associated with the fair value hedges of advances, thereby achieving the Bank’s hedging objectives of mitigating fair value basis risk. 74
Advances — Call Dates and Exercise Options The table below offers a view of the advance portfolio with the possibility of the exercise of the put option that is controlled by the FHLBNY, and put dates are summarized into similar maturity tenors as the previous table that summarizes advances by contractual maturities (dollars in thousands). Table 4.9: Advances by Put/Call Date | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | Percentage of | | | | | | Percentage of | | | | Amount | | | Total | | | Amount | | | Total | | | | | | | | | | | | | | | | | | | Overdrawn demand deposit accounts | | $ | — | | | | — | % | | $ | 196 | | | | — | % | Due or putable\callable in one year or less1 | | | 42,893,112 | | | | 59.33 | | | | 49,443,712 | | | | 64.26 | | Due or putable after one year through two years | | | 10,116,744 | | | | 13.99 | | | | 8,889,867 | | | | 11.55 | | Due or putable after two years through three years | | | 7,502,977 | | | | 10.38 | | | | 6,959,596 | | | | 9.05 | | Due or putable after three years through four years | | | 4,276,457 | | | | 5.91 | | | | 4,744,502 | | | | 6.17 | | Due or putable after four years through five years | | | 4,428,259 | | | | 6.12 | | | | 4,145,209 | | | | 5.39 | | Due or putable after five years through six years | | | 694,951 | | | | 0.96 | | | | 815,948 | | | | 1.06 | | Thereafter | | | 2,387,771 | | | | 3.31 | | | | 1,940,509 | | | | 2.52 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total par value | | | 72,300,271 | | | | 100.00 | % | | | 76,939,539 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount on AHP advances | | | (36 | ) | | | | | | | (42 | ) | | | | | Hedging adjustments | | | 3,187,142 | | | | | | | | 4,260,839 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 75,487,377 | | | | | | | $ | 81,200,336 | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Due or putable in one year or less includes five callable advances. |
Contrasting advances by contractual maturity dates (See Tables 4.1 — 4.9) with potential put dates illustrates the impact of hedging on the effective duration of the Bank’s advances. The Bank’s advances borrowed by members include a significant amount of putable advances in which the Bank has purchased from members the option to terminate advances at agreed-upon dates. Typically, almost all putable advances are hedged by cancellable interest rate swaps in which the derivative counterparty has the right to exercise and terminate the swap at par at agreed upon dates. Under current hedging practices, when the swap counterparty exercises its right to call the cancellable swap, the Bank would typically also exercise its right to put the advance at par. Under this hedging practice, on a put option basis, the potential exercised maturity is significantly accelerated, and is an important factor in the Bank’s current hedge strategy. The following table summarizes notional amounts of advances that were still putable or callable (one or more pre-determined option exercise dates remaining) (in thousands): Table 4.10: Putable and Callable Advances | | | | | | | | | | | Advances | | | | March 31, 2011* | | | December 31, 2010* | | Putable | | $ | 27,787,662 | | | $ | 34,651,912 | | | | | | | | | No-longer putable | | $ | 2,383,600 | | | $ | 2,581,100 | | | | | | | | | Callable | | $ | 305,000 | | | $ | 150,000 | | | | | | | | |
The FHLBNY has allowed its fixed-rate putable advances to decline and member borrowings have been weak for putable advances, which are typically medium and long-term. Significant prepayment of putable advances was the primary cause of the decline. Investments The FHLBNY maintains investments for liquidity purposes, to manage capital stock repurchases and redemptions, to provide additional earnings, and to ensure the availability of funds to meet the credit needs of its members. The FHLBNY also maintains longer-term investment portfolios, which are principally mortgage-backed securities issued by government-sponsored mortgage agencies, a smaller portfolio of MBS issued by private enterprises, and securities issued by state or local housing finance agencies. Finance Agency regulations prohibit the FHLBanks, including the FHLBNY, from investing in certain types of securities and limit the investment in mortgage- and asset-backed securities. Investments -Policies—Policies and practicesPractices Finance Agency regulations limit investment in housing-related obligations of state and local governments and their housing finance agencies to obligations that carry ratings of double-A or higher. Mortgage- and asset-backed securities acquired must carry the highest ratings from Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Rating Services (“S&P”) at the time of purchase. Finance Agency regulations further limit the mortgage- and asset-backed investments of each FHLBank to 300 percent of that FHLBank’s capital. The FHLBNY was within the 300 percent limit for all periods reported. The FHLBNY’s investment in mortgage-backed securities during all periods reported complied with FHLBNY’s Board-approved policy of acquiring mortgage-backed securities issued or guaranteed by the government-sponsored housing enterprises, or prime residential mortgages rated triple-A by both Moody’s and Standard & Poor’s rating services at acquisition. 75
The FHLBNY’s practice is not to lend unsecured funds to members, including overnight Federal funds and certificates of deposit. The FHLBNY does not preclude or specifically seek out investments any differently than it would in the normal course of acquiring securities for investments, unless it is prohibited by existing regulations. Unsecured lending to members is not prohibited by Finance Agency regulations or Board of Directors’ policy. The FHLBNY is prohibited from purchasing a consolidated obligation issued directly by another FHLBank, but may acquire consolidated obligations for investment in the secondary market after the bond settles. There were no investments in consolidated obligations by the FHLBNY at September 30, 2010 or December 31, 2009. On March 24, 2008, the Board of Directors of the Federal Housing Finance Board, predecessor to the Finance Agency adopted Resolution 2008-08, which temporarily expanded the authority of a FHLBank to purchase mortgage-backed securities (“MBS”) under certain conditions. The resolution allowed a FHLBank to increase its investmentsperiods in MBS issued by Fannie Mae and Freddie Mac by an amount equal to three times its capital, which is to be calculated in addition to the existing limit. The expanded authority permitted MBS investments to be as much as 600 percent of the FHLBNY’s capital. The FHLBNY did not exercise the expanded authority provided under the temporary regulations to purchase MBS issued by Fannie Mae and Freddie Mac. The expanded authority expired in March 2010.this report. The following table summarizes changes in investments by categories (including held-to-maturity securities, available-for-sale securities, and money market investments). Amounts are after writing down (at the time of credit related OTTI) held-to-maturity impaired securities to fair values. No securities classified as available-for-sale were OTTI (dollars in thousands): Table 16:5.1: Investments by Categories | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, | | December 31, | | Dollar | | Percentage | | | March 31, | | December 31, | | Dollar | | Percentage | | | | 2010 | | 2009 | | Variance | | Variance | | | 2011 | | 2010 | | Variance | | Variance | | | | | State and local housing finance agency obligations1 | | $ | 740,256 | | $ | 751,751 | | $ | (11,495 | ) | | | (1.53) | % | | $ | 755,712 | | $ | 770,609 | | $ | (14,897 | ) | | | (1.93 | )% | Mortgage-backed securities | | | Available-for-sale securities, at fair value | | 3,360,959 | | 2,240,564 | | 1,120,395 | | 50.01 | | | 3,708,872 | | 3,980,135 | | | (271,263 | ) | | | (6.82 | ) | Held-to-maturity securities, at carrying value | | 7,480,990 | | 9,767,531 | | | (2,286,541 | ) | | | (23.41 | ) | | 7,286,775 | | 6,990,583 | | 296,192 | | 4.24 | | | | | | | | | | | | | | | | | | | | | Total securities | | 11,582,205 | | 12,759,846 | | | (1,177,641 | ) | | | (9.23 | ) | | 11,751,359 | | 11,741,327 | | 10,032 | | 0.09 | | | | | Grantor trusts2 | | 12,822 | | 12,589 | | 233 | | 1.85 | | | 10,152 | | 9,947 | | 205 | | 2.06 | | Federal funds sold | | 4,095,000 | | 3,450,000 | | 645,000 | | 18.70 | | | 5,093,000 | | 4,988,000 | | 105,000 | | 2.11 | | | | | | | | | | | | | | | | | | | | | | | | Total investments | | $ | 15,690,027 | | $ | 16,222,435 | | $ | (532,408 | ) | | | (3.28) | % | | $ | 16,854,511 | | $ | 16,739,274 | | $ | 115,237 | | | 0.69 | % | | | | | | | | | | | | | | | | | | | |
| | | 1 | | Classified as held-to-maturity securities, at carrying value. | | 2 | | Classified as available-for-sale securities, at fair value and represents investments in registered mutual funds and other fixed-income securities maintained under the grantor trusts. |
86
Long-term investmentsLong-Term Investments
Investments with original long-term contractual maturities were comprised of mortgage- and asset-backed securities, and investment in securities issued by state and local housing agencies. These investments were classified either as “Held-to-maturity” or as “Available-for-sale” securities in accordance with accounting standard on investments in debt and equity securities as amended by the guidance on recognition and presentation of other-than-temporary impairments. SeveralThe Bank owns a grantor trusts have been established and owned by the FHLBNYtrust to fund current and potential future payments to retirees for supplemental pension plan obligations. The trust funds arefund is invested in fixed-income and equity funds, which were classified as available-for-sale. Mortgage-backed securitiesMortgage-Backed Securities — By issuerIssuer
Issuer composition of held-to-maturity mortgage-backed securities was as follows (carrying values; dollars in thousands): Table 17: Mortgage-Backed5.2: Held-to-maturity mortgage-backed Securities — Held-to-Maturity byBy Issuer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, | | Percentage | | December 31, | | Percentage | | | March 31, | | Percentage | | December 31, | | Percentage | | | | 2010 | | of total | | 2009 | | of total | | | 2011 | | of Total | | 2010 | | of Total | | | | | U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 6,248,361 | | | 83.52 | % | | $ | 8,482,139 | | | 86.84 | % | | $ | 5,659,761 | | | 77.67 | % | | $ | 5,528,792 | | | 79.09 | % | U.S. agency residential mortgage-backed securities | | 127,168 | | 1.70 | | 171,531 | | 1.76 | | | 107,456 | | 1.47 | | 116,126 | | 1.66 | | U.S. government sponsored enterprise commercial mortgage-backed securities | | 173,969 | | 2.33 | | — | | — | | | 707,826 | | 9.71 | | 476,393 | | 6.81 | | U.S. agency commercial mortgage-backed securities | | 48,953 | | 0.65 | | 49,526 | | 0.51 | | | 44,408 | | 0.61 | | 48,748 | | 0.70 | | Private-label issued securities backed by home equity loans | | 362,847 | | 4.85 | | 417,151 | | 4.27 | | | 341,464 | | 4.69 | | 351,455 | | 5.03 | | Private-label issued residential mortgage-backed securities | | 336,981 | | 4.51 | | 444,906 | | 4.55 | | | 254,794 | | 3.50 | | 292,477 | | 4.18 | | Private-label issued securities backed by manufactured housing loans | | 182,711 | | 2.44 | | 202,278 | | 2.07 | | | 171,066 | | 2.35 | | 176,592 | | 2.53 | | | | | | | | | | | | | | | | | | | | | | | | Total Held-to-maturity securities-mortgage-backed securities | | $ | 7,480,990 | | | 100.00 | % | | $ | 9,767,531 | | | 100.00 | % | | $ | 7,286,775 | | | 100.00 | % | | $ | 6,990,583 | | | 100.00 | % | | | | | | | | | | | | | | | | | | | |
76
Held-to-maturity mortgage- and asset-backed securities(“MBS”)-— The Bank’s conservative purchasing practicepractices over the years isare evidenced by the high concentration of MBS issued by the GSEs. Privately issued mortgage-backed securities made up the remaining 11.8% and 10.9% at September 30, 2010 and December 31, 2009. Local and housing finance agency bonds-—The FHLBNY had investments in primary public and private placements of taxable obligations of state and local housing finance authorities (“HFA”) classified as held-to-maturity. Investments in state and local housing finance bonds help to fund mortgages that finance low- and moderate-income housing. No additions were made in the 2010 three quarters. Available-for-sale securities-— The FHLBNY classifies investments that it may sell before maturity as available-for-sale (“AFS”) and carries them at fair value. Fair value changes are recorded in AOCI until the security is sold or is anticipated to be sold. Composition of FHLBNY’s available-for-sale securities was as follows (dollars in thousands): Table 18:5.3: Available-for-Sale Securities — Composition | | | | | | | | | | | | | | | | | | | | September 30, | | Percentage | | December 31, | | Percentage | | | | | | | | | | | | | | | | | | | | 2010 | | of total | | 2009 | | of total | | | March 31, | | Percentage | | December 31, | | Percentage | | | | | 2011 | | of Total | | 2010 | | of Total | | Fannie Mae | | $ | 2,275,326 | | | 67.70 | % | | $ | 1,544,500 | | | 68.93 | % | | $ | 2,309,122 | | | 62.26 | % | | $ | 2,478,313 | | | 62.26 | % | Freddie Mac | | 1,085,633 | | 32.30 | | 696,064 | | 31.07 | | | 1,329,160 | | 35.84 | | 1,429,900 | | 35.93 | | Ginnie Mae | | | 70,590 | | 1.90 | | 71,922 | | 1.81 | | | | | | | | | | | | | | | | | | | | | Total AFS mortgage-backed securities | | 3,360,959 | | | 100.00 | % | | 2,240,564 | | | 100.00 | % | | 3,708,872 | | | 100.00 | % | | 3,980,135 | | | 100.00 | % | | | | | | | | | | | | Grantor Trusts — Mutual funds | | 12,822 | | 12,589 | | | 10,152 | | 9,947 | | | | | | | | | | | | | Total Available-for-sale portfolio | | $ | 3,373,781 | | $ | 2,253,153 | | | Total AFS portfolio | | | $ | 3,719,024 | | $ | 3,990,082 | | | | | | | | | | | | |
One hundred percentAll of the mortgage-backed securities in the AFS portfolio of mortgage-backed securities was comprised of securitieswere issued by Fannie Mae, and Freddie Mac. The Bank acquired $2.0 billion of GSE issued, triple-A rated MBS in the 2010 first three quarters.Mac, or a U.S. agency. The Bank also has grantor trustsa grantors trust designed to fund current and potential future payments to retirees for supplemental pension plan obligations. The trustsfunds are invested in money market funds, fixed-income and equity funds, and are designated as available-for-sale.
For more information and analysis with respect to investment securities, see Investment Quality in the section captioned Asset Quality and Concentration — Advances, Investment securities, Mortgage loans, and Counterparty risks in this MD&A. Also, see Notes 4 and 5 to the unaudited financial statements in this report.
87
External rating information of the held-to-maturity portfolio was as follows. (Carrying values; in thousands): Table 19:5.4: External RatingRatings of the Held-to-Maturity Portfolio | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | | | | | | | | | | | | | | | | | | Below | | | | | | | | | | | | | | | | | | | | | | | Investment | | | | | | | AAA-rated | | | AA-rated | | | A-rated | | | BBB-rated | | | Grade | | | Total | | Long-term securities | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities | | $ | 6,977,063 | | | $ | 275,025 | | | $ | 44,215 | | | $ | 18,129 | | | $ | 166,557 | | | $ | 7,480,990 | | State and local housing finance agency obligations | | | 71,596 | | | | 592,594 | | | | 19,845 | | | | 56,221 | | | | — | | | | 740,256 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | Total Long-term securities | | | 7,048,660 | | | | 867,619 | | | | 64,060 | | | | 74,350 | | | | 166,557 | | | | 8,221,246 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 7,048,660 | | | $ | 867,619 | | | $ | 64,060 | | | $ | 74,350 | | | $ | 166,557 | | | $ | 8,221,246 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | | March 31, 2011 | | | | Below | | | | | Below Investment | | | | | | Investment | | | | | AAA-rated | | AA-rated | | A-rated | | BBB-rated | | Grade | | Total | | | | AAA-rated | | AA-rated | | A-rated | | BBB-rated | | Grade | | Total | | | Long-term securities | | | Mortgage-backed securities | | $ | 9,205,018 | | $ | 299,314 | | $ | 65,921 | | $ | 31,261 | | $ | 166,017 | | $ | 9,767,531 | | | $ | 6,737,651 | | $ | 264,513 | | $ | 105,873 | | $ | 4,668 | | $ | 174,070 | | $ | 7,286,775 | | State and local housing finance agency obligations | | 72,992 | | 601,109 | | 21,430 | | 56,220 | | — | | 751,751 | | | 71,344 | | 617,163 | | — | | 67,205 | | — | | 755,712 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Long-term securities | | 9,278,010 | | 900,423 | | 87,351 | | 87,481 | | 166,017 | | 10,519,282 | | | $ | 6,808,995 | | $ | 881,676 | | $ | 105,873 | | $ | 71,873 | | $ | 174,070 | | $ | 8,042,487 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 9,278,010 | | $ | 900,423 | | $ | 87,351 | | $ | 87,481 | | $ | 166,017 | | $ | 10,519,282 | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | | Below Investment | | | | | | | AAA-rated | | AA-rated | | A-rated | | BBB-rated | | Grade | | Total | | | | | Long-term securities | | | Mortgage-backed securities | | | $ | 6,463,552 | | $ | 266,567 | | $ | 87,796 | | $ | 17,446 | | $ | 155,222 | | $ | 6,990,583 | | State and local housing finance agency obligations | | | 71,461 | | 631,943 | | — | | 67,205 | | — | | 770,609 | | | | | | | | | | | | | | | | | | | | Total Long-term securities | | | $ | 6,535,013 | | $ | 898,510 | | $ | 87,796 | | $ | 84,651 | | $ | 155,222 | | $ | 7,761,192 | | | | | | | | | | | | | | | | |
External rating information of the available-for-sale portfolio was as follows (Carrying(the carrying values of AFS investments are at fair values; in thousands): Table 20:5.5: External RatingRatings of the Available-for-Sale Portfolio | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | | September 30, 2010 | | | AAA-rated | | AA-rated | | A-rated | | BBB-rated | | Unrated | | Total | | | | AAA-rated | | AA-rated | | A-rated | | BBB-rated | | Unrated | | Total | | | Available-for-sale securities | | | Mortgage-backed securities | | $ | 3,360,959 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,360,959 | | | Mortgage-backed securities1 | | | $ | 3,708,872 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,708,872 | | Other — Grantor trusts | | — | | — | | — | | — | | 12,822 | | 12,822 | | | — | | — | | — | | — | | 10,152 | | 10,152 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 3,360,959 | | $ | — | | $ | — | | $ | — | | $ | 12,822 | | $ | 3,373,781 | | | $ | 3,708,872 | | $ | — | | $ | — | | $ | — | | $ | 10,152 | | $ | 3,719,024 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | | AAA-rated | | AA-rated | | A-rated | | BBB-rated | | Unrated | | Total | | | | | Available-for-sale securities | | | Mortgage-backed securities1 | | | $ | 3,980,135 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,980,135 | | Other — Grantor trusts | | | — | | — | | — | | — | | 9,947 | | 9,947 | | | | | | | | | | | | | | | | | | | | Total | | | $ | 3,980,135 | | $ | — | | $ | — | | $ | — | | $ | 9,947 | | $ | 3,990,082 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | | | AAA-rated | | | AA-rated | | | A-rated | | | BBB-rated | | | Unrated | | | Total | | Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities | | $ | 2,240,564 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,240,564 | | Other — Grantor trusts | | | — | | | | — | | | | — | | | | — | | | | 12,589 | | | | 12,589 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 2,240,564 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,589 | | | $ | 2,253,153 | | | | | | | | | | | | | | | | | | | | |
| | | 1 | | GSE and U.S. Obligations |
77
Weighted average rates — Mortgage-backed securities (HTM and AFS) The following table summarizes weighted average rates and amounts by contractual maturities. A significant portion of the MBS portfolio consisted of floating-rate securities and the weighted average rates will change in parallel with changes in the indexed LIBOR rate (dollars in thousands): Table 21:5.6: Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Amortized | | Weighted | | Amortized | | Weighted | | | Amortized | | Weighted | | Amortized | | Weighted | | | | Cost | | Average rate | | Cost | | Average rate | | | Cost | | Average Rate | | Cost | | Average Rate | | Mortgage-backed securities | | | Due in one year or less | | $ | — | | | — | % | | — | | | — | % | | $ | — | | | — | % | | $ | — | | | — | % | Due after one year through five years | | 1,927 | | 6.25 | | 2,663 | | 6.25 | | | 1,502 | | 6.25 | | 1,730 | | 6.25 | | Due after five years through ten years | | 1,096,896 | | 4.69 | | 1,140,153 | | 4.78 | | | 1,508,748 | | 4.28 | | 1,374,456 | | 4.36 | | Due after ten years | | 9,814,713 | | 2.79 | | 10,977,950 | | 3.21 | | | 9,559,762 | | 2.37 | | 9,664,231 | | 2.57 | | | | | | | | | | | | | | | | | | | | | | | | Total mortgage-backed securities | | $ | 10,913,536 | | | 2.98 | % | | $ | 12,120,766 | | | 3.36 | % | | $ | 11,070,012 | | | 2.63 | % | | $ | 11,040,417 | | | 2.79 | % | | | | | | | | | | | | | | | | | | | |
88
Credit Impairment analysis (Other-than-temporary Impairment — OTTI)Adverse Case Scenario- OTTI securities
Management evaluates its investments for OTTI on a quarterly basis, under amended OTTI guidance issued in the prior year first quarter by theFinancial Accounting Standards Board(“FASB”). This amended OTTI guidance, which the FHLBNY early adopted in the 2009 first quarter, results in only the credit portion of OTTI securities being recognized in earnings. The non-credit portion of OTTI, which represent fair value losses of OTTI securities, is recognized in AOCI. Prior to the adoption of the amended guidance, if an impairment was determined to be other-than-temporary, the impairment loss recognized in earnings was equal to the entire difference between the security’s amortized cost basis and its fair value. The FHLBNY had not determined any security as impaired prior to 2009. Beginning with the quarter ended September 30, 2009, at each subsequent quarter, the FHLBNY performed its OTTI analysis by cash flow testing 100 percent of itits private-label MBS. At December 31, 2008, and atIn addition, the two interim quarters ended June 30, 2009, the FHLBNY’s methodology was to analyze all ofFHLBNY evaluated its credit-impaired private-label MBS to isolate securities that were considered to be at risk of OTTIunder a base case (or best estimate) scenario, and to performalso performed a cash flow analysis onfor each of those securities at riskunder more adverse external assumptions that forecasted a larger home price decline and a slower rate of OTTI. 2010 vs. 2009 current quarter- In 2010, the FHLBNY identified credit re-impairment on four HTM private-label MBS. Cash flow assessments of the expected credit performance of the four securities resulted in the recognition of $3.1 million as credit related OTTIhousing price recovery. The stress test scenario and was a charge to earnings. All four securities had been previously determined to be OTTI, and the additional impairment (re-impairment) was due to further deterioration in the credit performance measures of the impaired securities. The non-credit portion of OTTI recorded in AOCI wasassociated results do not significant. In the prior year current quarter,represent the Bank’s cash flow impairment analysis resulted in credit related OTTI of $3.7 million,current expectations and the non-credit portion of OTTI recorded in AOCI was $26.5 million.
2010 vs. 2009 year-to-date- In 2010, cumulative credit impairment charged to income was $7.7 million. Non-credit OTTI was not significant. In the same period in the prior year, cumulative credit impairment was $14.3 million and non-credit OTTI was a loss of $103.9 million.
Bond insurers Ambac and MBIA insure the four MBS credit securities impaired in the 2010 current quarter. The Bank’s analysis of Ambac concluded that the bond insurer couldtherefore should not be relied upon to pay future credit losses due to projected collateral shortfalls of the impaired securities. Analysis of MBIA concluded that insurance support could be relied upon for shortfalls up until June 30, 2011, beyond which date MBIA’s financial resources would be such that insurance protection could not be relied upon.
Based on detailed cash flow credit analysis onconstrued as a security level at the current quarter-end, the Bank has concluded the gross unrealized losses for the remainderprediction of the Bank’s investmentfuture results, market conditions or the actual performance of these securities.
The results of the adverse case scenario are presented below alongside the FHLBNY’s expected outcome for the credit impaired securities (other(the base case) (in thousands): Table 5.7: Base and Adverse Case Stress Scenarios | | | | | | | | | | | | | | | | | | | As of March 31, 2011 | | | | Actual Results — Base Case Scenario | | | Adverse Case Scenario | | | | | | | | OTTI Related to Credit | | | | | | | OTTI Related to Credit | | | | UPB | | | Loss | | | UPB | | | Loss | | RMBS Prime | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Alt-A | | | — | | | | — | | | | — | | | | — | | HEL Subprime | | | 30,869 | | | | (370 | ) | | | 30,869 | | | | (390 | ) | | | | | | | | | | | | | | Total | | $ | 30,869 | | | $ | (370 | ) | | $ | 30,869 | | | $ | (390 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of March 31, 2010 | | | | Actual Results — Base Case Scenario | | | Adverse Case Scenario | | | | | | | | OTTI related to credit | | | | | | | OTTI related to credit | | | | UPB | | | loss | | | UPB | | | loss | | RMBS Prime | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Alt-A | | | — | | | | — | | | | — | | | | — | | HEL Subprime | | | 67,114 | | | | 3,400 | | | | 67,114 | | | | 5,028 | | | | | | | | | | | | | | | Total | | $ | 67,114 | | | $ | 3,400 | | | $ | 67,114 | | | $ | 5,028 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2010 | | | | Actual Results — Base Case Scenario | | | Adverse Case Scenario | | | | | | | | OTTI related to credit | | | | | | | OTTI related to credit | | | | UPB | | | loss | | | UPB | | | loss | | RMBS Prime | | $ | 16,477 | | | | (176 | ) | | $ | 16,477 | | | $ | (272 | ) | Alt-A | | | — | | | | — | | | | — | | | | — | | HEL Subprime | | | 17,641 | | | | (409 | ) | | | 17,641 | | | | (421 | ) | | | | | | | | | | | | | | Total | | $ | 34,118 | | | | (585 | ) | | $ | 34,118 | | | $ | (693 | ) | | | | | | | | | | | | | |
In the adverse case scenario, expected losses were not significantly greater than the four securities credit impaired) were primarily caused by interest rate changes, credit spread wideningthose assessed and reduced liquidity, and the securities were temporarily impaired as definedrecorded under the new guidance for recognition and presentation of other-than-temporary impairment. Fair values of investment securitiesbase case expected loss scenario.
In an effort to achieve consistency among all of the FHLBanks on the pricing of investments in mortgage-backed securities, in the third quarter of 2009 the FHLBanks formed the MBS Pricing Governance Committee, which was responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. Consistent with the guidance from the Governance Committee, the FHLBNY changed the methodology used to estimate the fair value of mortgage-backed securities starting as of September 30, 2009. Under the approved methodology, the Bank requests prices for all mortgage-backed securities from four specified third-party vendors, and, depending on the number of prices received for each security, selected a median or average price as defined by the methodology. If four prices are received by the FHLBNY from the pricing vendors, the average of the middle two prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used subject to additional validation. The computed prices are tested for reasonableness using tolerance thresholds. Prices within the established thresholds are generally accepted unless strong evidence suggests that using the median pricing methodology as described above would not be appropriate. Preliminary estimated fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis of all relevant facts and circumstances that a market participant would consider.
To compute fair values at September 30, 2010, four vendor prices were received for substantially all of the FHLBNY’s MBS holdings and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supported the FHLBNY’s conclusion that the final computed prices were reasonable estimates of fair value. While the FHLBNY adopted this common methodology, the fair values of mortgage-backed investment securities are estimated by FHLBNY’s management which remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used.
The four specialized pricing services use pricing models or quoted prices of securities with similar characteristics. The valuation techniques used by pricing services employ cash flow generators and option-adjusted spread models. Pricing spreads used as inputs in the models are based on new issue and secondary market transactions if the securities are traded in sufficient volumes in the secondary market.
These pricing vendors typically employ valuation techniques that incorporate benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing, as may be deemed appropriate for the security. Such inputs into the pricing models employed by pricing services for most of the Bank’s investments are market based and observable and are considered Level 2 of the fair value hierarchy.
