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EX-31.02 - EXHIBIT 31.02 - Federal Home Loan Bank of New Yorkc92350exv31w02.htm
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EX-31.01 - EXHIBIT 31.01 - Federal Home Loan Bank of New Yorkc92350exv31w01.htm
EX-32.01 - EXHIBIT 32.01 - Federal Home Loan Bank of New Yorkc92350exv32w01.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
Commission file number: 000-51397
Federal Home Loan Bank of New York
(Exact name of registrant as specified in its charter)
     
Federal
(State or other jurisdiction of
incorporation or organization)
  13-6400946
(I.R.S. Employer
Identification No.)
     
101 Park Avenue, New York, N.Y.
(Address of principal executive offices)
  10178
(Zip Code)
(212) 681-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of the issuer’s common stock as of October 31, 2009 was 50,585,269.
 
 

 

 


 

FEDERAL HOME LOAN BANK OF NEW YORK
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED September 30, 2009
Table of Contents
         
    Page  
 
       
PART I. FINANCIAL INFORMATION
       
 
       
Item 1. FINANCIAL STATEMENTS (Unaudited):
       
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    6  
 
       
    74  
 
       
    169  
 
       
    174  
 
       
    175  
 
       
    175  
 
       
    175  
 
       
    175  
 
       
    175  
 
       
    175  
 
       
    175  
 
       
    176  
 
       
 Exhibit 31.01
 Exhibit 31.02
 Exhibit 32.01
 Exhibit 32.02

 

 


Table of Contents

Federal Home Loan Bank of New York
Statements of Condition — Unaudited (in thousands, except per share data)
As of September 30, 2009 and December 31, 2008
                 
    September 30, 2009     December 31, 2008  
Assets
               
Cash and due from banks (Note 2)
  $ 1,189,158     $ 18,899  
Interest-bearing deposits (Note 3)
          12,169,096  
Federal funds sold
    3,900,000        
Available-for-sale securities, net of unrealized losses of $16,085 at September 30, 2009 and $64,420 at December 31, 2008 (Note 5)
    2,362,592       2,861,869  
Held-to-maturity securities (Note 4)
               
Long-term securities
    10,478,027       10,130,543  
Certificates of deposit
    2,000,000       1,203,000  
Advances (Note 6)
    95,944,732       109,152,876  
Mortgage loans held-for-portfolio, net of allowance for credit losses of $3,358 at September 30, 2009 and $1,406 at December 31, 2008 (Note 7)
    1,336,228       1,457,885  
Accrued interest receivable
    354,934       492,856  
Premises, software, and equipment
    14,596       13,793  
Derivative assets (Note 15)
    9,092       20,236  
Other assets
    14,957       18,838  
 
           
 
               
Total assets
  $ 117,604,316     $ 137,539,891  
 
           
 
               
Liabilities and capital
               
 
               
Liabilities
               
Deposits (Note 9)
               
Interest-bearing demand
  $ 2,255,403     $ 1,333,750  
Non-interest bearing demand
    4,968       828  
Term
    15,600       117,400  
 
           
 
               
Total deposits
    2,275,971       1,451,978  
 
           
 
               
Consolidated obligations, net (Note 8)
               
Bonds (Includes $2,385,968 at September 30, 2009 and $998,942 at December 31, 2008 at fair value under the fair value option)
    69,670,836       82,256,705  
Discount notes
    38,385,244       46,329,906  
 
           
 
               
Total consolidated obligations
    108,056,080       128,586,611  
 
           
 
               
Mandatorily redeemable capital stock (Note 11)
    127,882       143,121  
 
               
Accrued interest payable
    337,221       426,144  
Affordable Housing Program (Note 10)
    144,822       122,449  
Payable to REFCORP (Note 10)
    38,692       4,780  
Derivative liabilities (Note 15)
    871,744       861,660  
Other liabilities
    91,115       75,753  
 
           
 
               
Total liabilities
    111,943,527       131,672,496  
 
           
 
               
Commitments and Contingencies (Notes 8, 10, 15 and 17)
               
 
               
Capital (Note 11)
               
Capital stock ($100 par value), putable, issued and outstanding shares:
               
51,422 and 55,857 at September 30, 2009 and December 31, 2008
    5,142,154       5,585,700  
Retained earnings
    666,237       382,856  
Accumulated other comprehensive income (loss) (Note 12)
               
Net unrealized loss on available-for-sale securities
    (16,085 )     (64,420 )
Non-credit portion of OTTI on held-to-maturity securities
    (103,884 )      
Accretion of non-credit portion of impairment losses on held-to-maturity securities
    3,421        
Net unrealized loss on hedging activities
    (24,504 )     (30,191 )
Employee supplemental retirement plans (Note 14)
    (6,550 )     (6,550 )
 
           
 
               
Total capital
    5,660,789       5,867,395  
 
           
 
               
Total liabilities and capital
  $ 117,604,316     $ 137,539,891  
 
           
The accompanying notes are an integral part of the unaudited financial statements.

 

1


Table of Contents

Federal Home Loan Bank of New York
Statements of Income — Unaudited (in thousands, except per share data)
For the three and nine months ended September 30, 2009 and 2008
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Interest income
                               
Advances (Note 6)
  $ 240,573     $ 678,896     $ 1,094,089     $ 2,211,823  
Interest-bearing deposits (Note 3)
    1,014       3,240       19,054       17,086  
Federal funds sold
    1,864       21,316       1,933       69,921  
Available-for-sale securities (Note 5)
    6,590       24,441       22,881       57,016  
Held-to-maturity securities (Note 4)
                               
Long-term securities
    111,232       138,412       355,916       396,660  
Certificates of deposit
    851       51,287       1,392       212,525  
Mortgage loans held-for-portfolio (Note 7)
    17,405       19,316       54,679       58,348  
Loans to other FHLBanks and other
    1       30       1       33  
 
                       
 
                               
Total interest income
    379,530       936,938       1,549,945       3,023,412  
 
                       
 
                               
Interest expense
                               
Consolidated obligations-bonds (Note 8)
    191,708       628,394       783,695       1,952,228  
Consolidated obligations-discount notes (Note 8)
    31,647       141,309       173,228       559,153  
Deposits (Note 9)
    516       7,370       2,002       33,235  
Mandatorily redeemable capital stock (Note 11)
    1,807       1,950       5,478       8,884  
Cash collateral held and other borrowings
          242       49       982  
 
                       
 
                               
Total interest expense
    225,678       779,265       964,452       2,554,482  
 
                       
 
                               
Net interest income before provision for credit losses
    153,852       157,673       585,493       468,930  
 
                       
 
                               
Provision (recovery) for credit losses on mortgage loans
    598       (31 )     1,966       215  
 
                       
 
                               
Net interest income after provision for credit losses
    153,254       157,704       583,527       468,715  
 
                       
 
                               
Other income (loss)
                               
Service fees
    1,101       934       3,181       2,422  
Instruments held at fair value — Unrealized gain (Note 16)
    426       3,582       8,653       3,582  
 
                               
Total OTTI losses
    (30,169 )           (118,160 )      
Portion of loss recognized in other comprehensive income
    26,486             103,884        
 
                       
Net impairment losses recognized in earnings
    (3,683 )           (14,276 )      
 
                       
 
                               
Net realized and unrealized gain (loss) on derivatives and hedging activities (Note 15)
    59,639       (25,515 )     124,613       (65,196 )
Net realized gain from sale of available-for-sale and redemption of held-to-maturity securities (Notes 4 and 5)
                721       1,058  
Provision for derivative counterparty credit losses (Notes 15 and 17)
          (64,523 )           (64,523 )
Other
    (39 )     92       59       (42 )
 
                       
 
                               
Total other income (loss)
    57,444       (85,430 )     122,951       (122,699 )
 
                       
 
                               
Other expenses
                               
Operating
    17,810       16,549       53,970       49,489  
Finance Agency and Office of Finance
    1,834       1,350       5,663       4,268  
 
                       
 
                               
Total other expenses
    19,644       17,899       59,633       53,757  
 
                       
 
                               
Income before assessments
    191,054       54,375       646,845       292,259  
 
                       
 
                               
Affordable Housing Program (Note 10)
    15,780       4,638       53,363       24,764  
REFCORP (Note 10)
    35,055       9,947       118,696       53,499  
 
                       
 
                               
Total assessments
    50,835       14,585       172,059       78,263  
 
                       
 
                               
Net income
  $ 140,219     $ 39,790     $ 474,786     $ 213,996  
 
                       
 
                               
Basic earnings per share (Note 13)
  $ 2.70     $ 0.79     $ 8.93     $ 4.55  
 
                       
 
                               
Cash dividends paid per share
  $ 1.40     $ 1.62     $ 3.54     $ 5.67  
 
                       
The accompanying notes are an integral part of the unaudited financial statements.

 

2


Table of Contents

Federal Home Loan Bank of New York
Statements of Capital — Unaudited (in thousands, except per share data)
For the nine months ended September 30, 2009 and 2008
                                                 
                            Accumulated                
    Capital Stock1             Other             Total  
    Class B     Retained     Comprehensive     Total     Comprehensive  
    Shares     Par Value     Earnings     Income (Loss)     Capital     Income (Loss)  
 
                                               
Balance, December 31, 2007
    43,680     $ 4,367,971     $ 418,295     $ (35,675 )   $ 4,750,591          
 
                                               
Proceeds from sale of capital stock
    36,970       3,697,013                   3,697,013          
Redemption of capital stock
    (24,964 )     (2,496,361 )                 (2,496,361 )        
Shares reclassified to mandatorily redeemable capital stock
    (648 )     (64,759 )                 (64,759 )        
Cash dividends ($5.67 per share) on capital stock
                (250,104 )           (250,104 )        
Net Income
                213,996             213,996     $ 213,996  
Net change in Accumulated other comprehensive income (Loss):
                                               
Net unrealized loss on available-for-sale securities
                      (43,952 )     (43,952 )     (43,952 )
Hedging activities
                      (1,755 )     (1,755 )     (1,755 )
 
                                   
 
                                          $ 168,289  
 
                                             
Balance, September 30, 2008
    55,038     $ 5,503,864     $ 382,187     $ (81,382 )   $ 5,804,669          
 
                                     
 
                                               
Balance, December 31, 2008
    55,857     $ 5,585,700     $ 382,856     $ (101,161 )   $ 5,867,395          
 
                                               
Proceeds from sale of capital stock
    26,932       2,693,233                   2,693,233          
Redemption of capital stock
    (31,363 )     (3,136,345 )                 (3,136,345 )        
Shares reclassified to mandatorily redeemable capital stock
    (4 )     (434 )                 (434 )        
Cash dividends ($3.54 per share) on capital stock
                (191,405 )           (191,405 )        
Net Income
                474,786             474,786     $ 474,786  
Net change in Accumulated other comprehensive income (Loss):
                                               
Non-credit portion of OTTI on held-to-maturity securities
                      (103,884 )     (103,884 )     (103,884 )
Accretion of non-credit portion of impairment losses on held-to-maturity securities
                      3,421       3,421       3,421  
Net unrealized gain on available-for-sale securities
                      48,335       48,335       48,335  
Hedging activities
                      5,687       5,687       5,687  
 
                                   
 
                                          $ 428,345  
 
                                             
Balance, September 30, 2009
    51,422     $ 5,142,154     $ 666,237     $ (147,602 )   $ 5,660,789          
 
                                     
     
1   Putable stock
The accompanying notes are an integral part of the unaudited financial statements.

 

3


Table of Contents

Federal Home Loan Bank of New York
Statements of Cash Flows — Unaudited (in thousands)
For the nine months ended September 30, 2009 and 2008
                 
    Nine months ended  
    September 30,  
    2009     2008  
Operating activities
               
 
               
Net Income
  $ 474,786     $ 213,996  
 
           
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization:
               
Net premiums and discounts on consolidated obligations, investments, mortgage loans and other adjustments
    (95,490 )     (103,645 )
Concessions on consolidated obligations
    4,977       6,904  
Premises, software, and equipment
    4,020       3,575  
Provision for derivative counterparty credit losses
          64,523  
Provision for credit losses on mortgage loans
    1,966       215  
Net realized (gains) from redemption of held-to-maturity securities
    (281 )     (1,058 )
Net realized (gains) from sale of available-for-sale securities
    (440 )      
Credit impairment losses on held-to-maturity securities
    14,276        
Change in net fair value adjustments on derivatives and hedging activities
    68,323       (468,072 )
Change in fair value adjustments on financial instruments held at fair value
    (8,653 )     (3,582 )
Net change in:
               
Accrued interest receivable
    137,921       110,871  
Derivative assets due to accrued interest
    184,842       151,442  
Derivative liabilities due to accrued interest
    (250,161 )     (91,585 )
Other assets
    4,830       (48,769 )
Affordable Housing Program liability
    22,373       3,323  
Accrued interest payable
    (95,244 )     (4,878 )
REFCORP liability
    33,912       (14,093 )
Other liabilities
    (5,759 )     (20,024 )
 
           
 
               
Total adjustments
    21,412       (414,853 )
 
           
 
               
Net cash provided (used) by operating activities
    496,198       (200,857 )
 
           
 
               
Investing activities
               
Net change in:
               
Interest-bearing deposits
    13,471,204       (341,090 )
Federal funds sold
    (3,900,000 )     (2,031,000 )
Deposits with other FHLBanks
    (84 )     (127 )
Premises, software, and equipment
    (4,823 )     (3,876 )
Held-to-maturity securities:
               
Long-term securities
               
Purchased
    (2,754,476 )     (2,142,900 )
Repayments
    2,283,149       1,862,789  
In-substance maturities
    38,251       94,634  
Net change in certificates of deposit
    (797,000 )     5,284,200  
Available-for-sale securities:
               
Purchased
    (613 )     (3,244,285 )
Proceeds
    420,607       251,777  
Proceeds from sales
    132,095       546  
Advances:
               
Principal collected
    320,102,436       389,788,259  
Made
    (308,324,718 )     (410,797,243 )
Mortgage loans held-for-portfolio:
               
Principal collected
    235,596       135,832  
Purchased and originated
    (117,152 )     (105,733 )
Loans to other FHLBanks
               
Loans made
    (400,000 )     (661,000 )
Principal collected
    400,000       716,000  
 
           
 
               
Net cash provided (used) by investing activities
    20,784,472       (21,193,217 )
 
           
The accompanying notes are an integral part of these unaudited financial statements.

 

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Table of Contents

Federal Home Loan Bank of New York
Statements of Cash Flows — Unaudited (in thousands)
For the nine months ended September 30, 2009 and 2008
                 
    Nine months ended  
    September 30,  
    2009     2008  
Financing activities
               
Net change in:
               
Deposits and other borrowings 1
  $ 531,109     $ 1,601,874  
Short-term loans from other FHLBanks:
               
Proceeds from loans
          1,260,000  
Payments for loans
          (1,260,000 )
Consolidated obligation bonds:
               
Proceeds from issuance
    35,112,667       55,509,862  
Payments for maturing and early retirement
    (47,224,995 )     (30,051,498 )
Consolidated obligation discount notes:
               
Proceeds from issuance
    814,559,648       536,200,240  
Payments for maturing
    (822,438,650 )     (542,193,830 )
Capital stock:
               
Proceeds from issuance
    2,693,233       3,697,013  
Payments for redemption / repurchase
    (3,136,345 )     (2,496,361 )
Redemption of Mandatorily redeemable capital stock
    (15,673 )     (159,857 )
Cash dividends paid 2
    (191,405 )     (250,104 )
 
           
 
               
Net cash (used) provided by financing activities
    (20,110,411 )     21,857,339  
 
           
 
               
Net increase in cash and cash equivalents
    1,170,259       463,265  
Cash and cash equivalents at beginning of the period
    18,899       7,909  
 
           
 
               
Cash and cash equivalents at end of the period
  $ 1,189,158     $ 471,174  
 
           
 
               
Supplemental disclosures:
               
Interest paid
  $ 1,161,678     $ 2,096,160  
Affordable Housing Program payments 3
  $ 30,990     $ 21,441  
REFCORP payments
  $ 84,784     $ 67,593  
Transfers of mortgage loans to real estate owned
  $ 1,091     $ 356  
Portion of non-credit OTTI losses on held-to-maturity securities
  $ 103,884     $  
     
1   Includes $227,796 of cash out-flows from derivatives for the nine months ended September 30, 2009 and $477,204 cash in-flows for the nine months ended September 30, 2008.
 
2   Does not include payments to holders of Mandatorily redeemable capital stock.
 
3   AHP payments = (beginning accrual - ending accrual) + AHP assessment for the period; payments represent funds released to the Affordable Housing Program.
The accompanying notes are an integral part of these unaudited financial statements.

 

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Notes to Financial Statements (Unaudited)
Background
The Federal Home Loan Bank of New York (“FHLBNY” or “the Bank”) is a federally chartered corporation, exempt from federal, state and local taxes except real property taxes. It is one of twelve district Federal Home Loan Banks (“FHLBanks”). The FHLBanks are U.S. government-sponsored enterprises (“GSEs”), organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”). Each FHLBank is a cooperative owned by member institutions located within a defined geographic district. The members purchase capital stock in the FHLBank and receive dividends on their capital stock investment. The FHLBNY’s defined geographic district is New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. The FHLBNY provides a readily available, low-cost source of funds for its member institutions. The FHLBNY does not have any wholly or partially owned subsidiaries, nor does it have an equity position in any partnerships, corporations, or off-balance-sheet special purpose entities.
The FHLBNY obtains its funds from several sources. A primary source is the issuance of FHLBank debt instruments, called consolidated obligations, to the public. The issuance and servicing of consolidated obligations are performed by the Office of Finance, a joint office of the FHLBanks. These debt instruments represent the joint and several obligations of all the FHLBanks. Additional sources of FHLBNY funding are member deposits and the issuance of capital stock. Deposits may be accepted from member financial institutions and federal instrumentalities.
Members of the cooperative must purchase FHLBNY stock according to regulatory requirements (See Note 11 – Capital, Capital Ratios, and Mandatorily Capital Stock — for more information). The business of the cooperative is to provide liquidity for the members (primarily in the form of loans referred to as “advances”) and to provide a return on members’ investment in FHLBNY stock in the form of a dividend. Since the members are both stockholders and customers, the Bank operates such that there is a trade-off between providing value to them via low pricing for advances with a relatively lower dividend versus higher advances pricing with a relatively higher dividend. The FHLBNY is managed to deliver balanced value to members, rather than to maximize profitability or advance volume through low pricing.
All federally insured depository institutions, insured credit unions and insurance companies engaged in residential housing finance can apply for membership in the FHLBank in their district. All members are required to purchase capital stock in the FHLBNY as a condition of membership. A member of another FHLBank or a financial institution that is not a member of any FHLBank may also hold FHLBNY stock as a result of having acquired an FHLBNY member. Because the Bank operates as a cooperative, the FHLBNY conducts business with related parties in the normal course of business and considers all members and non-member stockholders as related parties in addition to the other FHLBanks. See Note 18 — Related party transactions — for more information.
The FHLBNY’s primary business is making collateralized advances to members which is the principal factor that impacts the financial condition of the FHLBNY.
As of July 30, 2008, the FHLBNY is supervised and regulated by the Federal Housing Finance Agency (“Finance Agency”), which is an independent agency in the executive branch of the U.S. government. With the passage of the “Housing and Economic Recovery Act of 2008” (“Housing Act”), the Finance Agency was established and became the new independent Federal regulator (the “Regulator”) of the FHLBanks, effective July 30, 2008. The Finance Board, the FHLBanks’ former regulator, was merged into the Finance Agency as of October 27, 2008. The Finance Board was abolished one year after the date of enactment of the Housing Act. Finance Board regulations, orders, determinations and resolutions remain in effect until modified, terminated, set aside or superseded in accordance with the Housing Act by the FHFA Director, a court of competent jurisdiction or by operation of the law.

 

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The Finance Agency ensures that the FHLBNY carries out its housing and community development mission, remains adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner. However, while the Finance Agency establishes regulations governing the operations of the FHLBanks, each FHLBank functions as a separate entity with its own management, employees and board of directors.
Tax Status
The FHLBanks, including the FHLBNY, are exempt from ordinary federal, state, and local taxation except for local real estate tax.
Assessments
Resolution Funding Corporation (“REFCORP”) Assessments. Although 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.
REFCORP was established by Congress in 1989 to help facilitate the U.S. government’s bailout of failed financial institutions. The REFCORP assessments are used by the U.S. Treasury to pay a portion of the annual interest expense on long-term obligations issued to finance a portion of the cost of the bailout. Principal of those long-term obligations is paid from a segregated account containing zero-coupon U.S. government obligations, which were purchased using funds that Congress directed the FHLBanks to provide for that purpose in 1989.
Each FHLBank is required to pay 20 percent of income calculated in accordance with accounting principles generally accepted in the U.S. (“GAAP”) after the assessment for Affordable Housing Program, but before the assessment for the REFCORP. The Affordable Housing Program and REFCORP assessments are calculated simultaneously because of their dependence on each other. The FHLBNY accrues its REFCORP assessment on a monthly basis.
The Resolution Funding Corporation has been designated as the calculation agent for the Affordable Housing Program and REFCORP assessments. Each FHLBank provides the amount of quarterly income before Affordable Housing Program and REFCORP and other information to the Resolution Funding Corporation, which then performs the calculations for each quarter end.
Affordable Housing Program (“AHP” or “Affordable Housing Program”) Assessments. Section 10(j) of the FHLBank Act requires each FHLBank to establish an Affordable Housing Program. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances 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 FHLBanks must set aside for the Affordable Housing Program the greater of $100 million or 10 percent of regulatory net income. Regulatory net income is defined as GAAP net income before interest expense related to mandatorily redeemable capital stock under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity, and the assessment for Affordable Housing Program, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency. The FHLBNY accrues the AHP expense monthly.

 

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Basis of Presentation
The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expense during the reported periods. Although management believes these judgments, estimates, and assumptions to be appropriate, actual results may differ. The information contained in these financial statements is unaudited. In the opinion of management, normal recurring adjustments necessary for a fair presentation of the interim period results have been made. Certain amounts in the comparable 2007 and 2008 presentations have been conformed to the 2009 presentation and the impact of the changes was insignificant.
These unaudited financial statements should be read in conjunction with the FHLBNY’s audited financial statements for the year ended December 31, 2008, included in Form 10-K filed on March 27, 2009.
See Note 1 — Summary of Significant Accounting Policies in Notes to the Financial Statements of the Federal Home Loan Bank of New York filed on Form 10-K on March 27, 2009, which contains a summary of the Bank’s significant accounting policies.
Note 1. Recently Issued Accounting Standards and Interpretations, and Significant Accounting Policies and Estimates
Recently issued Accounting Standards and Interpretations
Accounting for the Consolidation of Variable Interest Entities — On June 12, 2009, the FASB issued guidance to improve financial reporting by enterprises involved with variable interest entities (VIEs) and to provide more relevant and reliable information to users of financial statements. This guidance amends the manner in which entities evaluate whether consolidation is required for VIEs. The guidance also requires that an entity continually evaluate VIEs for consolidation, rather than making such an assessment based upon the occurrence of triggering events. Additionally, the guidance requires enhanced disclosures about how an entity’s involvement with a VIE affects its financial statements and its exposure to risks. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the FHLBNY), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The FHLBNY is evaluating the impact of this pronouncement on its financial statements, results of operations and cash flows, which is not expected to be significant.
Accounting for Transfers of Financial Assets — On June 12, 2009, the FASB issued guidance, which is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Key provisions of the guidance include (i) the removal of the concept of qualifying special purpose entities, (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred and (iii) the requirement that to qualify for sale accounting, the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. The guidance also requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the FHLBNY), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The FHLBNY is evaluating the effect of the adoption of this guidance on its financial condition, results of operations and cash flows, which is not expected to be significant.

 

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Codification of Accounting Standards — On June 29, 2009, the FASB established FASB’s Accounting Standards Codification (Codification) as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. The Codification is effective for interim and annual periods ending after September 15, 2009. The FHLBNY adopted the Codification on September 30, 2009. As the Codification is not intended to change or alter previous GAAP, its adoption did not affect the FHLBNY’s financial condition, results of operations or cash flows. Because the Codification is the single source of authoritative U.S. GAAP, the notes will generally not refer to the Codification.
Subsequent Events — On May 28, 2009, the FASB issued guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued (FASB ASC 855-10). This guidance sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date, including disclosure of the date through which an entity has evaluated subsequent events and whether that represents the date the financial statements were issued or were available to be issued. This guidance does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. This guidance is effective for interim and annual financial periods ending after June 15, 2009. The FHLBNY adopted this guidance for the period ended June 30, 2009. Its adoption resulted in additional disclosures in the financial statements in Form 10-Q for the periods ended June 30, 2009 and September 30, 2009. For more information, see Note 20 — Subsequent events.
Enhanced Disclosures about Derivative Instruments and Hedging Activities — On March 19, 2008, the FASB issued guidance which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows (FASB ASC 815-10-65-1). The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009 for the FHLBNY). Since the new guidance only requires additional disclosures concerning derivatives and hedging activities, its adoption as of January 1, 2009 did not have an effect on our financial condition, results of operations or cash flows. The expanded disclosures related to this guidance are included in Note 15 — Derivatives and hedging activities.
In September 2008, the FASB issued guidance to require enhanced disclosures about credit derivatives and guarantees and amend the existing guidance on guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others (FASB ASC 460-10) to exclude credit derivative instruments accounted for at fair value under the accounting standard for derivatives and hedge accounting (FASB ASC 815-10). The new guidance is effective for financial statements issued for reporting periods ending after November 15, 2008. Since the new guidance only requires additional disclosures concerning credit derivatives and guarantees, its adoption as of January 1, 2009 did not have an effect on our financial condition, results of operations or cash flows.