8978
Non-Agency Private label mortgage- and asset-backed securities The valuationBank’s investments in privately issued MBS are summarized below. All private-label MBS were classified as held-to-maturity. (Unpaid principal balance; in thousands): Table 5.8: Non-Agency Private Label Mortgage- and Asset-Backed Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2010 | | | December 31, 2010 | | | | | | | | Variable | | | | | | | | | | | Variable | | | | | Private-label MBS | | Fixed Rate | | | Rate | | | Total | | | Fixed Rate | | | Rate | | | Total | | Private-label RMBS | | | | | | | | | | | | | | | | | | | | | | | | | Prime | | $ | 246,901 | | | $ | 3,890 | | | $ | 250,791 | | | $ | 284,552 | | | $ | 3,995 | | | $ | 288,547 | | Alt-A | | | 5,562 | | | | 3,215 | | | | 8,777 | | | | 5,877 | | | | 3,276 | | | | 9,153 | | | | | | | | | | | | | | | | | | | | | Total PL RMBS | | | 252,463 | | | | 7,105 | | | | 259,568 | | | | 290,429 | | | | 7,271 | | | | 297,700 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home Equity Loans | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | 379,957 | | | | 77,794 | | | | 457,751 | | | | 389,031 | | | | 81,835 | | | | 470,866 | | | | | | | | | | | | | | | | | | | | | Total Home Equity Loans | | | 379,957 | | | | 77,794 | | | | 457,751 | | | | 389,031 | | | | 81,835 | | | | 470,866 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | 171,084 | | | | — | | | | 171,084 | | | | 176,611 | | | | — | | | | 176,611 | | | | | | | | | | | | | | | | | | | | | Total Manufactured Housing Loans | | | 171,084 | | | | — | | | | 171,084 | | | | 176,611 | | | | — | | | | 176,611 | | | | | | | | | | | | | | | | | | | | | Total UPB of private-label MBS | | $ | 803,504 | | | $ | 84,899 | | | $ | 888,403 | | | $ | 856,071 | | | $ | 89,106 | | | $ | 945,177 | | | | | | | | | | | | | | | | | | | | |
Unpaid principal balance (UPB) is also known as the current face or par amount of the FHLBNY’s private-labela mortgage-backed securities, all designated as held-to-maturity, may require pricing services to use significant inputs that are subjective and may be considered to be Level 3security. The following tables present additional information of the fair value hierarchy becausevalues and gross unrealized losses of the current lackPLMBS by year of significantsecuritization and external rating (in thousands): Table 5.9: PLMBS by Year of Securitization and External Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | | | | | | | | | | | | | | | | | Unpaid Principal Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit and | | | | | | | | | | | | | | | | | | | | | | | | Below | | | | | | | Gross | | | | | | | Non-Credit | | | | Ratings | | | | | | | | | | | | | | | | | | | Investment | | | Amortized | | | Unrealized | | | | | | | OTTI | | Private-label MBS | | Subtotal | | | Triple-A | | | Double-A | | | Single-A | | | Triple-B | | | Grade | | | Cost | | | (Losses) | | | Fair Value | | | Losses1 | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | $ | 35,323 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 35,323 | | | $ | 34,798 | | | $ | (215 | ) | | $ | 34,707 | | | $ | — | | 2005 | | | 51,313 | | | | — | | | | — | | | | 14,202 | | | | — | | | | 37,111 | | | | 49,826 | | | | (555 | ) | | | 49,489 | | | | — | | 2004 and earlier | | | 164,155 | | | | 157,633 | | | | 6,522 | | | | — | | | | — | | | | — | | | | 163,438 | | | | (263 | ) | | | 166,115 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS Prime | | | 250,791 | | | | 157,633 | | | | 6,522 | | | | 14,202 | | | | — | | | | 72,434 | | | | 248,062 | | | | (1,033 | ) | | | 250,311 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alt-A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 8,777 | | | | 8,777 | | | | — | | | | — | | | | — | | | | — | | | | 8,778 | | | | (531 | ) | | | 8,296 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS | | | 259,568 | | | | 166,410 | | | | 6,522 | | | | 14,202 | | | | — | | | | 72,434 | | | | 256,840 | | | | (1,564 | ) | | | 258,607 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | HEL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 457,751 | | | | 71,524 | | | | 87,082 | | | | 110,516 | | | | 4,698 | | | | 183,931 | | | | 428,689 | | | | (55,607 | ) | | | 374,088 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 171,084 | | | | — | | | | 171,084 | | | | — | | | | — | | | | — | | | | 171,066 | | | | (18,998 | ) | | | 152,068 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total PLMBS | | $ | 888,403 | | | $ | 237,934 | | | $ | 264,688 | | | $ | 124,718 | | | $ | 4,698 | | | $ | 256,365 | | | $ | 856,595 | | | $ | (76,169 | ) | | $ | 784,763 | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1Credit-related OTTI was offset by reclassification of non-credit OTTI to Net income. 79
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | | | | | | | | | | | | | | | | Unpaid Principal Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit and | | | | | | | | | | | | | | | | | | | | | | | | Below | | | | | | | Gross | | | | | | | Non-Credit | | | | Ratings | | | | | | | | | | | | | | | | | | | Investment | | | Amortized | | | Unrealized | | | | | | | OTTI | | Private-label MBS | | Subtotal | | | Triple-A | | | Double-A | | | Single-A | | | Triple-B | | | Grade | | | Cost | | | (Losses) | | | Fair Value | | | Losses | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | $ | 40,987 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 40,987 | | | $ | 40,413 | | | $ | (303 | ) | | $ | 40,313 | | | $ | (479 | ) | 2005 | | | 59,456 | | | | — | | | | — | | | | 17,664 | | | | — | | | | 41,792 | | | | 57,863 | | | | (589 | ) | | | 57,763 | | | | — | | 2004 and earlier | | | 188,104 | | | | 180,110 | | | | 7,994 | | | | — | | | | — | | | | — | | | | 187,256 | | | | (388 | ) | | | 191,029 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS Prime | | | 288,547 | | | | 180,110 | | | | 7,994 | | | | 17,664 | | | | — | | | | 82,779 | | | | 285,532 | | | | (1,280 | ) | | | 289,105 | | | | (479 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alt-A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 9,153 | | | | 9,153 | | | | — | | | | — | | | | — | | | | — | | | | 9,154 | | | | (528 | ) | | | 8,684 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS | | | 297,700 | | | | 189,263 | | | | 7,994 | | | | 17,664 | | | | — | | | | 82,779 | | | | 294,686 | | | | (1,808 | ) | | | 297,789 | | | | (479 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | HEL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 470,866 | | | | 124,936 | | | | 88,402 | | | | 89,465 | | | | 27,984 | | | | 140,079 | | | | 442,173 | | | | (64,076 | ) | | | 378,992 | | | | (4,573 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 176,611 | | | | — | | | | 176,611 | | | | — | | | | — | | | | — | | | | 176,592 | | | | (21,437 | ) | | | 155,155 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total PLMBS | | $ | 945,177 | | | $ | 314,199 | | | $ | 273,007 | | | $ | 107,129 | | | $ | 27,984 | | | $ | 222,858 | | | $ | 913,451 | | | $ | (87,321 | ) | | $ | 831,936 | | | $ | (5,052 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
80
Weighted-average market activity so that the inputs may not be market based and observable. All private-label mortgage-backed securities were classified as held-to-maturity and were recorded in the balance sheet at their carrying values. Carrying valueprice offers an analysis of a security is the same as its amortized cost, unless the security is determined to be OTTI. In the period the security is determined to be OTTI, its carrying value is generally adjusted down to its fair value. Prior to the adoption of the new pricing methodology in the prior year third quarter, the Bank used a similar process that utilized three third-party vendors and similar variance thresholds. This change in pricing methodology did not have a significant impact on the Bank’s estimated fair values of its mortgage-backed securities.
Forunrealized loss percentage; a comparison of carrying values and fair valuesthe weighted-average credit support to weighted-average collateral delinquency percentage is another indicator of the credit support available to absorb potential cash flow shortfalls.
Table 5.10: Weighted-Average Market Price of MBS | | | | | | | | | | | | | | | March 31, 2011 | | | | Original | | | | | | | | | | Weighted- | | | Weighted- | | | Weighted-Average | | | | Average Credit | | | Average Credit | | | Collateral | | Private-label MBS | | Support % | | | Support % | | | Delinquency % | | RMBS | | | | | | | | | | | | | Prime | | | | | | | | | | | | | 2006 | | | 3.84 | % | | | 5.32 | % | | | 8.32 | % | 2005 | | | 2.46 | | | | 4.55 | | | | 3.50 | | 2004 and earlier | | | 1.59 | | | | 3.68 | | | | 0.81 | | | | | | | | | | | | Total RMBS Prime | | | 2.08 | | | | 4.09 | | | | 2.42 | | Alt-A | | | | | | | | | | | | | 2004 and earlier | | | 11.23 | | | | 33.59 | | | | 8.20 | | | | | | | | | | | | Total RMBS | | | 2.39 | | | | 5.09 | | | | 2.61 | | | | | | | | | | | | HEL | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 57.42 | | | | 32.08 | | | | 17.26 | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 100.00 | | | | 27.15 | | | | 3.25 | | | | | | | | | | | | Total Private-label MBS | | | 49.54 | % | | | 23.25 | % | | | 10.28 | % | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, 2010 | | | | Original | | | | | | | | | | Weighted- | | | Weighted- | | | Weighted-Average | | | | Average Credit | | | Average Credit | | | Collateral | | Private-label MBS | | Support % | | | Support % | | | Delinquency % | | RMBS | | | | | | | | | | | | | Prime | | | | | | | | | | | | | 2006 | | | 3.81 | % | | | 5.30 | % | | | 6.94 | % | 2005 | | | 2.52 | | | | 4.29 | | | | 3.05 | | 2004 and earlier | | | 1.56 | | | | 3.40 | | | | 0.65 | | | | | | | | | | | | Total RMBS Prime | | | 2.08 | | | | 3.86 | | | | 2.04 | | Alt-A | | | | | | | | | | | | | 2004 and earlier | | | 11.11 | | | | 33.38 | | | | 7.42 | | | | | | | | | | | | Total RMBS | | | 2.36 | | | | 4.76 | | | | 2.20 | | | | | | | | | | | | HEL | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 57.15 | | | | 64.57 | | | | 17.26 | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 100.00 | | | | 100.00 | | | | 3.51 | | | | | | | | | | | | Total Private-label MBS | | | 47.90 | % | | | 52.36 | % | | | 9.95 | % | | | | | | | | | | |
Definitions: Original Weighted-Average Credit Support percentagerepresents the arithmetic mean of a cohort of securities by vintage; credit support is defined as the credit protection level at the time the mortgage-backed securities see Notes 4 and 5 to the unaudited financial statements in this report. In the Statement of Conditions in this Form 10Q, the carrying values of certain HTM securities determined to be OTTI were written down to $8.1 million, their fair values, which were classifiedclosed. Support is expressed as Level 3 financial instruments within the fair value hierarchy. This determination was made based on management’s view that the private-label instruments may not have an active market becausea percentage of the specific vintagesum of: subordinate bonds, reserve funds, guarantees, overcollateralization, divided by the original collateral balance.
Weighted-Average Credit Support percentagerepresents the arithmetic mean of a cohort of securities by vintage; credit support is defined as the credit protection level as of the impairedmortgage-backed securities most current payment date. Support is expressed as well as inherent conditions surroundinga percentage of the trading of private-label mortgage-backed securities. For more information about the corroboration and other analytical procedures performedsum of: subordinate bonds, reserve funds, guarantees, overcollateralization, divided by the FHLBNY, see Note 1 — Significant Accounting Policies and Estimates, and Note 17 — Fair valuesmost current unpaid collateral balance.
Weighted-average collateral delinquency percentagerepresents the arithmetic mean of financial instruments to the financial statements accompanying this report. Examplesa cohort of securities priced under such a valuation technique, which are classified within Level 2by vintage: collateral delinquency is defined as the sum of the valuation hierarchy and valued usingunpaid principal balance of loans underlying the “market approach” as definedmortgage-backed security where the borrower is 60 or more days past due, or in bankruptcy proceedings, or the accounting standards for fair value measurements and disclosures, include GSE issued collateralized mortgage obligations and money market funds.loan is in foreclosure, or has become real estate owned divided by the aggregate unpaid collateral balance. 81
Short-term investments The FHLBNY typically maintains substantial investments in high quality, short- and intermediate-term financial instruments, such as certificates of deposit, as well as overnight and term Federal funds sold to highly rated financial institutions. These investments provide the liquidity necessary to meet members’ credit needs. Short-term investments also provide a flexible means of implementing the asset/liability management decisions to increase liquidity. The Bank investsmay also invest in certificates of deposit with maturities not exceeding 270 days and issued by major financial institutions. Certificates of deposit areinstitutions, and would be recorded at amortized cost basis and designated as held-to maturityheld-to-maturity investment. No certificates of deposit were outstanding at the current quarter-end or at December 31, 2009. Federal funds sold- Historically, the FHLBNY has been a provider of Federal funds to its members, allowing the FHLBNY to warehouse and provide balance sheet liquidity to meet unexpected member borrowing demands. See Table 16, Investment by Categories, forFor more details.information, see Tables 5.1— 5.10. Cash collateral pledged-— Cash deposited by the FHLBNY as pledged collateral to derivative counterparties is reported as a deduction to Derivative liabilities in the Statements of Condition. The FHLBNY generally executes derivatives with major financial institutions and typically enters into bilateral collateral agreements. When the FHLBNY’s derivatives are in a net unrealized loss position, as a liability from the FHLBNY’s perspective, counterparties are exposed and the FHLBNY would be called upon to pledge cash collateral to mitigate the counterparties’ credit exposure. Collateral agreements include certain thresholds and pledge requirements that are generally triggered if exposures exceed the agreed upon thresholds. At the current quarter-end and at December 31, 2009, the Bank had deposited $3.8 billion and $2.2 billion in interest-earning cash as pledged collateral to derivative counterparties. Typically, such cash deposit pledges earn interest at the overnight Federal funds rate. For more information, see Table 27: Derivative Financial Instruments by Hedge Designation.Tables 9.1 — 9.5. Mortgage Loans Held-for-Portfolio The portfolio of mortgage loans was primarily comprised of investments in Mortgage Partnership Finance loans (“MPF” or “MPF Program”) and Community Mortgage Asset loans (“CMA”). More details about the MPF program can be found in Mortgage Partnership Finance Program under the caption Acquired Member Assets Program in the Bank’s most recent Form 10-K filed on March 25, 2010. In the CMA program, the FHLBNY holds participation interests in residential and community development mortgage loans. Acquisition of participations under the CMA program was suspended indefinitely in November 2001 and the loans are being paid down under their contractual terms.2011. MPF Program- Paydowns slightly outpaced acquisitions in 2010. The FHLBNY does not expect the MPF loans to increase substantially, and the Bank provides this product to its members as another alternative for them to sell their mortgage production. CMA Program- The amortized cost basisfollowing table summarizes Mortgage Partnership Finance Loans (“MPF” or “Mortgage Partnership Finance program”) by loss layer structure product types (in thousands):
Table 6.1: MPF by Loss Layers | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | | | | Original MPF | | $ | 358,201 | | | $ | 343,925 | | MPF 100 | | | 22,170 | | | | 23,591 | | MPF 125 | | | 421,467 | | | | 392,780 | | MPF 125 Plus | | | 462,675 | | | | 494,917 | | Other | | | 6,491 | | | | 9,408 | | | | | | | | | Total MPF Loans * | | $ | 1,271,004 | | | $ | 1,264,621 | | | | | | | | |
| | | * | | Par amount of total mortgage loan held-for-portfolio includes CMA, par amount at March 31, 2011 was $0.3 million. |
Original MPF— The first layer of losses is applied to the First Loss Account provided by the Bank. The member then provides a credit enhancement up to “AA” rating equivalent. Any credit losses beyond the first two layers, though a remote possibility, would be absorbed by the FHLBNY. MPF 100— The first layer of losses is applied to the First Loss Account provided by the Bank. Losses incurred in the First Loss Account are deducted from credit enhancement fees payable to the member after the third year. The member then provides a credit enhancement up to “AA” rating equivalent less the amount placed in the FLA. The Bank absorbs any losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses). Credit losses beyond the first two layers, though a remote possibility, would be absorbed by the FHLBNY. MPF 125— The first layer of losses is applied to the First Loss Account provided by the Bank. Losses incurred in the First Loss Account are deducted from the credit enhancement fees payable to the member. The member then provides a credit enhancement up to “AA” rating equivalent less the amount placed in the FLA. The Bank absorbs any losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses). Credit losses beyond the first two layers, though a remote possibility would be absorbed by the FHLBNY. MPF Plus— The first layer of losses is applied to the First Loss Account (“FLA”) in an amount equal to a specified percentage of loans in the CMA program, which haspool as of the sale date. Losses incurred in the First Loss Account are deducted from the credit enhancement fees payable to the member. The Bank absorbs any losses incurred in the FLA that are not been active since 2001, has been declining steadily over time, and wasrecovered through credit enhancement fees (should the pool liquidate prior to repayment of losses) The member acquires an additional Credit Enhancement (“CE”) coverage through a supplemental mortgage insurance policy (“SMI”) to cover second-layer losses that exceed the deductible (“FLA”) of the Supplemental Mortgage Insurance policy. Losses not material.covered by the First Loss Account or Supplemental Mortgage Insurance coverage will be paid by the member’s Credit Enhancement obligation up to “AA” rating equivalent. The Bank would absorb losses that exceeded the Credit Enhancement obligation, though such losses are a remote possibility. 9082
Mortgage loans by loan type— Conventional and Insured Loans. The following table presents information onclassifies mortgage loans held-for-portfolio (dollars inbetween conventional loans and loans insured by FHA/VA (in thousands): Table 22:6.2: Mortgage Loans by Loan Type— Conventional and Insured Loans | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | Percentage | | | | | | | Percentage | | | | Amount | | | of Total | | | Amount | | | of Total | | Real Estate: | | | | | | | | | | | | | | | | | Fixed medium-term single-family mortgages | | $ | 344,781 | | | | 27.20 | % | | $ | 388,072 | | | | 29.43 | % | Fixed long-term single-family mortgages | | | 918,967 | | | | 72.50 | | | | 926,856 | | | | 70.27 | | Multi-family mortgages | | | 3,827 | | | | 0.30 | | | | 3,908 | | | | 0.30 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total par value | | | 1,267,575 | | | | 100.00 | % | | | 1,318,836 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unamortized premiums | | | 10,027 | | | | | | | | 9,095 | | | | | | Unamortized discounts | | | (4,700 | ) | | | | | | | (5,425 | ) | | | | | Basis adjustment1 | | | 322 | | | | | | | | (461 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total mortgage loans held-for-portfolio | | | 1,273,224 | | | | | | | | 1,322,045 | | | | | | Allowance for credit losses | | | (5,537 | ) | | | | | | | (4,498 | ) | | | | | | | | | | | | | | | | | | | | Total mortgage loans held-for-portfolio after allowance for credit losses | | $ | 1,267,687 | | | | | | | $ | 1,317,547 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | | | | Federal Housing Administration and Veteran Administration insured loans | | $ | 6,212 | | | $ | 5,610 | | Conventional loans | | | 1,264,513 | | | | 1,255,212 | | Others | | | 279 | | | | 3,799 | | | | | | | | | Total par value | | $ | 1,271,004 | | | $ | 1,264,621 | | | | | | | | |
| | | 1 | | Represents fair value basis of open and closed delivery commitments. |
Mortgage Loans — Credit Enhancement The amount of the credit enhancement is computed with the use of a Standard & Poor’s model to determine the amount of credit enhancement necessary to bring a pool of uninsured loans to “AA” credit risk. The credit enhancement becomes an obligation of the Participating Financial Institution. For taking on the credit enhancement obligation, the Participating Financial Institution receives a credit enhancement fee that is paid by the FHLBNY. For certain Mortgage Partnership Finance products, the credit enhancement fee is accrued and paid each month. For other Mortgage Partnership Finance products, the credit enhancement fee is accrued and paid monthly after the FHLBNY has accrued 12 months of credit enhancement fees. The portion of the credit enhancement that is an obligation of the Participating Financial Institution (“PFI”) must be fully secured with pledged collateral. A portion of the credit enhancement may also be covered by insurance, subject to limitations specified in the Acquired Member Assets regulation. Each member or housing associate that participates in the Mortgage Partnership Finance program must meet financial performance criteria established by the FHLBNY. In addition, each approved PFI must have a financial review performed by the FHLBNY on an annual basis. The second layer is that amount of credit obligation that the Participating Financial Institution has taken on, which will equate the loan to a double-A rating. The FHLBNY pays a Credit Enhancement fee to the Participating Financial Institution for taking on this obligation. The FHLBNY assumes all residual risk. Loan concentration was in New York State, which is to be expected since the largest two PFIs are located in New York. Table 6.3: Concentration of MPF Loans | | | | | | | | | | | | | | | | | | | Concentration of MPF Loans | | | | March 31, 2011 | | | December 31, 2010 | | | | Number of | | | Amounts | | | Number of | | | Amounts | | | | loans % | | | outstanding % | | | loans % | | | outstanding % | | | | | | | | | | | | | | | | | | | New York State | | | 72.9 | % | | | 66.3 | % | | | 73.3 | % | | | 67.7 | % |
Deposit Liabilities Deposit liabilities comprised of member deposits and, from time-to-time,time to time, may also include unsecured overnight borrowings from other FHLBanks. Member deposits-— The FHLBNY operates deposit programs for the benefit of its members. Deposits are primarily short-term in nature, with the majority maintained in demand accounts that reprice daily based upon rates prevailing in the overnight Federal funds market. Members’ liquidity preferences are the primary determinant of the level of deposits. Deposits at current quarter-endMarch 31, 2011 stood at $3.7$2.5 billion, an increase of $1.0 billion fromslightly above the balancebalances at December 31, 2009, primarily due to deposits placed by a U.S. government agency.2010. The Bank may accept deposits from governmental and semi-governmental institutions in addition to member deposit. Fluctuations in member deposits have little impact on the Bank and are not a significant source of liquidity for the Bank. Borrowings from other FHLBanksFHLBanks — The Bank borrows from other FHLBanks, generally for a period of one day and at market terms. There were no significant borrowings in the 2010 three quarters.any periods in this report. 83
Debt Financing Activity and Consolidated Obligations Consolidated obligations, which consist of consolidated bonds and consolidated discount notes, are the joint and several obligations of the FHLBanks and are the principal funding source for the FHLBNY’s operations and consist of consolidated bonds and consolidated discount notes.operations. Discount notes are consolidated obligations with maturities of up to 365 days, and consolidated bonds have maturities of one year or longer. Member deposits, capital, and to a lesser extent borrowings from other FHLBanks, are also funding sources. Consolidated Obligation Liabilities The issuance and servicing of consolidated obligations debt are performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Agency. Each FHLBank independently determines its participation in each issuance of consolidated obligations based on, among other factors, its own funding and operating requirements, maturities, interest rates, and other terms available for consolidated obligations in the market place. Although the FHLBNY is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. The FHLBanks, including the FHLBNY, have emphasized diversification of funding sources and channels as the need for funding from the capital markets has grown. The two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP issue programs as described below. The FHLBNY participates in both programs. The Global Debt Program provides the FHLBanks with the ability to distribute debt into multiple primary markets across the globe. The FHLBank global debt issuance facility has been in place since July 1994. FHLBank global bonds are known for their variety and flexibility; all can be customized to meet changing market demand with different structures, terms and currencies. Global Debt Program bonds are available in maturities ranging from one year to 30 years with the majority of global issues between one and five years. The most common Global Debt Program structures are bullets, floaters and fixed-rate callable bonds with maturities of one through ten years. Issue sizes are typically from $500 million to $5 billion and individual bonds can be reopened to meet additional demand. Bullets are the most common global bonds, particularly in sizes of $3 billion or larger. 91
In mid-1999, the Office of Finance implemented the TAP issue program on behalf of the FHLBanks. This program consolidates domestic bullet bond issuance through daily auctions of common maturities by reopening previously issued bonds. Effectively, the program has reduced the number of separate FHLBanks bullet issues and individual issues have grown as large as $1.0 billion. The increased issue sizes have a number of market benefits for investors, dealers and the 12 FHLBanks. TAP issues have improved market awareness, expanded secondary market trading opportunities, improved liquidity and stimulated greater demand from investors and dealers seeking high-quality Government Sponsored Enterprises securities with U.S. Treasury-like characteristics. The TAP issues follow the same 3-month quarterly cycles used for the issuance of “on-the-run” Treasury securities and also have semi-annual coupon payment dates (March, June, September and December). The coupons for new issues are determined by the timing of the first auction during a given quarter. The FHLBanks also issue global consolidated obligations-bonds.obligation bonds. Effective in January 2009, a debt issuance process was implemented by the FHLBanks and the Office of Finance to provide a scheduled monthly issuance of global bullet consolidated obligation bonds. As part of this process, management from each of the FHLBanks will determine and communicate a firm commitment to the Office of Finance for an amount of scheduled global debt to be issued on its behalf. If the FHLBanks’ orders do not meet the minimum debt issue size, the proceeds are allocated to all FHLBanks based on the larger of the FHLBank’s commitment or allocated proceeds based on the individual FHLBank’s capital to total system capital. If the FHLBanks’ commitments exceed the minimum debt issue size, the proceeds are allocated based on relative capital of the FHLBanks’FHLBanks with the allocation limited to the lesser of the allocation amount or actual commitment amount. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. The FHLBanks can, however, pass on any scheduled calendar slot and not issue any global bullet consolidated obligation bonds upon agreement of eight of the 12 FHLBanks. The FHLBanks, including the FHLBNY, continue to issue debt that is both competitive and attractive in the marketplace. In addition, the FHLBanks continuously monitor and evaluate their debt issuance practices to ensure that consolidated obligations are efficiently and competitively priced. Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices may include the London Interbank Offered Rate (“LIBOR”), Constant Maturity Treasury (“CMT”), 11th District Cost of Funds Index (“COFI”), Prime rate, the Federal funds rate, and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate bonds may also contain certain features that will result in complex coupon payment terms and call options. When the FHLBNY cannot use such complex coupons to hedge its assets, FHLBNY enters into derivative transactions containing offsetting features that effectively convert the terms of the bond to those of a simple variable-rate bond. The consolidated obligations, beyond having fixed- or variable-rate coupon payment terms, may also be Optional Principal Redemption Bonds (callable bonds) that the FHLBNY may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings. 84
Highlights — Debt issuance and funding management The FHLBNY’s consolidated obligations outstanding has contracted, at current quarter-end from December 31, 2009 in part due to the contraction of the Bank’s advance business and in part due to reduction in overall funding requirements, as the Bank has also been cautious about increasing its investment portfolios. However, the primary source of funds for the FHLBNY continued to be through issuance of consolidated bonds and discount notes. Reported amounts Financing (utilization of consolidated obligations outstanding, comprising of bonds and discount notes, at September 30, 2010 and December 31, 2009, were $92.7 billion and $104.8 billion, and funded 89.9% and 91.6% of Total assets at those dates. These financing ratios haveFHLBank issued debt) ratio has remained substantially unchanged over the years at around 90 percent, indicative of the stable funding strategy pursued by the FHLBNY. Fixed-rate non-callable debt remains the largest component of consolidated obligation debt. Earlier in the 2010In early 2011 first quarter, in response to market conditions for FHLBank debt, the FHLBNY shifted its funding strategy, reducing its issuance of discount notes while increasing the utilization of callable debt. In the second quarter, as market pricing of discount notes became relatively more attractive, the FHLBNY increased issuance of discount notes to replace callable bonds that had been called or had naturally matured. In the third quarter, as discount note pricing and spreads became less attractive, issuances of discount notes declined. Market trends for FHLBank bonds and discount notes and tactical changes in funding mix
While in 2009, key investors from Asia had reduced acquisitions of FHLBank debt and limited their participation in debt issuances, in 2010, there is now encouraging signs of the return of central banks from Asia to FHLBank debt issuances and increased participation in the debt offerings. In 2010, central banks in the Americas have also been strong buyers of “Global” FHLBank bonds in the 2010 second quarter. The most active issues were the 3-year and 2-year new issue Global bullets. The cost of long-term debt issuance has continued to be under pressure through the 2010 third quarter.
FHLBank consolidated obligation bonds
2010 first quarter- Several government support programs, including the Federal Reserve’s Agency debt program, expired during the 2010 first quarter. With the absence of Fed purchasing GSE debt, spreads deteriorated, with March 2010 witnessing the lowest weighted-average monthly bond pricing spreads since February 2009. At the same time, compression of swapped funding levels of FHLBank consolidated bonds to LIBOR had effectively driven up the cost of funding for the FHLBank debt, as much of FHLBank fixed-rate debt is swapped back to LIBOR.
92
2010 second quarter- Several factors helped improve the pricing of FHLBank issued discount notes were not favorable and spreads to LIBOR were generally in the FHLBank debt. First, the 3-month LIBOR index had risensingle digits. In March 2011 pricing improved, and spreads widened to 53around 15-18 basis points from around 25 basis points at March 31, 2010. That brought some relief to the FHLBank debt spreads (to LIBOR). Second, a decline in the availability of competing GSE issued debt in the 2010 second quarter also helped to improve funding costs of FHLBank debt. Lastly, the credit concerns in Europe heightened credit risk about sovereign debt and inter-bank lending, resulting in a flight to quality to FHLBank short-term debt. By the close of the 2010 second quarter, debt costs had improved for almost all short-term FHLBank debt. Cost of bullet bonds (non-callable, non-amortizing) was more favorable for all maturities with the exception of longer-term maturities. Investor demand had been particularly strong for bullets with maturities of less than 15 months. Cost ofbelow LIBOR. Short-term callable bonds improved onwith ultra short lock-out periods (before option exercise) were also popular as they provided a swapped out basis to 3-month LIBOR in parallel with the 3-month LIBOR rising to 53 basis points. Cost of callable step-up bonds also improved and“yield pick-up” for investors. With a short-lockout, investor interest warmed as the structure can be used as an effective hedge by investors in a rising rate environment. Some investors also saw opportunities in investing in step-up bonds on the assumptionexpectation is that the step-up callable bond wouldwill be called onat the first callexercise date, and the investor would benefit from the higher yield on the step-up bond relative to alternativea “yield pick-up” over an equivalent tenor short-term investment. Investor demand for floating-rateTerm FHLBank bonds was weak and volume was down.
2010 third quarter- Shrinking FHLBanks’ balance sheets and the resulting lower issuances have adversely compressed spreads. Evidence of a slowing economy has caused yields to fall for potential investors, who are, for the most part, cash rich. At the same time, callable bond redemptions are on the rise in a low interest rate environment, and this too has added to investor’s liquidity. All of these factors have driven investors to seek out ways to reinvest, driving intermediate-term callable bond spreads tighter. As a result of these factors, investor demand has shifted towards the shorter lockout (3-months or shorter) short-maturity callable bonds, also on the assumption that the callable bonds would be called on the first call date and investor would benefit from higher yield on the callable bond. Bullet bond issuances have declined for the same reason — investor perception of relatively low yields.
The outlook for the issuances of longer-term debt is still uncertain. It remains uneconomical for the FHLBanks to issue longer-term debt. Yields demanded by investors for longer-term FHLBank debt and spreads between 3-month LIBOR and FHLBank long-term debt yield have remainedwere priced at levels that make it expensive for the FHLBNY to issue term debt and offer longer-term advances to members even if there was sufficient investor demand for such debt.
FHLBank consolidated obligation discount notes
2010 first quarter- In the prior year, the U.S. money market funds had become key drivers of the increased demand for FHLBank discount notes. That changed in the 2010 first quarter as money market funds experienced a steady outflow of funds, limiting additional demand for discount notes longer than 2-months. With credit markets returning to normalcy in early 2010, money market fund balances declined, demand for discount notes declined, resulting in lower volumes of issuances of discount notes in the 2010 first quarter.
2010 second quarter- However, relief was in sight for the FHLBank discount notes with the amendments to SEC’s Rule 2a-7, effective May 28, 2010, that tightened the credit restrictions on money market funds, who are now required to purchase a greater percentage of “first tier” securities. This benefited FHLBank issued discount notes due to the triple A rating ascribed to the debt. The FHLBank discount notes also benefited as money market funds actively purchased discount notes out to 60 days, since these maturities are categorized as weekly liquid assets under the revised Rule 2a-7. The combination of the liquidity and maturity requirements coupled with limits on second tier securities had a favorable impact on pricing levels in the short end of the FHLBank discount note curve. Pricing along the longer end of the discount note curve had also improved. Investors sought out the high credit quality of FHLBank discount notes because of heightened inter-bank counterparty credit risk in light of European sovereign concerns. The cost of discount notes in June 2010 was lower for the length of the discount note curve, relative to equivalent term LIBOR, a key benchmark for the FHLBanks.
2010 third quarter -The 3-month LIBOR declined to levels in the first quarter. Since the FHLBank discount note is offered at yields below the equivalent LIBOR, declining rates tend to compress the spread to LIBOR and typically results in adverse pricing for the FHLBank debt. Further declines in short-term yields would have created further erosion of discount notevery tight spreads to LIBOR but it appears that yield volatility may have been stabilizedall through the 2011 first quarter. Longer term bond pricing remains prohibitively expensive as investors are reluctant to take the risk of locking in long-term investments without a step-up option which would protect yields when rates eventually rise.
Debt extinguishment— The following table summarizes debt transferred to or from another FHLBank and debt retired by the FRB’s actionFHLBNY (in thousands): Table 7.1: Transferred and Retired Debt | | | | | | | | | | | Three months ended March 31, | | | | 2011* | | | 2010* | | Debt transferred to another FHLBank | | $ | 150,000 | | | $ | — | | | | | | | | | Debt transferred from another FHLBank | | $ | — | | | $ | — | | | | | | | | | Debt extinguished | | $ | 328,560 | | | $ | — | | | | | | | | |
In the 2011 first quarter, debt transfer and retirement resulted in a charge to ensure support for Treasury bills by weekly auctionNet income of bills, just sufficient to meet maturing bills. That action will stabilize Treasury bill supply, stabilize Repo yields, and should prevent further discount note spread erosion.$52.0 million. 93
Consolidated obligation bonds The following summarizes types of bonds issued and outstanding (dollars in thousands): Table 23:7.2: Consolidated Obligation Bonds by Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Percentage | | Percentage | | | Percentage | | Percentage | | | | Amount | | of Total | | Amount | | of Total | | | Amount | | of Total | | Amount | | of Total | | | | Fixed-rate, non-callable | | $ | 46,800,200 | | | 63.48 | % | | $ | 48,647,625 | | | 66.31 | % | | $ | 38,662,070 | | | 56.93 | % | | $ | 43,307,980 | | | 61.01 | % | Fixed-rate, callable | | 6,321,300 | | 8.57 | | 8,374,800 | | 11.42 | | | 9,260,000 | | 13.64 | | 8,821,000 | | 12.43 | | Step Up, non-callable | | — | | — | | 53,000 | | 0.07 | | | — | | — | | — | | — | | Step Up, callable | | 2,180,000 | | 2.96 | | 3,305,000 | | 4.51 | | | 3,015,000 | | 4.44 | | 2,725,000 | | 3.84 | | Single-index floating rate | | 18,428,000 | | 24.99 | | 12,977,500 | | 17.69 | | | 16,968,000 | | 24.99 | | 16,128,000 | | 22.72 | | | | | | | | | | | | | | | | | | | | | | | Total par value | | 73,729,500 | | | 100.00 | % | | 73,357,925 | | | 100.00 | % | | 67,905,070 | | | 100.00 | % | | 70,981,980 | | | 100.00 | % | | | | | | | | | | | | | | | Bond premiums | | 145,239 | | 112,866 | | | 176,028 | | 163,830 | | Bond discounts | | | (27,718 | ) | | | (33,852 | ) | | | | (30,211 | ) | | | (31,740 | ) | | Fair value basis adjustments | | 1,060,537 | | 572,537 | | | 473,369 | | 622,593 | | Fair value basis adjustments on terminated hedges | | 1,099 | | 2,761 | | | 468 | | 501 | | Fair value option valuation adjustments and accrued interest | | 10,236 | | | (4,259 | ) | | | 5,257 | | 5,463 | | | | | | | | | | | | | | | | Total bonds | | $ | 74,918,893 | | $ | 74,007,978 | | | $ | 68,529,981 | | $ | 71,742,627 | | | | | | | | | | | | |
FHLBNY — Tactical changes in the funding mix In 2010, theThe FHLBNY issued fixed-ratefixed- and floating-rate bonds, and discount notes in a mix of issuances to achieve its asset/liability management goals and to be responsive to the changing market dynamics. The issuance of bonds has been the primary financing vehicle for the Bank, although the use of term and overnight discount notes remains vital sources of funding because of the ease of issuance of discount notes as a flexible funding tool for day-to-day operations.
2010 first quarter- As investor demand The 3-month LIBOR index is a vital indicator as the FHLBNY attempts to execute interest rate swaps to synthetically convert fixed-rate cash flows to sub-LIBOR cash flows, earning the FHLBNY a spread. In addition, the use of interest rate swaps effectively changes the repricing characteristics of a significant portion of the FHLBNY’s fixed-rate consolidated obligation debt (and fixed rate medium and long-term advances offered to members) to match shorter-term LIBOR rates that reprice at intervals of three months or less. When the Bank executes an interest rate swap to change the fixed payments on its debt to a LIBOR rate, it results in the 2010 first quarter shifted away from discount notes to callable debt, the FHLBNY was also opportunistic in pursuing the debt structure most in demand at a reasonable price consistent with the Bank’s asset/liability match. The Bank shifted its funding mix between bonds and discount notes, reducing its issuance of discount notes. The money-market sector, which had become a significant investor segment for FHLBank discount notes during muchrecognition of the credit crisis, was seeking short-term investments that offered a higher rate of return. As a result, discount note pricing was adversely impacted, spreads to LIBOR narrowed, and as a funding tool, discount notes were no longer as attractive as they had been inspread (between the prior year.
In the 2010 first quarter, spread deterioration was not just isolated to FHLBank discounts notes but across to short-callable bonds as well, although not as significantly. Since December 31, 2009, the weighted-average bond funding costs deteriorated relative 3-month LIBOR and resulted in increased funding costs on debt swapped to 3-month LIBOR. While short-term callable bond spreads to LIBOR also worsened, the spread compression had been relatively small compared to other FHLBank debt structures. Callable bonds became an attractive funding alternative in the 2010 first quarter. Investor demand for short and medium-term callable bonds with call lock-outs of 1-year or less was encouragingfixed payments and the FHLBNY increased issuance of callable bonds. These structures tended to fill inLIBOR cash receipts) as a substitute for discount notes. Swapped short-lockout callable bonds offeredthe FHLBNY’s effective durations that could be as short as a term discount note. In the falling interest rate environment, the swap counterparty is likely to exercise its rights to terminate the swap at the first exercise opportunity, and the FHLBNY would also exercise its right and terminate the debt.
2010 Second quarter- Discount notes made a comeback with increased investor demand for the 60-day maturity notes as a result of the amendment to SEC’s Rule 2a-7 that impacted the money market industry, and resulted in improved pricing for FHLBank discount notes. Cost of funding on the long-end of the discount note curve also improved as investors shifted from bank certificates of deposit and other form of debt to higher quality FHLBank debt because of sovereign and increased counterparty risk concerns in Europe. In response, the FHLBNY increased issuance of discount notes in June 2010, replacing significant amounts of called and maturing bonds with new issuances of discount notes.
2010 Third quarter -As interest rates declined further incost. Consequently, the current quarter,level of spread between the 3-month LIBOR rate and the swap rate for a fixed-rate FHLBank debt has an important benchmark forimpact on the FHLBNY’s funding strategy declinedprofitability. Also, the change in the absolute level of the index tends to impact the sub-LIBOR spread, which in turn impacts interest margin and resulted in adverse spread compression. In response, the FHLBNY reduced issuance of discount notes, instead relying on floating-rate notes and bullet bonds to replace maturing discount notes.
The principal tactical funding strategy changes employed in executing issuances of FHLBank bonds are outlined below:
• | | Floating rate bonds- Floating-rate bonds had declined steadily through the four quarters in 2009 and in the 2010 first two quarter. In those periods, maturing floating-rate bonds in general were not replaced because of marketplace perception of a pricing advantage of comparable GSE issued LIBOR-indexed floaters. In the 2010 third quarter, the Bank added (net of maturities) $7.6 billion of floating-rate debt. As a result, floating-rate bonds outstanding at September 30, 2010 increased to $18.4 billion, up from $10.8 billion at June 30, 2010 and $13.0 billion at December 31, 2009. The outstanding debt at September 30, 2010 consisted of $12.8 billion indexed to the 1-month LIBOR, the Prime rate and the Federal funds effective rates. By executing interest rate swaps concurrently with the issuances of the floating-rate bonds and swapping the non 3-month LIBOR indices for 3-month LIBOR, the Bank effectively created variable funding that was indexed to 3-month LIBOR, at spreads more favorable than it could have achieved by issuing a simple 3-month LIBOR floating-rate bond. | profitability. 9485
• | | Non-callable bonds- Non-callable bond remains the primary funding vehicle for the FHLBNY. Issuances of non-callable debt are predicated partly on pricing of such debt and investor demand, and partly on the need to achieve asset/liability management goals. The Bank has made a strong effort to issue fixed-rate longer-term debt and lock-in the relative low rates in the current interest-rate environment. This has been a challenge as investor appetite for term debt has continued to be lukewarm, given investor preference for discount notes, short-term bullets and short lock-out callable debt. |
• | | Callable-bonds- In 2010, investors were receptive to the FHLBank short lockout callable bonds with short maturities as an alternative to comparable debt available in the capital markets, and execution pricing fared relatively better even under deteriorating pricing conditions for other types of bond structures. Fixed-rate callable bonds with maturities up to 15 months and a short lockout call option have been the more popular FHLBank bond structure. Responding to investor preference, the FHLBNY issued short lockout callables, with call dates as short as 3 months from issue date. Such debt structures offer an alternative at an attractive pricing to similar maturity discount notes. FHLBank longer-term fixed-rate callable-bonds have not been an attractive investment asset for investors over the last several years, and have continued to be under price pressure. |
With a callable bond, the Bank purchases a call option from the investor and the option allows the Bank to terminate the bond at predetermined call dates at par. When the Bank purchases the call option from investors, it typically lowers the cost to the investor, who has traditionally been receptive to callable-bond yields offered by the FHLBNY.
Debt extinguishment- In 2010, the FHLBNY extinguished $250.0 million consolidated obligation bond at an insignificant gain.
Impact of hedging fixed-rates consolidated obligation bonds The Bank hedges certain fixed-rate debt by the use of both cancellable and non-cancellable interest rate swaps in fair value hedges under the accounting standards for derivatives and hedging. The Bank may also hedge the anticipatory issuance of bonds under the provisions of “cash flow” hedging rules as provided in the accounting standards for derivatives and hedging. Net interest accruals from qualifying interest rate swaps under the derivatives and hedge accounting rules are recorded together with interest expense of consolidated obligation bonds in the Statements of Income. Fair value changes of debt in a qualifying fair value hedge are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivative and hedging activities. An offset is recorded as a fair value basis adjustment to the carrying amount of the debt in the balance sheet. Net interest accruals associated with derivatives not qualifying under derivatives and hedge accounting rules are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. Derivatives are employed to hedge consolidated bonds in the following manner to achieve the indicated principal objectives: The FHLBNY: Makes extensive use of the derivatives to restructure interest rates on consolidated obligation bonds, both callable and non-callable, to better meet its members’ funding needs, to reduce funding costs, and to manage risk in a changing market environment. Converts, at the time of issuance, certain simple fixed-rate bullet and callable bonds into synthetic floating-rate bonds by the simultaneous execution of interest rate swaps that convert the cash flows of the fixed-rate bonds to conventional adjustable rate instruments tied to an index, typically 3-month LIBOR. Uses derivatives to manage the risk arising from changing market prices and volatility of a fixed coupon bond by matching the cash flows of the bond to the cash flows of the derivative and making the FHLBNY indifferent to changes in market conditions. Except when issued to fund MBS and MPF loans, callable bonds are typically hedged by an offsetting derivative with a mirror-image call option and identical terms. Adjusts the reported carrying value of hedged consolidated bonds for changes in their fair value (“fair value basis adjustments” or “fair value”) that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for consolidated obligation bonds in the Statements of Condition include fair value basis adjustments. Lowers its funding cost by the issuance of a callable bond and the execution of an associated interest rate swap with mirrored call options, which results in funding at a lower cost than the FHLBNY would otherwise have achieved. The issuance of callable bonds and the simultaneous swapping with a derivative instrument depends on the price relationships in both the bond and the derivatives markets. 95
The most significant element that impacts balance sheet reporting of debt is the recording of fair value basis and valuation adjustments. In addition, when callable bonds are hedged by cancellable swaps, the possibility of exercise of the call shortens the expected maturity of the bond. The impact of hedging debt on recorded interest expense is discussed in this MD&A under “Results of Operations”. Its impact as a risk management tool is discussed under ItemITEM 3. Quantitative andAnd Qualitative Disclosures aboutDisclosure About Market Risk. Fair value basis and valuation adjustments- The Bank uses interest rate derivatives to hedge the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR, and is also the discounting basis for computing changes in fair values of hedged bonds. The Bank recorded net unrealized fair value basis losses of $1.1 billion and $0.6 billion as partwhich were not significant for all periods in this report primarily because of the carrying valuesrelatively short durations of consolidated obligation bonds in the Statements of Condition at September 30, 2010 and December 31, 2009.hedged bonds. Carrying values of bonds designated under the FVO are also adjusted for valuation adjustments to recognize changes in the full fair value of the bonds elected under the FVO. At September 30, 2010, the fair value basis recorded was in an unrealized loss position of $10.2 million. At December 31, 2009, the fair value basis was in an unrealized gain position of $4.3 million. Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, the value and implied volatility of call options of callable bonds, and from the growth or decline in hedge volume. Hedge volume- As— The following table summarizes par amounts of September 30, 2010 and December 31, 2009,bonds hedged (in thousands): Table 7.3: Bonds Hedged | | | | | | | | | | | Consolidated Obligations Bonds | | Par Amount | | March 31, 2011 | | | December 31, 2010 | | Qualifying Hedges1 | | | | | | | | | Fixed-rate bullet bonds | | $ | 26,664,830 | | | $ | 27,610,830 | | Fixed-rate callable bonds | | | 8,285,000 | | | | 5,905,000 | | | | | | | | | | | $ | 34,949,830 | | | $ | 33,515,830 | | | | | | | | |
| | | 1 | | Under hedge accounting rules |
86
The following table summarizes par amounts of bonds under the Bank hadFVO (in thousands): | | Table 7.4: Bonds under the Fair Value Option (FVO) |
| | | | | | | | | | | Consolidated Obligations Bonds | | Par Amount | | March 31, 2011 | | | December 31, 2010 | | | | | | | | | | | Bonds designated under FVO | | $ | 12,600,000 | | | $ | 14,276,000 | | | | | | | | |
The FHLBNY continued to hedge a significant percentage of its fixed-rate non-callable bonds (also referred to as bullet bonds) under hedge accounting rules. Bonds hedged $32.3 billion and $32.9 billion of fixed-rate consolidated bonds with interest rate swaps. The swaps hedgedunder the fair value hedge accounting rule are to mitigate the fair value risk from changes in the benchmark rate, and were in hedge relationships that qualified under derivatives and hedge accounting rules. These hedges effectively convertedconverts the fixed-rate exposure of the bonds to a variable-rate exposure, generally indexed to 3-month LIBOR. The Bank’s callable bonds contain a call option purchased by the Bank from the investor. Generally, the call option terms mirror the call option terms embedded in a cancellable swap. Under the terms of the call option, the Bank has the right to terminate the bond at agreed upon dates, and the swap counterparty has the right to cancel the swap. At September 30, 2010 and December 31, 2009, outstanding par valueThe Bank also hedges certain bonds under the FVO. Under this accounting rule, the carrying values of consolidated obligation bonds electeddebt (designated under the FVO) are adjusted for changes in the full fair values of the debt, not just for changes in the benchmark rate. Bonds designated under the FVO was $10.8 billion and $6.0 billion. These bonds were alsoeconomically hedged by interest rate swaps, designated as economic hedges, as discusseddescribed below.
Economic hedges-—AtIf at inception of the hedges, the Bank did not believe that the hedges would be highly effective in offsetting fair value changes between the derivative and the bondsdebt (hedged item), and the FHLBNY accountedwould account for the derivatives as freestanding (economic hedge)hedges). UnlessWhen derivatives are designated as an economic hedge of a debt, the Bank may designate the debt under the FVO economic hedges of debt do not generate basis adjustments for the hedged instruments since their carrying values are not adjusted for fair value changes. The carrying values of debt designated under the FVO are adjusted for changes inif operationally practical, and the full fair values of both the derivative and debt would be marked through P&L. The recorded balance sheet value of debt under the FVO would include the fair value basis adjustments so that the debt’s balance sheet carrying values would be its fair value. In other instances, the Bank may decide that the operational cost of designating debt under the FVO (or fair value hedge accounting) is not operationally practical and would opt to hedge the debt on an economic basis to mitigate the economic risks. In this scenario, the balance sheet carrying value of the debt would not just forinclude fair value basis since the debt is recorded at amortized cost. All derivatives, however, are recorded in the balance sheets at fair value with changes in fair values recorded through P&L. The following table summarizes the benchmark rate.bonds that were economically hedged (in thousands): Principal economic hedges are summarized below:Table 7.5: Economically Hedged Bonds
| | | | | | | | | | | Consolidated Obligations Bonds | | Par Amount | | March 31, 2011 | | | December 31, 2010 | | Bonds designated as economically hedged | | | | | | | | | Floating-rate bonds | | $ | 10,053,000 | | | $ | 8,928,000 | | Fixed-rate bonds | | | 430,000 | | | | 115,000 | | | | | | | | | | | $ | 10,483,000 | | | $ | 9,043,000 | | | | | | | | |
Floating-rate debt- At September 30, 2010 and at December 31, 2009, the FHLBNY had hedged $13.4 billion and $8.0 billion of— Hedged floating-rate bonds that were indexed to interest rates other than 3-month LIBOR by entering into swap agreements with derivative counterparties that synthetically converted the floating rate debt cash flows to 3-month LIBOR. The hedge objective was to reduce the basis risk from any asymmetrical changes between 3-month LIBOR and the Prime, Federal funds rate, or the 1-month LIBOR. Such bonds were hedged by interest-rate swaps with mirror image terms and the swaps were designated a stand-alone derivatives because the operational cost of designating the swaps in a hedge qualifying relationship outweighed the benefits. Fixed-rate debt- At September 30, 2010— In a less volatile interest-rate environment at March 31, 2011 and December 31, 2009,2010, the FHLBNY hadwas able to comply with the hedge effectiveness standards under accounting rules, and fewer fixed-rate bonds were designated as hedged $1.5 billion and $13.1 billion of short-term fixed-rate debt. FVOon an economic hedge- At September 30, 2010 and December 31, 2009, the FHLBNY had hedged $10.8 billion and $6.0 billion of short-term bonds designated under the FVO.basis.
Impact of changes in interest raterates to the balance sheet carrying values of hedged bonds- The carrying amounts of consolidated obligation bonds included relative insignificant amounts of fair value basis losses of $1.1 billion at September 30, 2010 and $0.6 billion at December 31, 2009.losses. Changes in fair value basis from one period to another reflect changes in the term structure of interest rates, the shape of the yield curve at the two measurement dates, and the value and implied volatility of call options of callable bonds. Unrealized fair value basis losses were consistent with the forward yield curves at those dates that were projecting forward rates below the fixed-rate coupons of hedge qualifying bonds and bonds designated under the FVO. The flattening of the yield curve at September 30, 2010, with the forward rates well below the same yields projected at December 31, 2009, caused bond fair values to be in a loss position. At September 30, 2010, the yield curve was forecasting 0.64%, 1.29%, and 1.92% on the 3-year, 5-year and 7-year swap curves, compared to 1.67%, 2.68% and 3.38% at December 31, 2009.
Most of the hedged bonds had been issued in prior years at the then prevailing higher interest-rate environment. Since such bonds were typically fixed-rate, in a declining interest rate environment fixed-rate bonds exhibited unrealized fair value basis losses, which were recorded as part of the balance sheet carrying values of the hedged debt. In the Statements of Income, such unrealized losses from fair value basis adjustments on hedged bonds were almost entirely offset by net fair value unrealized gains from derivatives associated with the hedged bonds, thereby achieving the Bank’s hedging objectives of mitigating fair value basis risk. Fair value losses were not significant because the hedged bonds were short- and medium-term on average, and their contractual coupons were not so different than the market interest rates at the balance sheet dates. For the same reason, the period-over-period net fair value basis losses of hedged bonds remained almost unchanged because the FHLBNY has continued to replace maturing and called short-term and medium-term hedged bonds with equivalent term bonds. 9687
Consolidated obligation bonds — maturity or next call date Swapped, callable bonds contain an exercise date or a series of exercise dates that may result in a shorter redemption period. Thus, issuance of a callable bond with an associated callable swap significantly alters the contractual maturity characteristics of the original bond and introduces the possibility of an exercise call date that is significantly shorter than the contractual maturity. The following table summarizes consolidated bonds outstanding by years to maturity or next call date (dollars in thousands): Table 7.6: Consolidated Obligation Bonds — Maturity or Next Call Date | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | Percentage | | | | | | | Percentage | | | | Amount | | | of Total | | | Amount | | | of Total | | Year of Maturity or next call date | | | | | | | | | | | | | | | | | Due or callable in one year or less | | $ | 42,902,200 | | | | 63.18 | % | | $ | 40,228,200 | | | | 56.67 | % | Due or callable after one year through two years | | | 9,578,225 | | | | 14.10 | | | | 15,671,375 | | | | 22.08 | | Due or callable after two years through three years | | | 7,577,250 | | | | 11.16 | | | | 7,209,950 | | | | 10.16 | | Due or callable after three years through four years | | | 2,700,080 | | | | 3.98 | | | | 2,649,355 | | | | 3.73 | | Due or callable after four years through five years | | | 2,717,300 | | | | 4.00 | | | | 2,926,400 | | | | 4.12 | | Due or callable after five years through six years | | | 238,700 | | | | 0.35 | | | | 227,500 | | | | 0.32 | | Thereafter | | | 2,191,315 | | | | 3.23 | | | | 2,069,200 | | | | 2.92 | | | | | | | | | | | | | | | | | | 67,905,070 | | | | 100.00 | % | | | 70,981,980 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bond premiums | | | 176,028 | | | | | | | | 163,830 | | | | | | Bond discounts | | | (30,211 | ) | | | | | | | (31,740 | ) | | | | | Fair value basis adjustments | | | 473,369 | | | | | | | | 622,593 | | | | | | Fair value basis adjustments on terminated hedges | | | 468 | | | | | | | | 501 | | | | | | Fair value option valuation adjustments and accrued interest | | | 5,257 | | | | | | | | 5,463 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 68,529,981 | | | | | | | $ | 71,742,627 | | | | | | | | | | | | | | | | | | | | |
Contrasting consolidated obligation bonds by contractual maturity dates with potential put dates illustrates the impact of hedging on the effective duration of the Bank’s advances. A significant amount of the Bank’s debt has been issued to investors that are callable — the Bank has purchased from investors the option to terminate debt at agreed upon dates. Call options are owned and exercisable by the Bank and are generally either a one-time option or quarterly. The Bank’s current practice is to exercise its option to call a bond when the swap counterparty exercises its option to call the callable swap hedging the callable bond. The volume of callable bonds outstanding in a declining interest rate environment will shorten the “expected” maturities of hedged bonds. The following table summarizes callable bonds outstanding (in thousands): Table 7.7: Outstanding Callable Bonds | | | | | | | | | | | March 31, 2011* | | | December 31, 2010* | | Callable | | $ | 12,275,000 | | | $ | 11,546,000 | | | | | | | | | No longer callable | | $ | 1,015,000 | | | $ | 1,015,000 | | | | | | | | | Non-Callable | | $ | 54,615,070 | | | $ | 58,420,980 | | | | | | | | |
Typically, almost all callable debt is hedged by cancellable interest rate swaps in which the derivative counterparty has the right to exercise and terminate the swap at par at agreed upon dates. Discount Notes Consolidated obligation discount notes provide the FHLBNY with short-term and overnight funds. Discount notes have maturities of up to one year and are offered daily through a dealer-selling group; the notes are sold at a discount from their face amount and mature at par. Through a sixteen-member selling group, the Office of Finance, acting on behalf of the twelve Federal Home Loan Banks, offers discount notes. In addition, the Office of Finance offers discount notes in four standard maturities in two auctions each week. The FHLBNY typically uses discount notes to fund short-term advances, longer-term advances with short repricing intervals, putable advances and money market investments. 88
The following summarizes discount notes issued and outstanding (dollars in thousands): Table 24:7.8: Discount Notes Outstanding | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | | Par value | | $ | 17,791,522 | | $ | 30,838,104 | | | $ | 19,509,575 | | $ | 19,394,503 | | | | | | | | | | | | | | | | Amortized cost | | $ | 17,784,192 | | $ | 30,827,639 | | | $ | 19,504,022 | | $ | 19,388,317 | | Fair value option valuation adjustments | | 3,716 | | — | | | 3,137 | | 3,135 | | | | | | | | | | | | | | | | Total | | $ | 17,787,908 | | $ | 30,827,639 | | | $ | 19,507,159 | | $ | 19,391,452 | | | | | | | | | | | | | | | | Weighted average interest rate | | | 0.19 | % | | | 0.15 | % | | | 0.11 | % | | | 0.16 | % | | | | | | | | | | | |
Discount notes remainremained a popular funding vehicle for the FHLBNY. The efficiency of issuing discount notes is an important element in its use to alter funding tactics relatively rapidly, as discount notes can be issued any time and in a variety of amounts and maturities in contrast to other short-term funding sources, such as the issuance of callable debt with an associated interest rate derivative with matching terms. During the three quarters of 2010, the Bank has shifted its funding mix between bonds and discountDiscount notes reducing or increasing issuance— The following table summarizes hedges of discount notes depending(in thousands):
Table 7.9: Hedges of Discount Notes | | | | | | | | | | | Consolidated Obligations Discount Notes | | Principal Amount | | March 31, 2011 | | | December 31, 2010 | | Discount notes hedged under qualifying hedge | | $ | 150,000 | | | $ | — | | | | | | | | | Discount notes under FVO | | $ | 728,755 | | | $ | 953,202 | | | | | | | | |
In the first quarter of 2011, the Bank entered into an interest rate swap agreement with an unrelated swap dealer and designated it as a hedge of the variable quarterly interest payments on changes in pricing and spreadsa 9-year discount note borrowing program expected to be accomplished by a series of discount notes. In 2010, investor demand forissuances of $150.0 million discount notes has declined relative to 2009.with 91-day terms. The money-market sector, which had become a significant investor segment for FHLBankFHLBNY will continue issuing new 91-day discount notes during muchover the next 9 years as each outstanding discount note matures. The fair value recorded as part of the credit crisis, is now seeking short-term investments that offer a higher ratecarrying value of return. The prevailing low interest rate environment in 2010 has also adversely impactedthe hedged discount note spreadswas an unrealized gain of $1.9 million with an offset to LIBOR, and as a funding tool, discount notes are no longer as attractive as they had been in 2009. In large part, the FHLBNY has stopped the issuance of overnight discount notes, in part because of shortage of a ready source of a risk-free overnight asset to fund profitably, in part as a result of worsening pricing of overnight discount note, and in part because the FHLBNY has determined that term discount notes would better match its regulatory liquidity profile.AOCI. Discount notes outstanding at September 30, 2010 declined to $17.8 billion when spreads narrowed adversely to levels observed in the 2010 first quarter. In the 2010 second quarter, spreads to LIBOR had widened making the funding more attractive, discount notes outstanding rose to $27.5 billion from $19.8 billion at March 31, 2010.
Economic hedges of discount notes- As of September 30, 2010 and December 31, 2009, no discount notes were hedged under the accounting standards for derivatives and hedging. The Bank generally hedgeshad also hedged discount notes in economic hedges under the FVO accounting rules to convert the fixed-rate exposure of the discount notes to a variable-rate exposure, generally indexed to LIBOR. At September 30, 2010, theThe discount notes outstanding as designated under the FVO was $1.8 billion in principal amounts and were economically hedged by interest rate swaps to mitigate fair value risk due to changes in their fair valuesvalues.
Rating Actions With Respect to the FHLBNY are outlined below: On April 19, 2011 Standard & Poor’s Ratings Services today affirmed the ‘AAA’ rating of the notes. There were no discount notes designated underFHLBank but revised its outlooks on the FVO at December 31, 2010. debt issues of the Federal Home Loan Bank System to negative from stable. Concurrently, S&P revised its outlook to negative from stable for the Federal Home Loan Banks in Atlanta, Boston, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka while affirming their ‘AAA’ issuer credit ratings. These rating actions reflect S&P’s revision on April 18, 2011 of the outlook on the long-term sovereign credit rating on the United States of America to negative from stable (AAA/Negative/A-1+). Stockholders’ Capital and Mandatorily Redeemable Capital StockTable 7.10: FHLBNY Ratings
Capital Resources — Stockholders’ CapitalShort-Term Ratings:
The FHLBanks, including FHLBNY, have a unique cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. The member’s stock requirement is based on the amount of mortgage-related assets on the member’s balance sheet and its use of FHLBNY advances, as prescribed by the FHLBank Act, which reflects the value of having ready access to FHLBNY as a reliable source of low-cost funds. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. The shares are not publicly traded. See Note 11 for more information about Capital and Capital ratios.
At September 30, 2010, total capital stock $100 par value, putable and issued and held by members was 46,636,000 shares compared to 50,590,000 shares at December 31, 2009. Members are required to purchase FHLBNY stock in proportion to the volume of advances borrowed. Decrease in capital stock is in line with the decrease in advances borrowed by members.
Stockholders’ Capital- Stockholders’ Capital comprised of capital stock, retained earnings and Accumulated other comprehensive income (loss) (“AOCI”) decreased by $336.3 million at September 30, 2010 from December 31, 2009 primarily because of decrease in capital stock. Retained earnings, after payment of dividends, grew by $12.3 million to $701.2 million at September 30, 2010. For more information about the Bank’s retained earnings policy, refer to the section Retained Earnings and Dividend in the Bank’s Form 10-K filed on March 25, 2010. The loss in AOCI declined by $46.7 million from December 31, 2009. The principal components of AOCI are summarized in Note 13 to the unaudited financial statements accompanying this report. | | | | | | | | | | | | | | | Moody’s Investors Service | | S & P | Year | | Outlook | | Rating | | Short-Term Outlook | | Rating | 2010 | | June 17, 2010 – Affirmed | | P-1 | | July 21, 2010 | | Short-Term rating affirmed | | | | A-1+ | | | | | | | | | | | | | | 2009 | | June 19, 2009 – Affirmed | | P-1 | | July 13, 2009 | | Short-Term rating affirmed | | | | A-1+ | | | February 2, 2009 – Affirmed | | P-1 | | | | | | | | | | | | | | | | | | | | 2008 | | October 29, 2008 – Affirmed | | P-1 | | June 16, 2008 | | Short-Term rating affirmed | | | | A-1+ | | | April 17, 2008 – Affirmed | | P-1 | | | | | | | | | | Long-Term Ratings: | | | | | | | | | | | | | | | | Moody’s Investors Service | | S & P | Year | | Outlook | | Rating | | Long-Term Outlook | | Rating | 2010 | | June 17, 2010 – Affirmed | | Aaa/Stable | | July 21, 2010 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable | | | | | | | | | | | | | | 2009 | | June 19, 2009 – Affirmed | | Aaa/Stable | | July 13, 2009 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable | | | February 2, 2009 – Affirmed | | Aaa/Stable | | | | | | | | | | | | | | | | | | | | | | 2008 | | October 29, 2008 – Affirmed | | Aaa/Stable | | June 16, 2008 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable | | | April 17, 2008 – Affirmed | | Aaa/Stable | | | | | | | | |
9789
Stockholders’ Capital, stockRetained Earnings, and AOCI-Capital stock, par value $100, was $4.7 billion at September 30, 2010, a decline The following table summarizes the components of $395.4 million from December 31, 2009.Stockholders’ capital (in thousands): Table 8.1: Stockholders’ Capital | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | Capital Stock | | $ | 4,323,664 | | | $ | 4,528,962 | | Retained Earnings | | | 716,650 | | | | 712,091 | | Accumulated Other Comprehensive Income (Loss) | | | (97,287 | ) | | | (96,684 | ) | | | | | | | | Total Capital | | $ | 4,943,027 | | | $ | 5,144,369 | | | | | | | | |
Stockholders’ Capital— The declinedecrease in capital stock was consistent with decreases in advances borrowed by members. Since members are required to purchase stock as a percentage of advances borrowed from the FHLBNY, a decline in advances will typically result in a decline in capital stock. In addition, under the Bank’sour present practice, stock in excess of the amount necessary to support advance activity is redeemed daily by the FHLBNY. Therefore, the amount of capital stock outstanding varies directly with members’ outstanding borrowings under the provisions requiring members to purchase stock to support borrowingsexisting regulations and its practice of redeeming excess capital stock.Bank practices. Mandatorily RedeemableRetained earnings— Retained earnings grew marginally as the FHLBNY paid its member/stockholders a significant dividend payout. Net income in the 2011 first quarter was $71.0 million; dividends paid in the period were $66.4 million.
Restricted retained earnings— On February 28, 2011, the FHLBNY entered into a Joint Capital StockEnhancement Agreement (the Agreement) with the other eleven FHLBanks to allocate 20 percent of its Net income (after setting aside funds for the Affordable Housing Program) to restricted retained earnings. The Agreement essentially requires each FHLBank to allocate approximately the same amount from Net income as was historically paid to REFCORP. The FHLBanks’ REFCORP obligations are expected to be fully satisfied in 2011. Currently, an FHLBank is required to contribute 20 percent of its Net income towards payment of interest on REFCORP bonds (after setting aside AHP assessments). Under the Agreement, each FHLBank will continue to allocate from Net income to restricted retained earnings up to a minimum of one percent of consolidated obligations for which the FHLBank is the primary obligor. The FHLBNY’s capital stock is redeemable atAgreement includes provisions that would (1) allow the optionuse of bothrestricted retained earnings if an FHLBank incurs a quarterly or annual net loss, (2) allow the member and the FHLBNY subject to certain conditions. Such capital is considered to be mandatorily redeemable and a liability under the accounting guidance for certain financial instruments with characteristicsrelease of both liabilities and equity. Dividends related to capital stock classified as mandatorily redeemable are accrued at an estimated dividend rate and reported as interest expenserestricted retained earnings in the Statementsevent of Income. Mandatorily redeemable capital stock at September 30, 2010a decline in amount of consolidated obligations with certain restrictions, and December 31, 2009 represented stock held primarily(3) disallow the payments of dividends from restricted retained earnings. The Agreement can be voluntarily terminated by former members who were no longer members by virtuean affirmative vote of being acquired by members of other FHLBanks. Under existing practice, such stock will be repurchased when the stock is no longer required to support outstanding transactions with the FHLBNY. The FHLBNY reclassifies the stock subject to redemption from equity to liability once a member: irrevocably exercises a written redemption right; gives notice of intent to withdraw from membership; or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership.