 

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Recognition and Presentation of Other-Than-Temporary Impairments — On April 9, 2009, the FASB issued guidance for recognition and presentation of other-than-temporary impairment (OTTI) (FASB ASC 320-10-65-1). The new guidance is intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. The guidance applies to debt securities and requires that the total OTTI be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assert that (a) it does not have the intent to sell or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery, and (c) it expects to recover the amortized cost basis of the security. The FHLBNY early adopted this guidance at January 1, 2009, and has recorded OTTI on its securities under the new rules. No cumulative effect transition adjustment was recorded since the FHLBNY had no OTTI prior to 2009. The expanded disclosures related to the new guidance are included in Note 4 — Held-to-maturity securities and Note 5 — Available-for-sale securities.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly — On April 9, 2009, the FASB issued guidance, which clarifies the approach to, and provides additional factors to consider in estimating fair value when the volume and level of activity for the asset or liability have significantly decreased (FASB ASC 820-10-65-4). It also includes guidance on identifying circumstances that indicate a transaction is not orderly. The guidance is effective and should be applied prospectively for financial statements issued for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for reporting periods ending after March 15, 2009. If an entity elected to early adopt this guidance, it must also have concurrently adopted the OTTI guidance. The FHLBNY elected to early adopt this guidance effective January 1, 2009. The enhanced disclosures related to this guidance are included in Note 16 — Fair Values of Financial Instruments.
Interim Disclosures about Fair Value of Financial Instruments. On April 9, 2009, the FASB issued guidance to require disclosures about the fair value of financial instruments, including disclosure of the method(s) and significant assumptions used to estimate the fair value of financial instruments, in interim financial statements as well as in annual financial statements (FASB ASC 825-10-65-1). Previously, these disclosures were required only in annual financial statements. The guidance is effective and should be applied prospectively for financial statements issued for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for reporting periods ending after March 15, 2009. An entity may early adopt this guidance only if it also concurrently adopted guidance discussed in the previous paragraphs regarding fair value and the OTTI guidance. The FHLBNY elected to early adopt this guidance effective January 1, 2009. Its adoption resulted in increased interim financial statement disclosures, but did not affect the FHLBNY’s financial condition, results of operations or cash flows.

 

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Significant Accounting Policies and Estimates
The FHLBNY has identified certain accounting policies that it believes are significant because they require management to make subjective judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or by using different assumptions. These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios, evaluating the impairment of the Bank’s securities portfolios, estimating the liabilities for employee benefit programs, and estimating fair values of certain assets and liabilities.
Fair Value Measurements and Disclosures — The accounting standards on fair value measurements and disclosures discusses how entities should measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources or those that can be directly corroborated to market sources, while unobservable inputs reflect the FHLBNY’s market assumptions. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal or most advantageous market for the asset or liability between market participants at the measurement date. This definition is based on an exit price rather than transaction (entry) price.
In determining fair value, FHLBNY uses various valuation methods, including both the market and income approaches. The accounting guidance on fair value measurements and disclosures establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, and would be based on market data obtained from sources independent of FHLBNY. Unobservable inputs are inputs that reflect FHLBNY’s assumptions about the parameters market participants would use in pricing the asset or liability, and would be based on the best information available in the circumstances.
The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuations in which all significant inputs and significant parameters are observable in active markets.
Level 3 — Valuations based upon valuation techniques in which significant inputs and significant parameters are unobservable.
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors including, for example, the characteristics peculiar to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by FHLBNY in determining fair value is greatest for instruments categorized as Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purpose the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. At September 30, 2009 and December 31, 2008, the FHLBNY measured and recorded fair values using the above guidance in the Statements of Condition for derivatives, available-for-sale securities, for certain consolidated obligation bonds that were designated and recorded at fair value using the fair value option (FVO) accounting guidance for financial assets and liabilities, and at September 30, 2009, for certain held-to-maturity securities determined to be OTTI and measured at fair value on a non-recurring basis. At September 30, 2009 and December 31, 2008, the Bank had designated consolidated obligation debt of $2.4 billion and $983.0 million under the FVO.

 

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A significant percentage of fixed-rate advances and consolidated obligation bonds are hedged to mitigate the risk of fair value changes from changes in the interest rate environment and are typically accounted under hedge accounting rules in a fair value hedging relationship. When the FHLBNY deems that a hedge relationship is either not operationally practical or considers the hedge may not be highly effective under accounting standard on derivative and hedging, the FHLBNY may designate certain advances and consolidated obligation bonds as economic hedges.
Fair Values of Derivative positions — The FHLBNY is an end-user of over-the-counter (“OTC”) derivatives to hedge assets and liabilities under hedge accounting rules to mitigate fair value risks. In addition, the Bank records the fair value of an insignificant amount of mortgage-delivery commitments as derivatives, also under derivative and hedge accounting rules. For additional information, see Note 15 — Derivatives and hedging activities.
Valuations of derivative assets and liabilities reflect the value of the instrument including the value associated with counterparty risk. Derivative values also take into account the FHLBNY’s own credit standing. The valuation of the derivative instrument reflects the net credit differential between the FHLBNY and its counterparties to its derivative contracts. The computed fair values of the FHLBNY’s OTC derivatives take 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. On a contract-by-contract basis, the collateral and netting arrangements sufficiently mitigated the impact of the credit differential between the FHLBNY and its counterparties to an immaterial level such that an adjustment for nonperformance risk was not deemed necessary. Fair values of the derivatives were computed using quantitative models and employed multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors. These multiple market inputs were predominantly actively quoted and verifiable through external sources, including brokers and market transactions.
Fair Values of investments classified as available-for-sale securities — Changes in the values of available-for-sale securities are recorded in Accumulated other comprehensive income (loss), which is a component of members’ capital, with an offset to the recorded value of the investments in the Statements of Condition. The Bank’s entire portfolio of mortgage-backed securities classified as available-for-sale (“AFS”) is comprised of securities issued by GSE variable rate collateralized mortgage obligations which are marketable at recorded fair values. A small percentage of the AFS portfolio at September 30, 2009 and December 31, 2008 consisted of investments in equity and bond mutual funds held by grantor trusts owned by the FHLBNY. The unit prices, or the “Net asset values,” of the underlying mutual funds were available through publicly viewable web sites and the units were marketable at recorded fair values. In summary, the recorded fair values of available-for-sale securities in the Statements of Condition at September 30, 2009 and December 31, 2008 reflected the estimated price at which the positions could be sold.
All of the FHLBNY’s mortgage-backed securities classified as available-for-sale are marketable and the fair value of these investment securities is estimated by management using specialized pricing services that employ pricing models or quoted prices of securities with similar characteristics. Inputs into the pricing models are market based and observable. Examples of securities, which would generally be classified within Level 2 of the valuation hierarchy and valued using the “market approach” as defined under the accounting standard for fair value measurements and disclosures, include GSE issued collateralized mortgage obligations and money market funds.

 

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See Note 16 — Fair Values of Financial Instruments — for additional disclosures with respect to the Levels associated with assets and liabilities recorded on the Bank’s Statements of Condition at September 30, 2009 and December 31, 2008. See Note 16 – Fair Values of Financial Instruments — for more information about fair value disclosures of financial instruments.
Fair Value on a Nonrecurring Basis — Certain held-to-maturity investment securities are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments in certain circumstances (for example, when there is evidence of other-than-temporary impairment). The FHLBNY early adopted the new guidance on recognition and presentation of other-than-temporary impairments. In accordance with this guidance, held-to-maturity mortgage-backed securities with unpaid principal balance of $197.2 million and fair value of $125.8 million at September 30, 2009 were determined to be credit impaired as a result of evidence of other-than-temporary impairment (“OTTI”) in the current year third quarter. The impairment consisted of credit loss component of $3.7 million recorded as a charge to earnings in the three months ended September 30, 2009. The non-credit component of OTTI was a loss of $26.5 million, which was recorded in Accumulated other comprehensive income (loss).
Financial Assets and Financial Liabilities recorded under the Fair Value Option — The accounting standards on the fair value option for financial assets and liabilities, created a fair value option allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities with changes in fair value recognized in earnings as they occur. In the third quarter of 2008 and thereafter, the FHLBNY has elected the FVO designation for certain consolidated obligation bonds. The changes in fair values of the designated bonds are economically hedged by interest rate swaps. See Note 16 — Fair Values of Financial Instruments for more information.
Investments
Early adoption by the FHLBNY of the guidance on interim disclosures about fair value of financial instruments at January 1, 2009 required the Bank to incorporate certain clarifications and definitions in its investment policies. The new guidance amends the accounting rules for investments in debt and equity securities, and is primarily intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. The new guidance has been incorporated in the Bank’s investment policies as summarized below.
Held-to-maturity securities — The FHLBNY classifies investments for which it has both the ability and intent to hold to maturity as held-to-maturity investments, and are recorded at amortized cost basis. Amortized cost basis includes adjustments made to the cost of an investment for accretion, amortization, collection of cash, and fair value hedge accounting adjustments. If a held-to-maturity security is determined to be OTTI, the amortized cost basis of the security is adjusted for credit losses. Amortized cost basis of a held-to-maturity OTTI security is further adjusted for impairment related to all other factors (also referred to as the non-credit component of OTTI) recognized in Accumulated other comprehensive income (loss), and the adjusted amortized cost basis is the carrying value of the OTTI security reported in the Statements of Condition. Carrying value for a held-to-maturity security that is not impaired is its amortized cost basis.

 

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Under the accounting guidance for investments in debt and equity securities, changes in circumstances may cause the FHLBNY to change its intent to hold certain securities to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness or changes in regulatory requirements, is not considered inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the FHLBNY that could not have been reasonably anticipated may cause the FHLBNY to sell or transfer a held-to-maturity security without necessarily calling into question its intent to hold other debt securities to maturity. The Bank did not transfer or sell any held-to-maturity securities due to changes in circumstances thus far in 2009 as well as in 2008 or 2007.
In accordance with accounting guidance for investments in debt and equity securities, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (1) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) such that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value, or (2) the sale of a security occurs after the FHLBNY has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security paid over its term.
Available-for-sale securities — The FHLBNY classifies investments that it may sell before maturity as available-for-sale and carries them at fair value. Fair value changes are recorded in Accumulated other comprehensive income until the security is sold or is expected to be sold.
The FHLBNY classifies investments that it may sell before maturity as available-for-sale and carries them at fair value. The change in fair value of the available-for-sale securities is recorded in other comprehensive income as a net unrealized gain or loss on available-for-sale securities. If available-for-sale securities had been hedged under a fair value hedge qualifying under the accounting for derivatives and hedging, the FHLBNY would record the portion of the change in value related to the risk being hedged in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities together with the related change in the fair value of the derivative, and would record the remainder of the change in Accumulated other comprehensive income as a Net unrealized gain (loss) on available-for-sale securities. If available-for-sale securities had been hedged under a cash flow hedge qualifying under the accounting standard for derivatives and hedging, the FHLBNY would record the effective portion of the change in value of the derivative related to the risk being hedged in other comprehensive income as a Net unrealized gain (loss) on derivatives and hedging activities. The ineffective portion would be recorded in Other income (loss) and presented as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The FHLBNY computes the amortization and accretion of premiums and discounts on mortgage-backed securities using the level-yield method over the estimated lives of the securities. The FHLBNY’s estimated life method requires a retrospective adjustment of the effective yield each time the FHLBNY changes the estimated life as if the new estimate had been known at the original acquisition date of the asset.
The FHLBNY computes the amortization and accretion of premiums and discounts on investments other than mortgage-backed securities using the level-yield method to the contractual maturities of the investments.
The FHLBNY computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in Other income (loss). The FHLBNY treats securities purchased under agreements to resell as collateralized financings because the counterparty retains control of the securities.

 

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Other than-temporary Impairment — Accounting and Governance Policies — Impairment analysis and Pricing of mortgage-backed securities, and Bond insurer methodology.
The FHLBNY regularly evaluates its investments for impairment and determines if unrealized losses are temporary based in part on the creditworthiness of the issuers and the underlying collateral. A security is considered impaired if its fair value is less than its amortized cost basis. Amortized cost basis includes adjustments made to the cost of an investment for accretion, amortization, collection of cash, previous OTTI recognized in earnings and fair value hedge accounting adjustments. If management has made a decision to sell such an “impaired” security, OTTI is considered to have occurred. If a decision to sell the impaired investment has not been made, but management concludes that it is more likely than not that it will be required to sell such a security before recovery of the amortized cost basis of the security, an OTTI is also considered to have occurred.
Even if management does not intend to sell such an impaired security, an OTTI has occurred if analysis determines that a credit loss exists. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is a credit loss. To determine if a credit loss exists, management compares the present value of the cash flows expected to be collected to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the security’s amortized cost, an OTTI exists, irrespective of whether management will be required to sell such a security. The Bank’s methodology to calculate the present value of expected cash flows is to discount the expected cash flows (principal and interest) of a fixed-rate security that is deemed as OTTI by using the effective interest rate of the security as of the date it was acquired. For a variable-rate security that is evaluated for OTTI, the expected cash flows are computed using a forward-rate curve.
If management determines that it intends to sell a security in an unrealized loss position or can no longer assert that it will not be required to sell such as security before recovery of the amortized cost basis of the security, the entire OTTI is recorded as a charge to earnings in the period management reaches such a decision.
However, if management determines that OTTI exists only because of a credit loss (even if it does not intend to sell or it will not be required to sell such a security), the amount of impairment related to credit loss will affect earnings and the amount of loss related to factors other than credit loss is recognized as a component of Accumulated other comprehensive income (loss).
If the FHLBNY determines that OTTI has occurred, it accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment. The investment security is written down to fair value, which becomes its new amortized cost basis. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.
For securities designated as available-for-sale, subsequent unrealized changes to the fair values (other than OTTI) are recorded in Accumulated other comprehensive income (loss). For securities designated as held-to-maturity, the amount of OTTI recorded in Accumulated other comprehensive income (loss) for the non-credit component of OTTI is amortized prospectively over the remaining life of the securities based on the timing and amounts of estimated future cash flows. Amortization out of Accumulated other comprehensive income (loss) is offset by an increase in the carrying value of securities until the securities are repaid or are sold or subsequent OTTI is recognized in earnings.
If subsequent evaluation indicates a significant increase in cash flows greater than previously expected to be collected or if actual cash flows are significantly greater than previously expected, the increases are accounted for as a prospective adjustment to the accretable yield through interest income. In subsequent periods, if the fair value of the investment security has further declined below its then-current carrying value and there has been a decrease in the estimated cash flows the FHLBNY expects to collect, the FHLBNY will deem the security as OTTI.