One member was acquired by a non-member financial institution thus far in 2010. Reduction in mandatorily redeemable stock reflects the fact that the FHLBNY redeemed stock held by former members when advances to the former members matured or were prepaid. Under existing practice, capital stock held by non-members is repurchased at maturitytwo-thirds of the advances borrowed by former members. In accordance withBoards of Directors of the FHLBanks; or automatically, if a change in the Act, Finance Agency regulations, former members and non-members cannot renew their advance borrowings at maturity. Such capital is consideredor other applicable law creates an alternate form of taxation or mandatory level of retained earnings.
The Agreement further requires each FHLBank to be a liability and mandatorily redeemable and subjectsubmit an application to the Finance Agency for approval to amend its capital plan or capital plan submission, as applicable, consistent with the terms of the Agreement. Under the Agreement, if the FHLBanks’ REFCORP obligation terminates before the Finance Agency has approved all proposed capital plan amendments submitted pursuant to the Agreement, each FHLBank will nevertheless be required to commence the required allocation to its separate restricted retained earnings account beginning as of the end of the calendar quarter in which the final payments are made by the FHLBanks with respect to their REFCORP obligations. Depending on the earnings of the FHLBanks, the REFCORP obligations could be satisfied as of the end of the second quarter of 2011. As of the date of this report, the Bank is considering amending its capital plan to incorporate the terms of the Agreement, which, if approved by the Finance Agency, would result in conforming amendments to the Agreement, including, among other things, possible revisions to the termination provisions underand related provisions affecting restrictions on the accounting guidance for certain financial instruments with characteristics of both liabilities and equity.separate restricted retained earnings account. 90
The following table provides roll-forward information with respect to changes in mandatorily redeemable capital stock liabilitiessummarizes the components of AOCI (in thousands): Table 25: Roll-Forward Mandatorily Redeemable Capital Stock
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | Beginning balance | | $ | 69,569 | | | $ | 128,254 | | | $ | 126,294 | | | $ | 143,121 | | Capital stock subject to mandatory redemption reclassified from equity | | | 42 | | | | 434 | | | | 30,308 | | | | 434 | | Redemption of mandatorily redeemable capital stock1 | | | (2,263 | ) | | | (806 | ) | | | (89,254 | ) | | | (15,673 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 67,348 | | | $ | 127,882 | | | $ | 67,348 | | | $ | 127,882 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accrued interest payable | | $ | 794 | | | $ | 1,807 | | | $ | 794 | | | $ | 1,807 | | | | | | | | | | | | | | |
| | | 1 | | Redemption includes repayment of excess stock. | | | | | | (The annualized accrual rates were 4.60% for September 30, 2010 and 5.60% for September 30, 2009.Table 8.2: Accumulated other comprehensive income (loss) (“AOCI”) |
| | | | | | | | | | | Three months ended March 31, | | | | 2011 | | | 2010 | | | | | | | | | | | Accumulated other comprehensive income (loss) | | | | | | | | | Non-credit portion of OTTI on held-to-maturity securities, net of accretion | | $ | (89,271 | ) | | $ | (106,612 | ) | Net unrealized gains on available-for-sale securities | | | 14,979 | | | | 11,521 | | Net unrealized losses on hedging activities | | | (11,468 | ) | | | (20,551 | ) | Employee supplemental retirement plans | | | (11,527 | ) | | | (7,877 | ) | | | | | | | | Total Accumulated other comprehensive income (loss) | | $ | (97,287 | ) | | $ | (123,519 | ) | | | | | | | |
Losses in AOCI primarily represent non-credit portion of OTTI. No new non-credit OTTI losses on private-label securities were identified in the 2011 first quarter. At March 31, 2011, additional OTTI losses recorded on previously impaired securities did not result in additional non-credit OTTI because the market pricing of the credit impaired private-label securities were greater than the carrying values of the OTTI securities. The net decline in the non-credit component of OTTI was due to accretion recorded as a reduction in AOCI losses and a corresponding addition to the balance sheet carrying values of the OTTI securities. Cash flow hedging losses recorded in AOCI will be reclassified in future years as an expense over the terms of the hedged bonds as a yield adjustment to the fixed coupons of the debt. The loss in AOCI will continue to decline unless additional losses from cash flow hedges are recognized in AOCI. Minimum additional actuarially determined pension liabilities were recognized for the Bank’s supplemental pension plans. 9891
Derivative Instruments and Hedging Activities Interest rate swaps, swaptions, and cap and floor agreements (collectively, derivatives) enable the FHLBNY to manage its exposure to changes in interest rates by adjusting the effective maturity, repricing frequency, or option characteristics of financial instruments. The FHLBNY, to a limited extent, also uses interest rate swaps to hedge changes in interest rates prior to debt issuance and essentially lock in the FHLBNY’s funding cost. Finance Agency regulations prohibit the speculative use of derivatives. The FHLBNY does not take speculative positions with derivatives or any other financial instruments, or trade derivatives for short-term profits. The FHLBNY does not have any special purpose entities or any other types of off-balance sheet conduits. The notional amounts of derivatives are not recorded as assets or liabilities in the Statements of Condition, ratherCondition. Rather the fair values of all derivatives are recorded as either a derivative asset or a derivative liability. Although notional principal is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since the notional amount does not change hands (other than in the case of currency swaps, of which the FHLBNY has none). All derivatives are recorded on the Statements of Condition at their estimated fair values and designated as either fair value or cash flow hedges for qualifying hedges, or as non-qualifying hedges (economic hedges or customer intermediations) under the accounting standards for derivatives and hedging. In an economic hedge, the Bank retains or executes derivative contracts, which are economically effective in reducing risk. Such derivatives are designated as economic hedges either because a qualifying hedge is not available, the difficulty to demonstrateof demonstrating that the hedge would be effective on an ongoing basis as a qualifying hedge, or the cost of a qualifying hedge is not economical. Changes in the fair value of a derivative are recorded in current period earnings for a fair value hedge, or in AOCI for the effective portion of fair value changes of a cash flow hedge. Interest income and interest expense from interest rate swaps used for hedging are reported together with interest on the instrument being hedged if the swap qualifies for hedge accounting. If the swap is designated as an economic hedge, interest accruals are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The FHLBNY uses derivatives in three ways: (1) as a fair value or cash flow hedge of an underlying financial instrument or as a cash flow hedge of a forecasted transaction; (2) as intermediation hedges to offset derivative positions (e.g., caps) sold to members; and (3) as an economic hedge, defined as a non-qualifying hedge of an asset or liability and used as an asset/liability management tool. The FHLBNY uses derivatives to adjust the interest rate sensitivity of consolidated obligations to more closely approximate the sensitivity of assets or to adjust the interest rate sensitivity of advances to more closely approximate the sensitivity of liabilities. In addition, the FHLBNY uses derivatives to (1) offset embedded options in assets and liabilities; (2) hedge the market value of existing assets, liabilities and anticipated transactions; and (3) reduce funding costs. For additional information, see Note 16 –15 — Derivatives and hedging activities to the financial statements accompanying this report.Hedging Activities. 9992
The following table summarizestables provide information about the principal derivativesderivative hedging strategies: Table 26:9.1: Derivative Hedging Strategies — Advances | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | December 31, 2009 | | | March 31, 2011 | | December 31, 2010 | | | | Notional Amount | | Notional Amount | | | Notional Amount | | Notional Amount | | Derivatives/Terms | | Hedging Strategy | | Accounting Designation | | (in millions) | | (in millions) | | | Hedging Strategy | | Accounting Designation | | (in millions) | | (in millions) | | Pay fixed, receive floating interest rate swap | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate | | Economic Hedge of Fair Value Risk | | $ | 115 | | | $ | 123 | | | Pay fixed, receive floating | | | To convert fixed rate on a fixed rate | | Economic Hedge of Fair Value Risk | | $ | 86 | | $ | 128 | | interest rate swap | | | advance to a LIBOR floating rate | | | | Pay fixed, receive floating interest rate swap cancelable by FHLBNY | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate callable advance | | Fair Value Hedge | | $ | 150 | | | $ | — | | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate callable advance | | Fair Value Hedge | | $ | 305 | | $ | 150 | | Pay fixed, receive floating interest rate swap cancelable by counterparty | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate putable advance | | Fair Value Hedge | | $ | 34,231 | | | $ | 40,252 | | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate putable advance | | Fair Value Hedge | | $ | 26,877 | | $ | 33,612 | | Pay fixed, receive floating interest rate swap no longer cancelable by counterparty | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate no-longer putable advance | | Fair Value Hedge | | $ | 4,064 | | | $ | 2,283 | | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate no-longer putable advance | | Fair Value Hedge | | $ | 2,539 | | $ | 2,839 | | Pay fixed, receive floating interest rate swap non-cancelable | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate non-putable advance | | Fair Value Hedge | | $ | 23,109 | | | $ | 23,367 | | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate non-putable advance | | Fair Value Hedge | | $ | 27,051 | | $ | 23,724 | | Purchased interest rate cap | | To offset the cap embedded in the variable rate advance | | Economic Hedge of Fair Value Risk | | $ | 8 | | | $ | 390 | | | To offset the cap embedded in the variable rate advance | | Economic Hedge of Fair Value Risk | | $ | 8 | | $ | 8 | | | | | Table 9.2: Derivative Hedging Strategies — Consolidated Obligation Liabilities | | Table 9.2: Derivative Hedging Strategies — Consolidated Obligation Liabilities | | | | | | | March 31, 2011 | | December 31, 2010 | | | | | Notional Amount | | Notional Amount | | Derivatives/Terms | | | Hedging Strategy | | Accounting Designation | | (in millions) | | (in millions) | | Receive fixed, pay floating interest rate swap | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate | | Economic Hedge of Fair Value Risk | | $ | 5,300 | | | $ | 13,113 | | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate | | Economic Hedge of Fair Value Risk | | $ | 430 | | $ | 115 | | Receive fixed, pay floating interest rate swap cancelable by counterparty | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate callable bond | | Fair Value Hedge | | $ | 4,970 | | | $ | 6,785 | | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate callable bond | | Fair Value Hedge | | $ | 8,285 | | $ | 5,905 | | Receive fixed, pay floating interest rate swap no longer cancelable | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate no-longer callable | | Fair Value Hedge | | $ | 440 | | | $ | 108 | | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate no-longer callable | | Fair Value Hedge | | $ | 15 | | $ | 15 | | Receive fixed, pay floating interest rate swap non-cancelable | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate non-callable | | Fair Value Hedge | | $ | 26,908 | | | $ | 25,982 | | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate non-callable | | Fair Value Hedge | | $ | 26,650 | | $ | 27,596 | | Receive fixed, pay floating interest rate swap (non-callable) | | To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate non-callable | | Economic Hedge of Fair Value Risk | | $ | 87 | | | $ | 3,784 | | | Pay fixed, receive LIBOR interest rate swap | | | To offset the variability of cash flows associated with interest payments on forecasted issuance of fixed rate consolidated obligation bond debt. | | Cash flow hedge | | $ | 55 | | $ | — | | Pay fixed, receive LIBOR interest rate swap | | | To offset the variability of cash flows associated with interest payments on forecasted issuance of fixed rate consolidated obligation discount note debt. | | Cash flow hedge | | $ | 150 | | $ | — | | Basis swap | | To convert non-LIBOR index to LIBOR to reduce interest rate sensitivity and repricing gaps | | Economic Hedge of Cash Flows | | $ | 8,128 | | | $ | 6,035 | | | To convert non-LIBOR index to LIBOR to reduce interest rate sensitivity and repricing gaps | | Economic Hedge of Cash Flows | | $ | 8,003 | | $ | 6,878 | | Basis swap | | To convert 1M LIBOR index to 3M LIBOR to reduce interest rate sensitivity and repricing gaps | | Economic Hedge of Cash Flows | | $ | 1,450 | | | $ | 1,950 | | | To convert 1M LIBOR index to 3M LIBOR to reduce interest rate sensitivity and repricing gaps | | Economic Hedge of Cash Flows | | $ | 2,050 | | $ | 2,050 | | Receive fixed, pay floating interest rate swap cancelable by counterparty | | Fixed rate callable bond converted to a LIBOR floating rate; matched to callable bond accounted for under fair value option | | Fair Value Option | | $ | 3,101 | | | $ | 5,690 | | | Fixed rate callable bond converted to a LIBOR floating rate; matched to callable bond accounted for under fair value option | | Fair Value Option | | $ | 6,700 | | $ | 5,576 | | Receive fixed, pay floating interest rate swap no longer cancelable | | | Fixed rate callable bond converted to a LIBOR floating rate; matched to bond no -longer callable accounted for under fair value option. | | Fair Value Option | | $ | 1,000 | | $ | 1,000 | | Receive fixed, pay floating interest rate swap non-cancelable | | Fixed rate non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under fair value option | | Fair Value Option | | $ | 7,650 | | | $ | 350 | | | Fixed rate non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under fair value option | | Fair Value Option | | $ | 4,900 | | $ | 7,700 | | Receive fixed, pay floating interest rate swap non-cancelable | | Fixed rate consolidated obligation discount note converted to a LIBOR floating rate; matched to discount note accounted for under fair value option | | Fair Value Option | | $ | 1,752 | | | $ | — | | | Fixed rate consolidated obligation discount note converted to a LIBOR floating rate; matched to discount note accounted for under fair value option | | Fair Value Option | | $ | 729 | | $ | 953 | | Pay fixed, receive floating interest rate swap | | Economic hedge on the Balance Sheet | | Economic Hedge | | $ | — | | | $ | 1,050 | | | Receive fixed, pay floating interest rate swap | | Economic hedge on the Balance Sheet | | Economic Hedge | | $ | — | | | $ | 1,050 | | | | | | Table 9.3: Derivative Hedging Strategies — Balance Sheet and Intermediation | | Table 9.3: Derivative Hedging Strategies — Balance Sheet and Intermediation | | | | | | | March 31, 2011 | | December 31, 2010 | | | | | Notional Amount | | Notional Amount | | Derivatives/Terms | | | Hedging Strategy | | Accounting Designation | | (in millions) | | (in millions) | | Purchased interest rate cap | | Economic hedge on the Balance Sheet | | Economic Hedge | | $ | 1,892 | | | $ | 1,892 | | | Economic hedge on the Balance Sheet | | Economic Hedge | | $ | 1,892 | | $ | 1,892 | | | | | | | | | Intermediary positions interest rate swaps and caps | | To offset interest rate swaps and caps executed with members by executing offsetting derivatives with counterparties | | Economic Hedge of Fair Value Risk | | $ | 550 | | | $ | 320 | | | To offset interest rate swaps and caps executed with members by executing offsetting derivatives with counterparties | | Economic Hedge of Fair Value Risk | | $ | 550 | | $ | 550 | |
The accounting designation “economic” hedges represented derivative transactions under hedge strategies that do not qualify for hedge accounting but are an approved risk management hedge. 10093
Derivatives Financial Instruments by hedge designation
The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by hedge designation. The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands):
Table 27: Derivatives Financial Instruments by Hedge Designation
| | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | Estimated | | | | | | | Estimated | | | | Notional | | | Fair Value | | | Notional | | | Fair Value | | Interest rate swaps | | | | | | | | | | | | | | | | | Derivatives in fair value hedging relationships | | $ | 93,872,212 | | | $ | (4,556,517 | ) | | $ | 98,776,447 | | | $ | (3,056,718 | ) | Derivatives not designated as hedging instruments | | | 15,079,729 | | | | 117 | | | | 27,104,963 | | | | 31,723 | | Derivatives matching designated under FVO | | | 12,503,185 | | | | 10,198 | | | | 6,040,000 | | | | (2,632 | ) | Interest rate caps/floors | | | | | | | | | | | | | | | | | Economic-fair value changes | | | 1,900,000 | | | | 23,593 | | | | 2,282,000 | | | | 71,494 | | Mortgage delivery commitments (MPF) | | | | | | | | | | | | | | | | | Economic-fair value changes | | | 20,675 | | | | 4 | | | | 4,210 | | | | (39 | ) | Other | | | | | | | | | | | | | | | | | Intermediation | | | 550,000 | | | | 709 | | | | 320,000 | | | | 352 | | | | | | | | | | | | | | | Total | | $ | 123,925,801 | | | $ | (4,521,896 | ) | | $ | 134,527,620 | | | $ | (2,955,820 | ) | | | | | | | | | | | | | | Total derivatives, excluding accrued interest | | | | | | $ | (4,521,896 | ) | | | | | | $ | (2,955,820 | ) | Cash collateral pledged to counterparties | | | | | | | 3,844,058 | | | | | | | | 2,237,028 | | Cash collateral received from counterparties | | | | | | | (53,796 | ) | | | | | | | — | | Accrued interest | | | | | | | (20,439 | ) | | | | | | | (19,104 | ) | | | | | | | | | | | | | | | | Net derivative balance | | | | | | $ | (752,073 | ) | | | | | | $ | (737,896 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative asset balance | | | | | | $ | 32,425 | | | | | | | $ | 8,280 | | Net derivative liability balance | | | | | | | (784,498 | ) | | | | | | | (746,176 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative balance | | | | | | $ | (752,073 | ) | | | | | | $ | (737,896 | ) | | | | | | | | | | | | | | | |
Derivative Financial Instruments by Product The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by product and type of accounting treatment. The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands): Table 28: Derivative Financial Instruments by Product
| | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | Total estimated | | | | | | | Total estimated | | | | | | | | fair value | | | | | | | fair value | | | | | | | | (excluding | | | | | | | (excluding | | | | Total notional | | | accrued | | | Total notional | | | accrued | | | | amount | | | interest) | | | amount | | | interest) | | Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | Advances-fair value hedges | | $ | 61,554,507 | | | $ | (5,604,763 | ) | | $ | 65,901,667 | | | $ | (3,622,141 | ) | Consolidated obligations-fair value hedges | | | 32,317,705 | | | | 1,048,246 | | | | 32,874,780 | | | | 565,423 | | Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | Advances-economic hedges | | | 122,659 | | | | (3,861 | ) | | | 513,089 | | | | (196 | ) | Consolidated obligations-economic hedges | | | 14,965,070 | | | | 3,978 | | | | 24,881,874 | | | | 36,954 | | MPF loan-commitments | | | 20,675 | | | | 4 | | | | 4,210 | | | | (39 | ) | Balance sheet | | | 1,892,000 | | | | 23,593 | | | | 1,892,000 | | | | 71,494 | | Intermediary positions-economic hedges | | | 550,000 | | | | 709 | | | | 320,000 | | | | 352 | | Balance sheet-macro hedges swaps | | | — | | | | — | | | | 2,100,000 | | | | (5,035 | ) | Derivatives matching COs designated under FVO | | | | | | | | | | | | | | | | | Interest rate swaps-consolidated obligations-bonds | | | 10,751,000 | | | | 7,750 | | | | 6,040,000 | | | | (2,632 | ) | Interest rate swaps-consolidated obligations-discount notes | | | 1,752,185 | | | | 2,448 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total notional and fair value | | $ | 123,925,801 | | | $ | (4,521,896 | ) | | $ | 134,527,620 | | | $ | (2,955,820 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total derivatives, excluding accrued interest | | | | | | $ | (4,521,896 | ) | | | | | | $ | (2,955,820 | ) | Cash collateral pledged to counterparties | | | | | | | 3,844,058 | | | | | | | | 2,237,028 | | Cash collateral received from counterparties | | | | | | | (53,796 | ) | | | | | | | — | | Accrued interest | | | | | | | (20,439 | ) | | | | | | | (19,104 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative balance | | | | | | $ | (752,073 | ) | | | | | | $ | (737,896 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative asset balance | | | | | | $ | 32,425 | | | | | | | $ | 8,280 | | Net derivative liability balance | | | | | | | (784,498 | ) | | | | | | | (746,176 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative balance | | | | | | $ | (752,073 | ) | | | | | | $ | (737,896 | ) | | | | | | | | | | | | | | | |
The categories of “Fair value” “Commitment”value,” “Commitment,” andCash “Cash flow” hedges represented derivative transactions accounted for as hedges. The category of “Economic” hedges represented derivative transactions under hedge strategies that did not qualify for hedge accounting treatment but were an approved risk management strategy.No cash flow hedges were outstanding at September 30, 2010 or December 31, 2009.
101
Asset Quality The table also provides a reconciliation of fair value basis gains and Concentration– Advances, Investment Securities, Mortgage Loans, and Counterparty Risks
The FHLBNY incurs credit risk —(losses) of derivatives to the riskStatements of loss due to default — in its lending, investing, and hedging activities. It has instituted processes to help manage and mitigate this risk. Despite such processes, some amount of credit risk will always exist. External events, such as severe economic downturns, declining real estate values (both residential and non-residential), changes in monetary policy, adverse events in the capital markets, and other developments, could lead to member or counterparty default or impact the creditworthiness of investments. Such events would have a negative impact upon the FHLBNY’s income and financial performance.
The following table sets forth five-year history of the FHLBNY’s advances and mortgage loan portfoliosCondition (in thousands):
Table 29: Advances and Mortgage Loan Portfolios9.4: Derivative Financial Instruments by Product | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, | | | December 31, | | | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | Advances | | $ | 85,697,171 | | | $ | 94,348,751 | | | $ | 109,152,876 | | | $ | 82,089,667 | | | $ | 59,012,394 | | | $ | 61,901,534 | | | | | | | | | | | | | | | | | | | | | Mortgage loans before allowance for credit losses | | $ | 1,273,224 | | | $ | 1,322,045 | | | $ | 1,459,291 | | | $ | 1,492,261 | | | $ | 1,484,012 | | | $ | 1,467,525 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | Total Estimated | | | | | | | Total Estimated | | | | | | | | Fair Value | | | | | | | Fair Value | | | | | | | | (Excluding | | | | | | | (Excluding | | | | Total Notional | | | Accrued | | | Total Notional | | | Accrued | | | | Amount | | | Interest) | | | Amount | | | Interest) | | Derivatives designated as hedging instruments1 | | | | | | | | | | | | | | | | | Advances-fair value hedges | | $ | 56,772,474 | | | $ | (3,180,464 | ) | | $ | 60,324,983 | | | $ | (4,269,037 | ) | Consolidated obligations-fair value hedges | | | 34,949,830 | | | | 465,504 | | | | 33,515,830 | | | | 614,739 | | Cash Flow-anticipated transactions | | | 205,000 | | | | 2,357 | | | | — | | | | — | | Derivatives not designated as hedging instruments2 | | | | | | | | | | | | | | | | | Advances hedges | | | 93,775 | | | | (2,432 | ) | | | 136,345 | | | | (3,115 | ) | Consolidated obligations hedges | | | 10,483,000 | | | | 1,999 | | | | 9,043,000 | | | | 1,675 | | Mortgage delivery commitments | | | 25,197 | | | | 44 | | | | 29,993 | | | | (514 | ) | Balance sheet | | | 1,892,000 | | | | 38,196 | | | | 1,892,000 | | | | 41,785 | | Intermediary positions hedges | | | 550,000 | | | | 614 | | | | 550,000 | | | | 659 | | Derivatives matching COs designated under FVO3 | | | | | | | | | | | | | | | | | Interest rate swaps-consolidated obligations-bonds | | | 12,600,000 | | | | (3,099 | ) | | | 14,276,000 | | | | (505 | ) | Interest rate swaps-consolidated obligations-discount notes | | | 728,755 | | | | 421 | | | | 953,202 | | | | 1,282 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total notional and fair value | | $ | 118,300,031 | | | $ | (2,676,860 | ) | | $ | 120,721,353 | | | $ | (3,613,031 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total derivatives, excluding accrued interest | | | | | | $ | (2,676,860 | ) | | | | | | $ | (3,613,031 | ) | Cash collateral pledged to counterparties | | | | | | | 1,944,065 | | | | | | | | 2,739,402 | | Cash collateral received from counterparties | | | | | | | (71,100 | ) | | | | | | | (9,300 | ) | Accrued interest | | | | | | | (10,851 | ) | | | | | | | (49,959 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative balance | | | | | | $ | (814,746 | ) | | | | | | $ | (932,888 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative asset balance | | | | | | $ | 24,964 | | | | | | | $ | 22,010 | | Net derivative liability balance | | | | | | | (839,710 | ) | | | | | | | (954,898 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net derivative balance | | | | | | $ | (814,746 | ) | | | | | | $ | (932,888 | ) | | | | | | | | | | | | | | | |
Advances
The FHLBNY closely monitors the creditworthiness of the institutions to which it lends. The FHLBNY also closely monitors the quality and value of the assets that are pledged as collateral by its members. The FHLBNY periodically assesses the mortgage underwriting and documentation standards of its borrowing members. In addition, the FHLBNY has collateral policies and restricted lending procedures in place to manage its exposure to those members experiencing difficulty in meeting their capital requirements or other standards of creditworthiness.
The FHLBNY has not experienced any losses on advances extended to any member since its inception. The FHLBank Act affords any security interest granted to the FHLBNY by a member, or any affiliate of such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party) having the rights of a lien creditor. However, the FHLBNY’s security interest is not entitled to priority over claims and rights that (1) would be entitled to priority under applicable law, or (2) are held by a bona fide purchaser for value or by parties that are secured by actual perfected security interests.
The FHLBNY’s members are required to pledge collateral to secure advances. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. The FHLBNY has the right to take such steps, as it deems necessary, to protect its secured position on outstanding advances, including requiring additional collateral (whether or not such additional collateral would otherwise be eligible to secure a loan). The FHLBNY also has a statutory lien under the FHLBank Act on the capital stock of its members, which serves as further collateral for members’ indebtedness to the FHLBNY.
The FHLBNY has established asset classification and reserve policies. All adversely classified assets of the FHLBNY will have a reserve established for probable losses. Based upon the collateral held as security and prior repayment histories, no allowance for losses on advances is currently deemed necessary by management.
The FHLBNY uses methodologies to identify and measure credit risk from creditworthiness risk arising from members, counterparties, and other entities; collateral risk arising from type, quality, and lien status; and concentration risk arising from borrower, portfolio, geographic area, industry, or product type.
Creditworthiness Risk — Advances
The FHLBNY’s potential exposure to creditworthiness risk arises from the deterioration of the financial health of FHLBNY members. The FHLBNY manages its exposure to the creditworthiness of members by monitoring their collateral and advance levels daily and by analyzing their financial health each quarter.
Collateral Risk — Advances
The FHLBNY is exposed to collateral risk if it is unable to perfect its interest in pledged collateral, or when the liquidation value of pledged collateral does not fully cover the FHLBNY’s exposure. The FHLBNY manages this risk by pricing collateral on a weekly basis, performing on-site reviews of pledged mortgage collateral from time to time, and reviewing pledged portfolio concentrations on a quarterly basis. The FHLBNY requires that members pledge a specific amount of excess collateral above the par amount of their outstanding obligations. Members provide the FHLBNY with reports of pledged collateral and the FHLBNY evaluates the eligibility and value of the pledged collateral.
The FHLBNY’s loan and collateral agreements give the FHLBNY a security interest in assets held by borrowers that is sufficient to cover their obligations to the FHLBNY. The FHLBNY may supplement this security interest by imposing additional reporting, segregation or delivery requirements on the borrower. The FHLBNY assigns specific collateral requirements to a borrower, based on a number of factors. These include, but are not limited to: (1) the borrower’s overall financial condition; (2) the degree of complexity involved in the pledging, verifying, and reporting of collateral between the borrower and the FHLBNY, especially when third-party pledges, custodians, outside service providers and pledges to other entities are involved; and (3) the type of collateral pledged. The FHLBNY has also established collateral maintenance levels for borrower collateral that are intended to help ensure that the FHLBNY has sufficient collateral to cover credit extensions and reasonable expenses arising from potential collateral liquidation and other unknown factors. Collateral maintenance levels are designated by collateral type and are periodically adjusted to reflect current market and business conditions. Maintenance levels for individual borrowers may also be adjusted, based on the overall financial condition of the borrower or another, third-party entity involved in the collateral relationship with the FHLBNY. Borrowers are required to maintain an amount of eligible collateral with a liquidation value at least equal to the borrower’s current collateral maintenance level. All borrowers that pledge mortgage loans as collateral are also required to provide, on a monthly or quarterly basis, a detailed listing of mortgage loans pledged. The FHLBNY uses this detailed reporting to monitor and track payment performance of the collateral and to assess the risk profile of the pledged collateral based on mortgage characteristics, geographic concentrations and other pertinent risk factors.
102
Drawing on current industry standards, the FHLBNY establishes collateral valuation methodologies for each collateral type and calculates the estimated liquidation value of the pledged collateral to determine whether a borrower has satisfied its collateral maintenance requirement. The FHLBNY evaluates liquidation values on a weekly basis.
The FHLBNY makes on-site reviews of borrowers in connection with the evaluation of the borrowers’ pledged mortgage collateral. This review involves a qualitative assessment of risk factors that includes an examination of legal documentation, credit underwriting, and loan-servicing practices on mortgage collateral. The FHLBNY has developed the on-site review process to more accurately value each borrower’s pledged mortgage portfolio based on current secondary-market standards. The results of the review may lead to adjustments in the estimated liquidation value of pledged collateral. The FHLBNY may also make additional market value adjustments to a borrower’s pledged mortgage collateral based on the quality and accuracy of the automated data provided to the FHLBNY. See Tables 30-32 for more information.
Credit Risk and Concentration Risk — Advances
While the FHLBNY has never experienced a credit loss on an advance, the expanded eligible collateral for Community Financial Institutions and non-member housing associates permitted, but not required, by the Finance Agency provides the potential for additional credit risk for the FHLBNY. It is the FHLBNY’s current policy not to accept “expanded” eligible collateral from Community Financial Institutions. The management of the FHLBNY has the policies and procedures in place to appropriately manage credit risk associated with the advance business. In extending credit to a member, the FHLBNY adheres to specific credit policy limits approved by its Board of Directors. The FHLBNY has not established limits for the concentrations of specific types of advances, but management reports the activity in advances to the Board each month. Each quarter, management reports the concentrations of putable advances made to individual members. There were no past due advances and all advances were current at any periods in this report. Management does not anticipate any credit losses, and accordingly, the FHLBNY has not provided an allowance for credit losses on advances. The FHLBNY’s potential credit risk from advances is concentrated in commercial banks, savings institutions and insurance companies. At September 30, 2010, the top ten member institutions had borrowed advances aggregating $57.3 billion or 71.4% of total advances outstanding (par). The comparable amount at December 31, 2009 was $59.5 billion, or 65.6% of total advance outstanding. Sufficient collateral was held to cover the advances to these institutions. See Table 33 below for more information.
Collateral Coverage of Advances
The FHLBNY lends to financial institutions involved in housing finance within its district. In addition, the FHLBNY is permitted, but not required, to accept collateral in the form of small business or agricultural loans (“expanded collateral”) from Community Financial Institutions (“CFIs”). Borrowing members pledge their capital stock of the FHLBNY as additional collateral for advances. All member obligations with the FHLBNY must be fully collateralized throughout their entire term.
As of September 30, 2010 and December 31, 2009, the FHLBNY had rights to collateral with an estimated value greater than outstanding advances. Based upon the financial condition of the member, the FHLBNY:
Allows a member to retain possession of the collateral assigned to the FHLBNY, if the member executes a written security agreement and agrees to hold such collateral for the benefit of the FHLBNY; or
Requires the member specifically to assign or place physical possession of such collateral with the FHLBNY or its safekeeping agent.
The following table summarizes pledged collateral in support of advances (in thousands):
Table 30: Collateral Supporting Advances to Members
| | | | | | | | | | | | | | | | | | | | | | | Underlying Collateral for Advances | | | | | | | | Mortgage | | | Securities and | | | | | | | Advances1 | | | Loans2 | | | Deposits2 | | | Total2 | | September 30, 2010 | | $ | 80,102,811 | | | $ | 102,314,450 | | | $ | 44,596,206 | | | $ | 146,910,656 | | | | | | | | | | | | | | | | | | | December 31, 2009 | | $ | 90,737,700 | | | $ | 111,346,235 | | | $ | 49,564,456 | | | $ | 160,910,691 | |
| | | Note1 | | Par value | | Note2 | | Estimated market value |
103
The level of over-collateralization is on an aggregate basis and may not necessarily be indicative of a similar level of over-collateralization on an individual transaction basis. At a minimum, each member pledged sufficient collateral to adequately secure the member’s outstanding obligation with the FHLBNY. In addition, most members maintain an excess amount of pledged collateral with the FHLBNY to secure future liquidity needs.
The following table summarizes pledged collateral in support of other member obligations (other than advances) (in thousands):
Table 31: Collateral Supporting Member Obligations Other Than Advances
| | | | | | | | | | | | | | | | | | | | | | | Underlying Collateral for Other Obligations | | | | Other | | | | | | | Securities and | | | | | | | Obligations1 | | | Mortgage Loans2 | | | Deposits2 | | | Total 2 | | September 30, 2010 | | $ | 1,899,440 | | | $ | 4,686,068 | | | $ | 323,262 | | | $ | 5,009,330 | | | | December 31, 2009 | | $ | 720,622 | | | $ | 2,257,204 | | | $ | 126,970 | | | $ | 2,384,174 | |
| | | Note1 | | Standby financial letters of credit, derivatives and members’ credit enhancement guarantee amount. (“MPFCE”) | | Note2 | | Estimated market value |
The outstanding member obligations consisted principally of standby letters of credit, and a small amount of collateralized value of outstanding derivatives, and members’ credit enhancement guarantee amount (“MPFCE”) on loans sold to the FHLBNY through the Mortgage Partnership Finance program. The FHLBNY’s underwriting and collateral requirements for securing Letters of Credit are the same as its requirements for securing advances.
The following table shows the breakdown of collateral pledged by members between those that were specifically listed and those in the physical possession or that of its safekeeping agent (in thousands):
Table 32: Location of Collateral Held
| | | | | | | | | | | | | | | | | | | Estimated Market Values | | | | Collateral in | | | Collateral | | | Collateral | | | Total | | | | Physical | | | Specifically | | | Pledged for | | | Collateral | | | | Possession | | | Listed | | | AHP | | | Received | | September 30, 2010 | | $ | 51,752,820 | | | $ | 100,449,622 | | | $ | (282,455 | ) | | $ | 151,919,987 | | | | | | | | | | | | | | | | | | | December 31, 2009 | | $ | 57,660,864 | | | $ | 105,714,763 | | | $ | (80,762 | ) | | $ | 163,294,865 | |
The total of collateral pledged to the FHLBNY includes excess collateral pledged above the FHLBNY’s maximum Lendable value. These Lendable value requirements range from 60% to 97% of the collateral pledged, based on the collateral type. It is common for members to maintain excess collateral positions with the FHLBNY for future liquidity needs. Based on several factors (e.g. advance type, collateral type or member financial condition) members are required to comply with specified collateral requirements, including but not limited to, a detailed listing of pledged mortgage collateral and/or delivery of pledged collateral to FHLBNY or its designated collateral custodian(s). For example, all pledged securities collateral must be delivered to the FHLBNY’s nominee name at Citibank, N.A., the FHLBNY’s securities safekeeping custodian. Mortgage collateral that is required to be in the FHLBNY’s possession is typically delivered to the FHLBNY’s Jersey City, N.J. facility. However, in certain instances, delivery to an FHLBNY approved custodian may be allowed.
104
Table 33: Concentration analysis — Top Ten Advance Holders
The following tables provide summary data for the top ten advance holders (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | | | | | | | | | | Percentage of | | | | | | | | | | | Par | | | Total Par Value | | | Interest Income | | | | City | | State | | Advances | | | of Advances | | | Three months | | | Nine months | | Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,175,000 | | | | 21.4 | % | | $ | 178,029 | | | $ | 529,488 | | Metropolitan Life Insurance Company | | New York | | NY | | | 13,230,000 | | | | 16.5 | | | | 75,674 | | | | 222,705 | | New York Community Bank* | | Westbury | | NY | | | 7,593,167 | | | | 9.5 | | | | 77,416 | | | | 230,083 | | MetLife Bank, N.A. | | Bridgewater | | NJ | | | 4,969,500 | | | | 6.2 | | | | 16,368 | | | | 40,514 | | Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 3,709,163 | | | | 4.6 | | | | 11,607 | | | | 34,369 | | Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | | 2,735,000 | | | | 3.4 | | | | 27,463 | | | | 83,763 | | The Prudential Insurance Co. of America | | Newark | | NJ | | | 2,500,000 | | | | 3.1 | | | | 17,971 | | | | 60,244 | | Valley National Bank | | Wayne | | NJ | | | 2,361,500 | | | | 2.9 | | | | 24,677 | | | | 73,885 | | Doral Bank | | San Juan | | PR | | | 1,531,420 | | | | 1.9 | | | | 16,471 | | | | 53,041 | | New York Life Insurance Company | | New York | | NY | | | 1,500,000 | | | | 1.9 | | | | 4,274 | | | | 11,166 | | | | | | | | | | | | | | | | | | | Total | | | | | | $ | 57,304,750 | | | | 71.4 | % | | $ | 449,950 | | | $ | 1,339,258 | | | | | | | | | | | | | | | | | | |
| | | * | | Officer of member bank also served on the Board of Directors of the FHLBNY. |
| | | | | | | | | | | | | | | | | | | December 31, 2009 | | | | | | | | | | | | Percentage of | | | | | | | | | | | Par | | | Total Par Value | | | 12-months | | | | City | | State | | Advances | | | of Advances | | | Interest Income | | Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,275,000 | | | | 19.0 | % | | $ | 710,900 | | Metropolitan Life Insurance Company | | New York | | NY | | | 13,680,000 | | | | 15.1 | | | | 356,120 | | New York Community Bank* | | Westbury | | NY | | | 7,343,174 | | | | 8.1 | | | | 310,991 | | Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 5,005,641 | | | | 5.5 | | | | 97,628 | | The Prudential Insurance Co. of America | | Newark | | NJ | | | 3,500,000 | | | | 3.9 | | | | 93,601 | | Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | | 3,000,000 | | | | 3.3 | | | | 120,870 | | Emigrant Bank | | New York | | NY | | | 2,475,000 | | | | 2.7 | | | | 64,131 | | Doral Bank | | San Juan | | PR | | | 2,473,420 | | | | 2.7 | | | | 86,389 | | MetLife Bank, N.A. | | Bridgewater | | NJ | | | 2,430,500 | | | | 2.7 | | | | 46,142 | | Valley National Bank | | Wayne | | NJ | | | 2,322,500 | | | | 2.6 | | | | 103,707 | | | | | | | | | | | | | | | | Total | | | | | | $ | 59,505,235 | | | | 65.6 | % | | $ | 1,990,479 | | | | | | | | | | | | | | | |
| | | * | | At December 31, 2009, officer of member bank also served on the Board of Directors of the FHLBNY. |
| | | | | | | | | | | | | | | | | | | | | | | September 30, 2009 | | | | | | | | | | | | Percentage of | | | | | | | | | | | Par | | | Total Par Value | | | Interest Income | | | | City | | State | | Advances | | | of Advances | | | Three months | | | Nine months | | Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,325,000 | | | | 18.9 | % | | $ | 178,896 | | | $ | 532,100 | | Metropolitan Life Insurance Company | | New York | | NY | | | 14,280,000 | | | | 15.6 | | | | 84,277 | | | | 279,360 | | New York Community Bank* | | Westbury | | NY | | | 8,148,476 | | | | 8.9 | | | | 78,413 | | | | 233,129 | | Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 5,493,756 | | | | 6.0 | | | | 19,133 | | | | 83,856 | | The Prudential Insurance Co. of America | | Newark | | NJ | | | 3,500,000 | | | | 3.8 | | | | 22,448 | | | | 71,473 | | Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | | 2,960,000 | | | | 3.2 | | | | 29,824 | | | | 91,226 | | Emigrant Bank | | New York | | NY | | | 2,475,000 | | | | 2.7 | | | | 16,127 | | | | 48,004 | | Doral Bank | | San Juan | | PR | | | 2,473,420 | | | | 2.7 | | | | 21,513 | | | | 65,825 | | MetLife Bank, N.A. | | Bridgewater | | NJ | | | 2,382,000 | | | | 2.6 | | | | 12,854 | | | | 34,658 | | Valley National Bank | | Wayne | | NJ | | | 2,338,500 | | | | 2.6 | | | | 25,608 | | | | 78,322 | | | | | | | | | | | | | | | | | | | Total | | | | | | $ | 61,376,152 | | | | 67.0 | % | | $ | 489,093 | | | $ | 1,517,953 | | | | | | | | | | | | | | | | | | |
| | | * | | At September 30, 2009, officer of member bank also served on the Board of Directors of the FHLBNY. |
Investment quality
The FHLBNY’s investments are summarized below (dollars in thousands):
Table 34: Period-Over-Period Change in Investments
| | | | | | | | | | | | | | | | | | | September 30, | | | December 31, | | | Dollar | | | Percentage | | | | 2010 | | | 2009 | | | Variance | | | Variance | | | | | | | | | | | | | | | | | | | State and local housing finance agency obligations1 | | $ | 740,256 | | | $ | 751,751 | | | $ | (11,495 | ) | | | (1.53 | )% | Mortgage-backed securities | | | | | | | | | | | | | | | | | Available-for-sale securities, at fair value | | | 3,360,959 | | | | 2,240,564 | | | | 1,120,395 | | | | 50.01 | | Held-to-maturity securities, at carrying value | | | 7,480,990 | | | | 9,767,531 | | | | (2,286,541 | ) | | | (23.41 | ) | | | | | | | | | | | | | | Total securities | | | 11,582,205 | | | | 12,759,846 | | | | (1,177,641 | ) | | | (9.23 | ) | | | | | | | | | | | | | | | | | | Grantor trusts2 | | | 12,822 | | | | 12,589 | | | | 233 | | | | 1.85 | | Federal funds sold | | | 4,095,000 | | | | 3,450,000 | | | | 645,000 | | | | 18.70 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investments | | $ | 15,690,027 | | | $ | 16,222,435 | | | $ | (532,408 | ) | | | (3.28 | )% | | | | | | | | | | | | | |
| | | 1 | | Classified as held-to-maturity securities, at carrying value. | | 2 | | Classified as available-for-sale securities, at fair value and represents investments in registered mutual funds and other fixed-income securities maintained under the grantor trusts. |
Long-term investments were principally comprised of (1) Mortgage-backed securities classified as held-to-maturity at a carrying value of $7.5 billion, of which 88.2% comprised of securities issued by government sponsored enterprises and a U.S. government agency, (2) Mortgage-backed securities classified as available-for-sale securities at recorded fair values of $3.4 billion, 100 percent of which was comprised of GSE issued mortgage-backed securities. In addition, the FHLBNY had investments of $740.3 million in primary public and private placements of taxable obligations of state and local housing finance authorities classified as held-to-maturity. Short-term investments consisted of Federal funds sold.
105
Investment rating
External ratings and the changes in a security’s external rating are factors in the FHLBNY’s assessment of impairment; a rating or a rating change alone is not necessarily indicative of impairment or absence of impairment.
The following tables contain information about credit ratings of the Bank’s investments in Held-to-maturity and Available-for-sale securities (in thousands). Also see, Table 20 rating information:
Table 35: NRSRO Held-to-Maturity Securities
External ratings — Held-to-maturity securities — September 30, 2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Below | | | | Carrying | | | NRSRO Ratings - September 30, 2010 | | | Investment | | Issued, guaranteed or insured: | | Value | | | AAA | | | AA | | | A | | | BBB | | | Grade | | Pools of Mortgages | | | | | | | | | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 939,288 | | | $ | 939,288 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Freddie Mac | | | 269,515 | | | | 269,515 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | Total pools of mortgages | | | 1,208,803 | | | | 1,208,803 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | Collateralized Mortgage Obligations/Real | | | | | | | | | | | | | | | | | | | | | | | | | Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | | | | | | | | | | Fannie Mae | | | 1,854,692 | | | | 1,854,692 | | | | — | | | | — | | | | — | | | | — | | Freddie Mac | | | 3,184,866 | | | | 3,184,866 | | | | — | | | | — | | | | — | | | | — | | Ginnie Mae | | | 127,168 | | | | 127,168 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | Total CMOs/REMICs | | | 5,166,726 | | | | 5,166,726 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | Commercial Mortgage-Backed Securities | | | | | | | | | | | | | | | | | | | | | | | | | Freddie Mac | | | 173,969 | | | | 173,969 | | | | — | | | | — | | | | — | | | | — | | Ginnie Mae | | | 48,954 | | | | 48,954 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | Total commercial mortgage-backed securities | | | 222,923 | | | | 222,923 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | Non-GSE MBS | | | | | | | | | | | | | | | | | | | | | | | | | CMOs/REMICs | | | 336,980 | | | | 218,579 | | | | 9,688 | | | | 20,989 | | | | — | | | | 87,724 | | Asset-Backed Securities | | | | | | | | | | | | | | | | | | | | | | | | | Manufactured housing loans (insured) | | | 182,711 | | | | — | | | | 182,711 | | | | — | | | | — | | | | — | | Home equity loans (insured) | | | 196,641 | | | | 9,710 | | | | 70,835 | | | | 23,226 | | | | 14,037 | | | | 78,833 | | Home equity loans (uninsured) | | | 166,206 | | | | 150,323 | | | | 11,791 | | | | — | | | | 4,092 | | | | — | | | | | | | | | | | | | | | | | | | | | Total asset-backed securities | | | 545,558 | | | | 160,033 | | | | 265,337 | | | | 23,226 | | | | 18,129 | | | | 78,833 | | | | | | | | | | | | | | | | | | | | | Total HTM mortgage-backed securities | | $ | 7,480,990 | | | $ | 6,977,064 | | | $ | 275,025 | | | $ | 44,215 | | | $ | 18,129 | | | $ | 166,557 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | | | | | | | | | | | | | | | | State and local housing finance agency obligations | | $ | 740,256 | | | $ | 71,597 | | | $ | 592,594 | | | $ | 19,845 | | | $ | 56,220 | | | $ | — | | | | | | | | | | | | | | | | | | | | | Total other | | $ | 740,256 | | | $ | 71,597 | | | $ | 592,594 | | | $ | 19,845 | | | $ | 56,220 | | | $ | — | | | | | | | | | | | | | | | | | | | | | Total Held-to-maturity securities | | $ | 8,221,246 | | | $ | 7,048,661 | | | $ | 867,619 | | | $ | 64,060 | | | $ | 74,349 | | | $ | 166,557 | | | | | | | | | | | | | | | | | | | | |
Table 36: NRSRO Available-for-Sale Securities
External ratings — Available-for-sale securities — September 30, 2010:
| | | | | | | | | | | | | | | | | | | | | | | NRSRO Ratings - September 30, 2010 | | Issued, guaranteed or insured: | | Fair Value | | | AAA | | | AA | | | A | | Pools of Mortgages | | | | | | | | | | | | | | | | | Fannie Mae | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Freddie Mac | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Total pools of mortgages | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Collateralized Mortgage Obligations/Real | | | | | | | | | | | | | | | | | Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | | Fannie Mae | | | 2,275,326 | | | | 2,275,326 | | | | — | | | | — | | Freddie Mac | | | 1,085,633 | | | | 1,085,633 | | | | — | | | | — | | Ginnie Mae | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Total CMOs/REMICs | | | 3,360,959 | | | | 3,360,959 | | | | — | | | | — | | | | | | | | | | | | | | | Non-GSE MBS | | | | | | | | | | | | | | | | | CMOs/REMICs | | | — | | | | — | | | | — | | | | — | | Commercial mortgage-backed securities | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Total non-federal-agency MBS | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Asset-Backed Securities | | | | | | | | | | | | | | | | | Manufactured housing loans (insured) | | | — | | | | — | | | | — | | | | — | | Home equity loans (insured) | | | — | | | | — | | | | — | | | | — | | Home equity loans (uninsured) | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Total asset-backed securities | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Total AFS mortgage-backed securities | | $ | 3,360,959 | | | $ | 3,360,959 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | | | | | | | | Fixed income funds, equity funds and cash equivalents* | | $ | 12,822 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Available-for-sale securities | | $ | 3,373,781 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
106
Fannie Mae and Freddie Mac Securities
The FHLBNY’s mortgage-backed securities were predominantly issued by Fannie Mae and Freddie Mac.
The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are in conservatorship, with the Finance Agency named as conservator, who will manage Fannie Mae and Freddie Mac in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market.
Available-for-sale securities –100 percent of MBS outstanding and classified as AFS were issued by Fannie Mae and Freddie Mac.
Held-to-maturity securities –Comprised of 88.2% and 89.1% of MBS also issued by Fannie Mae, Freddie Mac and a U.S. government agency at September 30, 2010 and December 31, 2009.
The following table summarizes the carrying value basis of held-to-maturity mortgage-backed securities by issuer (dollars in thousands):
Table 37: Carrying Value Basis of Held-to-Maturity Mortgage-Backed Securities by Issuer
| | | | | | | | | | | | | | | | | | | September 30, | | | Percentage | | | December 31, | | | Percentage | | | | 2010 | | | of total | | | 2009 | | | of total | | | | | | | | | | | | | | | | | | | U.S. government sponsored enterprise residential mortgage-backed securities | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 2,793,981 | | | | 37.35 | % | | $ | 3,746,768 | | | | 38.36 | % | Freddie Mac | | | 3,454,380 | | | | 46.17 | | | | 4,735,371 | | | | 48.48 | | U.S. agency residential mortgage-backed securities | | | 127,168 | | | | 1.70 | | | | 171,531 | | | | 1.76 | | U.S. government sponsored enterprise commercial mortgage-backed securities | | | 173,969 | | | | 2.33 | | | | — | | | | — | | U.S. agency commercial mortgage-backed securities | | | 48,953 | | | | 0.65 | | | | 49,526 | | | | 0.51 | | Private-label issued securities | | | 882,539 | | | | 11.80 | | | | 1,064,335 | | | | 10.89 | | | | | | | | | | | | | | | Total Held-to-maturity securities-mortgage-backed securities | | $ | 7,480,990 | | | | 100.00 | % | | $ | 9,767,531 | | | | 100.00 | % | | | | | | | | | | | | | |
Non-Agency Private label mortgage — and asset-backed securities
The Bank also held MBS that were privately issued, and were classified as held-to-maturity. The following table summarizes private-label mortgage- and asset-backed securities by fixed- or variable-rate coupon types (Unpaid principal balance; in thousands):
Table 38: Non-Agency Private Label Mortgage Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | Private-label MBS | | Fixed Rate | | | Variable Rate | | | Total | | | Fixed Rate | | | Variable Rate | | | Total | | Private-label RMBS | | | | | | | | | | | | | | | | | | | | | | | | | Prime | | $ | 328,579 | | | $ | 4,068 | | | $ | 332,647 | | | $ | 435,913 | | | $ | 4,359 | | | $ | 440,272 | | Alt-A | | | 6,123 | | | | 3,338 | | | | 9,461 | | | | 7,229 | | | | 3,713 | | | | 10,942 | | | | | | | | | | | | | | | | | | | | | Total PL RMBS | | | 334,702 | | | | 7,406 | | | | 342,108 | | | | 443,142 | | | | 8,072 | | | | 451,214 | | | | | | | | | | | | | | | | | | | | | Home Equity Loans | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | 399,922 | | | | 85,256 | | | | 485,178 | | | | 437,042 | | | | 108,801 | | | | 545,843 | | | | | | | | | | | | | | | | | | | | | Total Home Equity Loans | | | 399,922 | | | | 85,256 | | | | 485,178 | | | | 437,042 | | | | 108,801 | | | | 545,843 | | | | | | | | | | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | 182,731 | | | | — | | | | 182,731 | | | | 202,299 | | | | — | | | | 202,299 | | | | | | | | | | | | | | | | | | | | | Total Manufactured Housing Loans | | | 182,731 | | | | — | | | | 182,731 | | | | 202,299 | | | | — | | | | 202,299 | | | | | | | | | | | | | | | | | | | | | Total UPB of private-label MBS | | $ | 917,355 | | | $ | 92,662 | | | $ | 1,010,017 | | | $ | 1,082,483 | | | $ | 116,873 | | | $ | 1,199,356 | | | | | | | | | | | | | | | | | | | | |
Unpaid principal balance (UPB) is also known as the current face or par amount of a mortgage-backed security.
Other-Than-Temporarily Impaired Securities
OTTI at 2010 third quarter —To assess whether the entire amortized cost basis of the Bank’s private-label MBS will be recovered, the Bank performed cash flow analysis on 100 percent of the its private-label MBS outstanding at September 30, 2010. Cash flow assessments identified credit impairment on four HTM private-label mortgage-backed securities, and $3.1 million as other-than-temporary impairment (“OTTI”) was recorded as a charge to earnings. All four securities had been previously determined to be OTTI, and the additional impairment (or re-impairment) in the 2010 third quarter was due to further deterioration in the credit performance metrics of the securities. The non-credit portion of OTTI recorded in AOCI was not significant. Year-to-date credit OTTI was $7.7 million.
107
The tables below provide the key characteristics of the securities1that were deemed OTTI in the 2010 (dollars in thousands):
Table 39: OTTI in 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | Nine Months Ended | | | | Quarter ended September 30, 2010 | | | September 30, 2010 | | | September 30, 2010 | | | | Insurer MBIA | | | Insurer Ambac | | | OTTI | | | OTTI | | Security | | | | | | Fair | | | | | | | Fair | | | Credit | | | Non-credit2 | | | Credit | | | Non-credit2 | | Classification | | UPB | | | Value | | | UPB | | | Value | | | Loss | | | Loss | | | Loss | | | Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | HEL Subprime* | | $ | 31,876 | | | $ | 15,050 | | | $ | 16,341 | | | $ | 8,233 | | | $ | (3,067 | ) | | $ | (2,569 | ) | | $ | (7,737 | ) | | $ | (3,164 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 31,876 | | | $ | 15,050 | | | $ | 16,341 | | | $ | 8,233 | | | $ | (3,067 | ) | | $ | (2,569 | ) | | $ | (7,737 | ) | | $ | (3,164 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | * | | HEL Subprime — MBS supported by home equity loans. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter ended June 30, 2010 | | | | Insurer MBIA | | | Insurer Ambac | | | OTTI | | Security | | | | | | Fair | | | | | | | Fair | | | Credit | | | Non-credit2 | | Classification | | UPB | | | Value | | | UPB | | | Value | | | Loss | | | Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | HEL Subprime* | | $ | 20,976 | | | $ | 9,044 | | | $ | 37,456 | | | $ | 22,564 | | | $ | (1,270 | ) | | $ | (1,068 | ) | | | | | | | | | | | | | | | | | | | | Total | | $ | 20,976 | | | $ | 9,044 | | | $ | 37,456 | | | $ | 22,564 | | | $ | (1,270 | ) | | $ | (1,068 | ) | | | | | | | | | | | | | | | | | | | |
| | | * | | HEL Subprime — MBS supported by home equity loans. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter ended March 31, 2010 | | | | Insurer MBIA | | | Insurer Ambac | | | OTTI | | Security | | | | | | Fair | | | | | | | Fair | | | Credit | | | Non-credit2 | | Classification | | UPB | | | Value | | | UPB | | | Value | | | Loss | | | Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | HEL Subprime* | | $ | 21,637 | | | $ | 9,730 | | | $ | 45,476 | | | $ | 26,015 | | | $ | (3,400 | ) | | $ | 473 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 21,637 | | | $ | 9,730 | | | $ | 45,476 | | | $ | 26,015 | | | $ | (3,400 | ) | | $ | 473 | | | | | | | | | | | | | | | | | | | | |
| | | * | | HEL Subprime — MBS supported by home equity loans. | | 1 | | At September 30, 2010, the total carrying value of the securities prior to OTTI was $22.7 million. The carrying values and fair values of OTTI securities in a loss position prior to OTTI were $8.6 million and $8.1 million also at September 30, 2010.Qualifying under hedge accounting rules. | | 2 | | Represents net amount of impairment losses reclassified (from) to AOCI to earningsNot qualifying under hedge accounting rules but used as a result of additional credit losses on securities that had been previously determined to be OTTI.an economic hedge (“standalone”). |
All four credit impaired securities at September 30, 2010 are insured by bond insurers Ambac and MBIA. The Bank’s analysis of Ambac concluded that the bond insurer could not be relied upon to make whole credit losses. Analysis of MBIA concluded that insurance support could be relied upon for shortfalls up until June 30, 2011, beyond which date, MBIA’s financial resources would be such that insurance protection could not be relied upon.
The following table summarizes the key characteristics of securities insured by MBIA, Ambac, and Assured Guaranty Municipal Trust (formerly FSA) (in thousands):
Table 40: Monoline Insurance of PLMBS
| | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | | AMBAC | | | MBIA | | | AGM * | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | | Private-label MBS | | UPB | | | Losses | | | UPB | | | Losses | | | UPB | | | Losses | | HEL | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | $ | 179,287 | | | $ | (31,202 | ) | | $ | 34,450 | | | $ | (8,414 | ) | | $ | 77,981 | | | $ | (2,577 | ) | Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | — | | | | — | | | | — | | | | — | | | | 182,731 | | | | (22,141 | ) | | | | | | | | | | | | | | | | | | | | Total of all Private-label MBS | | $ | 179,287 | | | $ | (31,202 | ) | | $ | 34,450 | | | $ | (8,414 | ) | | $ | 260,712 | | | $ | (24,718 | ) | | | | | | | | | | | | | | | | | | | |
| | | * | | Assured Guaranty Municipal Trust (formerly FSA) |
108
The following tables present additional information of the fair values and gross unrealized losses of PLMBS by year of securitization and external rating (in thousands):
Table 41: PLMBS by Year of Securitization and External Rating
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | | | | | | | | | | | | | | | | Unpaid Principal Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Below | | | | | | | Gross | | | | | | | | | | | Ratings | | | | | | | | | | | | | | | | | | | Investment | | | Amortized | | | Unrealized | | | | | | | Total OTTI | | Private-label MBS | | Subtotal | | | Triple-A | | | Double-A | | | Single-A | | | Triple-B | | | Grade | | | Cost | | | (Losses) | | | Fair Value | | | Losses | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | $ | 46,480 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 46,480 | | | $ | 46,029 | | | $ | (407 | ) | | $ | 45,710 | | | $ | — | | 2005 | | | 66,409 | | | | — | | | | — | | | | 21,223 | | | | — | | | | 45,186 | | | | 64,699 | | | | (716 | ) | | | 64,575 | | | | — | | 2004 and earlier | | | 219,758 | | | | 209,866 | | | | 9,892 | | | | — | | | | — | | | | — | | | | 218,805 | | | | (443 | ) | | | 223,795 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS Prime | | | 332,647 | | | | 209,866 | | | | 9,892 | | | | 21,223 | | | | — | | | | 91,666 | | | | 329,533 | | | | (1,566 | ) | | | 334,080 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alt-A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 9,461 | | | | 9,461 | | | | — | | | | — | | | | — | | | | — | | | | 9,462 | | | | (768 | ) | | | 8,746 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS | | | 342,108 | | | | 219,327 | | | | 9,892 | | | | 21,223 | | | | — | | | | 91,666 | | | | 338,995 | | | | (2,334 | ) | | | 342,826 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | HEL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 485,178 | | | | 180,811 | | | | 89,111 | | | | 42,759 | | | | 28,932 | | | | 143,565 | | | | 456,876 | | | | (76,438 | ) | | | 381,214 | | | | (4,573 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Manufactured | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 182,731 | | | | — | | | | 182,731 | | | | — | | | | — | | | | — | | | | 182,712 | | | | (22,141 | ) | | | 160,571 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total PLMBS | | $ | 1,010,017 | | | $ | 400,138 | | | $ | 281,734 | | | $ | 63,982 | | | $ | 28,932 | | | $ | 235,231 | | | $ | 978,583 | | | $ | (100,913 | ) | | $ | 884,611 | | | $ | (4,573 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | | | | | | | | | | | | | | | | | Unpaid Principal Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Below | | | | | | | Gross | | | | | | | | | | | Ratings | | | | | | | | | | | | | | | | | | | Investment | | | | | | | Unrealized | | | | | | | Total OTTI | | Private-label MBS | | Subtotal | | | Triple-A | | | Double-A | | | Single-A | | | Triple-B | | | Grade | | | Amortized Cost | | | (Losses) | | | Fair Value | | | Losses | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | $ | 63,276 | | | $ | — | | | $ | — | | | $ | 38,689 | | | $ | — | | | $ | 24,587 | | | $ | 62,654 | | | $ | (2,396 | ) | | $ | 60,258 | | | $ | — | | 2005 | | | 82,982 | | | | 28,687 | | | | — | | | | — | | | | — | | | | 54,295 | | | | 80,996 | | | | (1,708 | ) | | | 79,288 | | | | (3,204 | ) | 2004 and earlier | | | 294,014 | | | | 281,240 | | | | 12,774 | | | | — | | | | — | | | | — | | | | 292,773 | | | | (3,696 | ) | | | 289,958 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS Prime | | | 440,272 | | | | 309,927 | | | | 12,774 | | | | 38,689 | | | | — | | | | 78,882 | | | | 436,423 | | | | (7,800 | ) | | | 429,504 | | | | (3,204 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alt-A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 10,942 | | | | 10,942 | | | | — | | | | — | | | | — | | | | — | | | | 10,944 | | | | (938 | ) | | | 10,006 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total RMBS | | | 451,214 | | | | 320,869 | | | | 12,774 | | | | 38,689 | | | | — | | | | 78,882 | | | | 447,367 | | | | (8,738 | ) | | | 439,510 | | | | (3,204 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | HEL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 545,843 | | | | 205,480 | | | | 91,782 | | | | 48,838 | | | | 43,035 | | | | 156,708 | | | | 525,260 | | | | (151,818 | ) | | | 373,442 | | | | (137,708 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Manufactured | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2004 and earlier | | | 202,299 | | | | — | | | | 202,299 | | | | — | | | | — | | | | — | | | | 202,278 | | | | (37,101 | ) | | | 165,177 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total PLMBS | | $ | 1,199,356 | | | $ | 526,349 | | | $ | 306,855 | | | $ | 87,527 | | | $ | 43,035 | | | $ | 235,590 | | | $ | 1,174,905 | | | $ | (197,657 | ) | | $ | 978,129 | | | $ | (140,912 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
109
Weighted-average market price offers an analysis of unrealized loss percentage; a comparison of the weighted-average credit support to weighted-average collateral delinquency percentage is another indicator of the credit support available to absorb potential cash flow shortfalls.