 

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OTTI Governance Committee On April 28, 2009, and May 7, 2009, the Finance Agency, the FHLBanks’ regulator, provided the FHLBanks with guidance on the process for determining OTTI with respect to the FHLBanks’ holdings of private-label MBS and their adoption of the guidance for recognition and presentation of other-than-temporary impairment in the first quarter of 2009. The goal of the guidance is to promote consistency among all FHLBanks in the process for determining OTTI for private-label MBS.
Beginning with the second quarter of 2009, consistent with the objectives of the Finance Agency guidance, the FHLBanks formed an OTTI Governance Committee (“OTTI Committee”) with the responsibility for reviewing and approving the key modeling assumptions, inputs, and methodologies to be used by the FHLBanks to generate the cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS. The OTTI Committee charter was approved on June 11, 2009, and provides a formal process by which the FHLBanks can provide input on and approve the assumptions.
Although a FHLBank may engage another FHLBank to perform its OTTI analysis under the guidelines of the OTTI Committee, each FHLBank is responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and for performing the required present value calculations using appropriate historical cost bases and yields. FHLBanks that hold the same private-label MBS are required to consult with one another to make sure that any decision that a commonly held private-label MBS is other-than-temporarily impaired, including the determination of fair value and the credit loss component of the unrealized loss, is consistent among those FHLBanks.
The OTTI Committee’s role and scope with respect to the assessment of credit impairment for the FHLBNY’s private-label MBS are discussed below under “Impairment analysis of mortgage-backed securities”.
Pricing Committee In an effort to achieve consistency among all of the FHLBanks of the pricing of investments of mortgage-backed securities, in the third quarter of 2009 the FHLBanks also 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 Pricing Committee, the FHLBNY updated its methodology used to estimate the fair value of mortgage-backed securities during the quarter ended September 30, 2009. Under the approved methodology, the FHLBNY requests prices for all mortgage-backed securities from four specific third-party vendors. Prior to the change, the FHLBNY used three of the four vendors specified by the Pricing Committee. Depending on the number of prices received from the four vendors for each security, the FHLBNY selects a median or average price as defined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review by the FHLBNY. In certain limited instances (i.e., prices are outside of variance thresholds or the third-party services do not provide a price), the FHLBNY will obtain a price from securities dealers that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. Prices for CUSIPs held in common with other FHLBanks are reviewed for consistency. The incorporation of the Pricing Committee guidelines did not have a significant impact in the FHLBNY’s estimate of the fair values of its investment securities as of September 30, 2009.

 

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Bond Insurer analysis Certain held-to-maturity private-label MBS owned by the FHLBNY are insured by third-party bond insurers (“monoline insurers”). The bond insurance on these investments guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool. Private-label insured securities are cash flow tested for credit impairment. The cash flow analysis of the MBS protected by such third-party insurance looks first to the performance of the underlying security, considering its embedded credit enhancements in the form of excess spread, overcollateralization, and credit subordination, to determine the collectability of all amounts due. If these protections are deemed insufficient to make timely payment of all amounts due, then the FHLBNY considers the capacity of the third-party bond insurer to cover any shortfalls.
Certain monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. In estimating the insurers’ capacity to provide credit protection in the future to cover any decrease in cash flows expected to be collected for securities deemed to be OTTI, the FHLBNY has developed a methodology to assess the ability of the monoline insurers to meet future insurance obligations. The methodology establishes boundaries that can be used on a consistent basis, and includes both quantitative and qualitative factors.
This methodology calculates the length of time a monoline is expected to remain financially viable to pay claims for securities insured; it employs for the most part, publicly available information to identify cash flows used up by a monoline for insurance claims. Based on the monoline’s existing insurance reserves, the methodology attempts to predict the length of time over which the monoline’s claims-paying resource could sustain bond insurance losses. The methodology provides an indicator of a point in time in the future when the monoline’s claim-paying resource are estimated to be exhausted.
For the FHLBNY’s insured securities that are deemed to be credit impaired absent insurer protection, the methodology compares the timing and amount of the cash flow shortfall to the timing of when a monoline’s claim-paying resource is deemed exhausted. The analysis quantifies both the timing and the amount of cash flow shortfall that the insurer is unlikely to be able to cover. However, estimation of an insurer’s financial strength to remain viable over a long time horizon requires significant judgment and assumptions. Predicting when the insurers may no longer have the ability to perform under their contractual agreements, then comparing the timing and amounts of cash flow shortfalls of securities that are credit impaired absent insurer protection requires significant judgment.
Determining a monoline’s financial viability is primarily based on an analysis which establishes quantitative boundaries to provide consistency in the assessment of OTTI under different fact patterns. Because predicting outcomes over a distant time horizon is inherently subjective, the FHLBNY employs qualitative factors to assist in the identification of critical quantitative inputs and assumptions.
The FHLBNY believes that bond insurance is an inherent aspect of credit support within the structure of the security itself and it is appropriate to include insurance in its evaluation of expected cash flows and determination of OTTI. The FHLBNY has also established that the terms of insurance enable the insurance to travel with the security if the security is sold in the future. Currently, the monolines that provide insurance for the Bank’s securities are going concerns and are honoring claims with their existing capital resources. Within the boundaries set in the methodology outlined above, the Bank believes it is appropriate to assert that insurer credit support can be relied upon over a certain period of time. As with all assumptions, changes to these assumptions may result in materially different outcomes and the realization of additional other-than-temporary impairment charges in the future.

 

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Impairment analysis of mortgage-backed securities
Securities with a fair value below amortized cost basis are considered impaired. Determining whether a decline in fair value is OTTI requires significant judgment. The FHLBNY evaluates its individual held-to-maturity investment in private-label issued mortgage- and asset-backed securities for OTTI on a quarterly basis. As part of this process, the FHLBNY assesses if it has an intention to sell the security or it is more likely than not that it will be required to sell the impaired investment before recovery of its amortized cost basis. At September 30, 2009, to assess whether the entire amortized cost bases of the FHLBNY’s private-label MBS will be recovered, the Bank performed cash flow analysis for 100% of its private-label MBS, including bonds determined to be other-than-temporarily impaired in a previous reporting period. In prior quarters of 2009 and at December 31, 2008, the Bank had identified private-label MBS with weak performance measures indicating the possibility of other-than-temporary impairment based on the Bank’s screening and monitoring parameters, which included pricing, credit rating and credit enhancement coverage. Bonds selected through the screening process were cash flow tested for impairment. Bonds determined to be credit impaired at September 30, 2009 were cash flow tested for credit impairment previously.
Cash flow analysis derived from the FHLBNY’s own assumptions — The FHLBNY cash flow tested 100% of its private-label MBS. Assessment for impairment employed by the FHLBNY’s own techniques and assumptions were determined primarily using historical performance data of the 54 private-label MBS. These assumptions and performance measures were “benchmarked” by comparing to performance parameters from “market consensus”, data obtained from a specialized consulting service, and to the assumptions and parameters provided by the OTTI Committee for the FHLBNY’s private-label MBS.
The FHLBNY’s analysis was performed using an internal process to develop bond performance parameters and a third party process to generate expected cash flows to be collected. The Bank’s internal process calculated the historical average of each bond’s prepayments, defaults, and loss severities, and considered other factors such as delinquencies and foreclosures. Assumptions were primarily based on historical performance statistics extracted from reports from trustees, loan servicer reports and other sources. In arriving at historical performance assumptions, which is the FHLBNY’s expected case assumptions, the FHLBNY also considered various characteristics of each security including, but not limited to, the following: the credit rating and related outlook or status; the creditworthiness of the issuers of the debt securities; the underlying type of collateral; the year of securitization or vintage, the duration and level of the unrealized loss, credit enhancements, if any; and other collateral-related characteristics such as FICO® credit scores, and delinquency rates. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment.
Each bond’s performance parameters, primarily prepayments, defaults and loss severities, which were calculated by the Bank’s internal approach were then input into a third party specialized cash flow model that allocated the projected collateral level losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities was derived from the presence of subordinate securities, losses were generally allocated first to the subordinate securities until their principal balance was reduced to zero.

 

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If the security is insured by a bond insurer and the security relies on the insurer for support either currently or potentially in future periods, the FHLBNY performed another analysis to assess the financial strength of the monoline insurers. The results of the insurer financial analysis (“monoline burn-out period”) were then incorporated in the third-party cash flow model, as a key input. If the cash flow model projected cash flow shortfalls (credit impairment) on an insured security, the monoline’s “burn-out period”, an end date for credit support, was then input to the cash flow model. The end date, also referred to as the burn-out date, provided the necessary information to the cash flow model for the continuation of cash flows until the burn-out date. Any cash flow shortfalls that occurred beyond the “burn-out” date was considered to be not recoverable and the insured security was then deemed to be credit impaired.
In determining monoline insurer support, the Bank considered the contractual terms of the insurance guarantee, and whether the credit protection under the terms of the agreement would “travel” with the security.
Role and scope of the OTTI Governance Committee
Starting with the third quarter, the OTTI Committee has adopted guidelines that require each FHLBank to assess credit impairment by cash flow testing of 100% of private-label securities that are within its scope. Of the 54 private-label MBS owned by the FHLBNY, 26 MBS backed by sub-prime loans, commercial real estate loans, home equity loans, and manufactured housing loans were deemed to be outside the scope of the OTTI Committee because loan level collateral data was not available, and 28 securities were modeled in the OTTI Committee common platform as described below. The FHLBNY developed key modeling assumptions and forecasted cash flows using the FHLBNY’s own assumptions for 100% of its private-label MBS.
Cash flow derived from the OTTI Committee common platform Consistent with the guidelines provided by the OTTI Committee, the FHLBNY has contracted with the FHLBank of San Francisco to perform cash-flow analyses for 13 of its residential private-label MBS. The unpaid principal balance of the 13 securities was $414.7 million at September 30, 2009. The FHLBNY has also contracted with the FHLBank of Chicago to perform cash flow analyses for 15 of its subprime private-label MBS. The unpaid principal balance was $197.7 million at September 30, 2009. Although the FHLBNY has engaged the two FHLBanks to perform the cash flow analysis for 28 private-label MBS, the FHLBNY has reviewed the underlying assumptions and is ultimately responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and performing the required present value calculations using appropriate historical cost bases and yields.
The two FHLBanks performed cash flow analysis for the 28 securities using two third-party models. The first model considered borrower characteristics and the particular attributes of the loans underlying a security in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model was the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which were based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The FHLBanks’ housing price forecast assumed CBSA level current-to-trough home price declines ranging from 0 percent to 20 percent over the next 9 to 15 months. Thereafter, home prices were projected to increase 0 percent in the first six months, 0.5 percent in the next six months, 3 percent in the second year and 4 percent in each subsequent year.

 

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The month-by-month projections of future loan performance derived from the first model, which reflected projected prepayments, defaults and loss severities, were then input into a second model that allocated the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities was derived from the presence of subordinate securities, losses were generally allocated first to the subordinate securities until their principal balance was reduced to zero. The projected cash flows were based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on model approach described above reflects a best estimate scenario and includes a base case current to trough housing price forecast and a base case housing price recovery path described in the prior paragraph. The cash flows tested on the securities within the scope of the OTTI Committee resulted in the credit impairment of three securities which were also deemed to be credit impaired by the FHLBNY’s cash flow analysis.
GSE issued securities — The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac or a government agency by considering the creditworthiness and performance of the debt securities and the strength of the GSE’s guarantees of the securities. Based on the Bank’s analysis, GSE and agency issued securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE and agency issued securities given the current levels of collateral and credit enhancements and guarantees that exist to protect the investments.
Mortgage Loans Held-for-portfolio
The FHLBNY participates in the Mortgage Partnership Finance program® (“MPF” ®) by purchasing and originating conventional mortgage loans from its participating members, herein after referred to as Participating Financial Institutions (“PFI”). Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) insured loans purchased were not a significant total of the outstanding mortgage loans held-for-portfolio at September 30, 2009 and December 31, 2008. The FHLBNY manages the liquidity, interest rate and prepayment option risk of the MPF loans, while the PFIs retain servicing activities. The FHLBNY and the PFI share the credit risks of the uninsured MPF loans by structuring potential credit losses into layers. Collectability of the loans is first supported by liens on the real estate securing the loan. For conventional mortgage loans, additional loss protection is provided by private mortgage insurance required for MPF loans with a loan-to-value ratio of more than 80% at origination, which is paid for by the borrower. Credit losses are absorbed by the FHLBNY to the extent of the First Loss Account (“FLA”) for which the maximum exposure is estimated to be $13.9 million and $13.8 million at September 30, 2009 and at December 31, 2008. The aggregate amount of FLA is memorialized and tracked but is neither recorded nor reported as a loan 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 PFI. The credit enhancement held by PFIs ensures that the lender retains a credit stake in the loans it sells to the FHLBNY or originates as an agent for the FHLBNY (only relates to MPF 100 product). For assuming this risk, PFIs receive monthly “credit enhancement fees” from the FHLBNY.
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 PFI. For certain MPF products, the credit enhancement fee is accrued and paid each month. For other MPF products, the credit enhancement fee is accrued monthly and is paid monthly after the FHLBNY has accrued 12 months of credit enhancement fees.