Table 42: Weighted-Average Market Price of MBS
| | | | | | | | | | | | | | | September 30, 2010 | | | | Original | | | | | | | | | | Weighted- | | | Weighted- | | | Weighted-Average | | | | Average Credit | | | Average Credit | | | Collateral | | Private-label MBS | | Support % | | | Support % | | | Delinquency % | | RMBS | | | | | | | | | | | | | Prime | | | | | | | | | | | | | 2006 | | | 3.73 | % | | | 5.29 | % | | | 6.30 | % | 2005 | | | 2.59 | | | | 4.13 | | | | 2.56 | | 2004 and earlier | | | 1.58 | | | | 3.21 | | | | 0.65 | | | | | | | | | | | | Total RMBS Prime | | | 2.08 | | | | 3.69 | | | | 1.82 | | Alt-A | | | | | | | | | | | | | 2004 and earlier | | | 10.97 | | | | 33.36 | | | | 10.89 | | | | | | | | | | | | Total RMBS | | | 2.32 | | | | 4.51 | | | | 2.07 | | | | | | | | | | | | HEL | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 57.14 | | | | 64.72 | | | | 17.24 | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 100.00 | | | | 100.00 | | | | 3.14 | | | | | | | | | | | | Total Private-label MBS | | | 46.33 | % | | | 50.71 | % | | | 9.55 | % | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, 2009 | | | | Original | | | | | | | | | | Weighted- | | | Weighted- | | | Weighted-Average | | | | Average Credit | | | Average Credit | | | Collateral | | Private-label MBS | | Support % | | | Support % | | | Delinquency % | | RMBS | | | | | | | | | | | | | Prime | | | | | | | | | | | | | 2006 | | | 3.74 | % | | | 5.16 | % | | | 5.47 | % | 2005 | | | 2.67 | | | | 3.82 | | | | 2.32 | | 2004 and earlier | | | 1.58 | | | | 2.82 | | | | 0.79 | | | | | | | | | | | | Total RMBS Prime | | | 2.10 | | | | 3.35 | | | | 1.75 | | Alt-A | | | | | | | | | | | | | 2004 and earlier | | | 10.73 | | | | 32.35 | | | | 11.22 | | | | | | | | | | | | Total RMBS | | | 2.30 | | | | 4.05 | | | | 1.98 | | | | | | | | | | | | HEL | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 57.86 | | | | 65.34 | | | | 17.40 | | | | | | | | | | | | Manufactured Housing Loans | | | | | | | | | | | | | Subprime | | | | | | | | | | | | | 2004 and earlier | | | 57.78 | | | | 55.56 | | | | 3.64 | | | | | | | | | | | | Total Private-label MBS | | | 36.95 | % | | | 40.63 | % | | | 9.28 | % | | | | | | | | | | |
Definitions:
Original Weighted-Average Credit Support percentagerepresents the arithmetic mean of a cohort of securities by vintage; credit support is defined as the credit protection level at the time the mortgage-backed securities closed. Support is expressed as a percentage of the sum of: subordinate bonds, reserve funds, guarantees, overcollateralization, divided by the original collateral balance.
Weighted-Average Credit Support percentagerepresents the arithmetic mean of a cohort of securities by vintage; credit support is defined as the credit protection level as of the mortgage-backed securities most current payment date. Support is expressed as a percentage of the sum of: subordinate bonds, reserve funds, guarantees, overcollateralization, divided by the most current unpaid collateral balance.
Weighted-average collateral delinquency percentagerepresents the arithmetic mean of a cohort of securities by vintage: collateral delinquency is defined as the sum of the unpaid principal balance of loans underlying the mortgage-backed security where the borrower is 60 or more days past due, or in bankruptcy proceedings, or the loan is in foreclosure, or has become real estate owned divided by the aggregate unpaid collateral balance.
110
Mortgage Loans — Held-for-portfolio
Through the Mortgage Partnership Finance Program or MPF program, the FHLBNY invests in home mortgage loans originated by or through members or approved state and local housing finance agencies (“housing associates”). The FHLBNY purchases these mortgages loans under the Finance Agency’s Acquired Member Assets (“AMA”) regulation. These assets may include whole loans eligible to secure advances (excluding mortgages above the conforming-loan limit); whole loans secured by manufactured housing; or bonds issued by housing associates.
Underwriting standards- Summarized below are the principal underwriting criteria for the Bank’s MPF Program through which the Bank acquires mortgage loans for its own portfolio. For a fuller description of the MPF loan mortgage loan standards, refer to pages 8 through 19 of the Bank’s most recent Form 10-K filed on March 25, 2010.
Mortgage loans delivered under the MPF Program must meet certain underwriting and eligibility requirements. Loans must be qualifying 5- to 30-year conforming conventional or Government fixed-rate, fully amortizing mortgage loans, secured by first liens on owner-occupied one-to-four family residential properties and single unit second homes. Not eligible for delivery under the MPF Program are mortgage loans that are not ratable by S&P, or loans that are classified as high cost, high rate, or high risk. Satisfaction Collectability of mortgage loans is supported by liens on real estate securing the loan. For conventional loans, defined as mortgage loans other than VA and FHA insured loans, additional loss protection is provided by private mortgage insurance required for MPF loans with a loan-to-value ratio of more than 80 percent at origination, which is paid for by the borrower. The FHLBNY is responsible for losses up to the “first loss level”. Losses beyond this layer are absorbed through credit enhancement provided by the member participating in the Mortgage Partnership Program. All residual credit exposure is FHLBNY’s responsibility. The amount of credit enhancement is computed with the use of a Standard & Poor’s model to bring a pool of uninsured loans to “AA” credit risk. The credit enhancement is an obligation of the member.
The following table provides roll-forward information with respect to the First Loss Account (in thousands):
Table 43: Roll-Forward First Loss Account
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 11,513 | | | $ | 13,948 | | | $ | 13,934 | | | $ | 13,765 | | Additions | | | 187 | | | | 19 | | | | 340 | | | | 216 | | Resets* | | | — | | | | — | | | | (2,540 | ) | | | — | | Charge-offs | | | (97 | ) | | | — | | | | (131 | ) | | | (14 | ) | Recoveries | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Ending balance | | $ | 11,603 | | | $ | 13,967 | | | $ | 11,603 | | | $ | 13,967 | | | | | | | | | | | | | | |
| | | * | | For the Original MPF, MPF 100, MPF 125 and MPF Plus products, the Credit Enhancement is periodically recalculated. If the recalculated Credit Enhancement would result in a PFI Credit Enhancement obligation lower than the remaining obligation, the PFI’s Credit Enhancement obligation will be reset to the new, lower level. |
The aggregate amount of the First Loss Account is memorialized and tracked but is neither recorded nor reported as a credit loss reserve in the FHLBNY’s financial statements. If “second losses” beyond this layer are incurred, they are absorbed through a credit enhancement provided by the Participating Financial Institutions. The credit enhancement held by PFIs ensures that the lender retains a credit stake in the loans it originates. For managing this risk, PFIs receive monthly “credit enhancement fees” from the FHLBNY.
Mortgage loans — Past due
In the FHLBNY’s outstanding mortgage loans held-for-portfolio, non-performing loans and loans 90 days or more past due and accruing interest were as follows (in thousands):
Table 44: Mortgage Loans — Past Due
| | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | | | | Secured by 1-4 family | | $ | 668 | | | $ | 570 | | | | | | | | |
The past due loans still accruing were VA and FHA insured loans.
Non-performing mortgage loans were conventional mortgage loans that were placed on non-accrual/non-performing status when the collection of the contractual principal or interest from the borrower was 90 days or more past due. FHLBNY considers conventional loans that are 90 days or more past due as non-accrual loans. Conventional loans exclude Federal Housing Administration (“FHA”) and Veteran Administration (“VA”) insured loans. FHA and VA insured loans that were past due 90 days or more were not significant at any period reported, and interest was still being accrued because of VA and FHA insurance (See Table 45: Mortgage Loans — Interest Short-fall). No loans were impaired for any periods covered in this report, other than the non-accrual loans.
111
Mortgage loans — Interest on Non-performing loans
The FHLBNY’s interest contractually due and actually received for non-performing loans were as follows (in thousands):
Table 45: Mortgage Loans — Interest Short-Fall
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | | | | | | | | | | | | | | | | Interest contractually due1 | | $ | 373 | | | $ | 200 | | | $ | 973 | | | $ | 505 | | Interest actually received | | | 344 | | | | 179 | | | | 898 | | | | 452 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shortfall | | $ | 29 | | | $ | 21 | | | $ | 75 | | | $ | 53 | | | | | | | | | | | | | | |
| | | 13 | | The Bank does not recognize interest received as income from uninsured loans past due 90-days or greater.Economic hedge of debt designated under the FVO. |
Table 46: Mortgage Loans — Allowance for Credit Losses
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 5,392 | | | $ | 2,760 | | | $ | 4,498 | | | $ | 1,406 | | Charge-offs | | | (97 | ) | | | — | | | | (131 | ) | | | (14 | ) | Recoveries | | | 11 | | | | — | | | | 33 | | | | — | | Provision for credit losses on mortgage loans | | | 231 | | | | 598 | | | | 1,137 | | | | 1,966 | | | | | | | | | | | | | | | | | Ending balance | | $ | 5,537 | | | $ | 3,358 | | | $ | 5,537 | | | $ | 3,358 | | | | | | | | | | | | | | |
Participating Financial Institution Risk
The members or housing associates that are approved as Participating Financial Institutions continue to bear a significant portion of the credit risk through credit enhancements that they provide to the FHLBNY. The Acquired Member Assets regulation requires that these credit enhancements be sufficient to protect the FHLBNY from excess credit risk exposure. Specifically, the FHLBNY exposure must be no greater than it would be with an asset rated in the fourth-highest credit rating category by a Nationally Recognized Statistical Rating Organization (“NRSRO”), or such higher rating category as the FHLBNY may require. The MPF program is constructed to provide the Bank with assets that are credit-enhanced to the second-highest credit rating category (double-A).
The top five Participating Financial Institutions (PFI) and the outstanding MPF loan balances are listed below (dollars in thousands):
Table 47: Top Five Participating Financial Institutions — Concentration
| | | | | | | | | | | September 30, 2010 | | | | Mortgage | | | Percent of Total | | | | Loans | | | Mortgage Loans | | | | | | | | | | | Manufacturers and Traders Trust Company | | $ | 533,689 | | | | 42.23 | % | Astoria Federal Savings and Loan Association | | | 210,404 | | | | 16.65 | | Community Bank fka Elmira Svgs & Ln Assn | | | 51,694 | | | | 4.09 | | OceanFirst Bank | | | 50,658 | | | | 4.01 | | CFCU Community Credit Union | | | 40,802 | | | | 3.23 | | All Others | | | 376,501 | | | | 29.79 | | | | | | | | | | | | | | | | | | Total1 | | $ | 1,263,748 | | | | 100.00 | % | | | | | | | |
| | | | | | | | | | | December 31, 2009 | | | | Mortgage | | | Percent of Total | | | | Loans | | | Mortgage Loans | | | | | | | | | | | Manufacturers and Traders Trust Company | | $ | 607,072 | | | | 46.17 | % | Astoria Federal Savings and Loan Association | | | 220,268 | | | | 16.75 | | Elmira Savings and Loan F.A. | | | 61,663 | | | | 4.69 | | Ocean First Bank | | | 51,277 | | | | 3.90 | | CFCU Community Credit Union | | | 42,344 | | | | 3.22 | | All Others | | | 332,304 | | | | 25.27 | | | | | | | | | | | | | | | | | | Total1 | | $ | 1,314,928 | | | | 100.00 | % | | | | | | | |
| | | Note1 | | Totals do not include CMA loans. |
112
Derivative Credit Risk Exposure on MPF Loans — Mortgage insurer default risk CreditIn addition to market risk, on MPF loans is the potential for financial loss due to borrower default or depreciation in the value of the real estate collateral securing the MPF Loan, offset by the PFI’s credit enhancement protection, which may take the form of a contingent performance based credit enhancement fees as well as the credit enhancement amount. The credit enhancement amount is a direct liability of the PFI to pay credit losses; the PFI may also arrange with an insurer for a SMI policy insuring a portion of the credit losses. To the extent credit losses are not recoverable from PMI, the FHLBNY has potential credit exposure should the loan default and the PFI directly or indirectly is unable to recover credit losses.
The MPF Program uses certain mortgage insurance companies to provide both primary mortgage insurance (“PMI”) and supplemental mortgage insurance (“SMI”) for MPF loans. The FHLBNY is exposed to the performance of mortgage insurers to the extent PFI’s rely on insurer credit protection. Credit exposure is defined as the total of PMI and SMI coverage written by a mortgage insurer on MPF loans held by FHLBNY that are delinquent.
All mortgage insurance providers have had their external ratings for insurer financial strength downgraded below AA- by one or more NRSROs since December 31, 2008. If a mortgage insurer fails to fulfill its obligations, the FHLBNY may bear any remaining loss of the borrowers’ default on the related mortgage loans not covered by the PFI.
The FHLBNY has stopped accepting new loans under master commitments with SMI from mortgage insurers that no longer meet MPF insurer requirements. If an SMI provider is downgraded below an “AA-” rating under the MPF Plus product, the PFI has six months to either replace the SMI policy or provide its own undertaking; or it may forfeit its performance based CE Fees. If a PMI provider is downgraded, the FHLBNY may request the servicer to obtain replacement PMI coverage with a different provider. However, it is possible that replacement coverage may be unavailable or result in additional cost to the FHLBNY.
Derivative Counterparty Ratings
The FHLBNY is subject to credit risk duein derivative transactions because of the potential for non-performance by the counterparties, which could result in the FHLBNY having to the risk of nonperformance by counterparties to theacquire a replacement derivative agreements.from a different counterparty at a cost. The FHLBNY transacts most of its derivatives with major financial institutions. Some of these institutions or their affiliates buy, sell, and distribute consolidated obligations. The FHLBNYalso is also subject to operational risks in the execution and servicing of derivative transactions.
The degree of counterparty credit risk may depend, among other factors, on the extent to which netting procedures and/or the provision of collateral are used to mitigate the risk. The FHLBNY manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Agency’s regulations. The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, but it does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing derivatives in favorable fair value gain positions if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY. The FHLBNY uses collateral agreements to mitigate counterparty credit risk in derivatives. When the FHLBNY has more than one derivative transaction outstanding with a counterparty, and a legally enforceable master netting agreement exists with the counterparty, the exposure, less collateral held, represents the appropriate measure of credit risk. Substantially all derivative contracts are subject to master netting agreements or other right of offset arrangements.
113
The following table summarizes the FHLBNY’s credit exposure by counterparty credit rating (in thousands, except number of counterparties).
See Table 48: Credit Exposure by Counterparty Credit Rating9.5 below for summarized information. | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | | | | | | | | | | Total Net | | | | | | | Number of | | | Notional | | | Exposure at | | | Net Exposure after | | Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | | | | | | | | | | | | | | | | | | | AAA | | | — | | | $ | — | | | $ | — | | | $ | — | | AA | | | 8 | | | | 45,406,173 | | | | 40,342 | | | | 18,346 | | A | | | 8 | | | | 78,223,953 | | | | 35,340 | | | | 3,540 | | Members (Note1 and Note2) | | | 2 | | | | 275,000 | | | | 10,535 | | | | 10,535 | | Delivery Commitments | | | — | | | | 20,675 | | | | 4 | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 18 | | | $ | 123,925,801 | | | $ | 86,221 | | | $ | 32,425 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | December 31, 2009 | | | | | | | | | | | | Total Net | | | | | | | Number of | | | Notional | | | Exposure at | | | Net Exposure after | | Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | | | | | | | | | | | | | | | | | | | AAA | | | — | | | $ | — | | | $ | — | | | $ | — | | AA | | | 7 | | | | 45,652,167 | | | | 684 | | | | 684 | | A | | | 8 | | | | 88,711,243 | | | | — | | | | — | | Members (Note1 and Note2) | | | 2 | | | | 160,000 | | | | 7,596 | | | | 7,596 | | Delivery Commitments | | | — | | | | 4,210 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 17 | | | $ | 134,527,620 | | | $ | 8,280 | | | $ | 8,280 | | | | | | | | | | | | | | |
| | | Note1: | | Fair values of $10.5 million and $7.6 million comprising of intermediated transactions with members and interest-rate caps sold to members (with capped floating-rate advances) were collateralized at September 30, 2010 and December 31, 2009. | | Note2: | | Members are required to pledge collateral to secure derivatives purchased by the FHLBNY as an intermediary on behalf of its members. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. As a result of the collateral agreements with its members, the FHLBNY believes that its maximum credit exposure due to the intermediated transactions was $0 at September 30, 2010 and December 31, 2009. | | Note3: | | As reported in the Statements of Condition. |
Risk measurement-— Although notional amount is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since derivative counterparties do not exchange the notional amount (except in the case of foreign currency swaps, of which the FHLBNY has none). Counterparties use the notional amounts of derivative instruments to calculate contractual cash flows to be exchanged. The fair value of a derivative in a gain position is a more meaningful measure of the FHLBNY’s current market exposure on derivatives. The FHLBNY estimates exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a gain position, net of collateral pledged by the counterparty to mitigate the FHLBNY’s exposure. All derivative contracts with non-members are also subject to master netting agreements or other right of offset arrangements. Exposure-— In determining credit risk, the FHLBNY considers accrued interest receivable and payable, and the legal right to offset assets and liabilities by counterparty. The FHLBNY attempts to mitigate its exposure by requiring derivative counterparties to pledge cash collateral if the amount of exposure is above the collateral threshold agreements. At September 30, 2010, counterparties had deposited $53.8 million in cash as collateralThe FHLBNY is also required to mitigate such an exposure. At December 31, 2009, the fair values of derivatives in a gain position were below the threshold and derivative counterparties pledged no cash to the FHLBNY. At September 30, 2010 and December 31, 2009, the FHLBNY had posted $3.8 billion and $2.2 billion inpost cash as collateral to derivative counterparties to mitigate the risk faced by derivatives that are in a net fair value liability (unfavorable) position. The FHLBNY is exposed to the extent that a counterparty may not pay the posted cash collateral to the FHLBNY under unforeseen circumstances, such as bankruptcy; in such an event the FHLBNY would then exercise its rights under the “International Swaps and Derivatives Association agreement” (“ISDA”). To the extent the FHLBNY may not receive cash equal to the amount posted, the FHLBNY could face losses.
94
Derivative counterparty ratings-— The Bank’s credit exposures (derivatives in a net gain position) at September 30, 2010 were to counterparties rated Single A or better and to member institutions on whose behalf the FHLBNY had acted as an intermediary or had sold interest rate caps at the request of members to create capped floating rate advance borrowings. The exposures were collateralized under standard collateral agreements with the FHLBNY’s member. Acting as an intermediary, the Bank had also purchased equivalent notional amounts of derivatives from unrelated derivative counterparties. See Table 48:9.5: Derivatives Counterparty Notional Balance by Credit Exposure by Counterparty Credit Rating.Ratings. Risk mitigation-— The FHLBNY attempts to mitigate derivative counterparty credit risk by contracting only with experienced counterparties with investment-grade credit ratings. Annually, the FHLBNY’s management and Board of Directors review and approve all non-member derivative counterparties. Management monitors counterparties on an ongoing basis for significant business events, including ratings actions taken by nationally recognized statistical rating organizations. All approved derivatives counterparties must enter into a master ISDA agreement with the FHLBNY and, in addition, execute the Credit Support Annex to the ISDA agreement that provides for collateral support at predetermined thresholds. These annexes contain enforceable provisions for requiring collateral on certain derivative contracts that are in gain positions. The annexes also define the maximum net unsecured credit exposure amounts that may exist before collateral delivery is required. Typically, the maximum amount is based upon an analysis of individual counterparty’s rating and exposure. The FHLBNY also attempts to manage counterparty credit risk through credit analysis, collateral management and other credit enhancements, such as guarantees, and by following the requirements set forth in the Finance Agency’s regulations. Derivatives Counterparty Credit Ratings The following table summarizes the FHLBNY’s credit exposure by counterparty credit rating (in thousands, except number of counterparties). Table 9.5: Derivatives Counterparty Notional Balance by Credit Ratings | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | | | | | | | | | | | | Total Net | | | Credit Exposure | | | Other | | | Net | | | | Number of | | | Notional | | | Exposure at | | | Net of | | | Collateral | | | Credit | | Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | | | Held2 | | | Exposure | | | | | | | | | | | | | | | | | | | | | | | | | | | AAA | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | AA | | | 8 | | | | 45,423,489 | | | | 20,319 | | | | 14,619 | | | | — | | | | 14,619 | | A | | | 9 | | | | 72,576,345 | | | | 71,507 | | | | 6,107 | | | | — | | | | 6,107 | | Members (Notes1&2) | | | 2 | | | | 275,000 | | | | 4,194 | | | | 4,194 | | | | 4,194 | | | | — | | Delivery Commitments | | | — | | | | 25,197 | | | | 44 | | | | 44 | | | | 44 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 19 | | | $ | 118,300,031 | | | $ | 96,064 | | | $ | 24,964 | | | $ | 4,238 | | | $ | 20,726 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | | | | | | | | | Total Net | | | Credit Exposure | | | Other | | | Net | | | | Number of | | | Notional | | | Exposure at | | | Net of | | | Collateral | | | Credit | | Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | | | Held2 | | | Exposure | | | | | | | | | | | | | | | | | | | | | | | | | | | AAA | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | AA | | | 8 | | | | 43,283,429 | | | | 25,385 | | | | 16,085 | | | | — | | | | 16,085 | | A | | | 8 | | | | 77,132,931 | | | | — | | | | — | | | | — | | | | — | | Members (Notes1&2) | | | 2 | | | | 275,000 | | | | 5,925 | | | | 5,925 | | | | 5,925 | | | | — | | Delivery Commitments | | | — | | | | 29,993 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 18 | | | $ | 120,721,353 | | | $ | 31,310 | | | $ | 22,010 | | | $ | 5,925 | | | $ | 16,085 | | | | | | | | | | | | | | | | | | | | |
| | | Note1: | | Fair values of $4.2 million and $5.9 million comprising ofintermediated transactions with members and interest-rate caps sold to members (with capped floating-rate advances) were collateralized at March 31, 2011 and December 31, 2010. | | Note2: | | Members are required to pledge collateral to securederivatives purchased by the FHLBNY as an intermediary on behalf of its members. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. As a result of the collateral agreements with its members, the FHLBNY believes that its maximum credit exposure due to the intermediated transactions was $0 at March 31, 2011 and December 31, 2010. | | Note3: | | As reported in the Statements of Condition. |
11495
Commitments, Contingencies and Off-Balance Sheet Arrangements
Consolidated obligations — Joint and several liability
Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been transferred/assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks.
The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then 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 that the Finance Agency may determine. No FHLBank has ever failed to make a payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate among the other FHLBanks the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the 12 FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation (the Bank did not hold any consolidated obligations of other FHLBanks as investments at September 30, 2010 and December 31, 2009). If principal or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.
Although the FHLBNY is primarily liable for those consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock from, any member or non-member stockholder until the Finance Agency approves the FHLBNY’s consolidated obligation payment plan or another remedy, and until the FHLBNY pays all the interest and principal currently due under all its consolidated obligations. The par amounts of the outstanding consolidated obligations of all 12 FHLBanks were $0.8 trillion and $0.9 trillion at September 30, 2010 and December 31, 2009.
The FHLBNY does not believe that the identification of particular banks as the primary obligors on these consolidated obligations is relevant because all FHLBanks are jointly and severally obligated to pay all consolidated obligations. The identity of the primary obligor does not affect the FHLBNY’s investment decisions. The FHLBNY’s ownership of consolidated obligations in which other FHLBanks are primary obligors does not affect the FHLBNY’s “guarantee” on consolidated obligations as there is no automatic legal right of offset. Even if the FHLBNY were to claim an “offset,” the FHLBNY would still be jointly and severally obligated for any debt service shortfall caused by the FHLBanks’ failure to pay.
Off-balance sheet arrangements with respect to derivatives are discussed in detail in Note 16 to the unaudited financial statements in this report. Also, see Item 1 Legal Proceedings.
115
The following table summarizes contractual obligations and other commitments as of September 30, 2010 (in thousands):
Table 49: Contractual Obligations and Other Commitments
(For more information, see Note 18 to the unaudited financial statements in this report.)
| | | | | | | | | | | | | | | | | | | | | | | September 30, 2010 | | | | Payments due or expiration terms by period | | | | Less than | | | One year | | | Greater than three | | | Greater than | | | | | | | one year | | | to three years | | | years to five years | | | five years | | | Total | | Contractual Obligations | | | | | | | | | | | | | | | | | | | | | Consolidated obligations-bonds at par1 | | $ | 38,972,100 | | | $ | 25,068,825 | | | $ | 6,634,375 | | | $ | 3,054,200 | | | $ | 73,729,500 | | Mandatorily redeemable capital stock1 | | | 45,708 | | | | 14,650 | | | | 2,037 | | | | 4,953 | | | | 67,348 | | Premises (lease obligations)2 | | | 3,060 | | | | 6,284 | | | | 4,748 | | | | 4,674 | | | | 18,766 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total contractual obligations | | | 39,020,868 | | | | 25,089,759 | | | | 6,641,160 | | | | 3,063,827 | | | | 73,815,614 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other commitments | | | | | | | | | | | | | | | | | | | | | Standby letters of credit | | | 1,824,089 | | | | 20,012 | | | | 17,472 | | | | 3,861 | | | | 1,865,434 | | Consolidated obligations-bonds/ discount notes traded not settled | | | 774,322 | | | | — | | | | — | | | | — | | | | 774,322 | | Open delivery commitments (MPF) | | | 20,675 | | | | — | | | | — | | | | — | | | | 20,675 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other commitments | | | 2,619,086 | | | | 20,012 | | | | 17,472 | | | | 3,861 | | | | 2,660,431 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total obligations and commitments | | $ | 41,639,954 | | | $ | 25,109,771 | | | $ | 6,658,632 | | | $ | 3,067,688 | | | $ | 76,476,045 | | | | | | | | | | | | | | | | | |
| | | 1 | | Callable bonds contain exercise date or a series of exercise dates that may result in a shorter redemption period. Mandatorily redeemable capital stock is categorized by the dates at which the corresponding advances outstanding mature. Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock, under which stock may not be redeemed until the later of five years from the date the member becomes a nonmember or the related advance matures. | | 2 | | Immaterial amount of commitments for equipment leases are not included. |
Liquidity, Cash Flows, Short-Term Borrowings and Short-Term Debt The FHLBNY’s primary source of liquidity is the issuance of consolidated obligation bonds and discount notes. To refinance maturing consolidated obligations, the Bank relies on the willingness of the investors to purchase new issuances. The FHLBNY has access to the discount note market and the efficiency of issuing discount notes is an important factor as a source of liquidity, since discount notes can be issued any time and in a variety of amounts and maturities. Member deposits and capital stock purchased by members are another source of funds. Short-term unsecured borrowings from other FHLBanks and in the Federal funds market provide additional sources of liquidity. WithIn addition, the passageSecretary of the Housing Act on July 30, 2008, the U.S. Treasury wasis authorized to purchase up to $4.0 billion of consolidated obligations issued byfrom the FHLBanks, in any amount deemed appropriate by the U.S. Treasury. This temporary authorization expired December 31, 2009 and supplemented the existing limit of $4 billion. See Note 18 to the unaudited financial statements for more information.FHLBanks. The FHLBNY’s liquidity position remains in compliance with all regulatory requirements and management does not foresee any changes to that position. Finance Agency Regulations — Liquidity Beginning December 1, 2005, with the implementation of the Capital Plan, the Financial Management Policy rules of the Finance Agency with respect to liquidity were superseded by regulatory requirements that are specified in Parts 917, 932 and 965 of Finance Agency regulations and are summarized below. Each FHLBank shall at all times have at least an amount of liquidity equal to the current deposits received from its members that may be invested in: • | | Obligations of the United States; | | • | | Deposits in banks or trust companies; or | | • | | Advances with a maturity not to exceed five years. |
Obligations of the United States; Deposits in banks or trust companies; or Advances with a maturity not to exceed five years. In addition, each FHLBank shall provide for contingency liquidity, which is defined as the sources of cash an FHLBank may use to meet its operational requirements when its access to the capital markets is impeded. The FHLBNY met its contingency liquidity requirements and liquidityrequirements. Liquidity in excess of requirements is summarized in the table titled Contingency Liquidity. Violations of the liquidity requirements would result in non-compliance penalties under discretionary powers given to the Finance Agency under applicable regulations, which include other corrective actions. Liquidity Management The FHLBNY actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of the FHLBNY’s assets and liabilities. The FHLBNY recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the FHLBNY is required to maintain certain liquidity measures in accordance with the FHLBank Act and policies developed by the FHLBNY management and approved by the FHLBNY’s Board of Directors. The specific liquidity requirements applicable to the FHLBNY are described in the next four sections:sections. 116
Deposit Liquidity.The FHLBNY is required to invest an aggregate amount at least equal to the amount of current deposits received from the FHLBNY’s members in: (1) obligations of the U.S. government; (2) deposits in banks or trust companies; or (3) advances to members with maturities not exceeding five years. In addition to accepting deposits from its members, the FHLBNY may accept deposits from other FHLBank or from any other governmental instrumentality. Deposit liquidity is calculated daily. Quarterly average reserve requirements and actual reserves are summarized below (in millions). The FHLBNY met its requirements at all times. Table 50:10.1: Deposit Liquidity | | | | | | | | | | | | | | | Average Deposit | | | Average Actual | | | | | For the quarters ended | | Reserve Required | | | Deposit Liquidity | | | Excess | | September 30, 2010 | | $ | 5,055 | | | $ | 46,304 | | | $ | 41,249 | | June 30, 2010 | | | 5,227 | | | | 48,055 | | | | 42,828 | | March 31, 2010 | | | 5,032 | | | | 51,987 | | | | 46,955 | | December 31, 2009 | | | 2,364 | | | | 53,089 | | | | 50,725 | |
| | | | | | | | | | | | | | | Average Deposit | | | Average Actual | | | | | For the Quarters Ended | | Reserve Required | | | Deposit Liquidity | | | Excess | | March 31, 2011 | | $ | 2,404 | | | $ | 44,982 | | | $ | 42,578 | | December 31, 2010 | | | 3,304 | | | | 44,945 | | | | 41,641 | |
Operational Liquidity. The FHLBNY must be able to fund its activities as its balance sheet changes from day to day. The FHLBNY maintains the capacity to fund balance sheet growth through its regular money market and capital market funding activities. Management monitors the Bank’s operational liquidity needs by regularly comparing the Bank’s demonstrated funding capacity with its potential balance sheet growth. Management then takes such actions as may be necessary to maintain adequate sources of funding for such growth. Operational liquidity is measured daily. The FHLBNY met the requirements at all times. The following table summarizes excess operational liquidity (in millions): Table 51:10.2: Operational Liquidity | | | | | | | | | | | | | | | Average Balance Sheet | | | Average Actual | | | | | For the quarters ended | | Liquidity Requirement | | | Operational Liquidity | | | Excess | | September 30, 2010 | | $ | 3,915 | | | $ | 15,127 | | | $ | 11,212 | | June 30, 2010 | | | 2,665 | | | | 16,051 | | | | 13,386 | | March 31, 2010 | | | 2,283 | | | | 15,796 | | | | 13,513 | | December 31, 2009 | | | 6,710 | | | | 16,388 | | | | 9,678 | |
| | | | | | | | | | | | | | | Average Balance Sheet | | | Average Actual | | | | | For the Quarters Ended | | Liquidity Requirement | | | Operational Liquidity | | | Excess | | March 31, 2011 | | $ | 2,352 | | | $ | 17,796 | | | $ | 15,444 | | December 31, 2010 | | | 2,937 | | | | 15,500 | | | | 12,563 | |
Contingency Liquidity.The FHLBNY is required by Finance Agency regulations to hold “contingency liquidity” in an amount sufficient to meet its liquidity needs if it is unable, by virtue of a disaster, to access the consolidated obligation debt markets for at least five business days. Contingency liquidity includes (1) marketable assets with a maturity of one year or less; (2) self-liquidating assets with a maturity of one year or less; (3) assets that are generally acceptable as collateral in the repurchase market; and (4) irrevocable lines of credit from financial institutions receiving not less than the second-highest credit rating from a nationally recognized statistical rating organization. The FHLBNY consistently exceeded the regulatory minimum requirements for contingency liquidity. 117
Contingency liquidity is reported daily. The FHLBNY met the requirements at all times. 96
The following table summarizes excess contingency liquidity (in millions): Table 52:10.3: Contingency Liquidity | | | | | | | | | | | | | | | Average Five Day | | | Average Actual | | | | | For the quarters ended | | Requirement | | | Contingency Liquidity | | | Excess | | September 30, 2010 | | $ | 1,967 | | | $ | 14,859 | | | $ | 12,892 | | June 30, 2010 | | | 2,047 | | | | 15,821 | | | | 13,774 | | March 31, 2010 | | | 2,424 | | | | 15,463 | | | | 13,039 | | December 31, 2009 | | | 2,188 | | | | 15,309 | | | | 13,121 | |
| | | | | | | | | | | | | | | Average Five Day | | | Average Actual | | | | | For the Quarters Ended | | Requirement | | | Contingency Liquidity | | | Excess | | March 31, 2011 | | $ | 3,024 | | | $ | 17,586 | | | $ | 14,562 | | December 31, 2010 | | | 2,239 | | | | 15,289 | | | | 13,050 | |
The FHLBNY sets standards in its risk management policy that address its day-to-day operational and contingency liquidity needs. These standards enumerate the specific types of investments to be held by the FHLBNY to satisfy such liquidity needs and are outlined above. These standards also establish the methodology to be used by the FHLBNY in determining the FHLBNY’s operational and contingency needs. Management continually monitors and projects the FHLBNY’s cash needs, daily debt issuance capacity, and the amount and value of investments available for use in the market for repurchase agreements. Management uses this information to determine the FHLBNY’s liquidity needs and to develop appropriate liquidity plans. Advance “Roll-Off” and “Roll-Over” Liquidity guidelines. In September 2009, theThe Finance Agency finalized itsAgency’s Minimum Liquidity Requirement Guidelines. The guidelinesGuidelines expanded the existing liquidity requirements under Parts 917, 932 and 965 of the Finance Agency regulations to include additional cash flow requirements under two scenarios —- Advance “Roll-Over” and Roll-Off” scenarios. Each FHLBank, including the FHLBNY, must have positive cash balances to be able to maintain positive cash flows for 15 days under the Roll-Off scenario, and for five days under the Roll-Over scenario. The Roll-Off scenario assumes that advances maturing under their contractual terms would mature, and in that scenario the FHLBNY would maintain positive cash flows for a minimum of 5 days on a daily basis. The Roll-Over scenario assumes that the FHLBNY’s maturing advances would be rolled over, and in that scenario the FHLBNY would maintain positive cash flows for a minimum of 15 days on a daily basis. The FHLBNY calculates the amount of cash flows under each scenario on a daily basis and has been in compliance with the guidelines. Other Liquidity Contingencies. As discussed more fully under the section Debt Financing - Consolidated Obligations, the FHLBNY is primarily liable for consolidated obligations issued on its behalf. The FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the following rules apply: the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock of any member or non-member stockholder until the Finance Agency approves the FHLBNY’s consolidated obligation payment plan or other remedy and until the FHLBNY pays all the interest or principal currently due on all its consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $0.8 trillion at September 30, 2010. The FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future. Finance Agency regulations also state that the FHLBanks must maintain, free from any lien or pledge, the following types of assets in an amount at least equal to the amount of consolidated obligations outstanding: •Obligations of, or fully guaranteed by, the United States; •Mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States; •Investments described in section 16(a) of the FHLBank Act, including securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and •Other securities that are rated Aaa by Moody’s or AAA by Standard & Poor’s. Cash flows Cash and due from banks was $2.9 billion at March 31, 2011, compared to $0.7 billion at March 31, 2010. Cash balances were primarily maintained at the Federal Reserve Banks at those dates for liquidity purposes for the Bank’s members. The following discussion highlights the major activities and transactions that affected FHLBNY’s cash flows for the current year period in this report. Also see Statements of Cash Flows to the financial statements accompany this MD&A. Cash flows from operating activities FHLBNY’s operating assets and liabilities support the Bank’s lending activities to members. Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by member-driven borrowing, investment strategies and market conditions. Management believes cash flows from operations, available cash balances and the FHLBNY’s ability to generate cash through the issuance of consolidated obligation bonds and discount notes are sufficient to fund the FHLBNY’s operating liquidity needs. In the 2011 first quarter, net cash provided by operating activities was $236.1 million driven by Net income and adjustments for non-cash items such as the amount set aside for Affordable Housing Program, OTTI and other provisions for mortgage credit losses, depreciation and amortization. 97
Net cash generated from operating activities was higher than net income, largely as a result of adjustments for cash flows from certain interest rate swaps that were characterized as operating cash in-flows because of the financing element of the interest rate swaps, in addition to non-cash items. Cash flows from investing activities The FHLBNY’s investing activities predominantly include advances originated to be held for portfolio, the AFS and HTM securities portfolios and other short-term interest-earning assets. In the 2011 first quarter, investing activities provided net cash of $5.3 billion. This resulted primarily from decreases in advances borrowed by members. Partially offsetting these cash proceeds was an increase in investment securities purchased. Short-term Borrowings and Short-term Debt.The primary source of fund,funds, as discussed under the section Debt Financing Activity and Consolidation Obligation bonds and discount notes, in this MD&A is the issuance of FHLBank debt to the public. Consolidated obligation discount notes are issued with maturities up to one year and provide the FHLBNY with short-term funds andfunds. Discount notes are principally used in funding short-term advances, some long-term advances, as well as money market instruments. The FHLBNY also issues short-term consolidated obligation bonds as part of its asset-liability management strategy. The FHLBNY may also borrow from another FHLBanks,FHLBank, generally for a period of one day. Such borrowings have been insignificant historically. 118
The following table summarizes short-term debt and their key characteristics (in thousands): Table 53: Consolidated Obligations — Original Maturities Less Than One Year10.4: Short-term Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated Obligations-Bonds With | | | | Consolidated Obligations-Discount Notes | | | Original Maturities of One Year or Less | | | | September 30, 2010 | | | December 31, 2009 | | | September 30, 2010 | | | December 31, 2009 | | | | | | | | | | | | | | | | | | | Outstanding at end of the period1 | | $ | 17,784,192 | | | $ | 30,827,639 | | | $ | 13,054,985 | | | $ | 17,987,974 | | Weighted-average coupon rate at end of the period | | | 0.19 | % | | | 0.15 | % | | | 0.31 | % | | | 0.56 | % | Monthly-average outstanding for the period2 | | $ | 22,729,663 | | | $ | 41,495,856 | | | $ | 11,885,428 | | | $ | 15,626,249 | | Highest outstanding at any month-end2 | | $ | 27,479,446 | | | $ | 52,040,302 | | | $ | 17,537,976 | | | $ | 17,987,974 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated Obligations-Bonds With Original | | | | Consolidated Obligations-Discount Notes | | | Maturities of One Year or Less | | | | March 31, 2011 | | | December 31, 2010 | | | March 31, 2011 | | | December 31, 2010 | | | | | | | | | | | | | | | | | | | Outstanding at end of the period1 | | $ | 19,507,159 | | | $ | 19,391,452 | | | $ | 9,635,000 | | | $ | 12,410,000 | | Average outstanding for the period1 | | $ | 17,764,760 | | | $ | 21,727,968 | | | $ | 11,601,667 | 2 | | $ | 12,266,929 | | Highest outstanding at any month-end1 | | $ | 19,507,159 | | | $ | 27,480,949 | | | $ | 12,835,000 | | | $ | 17,538,000 | |
| | | 1 | | Outstanding balances represents the amortized costcarrying value of short-term debtdiscount notes and par value of bonds (less than 1-year)1 year) issued and outstanding at the reported dates. | | 2 | | MonthlyThe amount represents monthly average outstanding and highest outstanding represent amounts duringbalance for the 9-monthsthree months ended September 30, 2010, and 12-months ended DecemberMarch 31, 2009.2011. |
Leverage Limits and Unpledged Asset Requirements The FHLBNY met the Finance Agency’s requirement that unpledged assets, as defined under regulations, exceed the total of consolidated obligations as follows (in thousands):
Table 54: Unpledged Assets
| | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | Consolidated Obligations: | | | | | | | | | Bonds | | $ | 74,918,893 | | | $ | 74,007,978 | | Discount Notes | | | 17,787,908 | | | | 30,827,639 | | | | | | | | | | | | | | | | | | Total consolidated obligations | | | 92,706,801 | | | | 104,835,617 | | | | | | | | | | | | | | | | | | Unpledged assets | | | | | | | | | Cash | | | 69,471 | | | | 2,189,252 | | Less: Member pass-through reserves at the FRB | | | (50,339 | ) | | | (29,331 | ) | Secured Advances 2 | | | 85,697,171 | | | | 94,348,751 | | Investments1 | | | 15,690,234 | | | | 16,222,615 | | Mortgage loans | | | 1,267,687 | | | | 1,317,547 | | Accrued interest receivable on advances and investments | | | 305,763 | | | | 340,510 | | Less: Pledged Assets | | | (2,981 | ) | | | (2,045 | ) | | | | | | | | | | | | | | | | | | | | 102,977,006 | | | | 114,387,299 | | | | | | | | | Excess unpledged assets | | $ | 10,270,205 | | | $ | 9,551,682 | | | | | | | | |
| | | 1 | | The Bank pledged $3.0 million and $2.0 million at September 30, 2010 and December 31, 2009 to the FDIC. See Note 4 — Held-to-maturity securities. | | 2 | | The Bank also provided to the U.S. Treasury a listing of $0.0 and $10.3 billion in advances with respect to a lending agreement at September 30, 2010 and December 31, 2009. |
Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and such securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located. Purchases of MBS.Finance Agency investment regulations limit the purchase of mortgage-backed securities to 300 percent of capital. The FHLBNY was in compliance withmet the regulationFinance Agency’s requirement that unpledged assets, as defined under regulations, exceed the total of consolidated obligations at all times.periods in this report.
Table 55: FHFA MBS Limits
| | | | | | | | | | | | | | | | | | | September 30, 2010 | | | December 31, 2009 | | | | Actual | | | Limits | | | Actual | | | Limits | | | | | | | | | | | | | | | | | | | Mortgage securities investment authority | | | 209 | % | | | 300 | % | | | 213 | % | | | 300 | % | | | | | | | | | | | | | |
On March 24, 2008, the Board of Directors of the Federal Housing Finance Board (“Finance Board”), predecessor to the Finance Agency, adopted Resolution 2008-08, which temporarily expanded the authority of a FHLBank to purchase mortgage-backed securities (“MBS”) under certain conditions. The resolution had allowed an FHLBank to increase its investments in MBS issued by Fannie Mae and Freddie Mac by an amount equal to three times its capital, which is to be calculated in addition to the existing regulatory limit. The expanded authority permitted MBS to be as much as 600 percent of the FHLBNY’s capital.
All mortgage loans underlying any securities purchased under this expanded authority must have been originated after January 1, 2008. The Finance Board believed that such loans are generally of higher credit quality than loans originated at an earlier time, particularly in 2005 and 2006. The loans underlying any Fannie Mae and Freddie Mac issued MBS acquired pursuant to the new authority must have been underwritten to conform to standards imposed by the federal banking agencies in the "Interagency Guidance on Nontraditional Mortgage Product Risks”dated October 4, 2006 and the "Statement on Subprime Mortgage Lending”dated July 10, 2007.
119
The Bank has not notified or exercised Resolution 2008-08, therefore no separate calculation was required. The expanded authority expired in March 2010.
Rating Actions With Respect to the FHLBNY are outlined below:
Table 56:FHLBNY Ratings
Short-Term Ratings:
| | | | | | | | | | | | | Moody’s Investors Service | | S & P | Year | | Outlook | | Rating | | Short-Term Outlook | | Rating | 2010 | | June 17, 2010 - Affirmed | | P-1 | | July 21, 2010 | | Short-Term rating affirmed | | A-1+ | | | | | | | | | | | | 2009 | | June 19, 2009 - Affirmed | | P-1 | | July 13, 2009 | | Short-Term rating affirmed | �� | A-1+ | | | February 2, 2009 - Affirmed | | P-1 | | | | | | | | | | | | | | | | | | 2008 | | October 29, 2008 - Affirmed | | P-1 | | June 16, 2008 | | Short-Term rating affirmed | | A-1+ | | | April 17, 2008 - Affirmed | | P-1 | | | | | | |
Long-Term Ratings:
| | | | | | | | | | | | | | | Moody’s Investors Service | | S & P | Year | | Outlook | | Rating | | Long-Term Outlook | | Rating | 2010 | | June 17, 2010 - Affirmed | | Aaa/Stable | | July 21, 2010 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable | | | | | | | | | | | | | | 2009 | | June 19, 2009 - Affirmed | | Aaa/Stable | | July 13, 2009 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable | | | February 2, 2009 - Affirmed | | Aaa/Stable | | | | | | | | | | | | | | | | | | | | | | 2008 | | October 29, 2008 - Affirmed | | Aaa/Stable | | June 16, 2008 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable | | | April 17, 2008 - Affirmed | | Aaa/Stable | | | | | | | | |
Legislative and Regulatory Developments The most important legislative development duringand regulatory environment for the period covered by this report was the enactment ofBank continues to change as financial regulators issue proposed and/or final rules to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on(Dodd-Frank Act) enacted in July 21, 2010, which is discussed in greater detail below together with a presentation of certain regulatory actions resulting from the Dodd-Frank Act that may have an important impact on the Bank. Other important developments during the period covered by this report include certain Finance Agency regulatory actions, certain proposed legislation that would permit the Bank to continue to issue certain tax exempt letters of credit past December 31, 2010 and Basel Committee activity that may ultimately impact member demandCongress begins to debate proposals for advanceshousing finance and investor demand for COs, each discussed in greater detail below.GSE reform. Dodd-Frank ActThe Dodd-Frank Act, among other things: (1) creates an interagency oversight council (the “Oversight Council”) that is charged with identifying
As discussed under Legislative and regulating systemically important financial institutions; (2) regulatesRegulatory Developments on page 37 in the over-the-counter derivatives market; (3) imposes new executive compensation proxy and disclosure requirements; (4) establishes new requirements for MBS, including a risk-retention requirement; (5) reforms the credit rating agencies; (6) makes a number of changes to the federal deposit insurance system; and (7) creates a consumer financial protection bureau. Although the FHLBanks were exempted from several notable provisions ofBank’s 2010 Form 10-K, the Dodd-Frank Act will likely impact the FHLBanks’FHLBNY’s business operations, funding costs, rights, obligations, andand/or the environment in which FHLBanks carrythe FHLBNY carries out their housing-finance mission are likely to be impacted by the Dodd-Frank Act.its housing finance mission. Certain regulatory actions during the period covered by this report resulting from the Dodd-Frank Act that may have an important impact on the Bank are summarized below, although the full impacteffect of the Dodd-Frank Act will become known only after the required regulations, studies and reports are issued and finalized. New Requirements for the Bank’s Derivatives Transactions The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the Bank to hedge its interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. Such cleared trades are expected to be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps may reduce counterparty credit risk, the margin requirements for cleared trades have the potential of making derivative transactions more costly. Regulatory Activity98
The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the FHLBNY expects to continue to enter into uncleared trades on a bilateral basis, such trades are expected to be subject to new regulatory requirements, including new mandatory reporting requirements, new documentation requirements and new minimum margin and capital requirements imposed by other federal regulators. Under the proposed margin rules, the FHLBNY will have to post both initial margin and variation margin to its swap dealer counterparties. Pursuant to additional FHFA provisions, the Dodd-Frank ActProposed CommoditiesBank will be required to collect both initial margin and variation margin from its swap dealer counterparties, without any thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivative transactions entered into by the Bank and thus also make uncleared trades more costly.
The Commodity Futures Trading Commission (“CFTC”) — Securities and Exchange Commission (“SEC “) Rule—Certain Key Definitions for Derivatives.On August 20, 2010, the CFTC and the SEC jointly(CFTC) has issued a proposed rule which requested commentsrequiring that collateral posted by swaps customers to a clearinghouse in connection with cleared swaps be legally segregated on a customer basis. However, in connection with this proposed rule the CFTC has left open the possibility that customer collateral would not have to be legally segregated but could instead be commingled with all collateral posted by other customers of the clearing member. Such commingling would put the Bank’s collateral at risk in the event of a default by another customer of our clearing member. To the extent that the CFTC’s final rule places the Bank’s posted collateral at greater risk of loss in the clearing structure than under the current over-the-counter market structure, we may be adversely impacted. The Dodd-Frank Act will require swap dealers and certain key terms necessary to regulate the use and clearingother large users of derivatives to register as required“swap dealers” or “major swap participants,” as the case may be, with the CFTC and/or the SEC. Based on the definitions in the proposed rules jointly issued by the Dodd-Frank Act by September 20, 2010. The definitions of those terms may adversely impactCFTC and SEC, it does not appear likely that the Bank. For example, in additionFHLBNY will be required to the clearing and exchange trading requirements for certain standardized derivatives transactions, if the Bank is determined to beregister as a “major swap participant,” although this remains a possibility. Also, based on the definitions in the proposed rules, it does not appear likely that the FHLBNY will be required to register as a “swap dealer” as a result of the derivative transactions that the Bank will also haveenters into with dealer counterparties for the purpose of hedging and managing the Bank’s interest rate risk, which constitute the great majority of the Bank’s derivative transactions. However, based on the proposed rules, it is possible that the FHLBNY could be required to register with the CFTC as a swap dealer based on the intermediated “swaps” that the Bank has historically entered into with the Bank’s members. It is also unclear how the final rule will treat caps, floors and other derivatives embedded in advances to the FHLBNY’s members. The CFTC and SEC have issued joint proposed rules further defining the term “swap” under the Dodd-Frank Act. These proposed rules and accompanying interpretive guidance clarify that certain products will or will not be regulated as “swaps.” However, at this time it remains unclear whether certain transactions between the Bank and our member customers will be treated as “swaps.” Depending on how the terms “swap” and “swap dealer” are finally defined in the final regulations, the FHLBNY may be faced with the business decision of whether to continue to offer “swaps” to member customers if those transactions would require the Bank to register as a swap dealer. Designation as a swap dealer would subject the Bank to significant additional regulation and cost including, registration with the CFTC, new internal and external business conduct standards, of conductadditional reporting requirements and additional reporting and swap-based capital and margin requirements. In addition, derivatives transactionsEven if the Bank is designated as a swap dealer, the proposed regulation would permit the Bank to apply to the CFTC to limit such designation to those specified activities for which the Bank is acting as a swap dealer. Upon such designation, the hedging activities of the Bank would not subject to exchange trading or centralized clearing will also be subject to additional marginthe full requirements and all derivatives transactions couldthat will generally be subject to new reporting requirements. Such additional requirements would likely increaseimposed on traditional swap dealers. The FHLBNY, together with the costother FHLBanks, is actively participating in the development of the Bank’s hedging activitiesregulations under the Dodd-Frank Act by formally commenting to the regulators regarding a variety of rulemakings that could impact the FHLBanks. It is not expected that final rules implementing the Dodd-Frank Act will become effective until the latter half of 2011 and may adversely affect the Bank’s ability to hedge its interest rate risk exposure, to achieve its risk management objectives, and to act as an intermediary between its members and counterparties.delays beyond that time are possible. Regulation of Certain Nonbank Financial Companies Federal Reserve Board Proposed CFTC Rule on Eligible Investments for Derivatives Clearing OrganizationsRegulatory Oversight of Nonbank Financial Companies.. On November 3, 2010,February 11, 2011, the CFTCFederal Reserve Board issued a proposed rule withthat would define certain key terms to determine which nonbank financial companies will be subject to the Federal Reserve’s regulatory oversight. The proposed rule provides that a comment deadlinecompany is “predominantly engaged in financial activities” if: the annual gross financial revenue of December 3, 2010, which, among other changes,the company represents 85 percent or more of the company’s gross revenue in either of its two most recent completed fiscal years; or the company’s total financial assets represent 85 percent or more of the company’s total assets as of the end of either of its two most recently completed fiscal years. Comments on this proposed rule were due by March 30, 2011. The FHLBNY would eliminatebe predominantly engaged in financial activities under either prong of the abilityproposed test. In pertinent part to the Bank, the proposed rule also defines “significant nonbank financial company” to mean a nonbank financial company that had $50 billion or more in total assets as of futures commissions’ merchants and derivatives clearing organizations to invest customer funds in GSE securities that are not explicitly guaranteed by the U.S. government. Currently, GSE securities are eligible investments under CFTC regulations. If this change is adopted as proposed, then the demand for FHLBank debt may be adversely impacted.end of its most recently completed fiscal year. Oversight Council Notice of Proposed Rule RegardingRulemaking on Authority to Supervise and Regulate Certain Nonbank Financial Companies.Companies. On October 6, 2010,January 26, 2011, the Oversight Council created by the Dodd-Frank Act issued a proposed rule with a comment deadline of November 5, 2010 that if implemented, will givewould implement the Oversight Council theCouncil’s authority to require a ‘nonbanksubject nonbank financial company’ (a termcompanies to be defined by the Oversight Council) to be supervised by the Board of Governorssupervision of the Federal Reserve SystemBoard and subject to certain prudential standards. The proposed rule defines “nonbank financial company” broadly enough to likely cover the Bank. Also, under the proposed rule, the Oversight Council shall make this determination based onwill consider certain factors in determining whether materialto subject a nonbank financial distress at a given firm, orcompany to supervision and prudential standards. Some factors identified include: the nature, scope, size, scale, concentration, interconnectedness, or mixavailability of the activities of the firm, could pose a threat tosubstitutes for the financial stability ofservices and products the United States.entity provides as well as the entity’s size; interconnectedness with other financial firms; leverage, liquidity risk; and maturity mismatch and existing regulatory scrutiny. If the FHLBanks areFHLBNY is determined to be a nonbank financial companiescompany subject to the Oversight Council’s regulatory requirements, then the FHLBanks’its operations and business are likely to be impacted.affected. Comments on this proposed rule were due by February 25, 2011. 12099
Oversight Council Request for InformationRecommendations on Implementing the ‘Volcker Rule’.Volcker Rule.On October 6, 2010,In January 2011, the Oversight Council issued a public requestrecommendations for information in connection with the Oversight Council’s study on implementing certain prohibitions on proprietary trading, which prohibitions are commonly referred to as the ‘Volcker Rule’.Volcker Rule. Institutions covered bysubject to the Volcker Rule may be subject to higher capital requirements and quantitativevarious limits with regard to their proprietary trading.trading and various regulatory requirements to ensure compliance with the Volcker Rule. If the FHLBNY is made subject to the Volcker Rule, is implemented in a way that subjects FHLBanks to it, then the Bank may be subject to additional limitations on the composition of its investment portfolio beyond those to which it is already subject under existing Finance Agency regulations, which in turn couldFHFA regulations. These limitations may potentially result in less profitable investment alternatives. Further, complying with related regulatory requirements would be likely to increase the Bank’s regulatory requirements and incremental costs. The FHLBank System’s consolidated obligations generally are exempt from the operation of this rule, subject to certain limitations, including the absence of conflicts of interest and certain financial risks.
FDIC Regulatory Actions Federal Deposit Insurance Corporation (“FDIC”) ProposedFDIC Interim Final Rule on Unlimited Deposit Insurance for Non-interest Bearing Transaction Accounts.The Dodd-Frank Act requires the FDIC and the National Credit Union Administration to provide unlimited deposit insurance for non-interest bearing transaction accounts. This requirement is in effect for FDIC-insured institutions from December 31, 2010 untilOrderly Liquidation Resolution Authority.On January 1, 2013 and for insured credit unions from the effective date of the Dodd-Frank Act until January 1, 2013. On September 27, 2010,25, 2011, the FDIC issued a proposedan interim final rule to implement this provision of the Dodd-Frank Act. Deposits are a source of liquidity for our members, and a rise in deposits, which may occur due to the FDIC’s unlimited support of non-interest bearing transaction accounts if the proposed rule is adopted, would tend to weaken member demand for Bank advances.FDIC Proposed Rule on Dodd-Frank Resolution Authority.On October 12, 2010, the FDIC issued a proposed rule with a comment deadline of November 18, 2010 on how the FDIC would treat certain creditor claims under the new orderly liquidation authority established by the Dodd-Frank Act. The Dodd-Frank Act provides for the appointment of the FDIC as receiver for a financial company, not including FDIC-insured depository institutions, in instances where the failure of the company and its liquidation under other insolvency procedures (such as bankruptcy) would pose a significant risk to the financial stability of the United States. The proposedinterim final rule provides, among other things, that:
things: a valuation standard for collateral on secured claims; that all unsecured creditors must expect to absorb losses in any liquidation and that secured creditors will only be protected to the extent of the fair value of their collateral; toa clarification of the extent treatment for contingent claims; and that any portion of a secured creditor’s claim is unsecured, it will absorb losses along with other unsecured creditors; and secured obligations collateralized with USU.S. government obligations will be valued at par.fair market value.
Comments on this interim final rule were due by March 28, 2011. Valuing most collateral at fair value, rather than par, could adversely impact the value of the Bank’s investments in the event of the issuer’s insolvency. FDIC Final Rule on Assessment System. On February 25, 2011, the FDIC issued a final rule to revise the assessment system applicable to FDIC insured financial institutions. The rule, among other things, implements a provision in the Dodd-Frank Act to redefine the assessment base used for calculating deposit insurance assessments. Specifically, the rule changes the assessment base for most institutions from adjusted domestic deposits to average consolidated total assets minus average tangible equity. This rule became effective on April 1, 2011, so the FHLBNY advances are now included in its members’ assessment base. The rule also eliminates an adjustment to the base assessment rate paid for secured liabilities, including the FHLBNY advances, in excess of 25% of an institution’s domestic deposits since these are now part of the assessment base. To the extent that increased assessments increase the cost of advances for some members, it may negatively impact their demand for the Bank’s advances. Finance AgencyJoint Regulatory Actions
Proposed Rule on Incentive-based Compensation Arrangements. On April 14, 2011, seven federal financial regulators, including the FHFA, published a proposed rule that would prohibit “covered financial institutions” from entering into incentive-based compensation arrangements that encourage inappropriate risks. Applicable to the FHLBanks and the Office of Finance, Agency Regulationthe rule would: prohibit excessive compensation; prohibit incentive compensation that could lead to material financial loss; require an annual report; require policies and procedures; and require mandatory deferrals of 50% of incentive compensation over three years for executive officers. Covered persons under the rule would include senior management responsible for the oversight of firm wide activities or material business lines and non-executive employees or groups of those employees whose activities may expose the institution to a material loss. Under the proposed rule, covered financial institutions would be required to comply with three key risk management principles related to the design and governance of incentive-based compensation: balanced design, independent risk management controls and strong governance. The proposed rule identifies four methods to balance compensation design and make it more sensitive to risk: risk adjustment of awards, deferral of payment, longer performance periods and reduced sensitivity to short-term performance. Larger covered financial institutions, like the Bank, would also be subject to a mandatory 50% deferral of incentive-based compensation for executive officers and board oversight of incentive-based compensation for certain risk-taking employees who are not executive officers. The proposed rule would impact the design of the Bank’s compensation policies and practices, including its incentive compensation policies and practices, if adopted as proposed. Comments on Conservatorshipthe proposed rule are due by May 31, 2011. 100
Proposed Rule on Credit Risk Retention for Asset-Backed Securities. On April 29, 2011, the Federal banking agencies, the FHFA, the Department of Housing and Receivership.On July 9, 2010,Urban Development and the Finance AgencySecurities and Exchange Commission jointly issued a proposed regulationrule, which proposes requiring sponsors of asset-backed securities to retain a minimum of five percent economic interest in a portion of the credit risk of the assets collateralizing asset-backed securities, unless all the assets securitized satisfy specified qualifications. The proposed rule specifies criteria for qualified residential mortgage, commercial real estate, auto and commercial loans that would make them exempt from the risk retention requirement. The criteria for qualified residential mortgages is described in the proposed rulemaking as those underwriting and product features which, based on historical data, are associated with low risk even in periods of decline of housing prices and high unemployment. Key issues in the conservatorshipproposed rule include: (1) the appropriate terms for treatment as a qualified residential mortgage; (2) the extent to which Fannie Mae and receivershipFreddie Mac related securitizations will be exempt from the risk retention rules; and (3) the possibility of creating a category of high quality non-qualified residential mortgage loans that would have less than a five percent risk retention requirement. If adopted as proposed, the rule could reduce the number of loans originated by the FHLBNY’s members, which could negatively impact member demand for the Bank’s products. Comments on this proposed rule are due on June 10, 2011. Housing Finance and GSE Reform In the wake of the financial crisis and related housing problems, both Congress and the Obama Administration are considering changes to the U.S. housing finance structure, specifically reforming or eliminating Fannie Mae and Freddie Mac. These efforts may have implications for the FHLBanks. On February 11, 2011, the Department of the Treasury and the U.S. Department of Housing and Urban Development issued a report to Congress entitledReforming America’s Housing Finance Market. The report’s primary focus is to provide options for Congressional consideration regarding the long-term structure of housing finance, including reforms specific to Fannie Mae and Freddie Mac. In addition, the Obama Administration noted it would work, in consultation with the FHFA and Congress, to restrict the areas of mortgage finance in which Fannie Mae, Freddie Mac and the FHLBanks operate so that overall government support of the mortgage market will be substantially reduced over time. Although the FHLBanks are not the primary focus of this report, they are recognized as playing a vital role in helping smaller financial institutions access liquidity and capital to compete in an increasingly competitive marketplace. The report suggests the following possible reforms for the FHLBank System: focus the FHLBanks on small- and medium-sized financial institutions; restrict membership by allowing each institution eligible for membership to be an active member in only a single FHLBank; limit the level of outstanding advances to larger members; and reduce FHLBank investment portfolios and their composition, focusing FHLBanks on providing liquidity for insured depository institutions. The report also supports exploring additional means to provide funding to housing lenders, including potentially the development of a covered bond market. In response, several bills have been introduced in Congress. While none propose specific changes to the FHLBanks, the FHLBNY could nonetheless be affected in numerous ways by changes to the U.S. housing finance structure and to Fannie Mae and Freddie Mac. For example, the FHLBanks traditionally have allocated a significant portion of their investment portfolio to investments in Fannie Mae and Freddie Mac debt securities. Accordingly, the FHLBanks’ investment strategies would likely be affected by winding down those entities. Winding down these two GSEs, or limiting the amount of mortgages they purchase, also could increase demand for the FHLBank advances if the FHLBank members responded by retaining more of their mortgage loans in portfolio, using advances to fund the loans. It is also possible that Congress will consider any or all of the specific changes to the FHLBanks suggested by the Administration’s proposal. If legislation is enacted incorporating these changes, the FHLBanks could be significantly limited in their ability to make advances to their members and subject to additional limitations on their investment authority. Additionally, if Congress enacts legislation encouraging the development of a covered bond market, FHLBank advances could be reduced in time as larger members use covered bonds as an alternative form of wholesale mortgage financing. The potential effect of housing finance and GSE reform on the FHLBanks is unknown at this time and will depend on the legislation, if any, that is ultimately enacted. FHFA Regulatory Actions Final Rule on Temporary Increases in Minimum Capital Levels. On March 3, 2011, the FHFA issued a final rule effective April 4, 2011 authorizing the Director of the FHFA to increase the minimum capital level for an FHLBank if the Director determines that the current level is insufficient to address such FHLBank’s risks. The rule provides the factors that the Director may consider in making this determination including the FHLBank’s: 101
• | | current or anticipated declines in the value of assets held by it; | | • | | ability to access liquidity and funding; | | • | | credit, market, operational and other risks; | | • | | current or projected declines in its capital; | | • | | material compliance with regulations, written orders, or agreements; | | • | | housing finance market conditions; | | • | | level of retained earnings; | | • | | initiatives, operations, products or practices that entail heightened risk; | | • | | ratio of market value of equity to the par value of capital stock; and/or | | • | | other conditions as notified by the Director. |
The rule provides that the Director shall consider the need to maintain, modify or rescind any such increase no less than every 12 months. If the FHLBNY is required to increase its minimum capital level, the Bank may need to lower or suspend dividend payments to increase retained earnings to satisfy such increase. Alternatively, the FHLBNY could satisfy an increased capital requirement by disposing of assets to decrease the size of its balance sheet relative to total outstanding stock, which may adversely impact the Bank’s results of operations and financial condition and ability to satisfy the Bank’s mission. Final Rule on FHLBank Liabilities. On April 4, 2011, the FHFA issued a final rule that would, set forthamong other things: | • | | reorganize and re-adopt Finance Board regulations dealing with consolidated obligations, as well as related regulations addressing other authorized FHLBank liabilities and book entry procedures for consolidated obligations; | | | • | | implement recent statutory amendments that removed authority from the FHFA to issue consolidated obligations; | | | • | | specify that the FHLBanks issue consolidated obligations that are the joint and several obligations of the FHLBanks as provided for in the statute rather than as joint and several obligations of the FHLBanks as provided for in the current regulation; and | | | • | | provide that consolidated obligations are issued under Section 11(c) of the FHLBank Act rather than under Section 11(a) of the FHLBank Act. |
This rule is not expected to have any adverse impact on the basic authoritiesFHLBanks’ joint and several liability for the principal and interest payments on consolidated obligations. This rule became effective May 4, 2011. Regulatory Policy Guidance on Reporting of the Finance Agency as conservator or receiver, including the enforcement and repudiation of contracts; establishment of procedures for conservators and receivers and priorities of claims for contract parties and other claimants; and address whether and to what extent claims by current and former holders of equity interests in the regulated entities will be paid.Proposed Finance Agency Regulation on Rules of Practice and Procedure for Enforcement Proceedings.Fraudulent Financial Instruments.On August 12,January 27, 2010, the Finance AgencyFHFA issued a regulation requiring the FHLBanks to report to the FHFA upon the discovery of any fraud or possible fraud related to the purchase or sale of financial instruments or loans. On March 29, 2011, the FHFA issued immediately effective final guidance which sets forth fraud reporting requirements for the FHLBanks under the regulation. The guidance, among other things, provides examples of fraud that should be reported to the FHFA and the FHFA’s Office of Inspector General. In addition, the guidance requires FHLBanks to establish and maintain effective internal controls, policies, procedures and operational training to discover and report fraud or possible fraud. Although complying with the guidance will increase the FHLBNY’s regulatory requirements, the Bank does not expect any material incremental costs or adverse impact to its business.