 

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Delivery commitment fees are charged to a PFI for extending the scheduled delivery period of the loans. Pair-off fees may be assessed and charged to PFI when the settlement of the delivery commitment (1) fails to occur, or (2) the principal amount of the loans purchased by the FHLBNY under a delivery commitment is not equal to the contract amount beyond established limits. Extension fees are received when a member requests to extend the period of the delivery commitment beyond the original stated maturity.
The FHLBNY records credit enhancement fees as a reduction to mortgage loan interest income. The FHLBNY records other non-origination fees, such as delivery commitment extension fees and pair-off-fees, as derivative income over the life of the commitment. All such fees were inconsequential for all periods reported. Mortgage loans are recorded at fair value on settlement date.
The FHLBNY defers and amortizes premiums, costs, and discounts as interest income using the level yield method to the loan’s contractual maturities. The FHLBNY classifies mortgage loans as held-for-portfolio and, accordingly, reports them at their principal amount outstanding, net of premiums, costs and discounts.
The FHLBNY places a mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on non-accrual status, accrued but uncollected interest is reversed against interest income.
Allowance for credit losses on mortgage loans. — The Bank performs periodic reviews of its portfolio to identify the losses inherent within the portfolio and to determine the likelihood of collection of the principal and interest. Mortgage loans, that are either classified under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due, are separated from the aggregate pool and evaluated separately for impairment.
The allowance for credit losses on mortgage loans was $3.4 million and $1.4 million as of September 30, 2009 and December 31, 2008.
The Bank identifies inherent losses through analysis of the conventional loans (FHA and VA are insured loans, and excluded from the analysis) that are not adversely classified or past due. Reserves are based on the estimated costs to recover any portions of the MPF loans that are not FHA and VA insured. When a loan is foreclosed, the Bank will charge to the loan loss reserve account for any excess of the carrying value of the loan over the net realizable value of the foreclosed loan.
If adversely classified, or on non-accrual status, 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. FHA and VA insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicers defaulting on their obligations. FHA and VA insured mortgage loans, if adversely classified, will have reserves established only in the event of a default of a PFI. Reserves are based on aging, collateral value and estimated costs to recover any uninsured portion of the MPF loan.
The FHLBNY also holds participation interests in residential and community development mortgage loans through its Community Mortgage Asset (“CMA”) program. Acquisition of participations under the CMA program was suspended indefinitely in November 2001, and outstanding balance was approximately $4.0 million at September 30, 2009 and December 31, 2008. If adversely classified, CMA loans will have additional reserves established based on the shortfall of the underlying estimated liquidation value of collateral to cover the remaining balance of the CMA loan. Reserve values are calculated by subtracting the estimated liquidation value of the collateral (after sale value) from the current remaining balance of the CMA loan.

 

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Note 2. Cash and due from banks
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Banks are included in cash and due from banks.
Compensating balances
The Bank maintained average required clearing balances with various Federal Reserve Banks of approximately $1.0 million for the periods ended September 30, 2009 and December 31, 2008. The Bank uses earnings credits on these balances to pay for services received from the Federal Reserve Banks.
Pass-through deposit reserves
The Bank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. Pass-through reserves deposited with Federal Reserve Banks were $27.1 million and $31.0 million as of September 30, 2009 and December 31, 2008. The Bank includes member reserve balances in other liabilities in the Statements of Condition.
Note 3. Interest-bearing deposits
In October 2008, the Board of Governors of the Federal Reserve System directed the Federal Reserve Banks (“FRB”) to pay interest on balances in excess of certain required reserve and clearing balances. The formula for calculating interest earned is based on average excess balances over the calculation period; rates are generally tied to the federal funds rate. On July 1, 2009, the FHLBNY was no longer eligible to collect interest on excess balances with the FRB. The FRB will pay interest only on required reserves. At December 31, 2008, excess balances placed with the FRB were classified as interest- bearing deposit. At September 30, 2009, the balance with the FRB did not earn interest and was classified as Cash and Due from Banks.
Note 4. Held-to-maturity securities
Held-to-maturity securities consist of mortgage- and asset-backed securities (collectively mortgage-backed securities or “MBS”), state and local housing finance agency bonds, and short-term certificates of deposits issued by highly rated banks and financial institutions.
At September 30, 2009 and December 31, 2008, the FHLBNY had pledged MBS with an amortized cost basis of $2.2 million and $2.7 million to the FDIC in connection with deposits maintained by the FDIC at the FHLBNY.

 

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Mortgage-backed securities The carrying value and amortized cost basis of investments in mortgage-backed securities issued by Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”) (together, government sponsored enterprises or “GSE”) and a U.S. government agency at September 30, 2009 was $8.5 billion, or 88.2% of the carrying value of total MBS classified as held-to-maturity. The comparable carrying value of GSE issued MBS at December 31, 2008 was $7.6 billion, or 81.3% of total MBS classified as held-to-maturity. The carrying value (amortized cost less non-credit component of OTTI) of privately issued mortgage- and asset-backed securities at September 30, 2009 and December 31, 2008 was $1.2 billion and $1.7 billion. Privately issued MBS primarily included asset-backed securities, mortgage pass-throughs and Real Estate Mortgage Investment Conduit bonds, and securities supported by manufactured housing loans.
Certificates of deposits Investments in certificates of deposit are also classified as held-to-maturity. All such investments mature within one year. The amortized cost basis of certificates of deposit was $2.0 billion at September 30, 2009 and $1.2 billion at December 31, 2008.
State and local housing finance agency bonds Investments in primary public and private placements of taxable obligations of state and local housing finance authorities (“HFA”) were classified as held-to-maturity and the amortized cost basis was $791.2 million and $804.1 million at September 30, 2009 and December 31, 2008.
Impairment analysis of GSE issued securities The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac or a government agency by considering the creditworthiness and performance of the debt securities and the strength of the GSE’s guarantees of the securities. Based on the Bank’s analysis, GSE and agency issued securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE and agency issued securities given the current levels of collateral and credit enhancements and guarantees that exist to protect the investments.
Impairment analysis of held-to-maturity non-agency private-label mortgage- and asset-backed securities (“PLMBS”) — To assess whether the entire amortized cost bases of the Bank’s private-label MBS will be recovered, the Bank performed cash flow analysis for one hundred percent of the FHLBNY’s private-label MBS outstanding at September 30, 2009, including private-label MBS that were determined to be other-than-temporarily impaired in a previous reporting period.
Based on the results of its cash flow analyses, the FHLBNY determined that it was likely that it will not fully recover the amortized cost of ten of its private-label MBS and, accordingly, these securities were deemed to be OTTI at September 30, 2009. The impaired securities included seven securities, with total unpaid principal balance of $124.7 million at September 30, 2009, that had previously been identified as OTTI and three securities, with total unpaid principal balance of $72.5 million at September 30, 2009, that were determined to be OTTI as of September 30, 2009. The cash flow analysis compared the present value of the cash flows expected to be collected from the ten securities to the securities’ amortized cost bases. The difference, the credit loss of $3.7 million, was recorded as a charge to current year third quarter earnings. The non-credit component of OTTI associated with the impairment in the third quarter was $26.5 million and was recorded as a loss in Accumulated other comprehensive income (loss). In all fifteen securities have been deemed OTTI through the current year third quarter. Thirteen impaired 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 impaired securities would not be fully supported by the two bond insurers.

 

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The cumulative credit impairment expenses recorded through earnings year-to-date September 30, 2009 was $14.3 million as a charge to earnings recorded in Other income (loss). The non-credit component of OTTI recorded in Accumulated other comprehensive income through the third quarter was $103.9 million. The Bank did not experience any OTTI during 2008 or 2007.
At December 31, 2008, the FHLBNY’s screening and monitoring process, which included pricing, credit rating and credit enhancement coverage, had identified 21 private-label MBS with weak performance measures indicating the possibility of OTTI. Bonds selected through the screening process were cash flow tested for credit impairment. Fourteen of the securities were determined to be impaired absent bond insurer support to meet scheduled cash flows in the future. The remaining securities were considered to be only temporarily impaired based on cash flow analysis. Based on financial analysis of the bond insurers it was deemed that Ambac and MBIA had the ability to meet future claims, and the fourteen bonds were determined to be also temporarily impaired at December 31, 2008.
In the first and second quarters of 2009, the FHLBNY also employed its screening procedures and identified private-label MBS with weaker performance measures. Bonds selected through the screening process were cash flow tested for credit impairment. Certain insured bonds that were determined to be credit impaired at December 31, 2008 absent insurer support were determined to be OTTI because of deteriorating financial conditions of MBIA and Ambac. First MBIA and then Ambac was downgraded and released financial information and results that the FHLBNY’s views resulted in the shortening of the bond insurance support period, a quantitative measure under the FHLBNY’s bond insurer analysis methodology. With the incremental shortening of the insurance support period of a credit impaired bond starting with the first quarter of 2009 because of deteriorating financial conditions at Ambac and MBIA, the FHLBNY recognized larger amounts of cash flow shortfalls at each of the quarters for certain insured bonds. Certain uninsured bonds were determined to be credit impaired also based on cash flow testing for credit impairment in the second and third quarters of 2009. Observed historical performance parameters of certain securities have deteriorated in 2009, and these factors have increased loss severities in the cash flow analyses of those private-label MBS.
The projected cash flows were based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined reflected the FHLBNY’s best estimate scenario.

 

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The table below summarizes the key characteristics of the 15 OTTI securities at September 30, 2009 (dollars in thousands):
                                                                                         
            September 30, 2009  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
                                                                                       
RMBS-Prime*
    1     $     $     $     $     $ 56,867     $ 54,687     $ (438 )   $ (2,766 )   $ (3,204 )   $  
HEL Subprime*
    14       35,616       20,653       181,995       117,651       62,461       38,392       (13,838 )     (101,118 )           (114,956 )
 
                                                                 
Total
    15     $ 35,616     $ 20,653     $ 181,995     $ 117,651     $ 119,328     $ 93,079     $ (14,276 )   $ (103,884 )   $ (3,204 )   $ (114,956 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
The table below summarizes the key characteristics of the securities that were deemed OTTI in the third quarter of 2009 (dollars in thousands):
                                                                                         
            Q3 2009 activity  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
                                                                                       
RMBS-Prime*
        $     $     $     $     $     $     $     $     $     $  
HEL Subprime*
    10       13,304       7,680       121,435       79,700       62,460       38,392       (3,683 )     (26,486 )           (30,169 )
 
                                                                 
Total
    10     $ 13,304     $ 7,680     $ 121,435     $ 79,700     $ 62,460     $ 38,392     $ (3,683 )   $ (26,486 )         $ (30,169 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
The table below summarizes the weighted average and range of Key Base Assumptions at September 30, 2009 for all 15 securities that were deemed OTTI through the third quarter of 2009 (dollars in thousands):
                                                         
            Key Base Assumption - OTTI Securities  
            CDR     CPR     Loss Severity %  
    Count     Average     Range     Average     Range     Average     Range  
 
                                                       
Prime-RMBS*
    1       22.2       22.2       2.0       2.0       40.0       40.0  
HEL-Subprime*
    14       7.3       14.62-2       6.9       15.03-3.21       90.0       110-70.5  
 
                                                     
Total
    15                                                  
 
                                                     
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans;
 
    HEL Subprime — MBS supported by home equity loans.
Conditional Prepayment Rate(CPR): 1-((1-SMM^12) where, SMM is defined as the “Single Monthly Mortality (SMM)” = (Voluntary partial and full prepayments + repurchases + Liquidated Balances)/Beginning Principal Balance — Scheduled Principal). Voluntary prepayment excludes the liquidated balances mentioned above.
Conditional Default Rate (CDR): 1-((1-MDR)^12) where, MDR is defined as the “Monthly Default Rate (MDR)” = (Beginning Principal Balance of Liquidated Loans)/(Total Beginning Principal Balance).
Loss Severity* (Principal and interest in the current period) = Sum (Total Realized Loss Amount)/Sum (Beginning Principal and interest Balance of Liquidated Loans).
     
*   If the present value of cash flows expected to be collected (discounted at the security’s effective yield) is less than the amortized cost basis of the security, an other-than-temporary impairment is considered to have occurred because the entire amortized cost basis of the security will not be recovered. The Bank considers whether or not it will recover the entire amortized cost of the security by comparing the present value of the cash flows expected to be collected from the security (discounted at the security’s effective yield) with the amortized cost basis of the security.
Monoline support — Thirteen insured securities have been identified as credit impaired despite credit protection from Ambac and MBIA to meet scheduled payments in the future. Cash flows on certain insured securities are currently experiencing cash flow shortfalls. Ambac and MBIA are currently paying claims in order to meet current cash flow deficiency within the structure of the securities. Of the thirteen insured securities determined to be OTTI, eleven are insured by Ambac Assurance Corp (“Ambac”) and two by MBIA Insurance Corp (“MBIA”). Two OTTI securities, a triple-A and a double-B rated security, are uninsured.

 

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Monoline Analysis and Methodology — The two monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. Rating downgrade implies an increased risk that the insurer will fail to fulfill its obligations to reimburse the investor for claims under the insurance policies. Monoline insurers are segmented into two categories of claims paying ability — (1) Adequate, and (2) At Risk. These categories represent an assessment of an insurer’s ability to perform as a financial guarantor.
Adequate. Monolines determined to possess “adequate” claims paying ability are expected to provide full protection on their insured private-label mortgage-backed securities. Accordingly, bonds insured by monolines with adequate ability to cover written insurance are run with full financial guarantee set to “on” in the cashflow model.
At Risk. For monolines with at risk coverage, further analysis is performed to establish an expected case regarding the time horizon of the monoline’s ability to fulfill its financial obligations and provide credit support. Accordingly, bonds insured by monolines in the at risk category are run with a partial financial guarantee in the cashflow model. This partial claim paying condition is expressed in the cashflow model by specifying a “guarantee ignore” date. The ignore date is based on the “burnout period” calculation method.
Burnout Period. The projected time horizon of credit protection provided by an insurer is a function of claim paying resources and anticipated claims in the future. This assumption is referred to as the “burnout period” and is expressed in months, and is computed by dividing each (a) insurers’ total claims paying resources by the (b) “burnout rate” projection. This variable uses monthly or aggregate dollar amount of claims each insurer has paid most recently, and additional qualitative information pertinent to the financial guarantor.
Based on the methodology, the Bank has classified FSA as adequate, and MBIA and Ambac as “at risk”. The Bank analyzed the going-concern basis of Ambac and MBIA and their financial strength to perform with respect to their contractual obligations for the securities owned by the FHLBNY; the monolines are currently performing under the terms of their contractual agreements with respect to the FHLBNY’s insured bonds. However, estimation of an insurer’s financial strength to remain viable over a long time horizon requires significant judgment and assumptions. Predicting when the insurers may no longer have the ability to perform under their contractual agreements, then comparing the timing and amounts of cash flow shortfalls of securities that are credit impaired to when insurer protection may not be available, and determining credit impairment is judgmental.

 

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The monoline analysis methodology resulted in the following “Protection time horizon” dates for Ambac and MBIA:
                 
    Protection time horizon calculation  
    Ambac     MBIA  
 
               
Burnout period (months)
    83       31  
Coverage ignore date
    7/31/2016       3/31/2012  
Number of OTTI securities
    11       2  
With respect to the Bank’s remaining investments, the Bank believes no OTTI exists. The Bank’s conclusion is based upon multiple factors: bond issuers’ continued satisfaction of their obligations under the contractual terms of the securities; the estimated performance of the underlying collateral; the evaluation of the fundamentals of the issuers’ financial condition; and the estimated support from the monoline insurers under the contractual terms of insurance. Management has not made a decision to sell such securities at September 30, 2009. Management has also concluded that it is more likely than not that it will not be required to sell such securities before recovery of the amortized cost basis of the securities. Based on factors outlined above, the FHLBNY believes that the remaining securities classified as held-to-maturity were not other-than-temporarily impaired as of September 30, 2009.
However, without recovery in the near term such that liquidity returns to the mortgage-backed securities market and spreads return to levels that reflect underlying credit characteristics, or if the credit losses of the underlying collateral within the mortgage-backed securities perform worse than expected, or if the presumption of the ability of monoline insurers to support the insured securities identified at September 30, 2009 as dependent on insurance is negatively impacted by the insurers’ future financial performance, additional OTTI may be recognized in future periods.
The following table provides rollforward information of the credit component of OTTI recognized as a charge to earnings related to held-to-maturity securities for which a significant portion of the OTTI (non-credit component) was recognized in Accumulated other comprehensive income (loss) (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,     September 30,     September 30,  
    2009     2008     2009     2008  
Beginning balance
  $ 10,593     $     $     $  
 
                               
Additions to the credit component for OTTI loss not previously recognized
    1,459             14,276        
Additional credit losses for which an OTTI charge was previously recognized
    2,224                    
Increases in cash flows expected to be collected, recognized over the remaining life of the securities
                       
 
                       
 
                               
Ending balance
  $ 14,276     $     $ 14,276     $  
 
                       

 

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Major Security Types
Amortized cost basis, as defined under the recently issued guidance on recognition and presentation of other-than-temporary impairment, includes adjustments made to the cost of an investment for accretion, amortization, collection of cash, and fair value hedge accounting adjustments. If a held-to-maturity security is determined to be OTTI, the amortized cost basis of the security is adjusted for previous OTTI recognized in earnings. Amortized cost basis of a held-to-maturity OTTI security is further adjusted for impairment related to all other factors (also referred to as the non-credit component of OTTI) recognized in Accumulated other comprehensive income (loss), and the adjusted amortized cost basis is the carrying value of the OTTI security reported in the Statements of Condition. Carrying value of a held-to-maturity security that is not OTTI is its amortized cost basis.
The amortized cost basis, the gross unrealized gains and losses, the fair values of held-to-maturity securities, and OTTI recognized in Accumulated other comprehensive income were as follows (in thousands):
                                                 
    September 30, 2009  
    Amortized                     Gross     Gross        
    Cost     OTTI     Carrying     Unrecognized     Unrecognized     Fair  
Issued, guaranteed or insured   Basis     in OCI     Value     Holding Gains     Holding Losses     Value  
Pools of Mortgages
                                               
Fannie Mae
  $ 1,194,202     $     $ 1,194,202     $ 47,563     $     $ 1,241,765  
Freddie Mac
    354,212             354,212       15,657             369,869  
 
                                   
Total pools of mortgages
    1,548,414             1,548,414       63,220             1,611,634  
 
                                   
 
                                               
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                                               
Fannie Mae
    2,370,747             2,370,747       70,184       (4,176 )     2,436,755  
Freddie Mac
    4,384,624             4,384,624       132,871       (7,914 )     4,509,581  
Ginnie Mae
    187,470             187,470       148       (1,432 )     186,186  
 
                                   
Total CMOs/REMICs
    6,942,841             6,942,841       203,203       (13,522 )     7,132,522  
 
                                   
 
                                               
Ginnie Mae-CMBS
    49,706             49,706       263             49,969  
 
                                               
Non-GSE MBS
                                               
CMOs/REMICs
    485,419       (2,545 )     482,874       2,533       (10,732 )     474,675  
Commercial mortgage-backed securities
                                   
 
                                   
Total non-federal-agency MBS
    485,419       (2,545 )     482,874       2,533       (10,732 )     474,675  
 
                                   
 
                                               
Asset-Backed Securities
                                               
Manufactured housing (insured)
    208,544             208,544             (46,536 )     162,008  
Home equity loans (insured)
    324,833       (74,915 )     249,918       8,515       (34,559 )     223,874  
Home equity loans (uninsured)
    227,546       (23,003 )     204,543             (44,662 )     159,881  
 
                                   
Total asset-backed securities
    760,923       (97,918 )     663,005       8,515       (125,757 )     545,763  
 
                                   
Total mortgage-backed securities
  $ 9,787,303     $ (100,463 )   $ 9,686,840     $ 277,734     $ (150,011 )   $ 9,814,563  
 
                                   
 
                                               
Other
                                               
State and local housing finance agency obligations
    791,187             791,187       5,325       (14,527 )     781,985  
Certificates of deposit
    2,000,000             2,000,000       3             2,000,003  
 
                                   
Total other
  $ 2,791,187     $     $ 2,791,187     $ 5,328     $ (14,527 )   $ 2,781,988  
 
                                   

 

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    December 31, 2008  
    Amortized     Gross     Gross        
    Cost     Unrealized     Unrealized     Fair  
Issued, guaranteed or insured   Basis     Holding Gains     Holding Losses     Value  
Pools of Mortgages
                               
Fannie Mae
  $ 1,400,058     $ 26,789     $     $ 1,426,847  
Freddie Mac
    422,088       7,860             429,948  
 
                       
Total pools of mortgages
    1,822,146       34,649             1,856,795  
 
                       
 
                               
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                               
Fannie Mae
    2,032,051       51,138       (125 )     2,083,064  
Freddie Mac
    3,722,840       101,595       (30 )     3,824,405  
Ginnie Mae
    6,325             (187 )     6,138  
 
                       
Total CMOs/REMICs
    5,761,216       152,733       (342 )     5,913,607  
 
                       
 
                               
Ginnie Mae-CMBS
                       
 
                               
Non-GSE MBS
                               
CMOs/REMICs
    609,907             (42,706 )     567,201  
Commercial mortgage-backed securities
    266,994       149       (127 )     267,016  
 
                       
Total non-federal-agency MBS
    876,901       149       (42,833 )     834,217  
 
                       
 
                               
Asset-Backed Securities
                               
Manufactured housing (insured)
    229,714             (75,418 )     154,296  
Home equity loans (insured)
    376,587             (144,957 )     231,630  
Home equity loans (uninsured)
    259,879             (79,112 )     180,767  
 
                       
Total asset-backed securities
    866,180             (299,487 )     566,693  
 
                       
Total mortgage-backed securities
  $ 9,326,443     $ 187,531     $ (342,662 )   $ 9,171,312  
 
                       
 
                               
Other
                               
State and local housing finance agency obligations
    804,100       6,573       (47,512 )     763,161  
Certificates of deposit
    1,203,000       328             1,203,328  
 
                       
Total other
  $ 2,007,100     $ 6,901     $ (47,512 )   $ 1,996,489  
 
                       

 

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Unrealized Losses
The following tables summarize held-to-maturity securities with fair values below their amortized cost basis. The fair values and gross unrealized holding losses are aggregated by major security type and by the length of time individual securities have been in a continuous unrealized loss position. (in thousands):
                                                 
    September 30, 2009  
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
Non-MBS Investment Securities
                                               
State and local housing agency obligations
  $ 254,366     $ (14,527 )   $     $     $ 254,366     $ (14,527 )
 
                                   
Total Non-MBS
    254,366       (14,527 )                 254,366       (14,527 )
 
                                   
 
                                               
MBS Investment Securities
                                               
MBS — Other US Obligations
                                               
Ginnie Mae
    136,455       (1,415 )     2,789       (17 )     139,244       (1,432 )
MBS-GSE
                                               
Fannie Mae
    771,784       (4,171 )     2,869       (5 )     774,653       (4,176 )
Freddie Mac
    1,384,438       (7,914 )                 1,384,438       (7,914 )
 
                                   
Total MBS-GSE
    2,156,222       (12,085 )     2,869       (5 )     2,159,091       (12,090 )
 
                                   
MBS-Private-Label
    54,687       (367 )     932,366       (225,892 )     987,053       (226,259 )
 
                                   
Total MBS
    2,347,364       (13,867 )     938,024       (225,914 )     3,285,388       (239,781 )
 
                                   
Total
  $ 2,601,730     $ (28,394 )   $ 938,024     $ (225,914 )   $ 3,539,754     $ (254,308 )
 
                                   
                                                 
    December 31, 2008  
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
Non-MBS Investment Securities
                                               
State and local housing agency obligations
  $ 78,261     $ (16,065 )   $ 84,108     $ (31,447 )   $ 162,369     $ (47,512 )
 
                                   
Total Non-MBS
    78,261       (16,065 )     84,108       (31,447 )     162,369       (47,512 )
 
                                   
 
                                               
MBS Investment Securities
                                               
MBS — Other US Obligations
                                               
Ginnie Mae
    6,137       (187 )                 6,137       (187 )
MBS-GSE
                                               
Fannie Mae
    3,452       (125 )                 3,452       (125 )
Freddie Mac
    1,102       (30 )     32             1,134       (30 )
 
                                   
Total MBS-GSE
    4,554       (155 )     32             4,586       (155 )
 
                                   
MBS-Private-Label
    509,273       (115,061 )     718,321       (227,259 )     1,227,594       (342,320 )
 
                                   
Total MBS
    519,964       (115,403 )     718,353       (227,259 )     1,238,317       (342,662 )
 
                                   
Total
  $ 598,225     $ (131,468 )   $ 802,461     $ (258,706 )   $ 1,400,686     $ (390,174 )
 
                                   

 

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Note 5. Available-for-sale securities
Impairment analysis on Available-for-sale securities The Bank’s portfolio of mortgage-backed securities classified as available-for-sale (“AFS”) is comprised entirely of securities issued by GSEs collateralized mortgage obligations which are “pass through” securities. The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac by considering the creditworthiness and performance of the debt securities and the strength of the government-sponsored enterprises’ guarantees of the securities. Based on the Bank’s analysis, GSE securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. The U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE issued securities given the current levels of collateral, credit enhancements and guarantees that exist to protect the investments. Management has not made a decision to sell such securities at September 30, 2009. Management also concluded that it is more likely than not that it will not be required to sell such securities before recovery of the amortized cost basis of the security. The FHLBNY believes that these securities were not other-than-temporarily impaired as of September 30, 2009 and December 31, 2008. The Bank established certain grantor trusts to fund current and future payments under certain supplemental pension plans and these are classified as available-for-sale. The grantor trusts invest in money market and bond funds. Investments in equity and fixed-income funds are redeemable at short notice, and realized gains and losses from investments in the funds were not significant. No available-for-sale-securities had been pledged at September 30, 2009 and December 31, 2008.
The amortized cost basis, gross unrealized gains, losses, and the fair value of investments classified as available-for-sale were as follows (in thousands):
                                 
    September 30, 2009  
    Amortized     Gross     Gross        
    Cost     Unrealized     Unrealized     Fair  
    Basis     Gains     Losses     Value  
 
                               
Cash equivalents
  $ 1,272     $     $     $ 1,272  
Equity funds
    9,445       43       (1,984 )     7,504  
Fixed income funds
    3,253       255             3,508  
Mortgage-backed securities
    2,364,707       4,329       (18,728 )     2,350,308  
 
                       
Total
  $ 2,378,677     $ 4,627     $ (20,712 )   $ 2,362,592  
 
                       
                                 
    December 31, 2008  
    Amortized     Gross     Gross        
    Cost     Unrealized     Unrealized     Fair  
    Basis     Gains     Losses     Value  
 
                               
Cash equivalents
  $ 836     $     $     $ 836  
Equity funds
    8,978             (3,516 )     5,462  
Fixed income funds
    3,833       66       (10 )     3,889  
Mortgage-backed securities
    2,912,642       364       (61,324 )     2,851,682  
 
                       
Total
  $ 2,926,289     $ 430     $ (64,850 )   $ 2,861,869  
 
                       
There were no AFS mortgage-backed securities supported by commercial loans at September 30, 2009 and December 31, 2008.