Proposed Rule on Private Transfer Fee Covenants. On February 8, 2011, the FHFA issued a proposed regulation with a comment deadline of October 12, 2010rule that would if adopted, amend existing regulations implementing stronger Finance Agency enforcement powersrestrict the Bank from purchasing, investing in, or taking security interests in, mortgage loans on properties encumbered by private transfer fee covenants, securities backed by such mortgage loans, and procedures.Additional Developments
Tax-Exempt Bonds Supportedsecurities backed by FHLBank Lettersthe income stream from such covenants, except for certain transfer fee covenants. Excepted transfer fee covenants would include covenants to pay a private transfer fees to covered associations (including organizations comprising owners of Credit.Legislation has been introducedhome, condominiums, or cooperatives or certain other tax-exempt organizations) that use the private transfer fees exclusively for the direct benefit of the property. The foregoing restrictions would allow an FHLBank,apply only to mortgages on behalf of oneproperties encumbered by private transfer fee covenants created on or more members,after February 8, 2011, and to issue letters of creditsuch securities backed by such mortgages, and to support non-housing related tax-exempt state and local bond issuancessecurities issued after December 31, 2010. If enacted, thisthat date and backed by revenue from private transfer fees regardless of when the covenants were created. The FHLBNY would be an extension of the Bank’s authority to issue such letters of credit that was first granted to the FHLBanks by the Housing and Economic Recovery Act of 2008, which authority is otherwise set to expire on December 31, 2010.
Basel Committee on Banking Supervision Capital Framework.The Basel Committee on Banking Supervision (the “Basel Committee”) has developed a new capital regime for internationally-active banks. Banks subject to the new regime will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses. While it is uncertain how the new capital regime or other standards being developed by the Basel Committee, such as liquidity standards, will be implemented by the U.S. regulatory authorities, the new regime could require some of our members to divest assets in order to comply with the more stringentregulation within 120 days of the publication of the final rule. To the extent that a final rule limits the type of collateral the Bank accept for advances and the type of loans eligible for purchase under the MPF Xtra product, the Bank’s business may be adversely impacted. Comments on the proposed rule were due by April 11, 2011.
Advance Notice of Proposed Rulemaking on Use of NRSRO Credit Ratings.On January 31, 2011, the FHFA issued an advanced notice of proposed rulemaking that would implement a provision in Dodd-Frank Act that requires all federal agencies to remove regulations that require use of NRSRO credit ratings in the assessment of a security. The notice seeks comment regarding certain specific FHFA regulations applicable to FHLBanks including risk-based capital requirements, thereby decreasing their need for advances. Likewise, any new liquidityprudential requirements, may also adversely impact member demand for advances and/or investor demand for COs.investments, and consolidated obligations. Comments on this advance notice of rulemaking were due on March 17, 2011. Advance Notice of Proposed Rulemaking on FHLBank Members.On December 27, 2010, the FHFA issued an advance notice of proposed rulemaking to address its regulations on FHLBank membership to ensure such regulations are consistent with maintaining a nexus between FHLBank membership and the housing and community development mission of the FHLBanks, as further discussed on page 41 in theLegislative and Regulatory Developmentssection in the FHLBNY’s 2010 Form 10-K. 121102
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | | ITEM 3. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk Management.Market risk or interest rate risk (“IRR”) is the risk of loss ofto market value or future earnings that may result from changes in the interest rate environment. Embedded in IRR is a tradeoff of risk versus reward wherein thereward. The FHLBNY could earn higher income by having higher IRR through greater mismatches between its assets and liabilities at the cost of potentially significant declines in market value and future income if the interest rate environment turned against the FHLBNY’s expectations. The FHLBNY has opted to retain a modest level of IRR which allows it to preserve its capital value while generating steady and predictable income. In keeping with that philosophy, the FHLBNY’s balance sheet consists of predominantly short-term and LIBOR-based assets and liabilities. More than 8085 percent of the FHLBNY’s financial assets are either short-term or LIBOR-based, and a similar percentage of its liabilities are also either short-term or LIBOR based. These positions protect the FHLBNY’s capital from large changes in value arising from interest rate or volatility changes. The primary tool used by management to achieve the desired risk profile is the use of interest rate exchange agreements (“Swaps”). All the LIBOR-based advances are long-term advances that are swapped to 3- or 1-month LIBOR or possess adjustable rates which periodically reset to a LIBOR index. Similarly, a majority of the long-term consolidated obligations are swapped to 3- or 1-month LIBOR. These features create a relatively steady income that changes in concert with prevailing interest rate changes to maintain a spread to short-term rates. Despite its conservative philosophy, IRR does arise from a number of aspects of the FHLBNY’s portfolio. These include the embedded prepayment rights, refunding needs, rate resets between the FHLBNY’s short-term assets and liabilities, and basis risks arising from differences between the yield curves associated with the FHLBNY’s assets and its liabilities. To address these risks, the FHLBNY uses certain key IRR measures including re-pricing gaps, duration of equity (“DOE”), value at risk (“VaR”), net interest income (“NII”) at risk, key rate durations (“KRD”), and forecasted dividend rates. Risk Measurements.The FHLBNY’s Risk Management Policy sets up a series of risk limits that the FHLBNY calculates on a regular basis. The risk limits are as follows: | • | | The option-adjusted DOE is limited to a range of +/- four+2.0 years to -3.5 years in the rates unchanged case and to a range of +/- six-6.0 years in the +/-200bps shock cases. Due to the low interest rate environment beginning in early 2008, through the third quarter ofMarch 2010, June 2010, September 2010, December 2010, and March 2011 rates were too low for a meaningful parallel down-shock measurement. | | | • | | The one-year cumulative re-pricing gap is limited to 10 percent of total assets. | | | • | | The sensitivity of expected net interest income over a one-year period is limited to a -15 percent change under both the +/-200bps shocks compared to the rates unchanged case. | | | • | | The potential decline in the market value of equity is limited to a 10 percent change under the +/-200bps shocks. | | | • | | KRD exposure at any of nine term points (3-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 15-year, and 30-year) is limited to between +/-12 months.months through the 3-year term point and a cumulative limit of +/-30 months from the 5-year through 30-year term points. |
The FHLBNY’s portfolio, including its derivatives, is tracked and the overall mismatch between assets and liabilities is summarized by using a DOE measure. The FHLBNY’s last five quarterly DOE results are shown in years in the table below:below (note that, due to the on-going low interest rate environment, there was no down-shock measurement performed between the first quarter of 2010 and the first quarter of 2011): | | | | | | | | | | | | | | | | | | | | | | | | | Base Case DOE | | -200bps DOE* | | +200bps DOE | | | Base Case DOE | | -200bps DOE | | +200bps DOE | | March 31, 2010 | | | -0.51 | | N/A | | 3.81 | | June 30, 2010 | | | -1.20 | | N/A | | 2.80 | | September 30, 2010 | | -2.13 | | N/A | | 1.46 | | | -2.13 | | N/A | | 1.46 | | June 30, 2010 | | -1.20 | | N/A | | 2.80 | | | March 31, 2010 | | -0.51 | | N/A | | 3.81 | | | December 31, 2009 | | 0.42 | | N/A | | 3.68 | | | September 30, 2009 | | -0.39 | | N/A | | 3.88 | | | December 31, 2010 | | | -1.09 | | N/A | | 2.92 | | March 31, 2011 | | | -0.29 | | N/A | | 3.48 | |
| | | * | | Due to the on-going low interest rate environment, there were no down-shock measurements performed between the third quarter of 2009 and the third quarter of 2010. |
The DOE has remained within its limits. Duration indicates any cumulative re-pricing/maturity imbalance in the FHLBNY’s financial assets and liabilities. A positive DOE indicates that, on average, the liabilities will re-price or mature sooner than the assets while a negative DOE indicates that, on average, the assets will re-price or mature earlier than the liabilities. The FHLBNY measures its DOE using software that incorporates any optionality within the FHLBNY’s portfolio using well-known and tested financial pricing theoretical models. 103
The FHLBNY does not solely rely on the DOE measure as a mismatch measure between its assets and liabilities. It also performs the more traditional gap measure that subtracts re-pricing/maturing liabilities from re-pricing/maturing assets over time. The FHLBNY observes the differences over various horizons, but has set a 10 percent of assets limit on cumulative re-pricings at the one-year point. This quarterly observation of the one-year cumulative re-pricing gap is provided in the table below and all values are below 10 percent of assets;assets well within the limit: | | | | | | | One Year Re- | | | pricing Gap | September 30, 2010 | | $ | 6.888 | Billion | June 30, 2010 | | $ | 4.939 | Billion | March 31, 2010 | | $ | 4.753 | Billion | December 31, 2009 | | $ | 4.626 | Billion | September 30, 2009 | | $ | 5.480 | Billion |
| | | | | | | One Year Re- | | | | pricing Gap | | March 31, 2010 | | $4.753 Billion | | June 30, 2010 | | $4.939 Billion | | September 30, 2010 | | $6.888 Billion | | December 31, 2010 | | $5.565 Billion | | March 31, 2011 | | $5.123 Billion | |
122
The FHLBNY’s review of potential interest rate risk issues also includes the effect of changes in interest rates on expected net income. The FHLBNY projects asset and liability volumes and spreads over a one-year horizon and then simulates expected income and expenses from those volumes and other inputs. The effects of changes in interest rates are measured to test whether the FHLBNY has too much exposure in its net interest income over the coming twelve-month period. To measure the effect, the change to the spread in the shocks is calculated and compared against the base case and subjected to a -15 percent limit. The quarterly sensitivity of the FHLBNY’s expected net interest income under both +/-200bps shocks over the next twelve months is provided in the table below:below (due to the ongoing low interest rate environment, the down-shock measurement was not performed between the first quarter of 2010 and the first quarter of 2011): | | | | | | | | | | | Sensitivity in | | | Sensitivity in | | | | the -200bps | | | the +200bps | | | | Shock * | | | Shock | | September 30,March 31, 2010 | | | N/A | | | | 12.963.13 | % | June 30, 2010 | | | N/A | | | | 12.20 | % | March 31,September 30, 2010 | | | N/A | | | | 3.1312.96 | % | December 31, 2009 | 2010 | | N/A | | | | 4.539.05 | % | September 30, 2009 | March 31, 2011 | | N/A | | | | 9.233.90 | % |
| | | * | | Due to the on-going low interest rate environment, there were no down-shock measurements performed between the third quarter of 2009 and the third quarter of 2010. |
Aside from net interest income, the other significant impact on changes in the interest rate environment is the potential impact on the value of the portfolio. These calculated and quoted market values are estimated based upon their financial attributes including optionality and then re-estimated under the assumption that interest rates suddenly rise or fall by 200bps. The worst effect, whether it is the up or the down shock, is compared to the internal limit of 10 percent. The quarterly potential maximum decline in the market value of equity under these 200bps shocks is provided below:below (due to the ongoing low interest rate environment, the down-shock measurement was not performed between the first quarter of 2010 and the first quarter of 2011): | | | | | | | | | | | Down-shock | | | +200bps Change in | | | | Change in MVE * | | | MVE | | September 30,March 31, 2010 | | | N/A | | | | 1.63-4.53 | % | June 30, 2010 | | | N/A | | | | -1.62 | % | March 31,September 30, 2010 | | | N/A | | | | -4.531.63 | % | December 31, 2009 | 2010 | | N/A | | | | -5.08-2.75 | % | September 30, 2009 | March 31, 2011 | | N/A | | | | -4.68-3.96 | % |
| | | * | | Due to the on-going low interest rate environment, there were no down-shock measurements performed between the third quarter of 2009 and the third quarter of 2010. |
As noted, the potential declines under these shocks are within the FHLBNY’s limits of a maximum 10 percent. 123104
The following table displays the FHLBNY’s maturity/re-pricing gaps as of September 30,March 31, 2011 and December 31, 2010 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Rate Sensitivity | | | Interest Rate Sensitivity | | | | September 30, 2010 | | | March 31, 2011 | | | | More than | | More than | | More than | | | | | More Than | | More Than | | More Than | | | | | | Six months | | six months to | | one year to | | three years to | | More than | | | Six Months | | Six Months to | | One Year to | | Three Years to | | More Than | | | | or less | | one year | | three years | | five years | | five years | | | or Less | | One Year | | Three Years | | Five Years | | Five Years | | | | | Interest-earning assets: | | | Non-MBS Investments | | $ | 8,899 | | $ | 315 | | $ | 417 | | $ | 184 | | $ | 186 | | | $ | 10,807 | | $ | 144 | | $ | 364 | | $ | 253 | | $ | 454 | | MBS Investments | | 7,636 | | 1,548 | | 1,035 | | 241 | | 481 | | | 7,395 | | 667 | | 1,391 | | 432 | | 1,214 | | Adjustable-rate loans and advances | | 9,191 | | — | | — | | — | | — | | | 8,016 | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | Net unswapped | | 25,726 | | 1,863 | | 1,452 | | 425 | | 667 | | | 26,218 | | 811 | | 1,755 | | 685 | | 1,668 | | | | | Fixed-rate loans and advances | | 14,117 | | 4,201 | | 13,883 | | 7,780 | | 30,932 | | | 9,934 | | 4,915 | | 15,597 | | 10,902 | | 22,944 | | Swaps hedging advances | | 55,269 | | | (3,905 | ) | | | (12,857 | ) | | | (7,590 | ) | | | (30,917 | ) | | 52,721 | | | (4,402 | ) | | | (14,776 | ) | | | (10,618 | ) | | | (22,924 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net fixed-rate loans and advances | | 69,386 | | 296 | | 1,026 | | 190 | | 15 | | | 62,655 | | 513 | | 821 | | 284 | | 20 | | Loans to other FHLBanks | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | $ | 95,112 | | $ | 2,159 | | $ | 2,478 | | $ | 615 | | $ | 682 | | | $ | 88,873 | | $ | 1,324 | | $ | 2,576 | | $ | 969 | | $ | 1,688 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities: | | | Deposits | | $ | 3,773 | | $ | 1 | | $ | — | | $ | — | | $ | — | | | $ | 2,581 | | $ | — | | $ | — | | $ | — | | $ | — | | | | | Discount notes | | 17,156 | | 630 | | — | | — | | — | | | 19,170 | | 337 | | — | | — | | — | | Swapped discount notes | | 629 | | | (629 | ) | | — | | — | | — | | | 100 | | | (100 | ) | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | Net discount notes | | 17,785 | | 1 | | — | | — | | — | | | 19,270 | | 237 | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated Obligation Bonds | | | FHLB bonds | | 28,034 | | 14,522 | | 21,510 | | 6,741 | | 3,040 | | | 21,085 | | 11,590 | | 23,771 | | 7,927 | | 3,684 | | Swaps hedging bonds | | 39,771 | | | (13,505 | ) | | | (19,119 | ) | | | (5,097 | ) | | | (2,050 | ) | | 41,358 | | | (11,048 | ) | | | (21,648 | ) | | | (6,422 | ) | | | (2,240 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net FHLB bonds | | 67,805 | | 1,017 | | 2,391 | | 1,644 | | 990 | | | 62,443 | | 542 | | 2,123 | | 1,505 | | 1,444 | | | | | Total interest-bearing liabilities | | $ | 89,363 | | $ | 1,019 | | $ | 2,391 | | $ | 1,644 | | $ | 990 | | | $ | 84,294 | | $ | 779 | | $ | 2,123 | | $ | 1,505 | | $ | 1,444 | | | | | | | | | | | | | | | | | | | | | | | | | Post hedge gaps1: | | | Periodic gap | | $ | 5,749 | | $ | 1,140 | | $ | 87 | | $ | (1,029 | ) | | $ | (308 | ) | | $ | 4,579 | | $ | 545 | | $ | 453 | | $ | (536 | ) | | $ | 244 | | Cumulative gaps | | $ | 5,749 | | $ | 6,889 | | $ | 6,976 | | $ | 5,947 | | $ | 5,639 | | | $ | 4,579 | | $ | 5,124 | | $ | 5,577 | | $ | 5,041 | | $ | 5,285 | |
| | | | | | | | | | | | | | | | | | | | | | | Interest Rate Sensitivity | | | | December 31, 2010 | | | | | | | | More Than | | | More Than | | | More Than | | | | | | | Six Months | | | Six Months to | | | One Year to | | | Three Years to | | | More Than | | | | or Less | | | One Year | | | Three Years | | | Five Years | | | Five Years | | | | | | | | | | | | | | | | | | | | | | | Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | Non-MBS Investments | | $ | 9,240 | | | $ | 169 | | | $ | 374 | | | $ | 245 | | | $ | 399 | | MBS Investments | | | 7,306 | | | | 874 | | | | 1,485 | | | | 411 | | | | 993 | | Adjustable-rate loans and advances | | | 8,121 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Net unswapped | | | 24,667 | | | | 1,043 | | | | 1,859 | | | | 656 | | | | 1,392 | | | | | | | | | | | | | | | | | | | | | | | Fixed-rate loans and advances | | | 10,994 | | | | 3,469 | | | | 13,971 | | | | 10,561 | | | | 29,824 | | Swaps hedging advances | | | 56,262 | | | | (3,041 | ) | | | (13,069 | ) | | | (10,347 | ) | | | (29,805 | ) | | | | | | | | | | | | | | | | | Net fixed-rate loans and advances | | | 67,256 | | | | 428 | | | | 902 | | | | 214 | | | | 19 | | Loans to other FHLBanks | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | $ | 91,923 | | | $ | 1,471 | | | $ | 2,761 | | | $ | 870 | | | $ | 1,411 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 2,454 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | Discount notes | | | 19,120 | | | | 271 | | | | — | | | | — | | | | — | | Swapped discount notes | | | 100 | | | | (100 | ) | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Net discount notes | | | 19,220 | | | | 171 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated Obligation Bonds | | | | | | | | | | | | | | | | | | | | | FHLB bonds | | | 21,722 | | | | 14,333 | | | | 23,856 | | | | 7,793 | | | | 3,410 | | Swaps hedging bonds | | | 43,497 | | | | (13,567 | ) | | | (21,638 | ) | | | (6,167 | ) | | | (2,125 | ) | | | | | | | | | | | | | | | | | Net FHLB bonds | | | 65,219 | | | | 766 | | | | 2,218 | | | | 1,626 | | | | 1,285 | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | $ | 86,893 | | | $ | 937 | | | $ | 2,218 | | | $ | 1,626 | | | $ | 1,285 | | | | | | | | | | | | | | | | | | Post hedge gaps1: | | | | | | | | | | | | | | | | | | | | | Periodic gap | | $ | 5,030 | | | $ | 534 | | | $ | 543 | | | $ | (756 | ) | | $ | 126 | | Cumulative gaps | | $ | 5,030 | | | $ | 5,564 | | | $ | 6,107 | | | $ | 5,351 | | | $ | 5,477 | |
| | | 1 | | Re-pricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the re-pricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity. |
124
The following tables display the FHLBNY’s maturity/re-pricing gaps as of December 31, 2009 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | Interest Rate Sensitivity | | | | December 31, 2009 | | | | | | | | More than | | | More than | | | More than | | | | | | | Six months | | | six months to | | | one year to | | | three years to | | | More than | | | | or less | | | one year | | | three years | | | five years | | | five years | | | | | | | | | | | | | | | | | | | | | | | Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | Non-MBS Investments | | $ | 8,621 | | | $ | 124 | | | $ | 371 | | | $ | 249 | | | $ | 587 | | MBS Investments | | | 6,773 | | | | 903 | | | | 2,420 | | | | 1,167 | | | | 879 | | Adjustable-rate loans and advances | | | 14,101 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Net unswapped | | | 29,495 | | | | 1,027 | | | | 2,791 | | | | 1,416 | | | | 1,466 | | | | | | | | | | | | | | | | | | | | | | | Fixed-rate loans and advances | | | 9,588 | | | | 7,853 | | | | 16,124 | | | | 8,254 | | | | 34,814 | | Swaps hedging advances | | | 63,852 | | | | (6,722 | ) | | | (14,389 | ) | | | (7,950 | ) | | | (34,791 | ) | | | | | | | | | | | | | | | | | Net fixed-rate loans and advances | | | 73,440 | | | | 1,131 | | | | 1,735 | | | | 304 | | | | 23 | | Loans to other FHLBanks | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | $ | 102,935 | | | $ | 2,158 | | | $ | 4,526 | | | $ | 1,720 | | | $ | 1,489 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 2,590 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | Discount notes | | | 28,770 | | | | 2,057 | | | | — | | | | — | | | | — | | Swapped discount notes | | | 1,422 | | | | (1,422 | ) | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Net discount notes | | | 30,192 | | | | 635 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated Obligation Bonds | | | | | | | | | | | | | | | | | | | | | FHLB bonds | | | 25,717 | | | | 16,014 | | | | 22,829 | | | | 6,033 | | | | 2,844 | | Swaps hedging bonds | | | 39,617 | | | | (14,298 | ) | | | (19,513 | ) | | | (4,501 | ) | | | (1,305 | ) | | | | | | | | | | | | | | | | | Net FHLB bonds | | | 65,334 | | | | 1,716 | | | | 3,316 | | | | 1,532 | | | | 1,539 | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | $ | 98,116 | | | $ | 2,351 | | | $ | 3,316 | | | $ | 1,532 | | | $ | 1,539 | | | | | | | | | | | | | | | | | | Post hedge gaps1: | | | | | | | | | | | | | | | | | | | | | Periodic gap | | $ | 4,819 | | | $ | (193 | ) | | $ | 1,210 | | | $ | 188 | | | $ | (50 | ) | Cumulative gaps | | $ | 4,819 | | | $ | 4,626 | | | $ | 5,836 | | | $ | 6,024 | | | $ | 5,974 | |
| | | 1 | | Re-pricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the re-pricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity. |
125
Operational Risk Management.Operational risk is the risk of loss resulting from the failures or inadequacies of internal processes, people, and systems, or resulting from external events. Operational risks include those arising from fraud, human error, computer system failures and a wide range of external events — from adverse weather to terrorist attacks. The management of these risks is the responsibility of the senior managers at the operating level. To assist them in discharging this responsibility and to ensure that operational risk is managed consistently throughout the organization, the FHLBNY has developed an operational risk management framework, which evolves as warranted by circumstances and changing conditions. The FHLBNY’s Operational Risk Management framework defines the core governing principles for operational risk management and provides the framework to identify, control, monitor, measure, and report operational risks in a consistent manner across the FHLBNY.
Risk and Control Self-Assessment. FHLBNY’s Risk and Control Self-Assessment incorporates standards for risk and control self-assessment which apply to all businesses and establish Risk and Control Self-Assessment as the process for identifying the risks inherent in a business’ activities and for evaluating and monitoring the effectiveness of the controls over those risks. It is the policy of the FHLBNY to require businesses and staff functions to perform a Risk and Control Self-Assessment on a periodic basis. The Risk and Control Self-Assessment must include documentation of the control environment as well as policies for assessing risks and controls, testing commensurate with risk level and tracking corrective action for control breakdowns or deficiencies. The Risk and Control Self-Assessment also must require periodic reporting to senior management and to the Board’s Audit Committee.
126105
ITEM 4T. CONTROLS AND PROCEDURES | | | ITEM 4T. | | CONTROLS AND PROCEDURES. |
| (a) | | Evaluation of Disclosure Controls and Procedures: An evaluation of the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)) was carried out under the supervision and with the participation of the Bank’s President and Chief Executive Officer, Alfred A. DelliBovi, and Senior Vice President and Chief Financial Officer, Patrick A. Morgan, at September 30, 2010.March 31, 2011. Based on this evaluation, they concluded that as of September 30, 2010,March 31, 2011, the Bank’s disclosure controls and procedures were effective, at a reasonable level of assurance, in ensuring that the information required to be disclosed by the Bank in the reports it files or submits under the Act is (i) accumulated and communicated to the Bank’s management (including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. | | | (b) | | Changes in Internal Control Over Financial Reporting: There were no changes in the Bank’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the Bank’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting. |
127106
Part II.PART II OTHER INFORMATION
From time to time, the Federal Home Loan Bank of New York is involved in disputes or regulatory inquiries that arise in the ordinary course of business. There has been no change with respect to a continuing legal proceeding involving the FHLBNY that was previously disclosed in Part 1, Item 1. LEGAL PROCEEDINGS As previously reported, on September 15, 2008, Lehman Brothers Holdings, Inc. (“LBHI”), the parent company of Lehman Brothers Special Financing Inc. (“LBSF”) and a guarantor of LBSF’s obligations, filed for protection under Chapter 113 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. LBSFFHLBNY’s 2010 Annual Report on Form 10-K filed for protection under Chapter 11 in the same court on October 3, 2008. LBSF was a counterparty to FHLBNY on multiple derivative transactions under an International Swap Dealers Association, Inc. master agreement with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF. The net amount that was due to the Bank after giving effect to obligations that were due LBSF was approximately $65 million. The FHLBNY timely filed proofs of claim in the amount of approximately $65 million as creditors of LBSF and LBHI in connection with the bankruptcy proceedings. The Bank fully reserved the LBSF receivables as the bankruptcies of LBHI and LBSF make the timing and the amount of any recovery uncertain.
As previously reported, the Bank received a Derivatives ADR Notice from LBSF dated July 23, 2010 making a Demand as of the date of the Notice of approximately $268 million owed to LBSF by the Bank. Subsequently, in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court dated September 17, 2009 (“Order”), the Bank responded to LBSF on August 23, 2010, denying LBSF’s Demand. LBSF served a reply on September 7, 2010, effectively reiterating its position. A mediation has been scheduled pursuant to the Order for December 8, 2010.
While the Bank believes that LBSF’s position is without merit, the amount the Bank actually recovers or pays will ultimately be decided in the course of the bankruptcy proceedings.March 25, 2011.
There have been no material changes from risk factors included in the FHLBNY’s Form 10-K for the fiscal year ended December 31, 2009.2010. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | | | Item 2. | | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.applicable Item 3. DEFAULTS UPON SENIOR SECURITIES | | | Item 3. | | DEFAULTS UPON SENIOR SECURITIES |
None. Item 4. (REMOVED AND RESERVED) | | | Item 4. | | (REMOVED AND RESERVED) |
Item 5. OTHER INFORMATIONNone.None
128107
| | | | | | | | | | | | | Exhibit | | | | | | Filed with | | | | | | | No. | | Identification of Exhibit Description | | this Form 10-Q | | Form | | File No. | | Date Filed | | | | | | | | | | | | | | | 10.01 | | | Bank Benefit Equalization Plana | | X | | | | | | | | | | | | | | | | | | | | | 10.02 | | | Bank 2011 Incentive Compensation Plana * | | X | | | | | | | | | | | | | | | | | | | | | 10.03 | | | Joint Capital Enhancement Agreement | | | | 8-K | | 000-51397 | | 3/1/2011 | | | | | | | | | | | | | | | 31.01 | | | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 byfor the President and Chief Executive Officer | | X | | | | | | | | | | | | | | | | | | | | | 31.02 | | | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 byfor the Senior Vice President and Chief Financial Officer | | X | | | | | | | | | | | | | | | | | | | | | 32.01 | | | Certification ofby the President and Chief Executive Officer furnished pursuantPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350 | | X | | | | | | | | | | | | | | | | | | | | | 32.02 | | | Certification ofby the Senior Vice President and Chief Financial Officer furnished pursuantPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350 | | X | | | | | | |
| | | Notes: | | a | | This exhibit includes a management contract, compensatory plan or arrangement required to be noted herein. | | * | | Portions of the exhibit have been omitted and separately filed with the U.S. Securities and Exchange Commission with a request for confidential treatment. |
129108
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | Federal Home Loan Bank of New York (Registrant) | | | /s/ Patrick A. Morgan | | | Patrick A. Morgan | | | Senior Vice President and Chief Financial Officer Federal Home Loan Bank of New York (on behalf of the registrant and as the Principal Financial Officer) | | Date: November 12, 2010 |
Date: May 12, 2011 130109
|