 

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Unrealized Losses — Available-for-sale securities (in thousands):
                                                 
    September 30, 2009  
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
Mortgage-backed securities
                                               
MBS-GSE
                                               
Fannie Mae
  $ 144,044     $ (327 )   $ 1,059,185     $ (12,230 )   $ 1,203,229     $ (12,557 )
Freddie Mac
                689,462       (6,171 )     689,462       (6,171 )
 
                                   
Total MBS-GSE
    144,044       (327 )     1,748,647       (18,401 )     1,892,691       (18,728 )
 
                                   
Total Temporarily Impaired
  $ 144,044     $ (327 )   $ 1,748,647     $ (18,401 )   $ 1,892,691     $ (18,728 )
 
                                   
                                                 
    December 31, 2008  
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
Mortgage-backed securities
                                               
MBS-GSE
                                               
Fannie Mae
  $ 1,662,928     $ (35,047 )   $ 142,630     $ (3,539 )   $ 1,805,558     $ (38,586 )
Freddie Mac
    957,617       (21,744 )     39,077       (994 )     996,694       (22,738 )
 
                                   
Total MBS-GSE
    2,620,545       (56,791 )     181,707       (4,533 )     2,802,252       (61,324 )
 
                                   
Total Temporarily Impaired
  $ 2,620,545     $ (56,791 )   $ 181,707     $ (4,533 )   $ 2,802,252     $ (61,324 )
 
                                   
Notes: Does not include unrealized losses of $2.0 million and $3.5 million at September 30, 2009 and December 31, 2008 in several grantor trusts comprising of money market and mutual funds.
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, previous OTTI recognized in earnings and/or fair value hedge accounting adjustments. There were no AFS securities determined to be OTTI at September 30, 2009. No securities were hedged at September 30, 2009.
Gross unrealized losses at September 30, 2009 and December 31, 2008 were caused by interest rate changes, credit spread widening and reduced liquidity in the applicable markets. The FHLBNY has reviewed the investment security holdings and determined, based on creditworthiness of the securities and including any underlying collateral and/or insurance provisions of the security, that unrealized losses in the analysis above represent temporary impairment.

 

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Note 6. Advances
Redemption terms
Contractual redemption terms and yields of advances were as follows (dollars in thousands):
                                                 
    September 30, 2009     December 31, 2008  
            Weighted 2                     Weighted 2        
            Average     Percentage             Average     Percentage  
    Amount     Yield     of Total     Amount     Yield     of Total  
 
Overdrawn demand deposit accounts
  $       %     %   $       %     %
Due in one year or less
    20,222,153       1.98       22.08       32,420,095       2.52       31.36  
Due after one year through two years
    15,572,319       3.00       17.00       16,150,121       3.71       15.62  
Due after two years through three years
    8,933,691       2.99       9.75       7,634,680       3.76       7.39  
Due after three years through four years
    6,604,702       3.20       7.21       6,852,514       3.74       6.63  
Due after four years through five years
    3,565,489       3.38       3.89       3,210,575       3.88       3.11  
Due after five years through six years
    1,787,448       3.77       1.95       836,689       3.74       0.81  
Thereafter
    34,916,207       3.80       38.12       36,275,053       3.96       35.08  
 
                                   
 
                                               
Total par value
    91,602,009       3.12 %     100.00 %     103,379,727       3.44 %     100.00 %
 
                                       
 
                                               
Discount on AHP advances 1
    (275 )                     (330 )                
Hedging adjustments 1
    4,342,998                       5,773,479                  
 
                                           
 
                                               
Total
  $ 95,944,732                     $ 109,152,876                  
 
                                           
     
1   Discounts on AHP advances were amortized to interest income using the level-yield method and were not significant for all periods reported. Interest rates on AHP advances ranged from 1.25% to 4.00% at September 30, 2009 and 1.25% to 6.04% at December 31, 2008.
 
2   The weighed average yield is the weighted average coupon rates for advances, unadjusted for swaps. For floating-rate advances, the weighted average rate is the rate outstanding at the reporting dates.
The following summarizes advances by year of maturity or next call date (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
            Percentage of             Percentage of  
    Amount     Total     Amount     Total  
 
Overdrawn demand deposit accounts
  $       %   $       %
Due or putable in one year or less
    53,090,265       57.96       63,251,007       61.18  
Due or putable after one year through two years
    18,689,569       20.40       18,975,821       18.36  
Due or putable after two years through three years
    8,427,941       9.20       10,867,530       10.51  
Due or putable after three years through four years
    5,838,402       6.37       5,293,364       5.12  
Due or putable after four years through five years
    3,085,989       3.37       2,728,075       2.64  
Due or putable after five years through six years
    156,448       0.17       230,189       0.22  
Thereafter
    2,313,395       2.53       2,033,741       1.97  
 
                       
 
                               
Total par value
    91,602,009       100.00 %     103,379,727       100.00 %
 
                           
 
                               
Discount on AHP advances
    (275 )             (330 )        
Hedging adjustments
    4,342,998               5,773,479          
 
                           
 
                               
Total
  $ 95,944,732             $ 109,152,876          
 
                           

 

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Note 7. Mortgage loans held-for-portfolio
Mortgage Partnership Finance program, (“MPF”) constitutes the majority of the mortgage loans held-for-portfolio. The MPF program involves investment by the FHLBNY in mortgage loans that are purchased from or originated through its participating financial institutions (“PFIs”). The members retain servicing rights and may credit-enhance the portion of the loans participated to the FHLBNY. No intermediary trust is involved.
The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
            Percentage of             Percentage of  
    Amount     Total     Amount     Total  
Real Estate:
                               
Fixed medium-term single-family mortgages
  $ 406,055       30.38 %   $ 467,845       32.15 %
Fixed long-term single-family mortgages
    926,537       69.32       983,493       67.58  
Multi-family mortgages
    3,934       0.30       4,009       0.27  
 
                       
 
Total par value
    1,336,526       100.00 %     1,455,347       100.00 %
 
                           
 
Unamortized premiums
    9,257               10,662          
Unamortized discounts
    (5,641 )             (6,310 )        
Basis adjustment 1
    (556 )             (408 )        
 
                           
 
Total mortgage loans held-for-portfolio
    1,339,586               1,459,291          
Allowance for credit losses
    (3,358 )             (1,406 )        
 
                           
Total mortgage loans held-for-portfolio after allowance for credit losses
  $ 1,336,228             $ 1,457,885          
 
                           
     
1   Represents fair value basis of open and closed delivery commitments.
The FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers (See Significant Accounting Policies and Estimates in Note 1 in the Bank’s most recent Form 10-K filed on March 27, 2009). 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 (“FLA”), was estimated as $14.0 million and $13.8 million at September 30, 2009 and December 31, 2008. The FLA is not recorded or reported as a reserve for loan losses as it serves as a memorandum information account. The FHLBNY is responsible for absorbing the first layer. The second layer is that amount of credit obligation 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 2009 and 2008, and $1.2 million and $1.3 million for the nine months ended September 30, 2009 and 2008. The fees 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.

 

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The following provides rollforward analysis of the allowance for credit losses (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
 
                               
Beginning balance
  $ 2,760     $ 879     $ 1,406     $ 633  
Charge-offs
          (4 )     (14 )     (4 )
Provision for credit losses on mortgage loans
    598       (31 )     1,966       215  
 
                       
 
                               
Ending balance
  $ 3,358     $ 844     $ 3,358     $ 844  
 
                       
The First Loss Account (“FLA”) memorializes the first tier of credit exposure and is neither an indication of inherent losses in the loan portfolio nor a loan loss reserve.
As of September 30, 2009 and December 31, 2008, the FHLBNY had $13.0 million and $4.8 million of non-accrual loans. The estimated fair value of the mortgage loans as of September 30, 2009 and December 31, 2008 are reported in Note 16 — Fair Values of Financial Instruments. 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.
The following table summarizes mortgage loans held-for-portfolio, all Veterans Administrations insured loans, past due 90 days or more and still accruing interest (in thousands):
                 
    September 30, 2009     December 31, 2008  
 
               
Secured by 1-4 family
  $ 698     $ 507  
 
           
Note 8. 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 other FHLBanks, were approximately $1.0 trillion and $1.3 trillion as of September 30, 2009 and December 31, 2008.
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.

 

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The FHLBNY met the qualifying unpledged asset requirements in each of the period ends in this report as follows:
                 
    September 30, 2009     December 31, 2008  
 
               
Percentage of unpledged qualifying assets to consolidated obligations
    109 %     107 %
 
           
General Terms
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.
These 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 the bonds at its option on predetermined exercise dates at par.

 

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The following summarizes consolidated obligations issued by the FHLBNY and outstanding at September 30, 2009 and December 31, 2008 (in thousands):
                 
    September 30, 2009     December 31, 2008  
 
Consolidated obligation bonds-amortized cost
  $ 68,849,386     $ 80,978,383  
Fair value basis adjustments
    817,374       1,254,523  
Fair value basis on terminated hedges
    3,108       7,857  
Fair value option valuation adjustments and accrued interest
    968       15,942  
 
           
 
               
Total Consolidated obligation-bonds
  $ 69,670,836     $ 82,256,705  
 
           
 
               
Discount notes-amortized cost
  $ 38,385,244     $ 46,329,545  
Fair value basis adjustments
          361  
 
           
 
               
Total Consolidated obligation-discount notes
  $ 38,385,244     $ 46,329,906  
 
           
Redemption Terms of consolidated obligation bonds
The following is a summary of consolidated bonds outstanding by year of maturity (dollars in thousands):
                                                 
    September 30, 2009     December 31, 2008  
            Weighted                     Weighted        
            Average     Percentage             Average     Percentage  
Maturity   Amount     Rate 1     of total     Amount     Rate 1     of total  
 
                                               
One year or less
  $ 35,806,100       1.36 %     52.06 %   $ 49,568,550       1.93 %     61.23 %
Over one year through two years
    19,296,100       2.00       28.06       16,192,550       3.20       20.00  
Over two years through three years
    5,434,495       2.59       7.90       5,299,700       3.73       6.55  
Over three years through four years
    2,956,730       4.05       4.30       2,469,575       4.75       3.05  
Over four years through five years
    1,943,800       4.13       2.82       3,352,450       3.99       4.14  
Over five years through six years
    1,224,850       4.94       1.78       989,300       5.06       1.22  
Thereafter
    2,110,200       5.30       3.08       3,082,050       5.35       3.81  
 
                                   
 
                                               
Total par value
    68,772,275       2.01 %     100.00 %     80,954,175       2.64 %     100.00 %
 
                                       
 
                                               
Bond premiums
    112,091                       63,737                  
Bond discounts
    (34,980 )                     (39,529 )                
Fair value basis adjustments
    817,374                       1,254,523                  
Fair value basis adjustments on terminated hedges
    3,108                       7,857                  
Fair value option valuation adjustments and accrued interest
    968                       15,942                  
 
                                           
 
                                               
Total bonds
  $ 69,670,836                     $ 82,256,705                  
 
                                           
     
1   Weighted average rate represents the weighted average coupons of bonds, unadjusted for swaps. The weighted average coupon of bonds outstanding at September 30, 2009 and December 31, 2008, represent contractual coupons payable to investors.

 

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The following summarizes bonds outstanding by year of maturity or next call date (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
            Percentage of             Percentage of  
    Amount     total     Amount     total  
Year of Maturity or next call date
                               
Due or callable in one year or less
  $ 41,328,100       60.09 %   $ 53,034,550       65.51 %
Due or callable after one year through two years
    16,921,400       24.61       15,472,350       19.11  
Due or callable after two years through three years
    3,389,495       4.93       4,843,700       5.98  
Due or callable after three years through four years
    2,696,730       3.92       1,445,575       1.79  
Due or callable after four years through five years
    1,326,800       1.93       2,954,450       3.65  
Due or callable after five years through six years
    1,114,850       1.62       684,800       0.85  
Thereafter
    1,994,900       2.90       2,518,750       3.11  
 
                       
 
                               
Total par value
    68,772,275       100.00 %     80,954,175       100.00 %
 
                           
 
Bond premiums
    112,091               63,737          
Bond discounts
    (34,980 )             (39,529 )        
Fair value basis adjustments
    817,374               1,254,523          
Fair value basis adjustments on terminated hedges
    3,108               7,857          
Fair value option valuation adjustments and accrued interest
    968               15,942          
 
                           
 
                               
Total bonds
  $ 69,670,836             $ 82,256,705          
 
                           
Discount notes
Consolidated 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, 2009     December 31, 2008  
 
Par value
  $ 38,406,688     $ 46,431,347  
 
           
 
               
Amortized cost
  $ 38,385,244     $ 46,329,545  
Fair value basis adjustments
          361  
 
           
 
               
Total
  $ 38,385,244     $ 46,329,906  
 
           
 
               
Weighted average interest rate
    0.26 %     1.00 %
 
           
Note 9. 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):
                 
    September 30, 2009     December 31, 2008  
 
Due in one year or less
  $ 15,600     $ 117,400  
 
           
 
               
Total term deposits
  $ 15,600     $ 117,400  
 
           

 

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Note 10. Affordable Housing Program and REFCORP
The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances to members who use 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% of regulatory income. 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 result of the aggregate 10% calculation described above is less than $100 million for all twelve FHLBanks, then the FHLBank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before AHP and REFCORP to the sum of the income before AHP and REFCORP of the twelve FHLBanks. There was no shortfall during the current or prior period quarters.
Regulatory income is income before assessments, and before interest expense related to mandatorily redeemable capital stock under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation. The AHP 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. An FHLBank reduces its AHP liability as members use subsidies.
The following provides rollforward information with respect to changes in Affordable Housing Program liabilities (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
 
                               
Beginning balance
  $ 140,037     $ 124,170     $ 122,449     $ 119,052  
Additions from current period’s assessments
    15,780       4,638       53,363       24,764  
Net disbursements for grants and programs
    (10,995 )     (6,433 )     (30,990 )     (21,441 )
 
                       
 
                               
Ending balance
  $ 144,822     $ 122,375     $ 144,822     $ 122,375  
 
                       
Each FHLBank is required to pay to REFCORP 20 percent of income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. REFCORP has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLBank provides its net income before AHP and REFCORP to REFCORP, which then performs the calculations for each quarter end.

 

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Note 11. Capital, Capital Ratios, 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. 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.
The FHLBNY 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 and certain commitments outstanding with the FHLBNY. Class B1 and Class B2 shares have the same voting and dividend rights.
Any member that withdraws from membership must wait 5 years from the termination of the charter 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 expiration of the five-year waiting period1.
The FHLBNY is subject to risk-based capital rules. Specifically, the FHLBNY is subject to three capital requirements. First, the FHLBNY must maintain at all times permanent capital in an amount at least equal to the sum of its credit, market, and operations risks capital requirements calculated in accordance with the FHLBNY policy and the rules and regulations of the Federal Housing Finance Agency (“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 greater amount of permanent capital than is required as defined by the risk-based capital requirements. In addition, the FHLBNY is required to maintain at least a 4% total capital-to-asset ratio and at least a 5% leverage ratio at all times. The leverage ratio is defined as the sum of permanent capital weighted 1.5 times plus allowance for loan loss reserves and nonpermanent capital weighted 1.0 times plus allowance for loan loss reserves divided by total assets. The FHLBNY was in compliance with the capital rules and requirements for all periods reported.
     
1   On December 12, 2007 the Finance Board, the predecessor of the Finance Agency, approved amendments to the FHLBNY’s capital plan, which allow the FHLBNY to recalculate the membership stock purchase requirement any time after 30 days subsequent to a merger. The amendments also permit 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. As a result of these amendments, the FHLBNY could determine that all of the membership stock formerly held by the member would become excess stock, which would give the FHLBNY the discretion, but not the obligation, to repurchase that stock prior to the expiration of the five-year notice period.

 

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Capital Ratios
The following table summarizes the Bank’s risk-based capital ratios (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
    Required 4     Actual     Required 4     Actual  
Regulatory capital requirements:
                               
Risk-based capital1
  $ 558,940     $ 5,936,273     $ 650,333     $ 6,111,676  
Total capital-to-asset ratio
    4.00 %     5.05 %     4.00 %     4.44 %
Total capital2
  $ 4,704,173     $ 5,939,631     $ 5,501,596     $ 6,113,082  
Leverage ratio
    5.00 %     7.57 %     5.00 %     6.67 %
Leverage capital3
  $ 5,880,216     $ 8,907,767     $ 6,876,995     $ 9,168,920  
     
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% 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 “Risk-based capital” times 1.5 plus allowance for loan losses.
 
4   Required minimum.
Mandatorily Redeemable 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 to 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 filings 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.

 

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In accordance with the accounting guidance for certain financial instruments with characteristics of both liabilities and equity, the FHLBNY 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 classified as a liability in the Statements of Condition and an offset in the Statements of Income as an interest expense. The repayment of these mandatorily redeemable financial instruments, once settled, is reflected as financing cash outflows in the Statements of Cash Flows. In compliance with this provision, dividends on mandatorily redeemable capital stock in the amounts of $1.8 million and $2.0 million for the three months ended September 30, 2009 and 2008, and $5.5 million and $8.9 million for the nine months ended September 30, 2009 and 2008 were recorded as interest expense. 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.
At September 30, 2009 and December 31, 2008, mandatorily redeemable capital stock of $127.9 million and $143.1 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, 2009     December 31, 2008  
 
               
Redemption less than one year
  $ 82,076     $ 38,328  
Redemption from one year to less than three years
    38,724       83,159  
Redemption from three years to less than five years
    2,123       14,646  
Redemption after five years or greater
    4,959       6,988  
 
           
 
               
Total
  $ 127,882     $ 143,121  
 
           
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 may also redeem, at its discretion, non-members’ membership stock.

 

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Note 12. Total comprehensive income
Changes in Accumulated other comprehensive income (loss) and total comprehensive income were as follows for the three and nine months ended September 30, 2009 and 2008 (in thousands):
                                                                 
    Three months ended September 30, 2009  
                    Accretion of                                      
                    non-credit portion                     Accumulated                
    Available-     Non-credit     of impairment     Cash     Supplemental     Other             Total  
    for-sale     OTTI on HTM     losses on     flow     Retirement     Comprehensive     Net     Comprehensive  
    securities     securities     HTM securities     hedges     Plans     Income (Loss)     Income     Income  
 
                                                               
June 30, 2008
  $ (29,612 )   $     $     $ (33,698 )   $ (5,087 )   $ (68,397 )                
 
                                                               
Net change
    (14,713 )                 1,728             (12,985 )   $ 39,790     $ 26,805  
 
                                               
 
                                                               
September 30, 2008
  $ (44,325 )   $     $     $ (31,970 )   $ (5,087 )   $ (81,382 )                
 
                                                   
 
                                                               
June 30, 2009
  $ (10,129 )   $ (77,398 )   $ 239     $ (26,402 )   $ (6,550 )   $ (120,240 )                
 
                                                               
Net change
    (5,956 )     (26,486 )     3,182       1,898             (27,362 )   $ 140,219     $ 112,857  
 
                                               
 
                                                               
September 30, 2009
  $ (16,085 )   $ (103,884 )   $ 3,421     $ (24,504 )   $ (6,550 )   $ (147,602 )                
 
                                                   
                                                                 
    Nine months ended September 30, 2009  
                    Accretion of                                      
                    non-credit portion                     Accumulated                
    Available-     Non-credit     of impairment     Cash     Supplemental     Other             Total  
    for-sale     OTTI on HTM     losses on     flow     Retirement     Comprehensive     Net     Comprehensive  
    securities     securities     HTM securities     hedges     Plans     Income (Loss)     Income     Income  
 
                                                               
December 31, 2007
  $ (373 )   $     $     $ (30,215 )   $ (5,087 )   $ (35,675 )                
 
                                                               
Net change
    (43,952 )                 (1,755 )           (45,707 )   $ 213,996     $ 168,289  
 
                                               
 
                                                               
September 30, 2008
  $ (44,325 )   $     $     $ (31,970 )   $ (5,087 )   $ (81,382 )                
 
                                                   
 
                                                               
December 31, 2008
  $ (64,420 )   $     $     $ (30,191 )   $ (6,550 )   $ (101,161 )                
 
                                                               
Net change
    48,335       (103,884 )     3,421       5,687             (46,441 )   $ 474,786     $ 428,345  
 
                                               
 
                                                               
September 30, 2009
  $ (16,085 )   $ (103,884 )   $ 3,421     $ (24,504 )   $ (6,550 )   $ (147,602 )                
 
                                                   

 

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Note 13. Earnings per share of 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,  
    2009     2008     2009     2008  
 
                               
Net income
  $ 140,219     $ 39,790     $ 474,786     $ 213,996  
 
                       
 
                               
Net income available to stockholders
  $ 140,219     $ 39,790     $ 474,786     $ 213,996  
 
                       
 
                               
Weighted average shares of capital
    53,233       52,000       54,505       48,757  
Less: Mandatorily redeemable capital stock
    (1,280 )     (1,538 )     (1,351 )     (1,742 )
 
                       
Average number of shares of capital used to calculate earnings per share
    51,953       50,462       53,154       47,015  
 
                       
 
                               
Net earnings per share of capital
  $ 2.70     $ 0.79     $ 8.93     $ 4.55  
 
                       
Basic and diluted earnings per share of capital are the same. The FHLBNY has no dilutive potential common shares or other common stock equivalents.
Note 14. Employee 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 trusts to meet future benefit obligations and current payments to beneficiaries in 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.
Effective January 1, 2009, the Bank offers 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 may elect to defer all or a portion of their compensation earned. The deferment period is generally for a minimum period of five years. Amounts recorded as a liability were de minimis at September 30, 2009.

 

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Retirement Plan Expenses — Summary
The following table presents employee retirement plan expenses for the periods ended (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
 
                               
Defined Benefit Plan
  $ 1,441     $ 1,556     $ 4,324     $ 4,545  
Benefit Equalization Plan (defined benefit)
    515       469       1,544       1,408  
Defined Contribution Plan and BEP Thrift
    582       162       1,366       650  
Postretirement Health Benefit Plan
    251       250       753       749  
 
                       
 
                               
Total retirement plan expenses
  $ 2,789     $ 2,437     $ 7,987     $ 7,352  
 
                       
Benefit Equalization Plan (“BEP”)
The plan’s liability consisted of the accumulated compensation deferrals and accrued interest on the deferrals. There were no plan assets that have been designated for the BEP plan.
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,  
    2009     2008     2009     2008  
Service cost
  $ 153     $ 154     $ 458     $ 460  
Interest cost
    263       235       789       708  
Amortization of unrecognized prior service cost
    (36 )     (35 )     (108 )     (107 )
Amortization of unrecognized net loss
    135       115       405       347  
 
                       
 
                               
Net periodic benefit cost
  $ 515     $ 469     $ 1,544     $ 1,408  
 
                       
Key assumptions and other information for the actuarial calculations to determine benefit obligations for the Bank’s BEP were as follows (dollars in thousands):
                 
    September 30, 2009     December 31, 2008  
 
               
Discount rate *
    6.14 %     6.14 %
Salary increases
    5.50 %     5.50 %
Amortization period (years)
    8       8  
Benefits paid during the periods
  $ (544 )   $ (392 )
     
*   The discount rate was based on the Citigroup Pension Liability Index at December 31, 2008 and adjusted for durations.
The total amounts of benefits paid and expected to be paid under this plan are not expected to be materially different from amount disclosed in the Bank’s Form 10-K filed on March 27, 2009.

 

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Postretirement Health Benefit Plan
The Bank has a postretirement health benefit plan for retirees. 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,  
    2009     2008     2009     2008  
 
                               
Service cost (benefits attributed to service during the period)
  $ 139     $ 129     $ 417     $ 385  
Interest cost on accumulated postretirement health benefit obligation
    217       225       651       680  
Amortization of loss
    78       78       234       232  
Amortization of prior service cost/(credit)
    (183 )     (182 )     (549 )     (548 )
 
                       
 
                               
Net periodic postretirement health benefit cost
  $ 251     $ 250     $ 753     $ 749  
 
                       
Key assumptions and other information to determine obligation for the Bank’s postretirement health benefit plan were as follows:
                 
    September 30, 2009     December 31, 2008  
 
               
Weighted average discount rate at the end of the year*
    6.14 %     6.14 %
 
               
Health care cost trend rates:
               
Assumed for next year
    7.00 %     7.00 %
Ultimate rate
    5.00 %     5.00 %
Year that ultimate rate is reached
    2011       2011  
Alternative amortization methods used to amortize
           
Prior service cost
  Straight - line     Straight - line  
Unrecognized net (gain) or loss
  Straight - line     Straight - line  
     
*   The discount rate was based on the Citigroup Pension Liability Index at December 31, 2008 and adjusted for durations.
The total amounts of benefits paid and expected to be paid under this plan are not expected to be materially different from amount disclosed in the Bank’s Form 10-K filed on March 27, 2009.
Note 15. Derivatives and 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 cancellable 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; 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.

 

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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 a asset or liability that is elected under the fair value option (“FVO”) in accordance with the accounting standards on the fair value option for financial assets and liabilities. The swap is designated 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 thereafter, the FHLBNY elected the FVO for certain consolidated obligation bonds and executed interest rate swaps to offset the fair value changes of the bonds. At September 30, 2009 and December 31, 2008, par amounts of debt designated under the FVO were $2.4 billion and $983.0 million.
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.
Derivatives and 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 outflows 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 enter into an interest rate swap contract 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. Such transactions are treated as fair value hedges under the accounting standards for derivatives and hedging.
The issuance of the FHLB fixed-rate bonds to investors and the execution of interest rate swaps typically result in cash flow pattern in which the FHLBNY has effectively converted the bonds’ 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.

 

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The FHLBNY has also issued variable-rate consolidated obligations bonds indexed to 1- month LIBOR, the U.S. Prime rate, or federal funds rate and has simultaneously executed interest-rate swaps to hedge the basis risk of the variable rate debt to 3-month LIBOR, the Bank’s preferred funding base. The interest rate swaps were accounted as economic hedges of the floating-rate bonds.
In the third quarter of 2008 and thereafter, the FHLBNY had elected the fair value option in accordance with the accounting standards on the fair value option for financial assets and liabilities for certain consolidated obligation bonds and these were measured under the provisions of the accounting standards on fair value measurements and disclosures as of September 30, 2009 and December 31, 2008.
Advances With a putable advance (also referred to as convertible) 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 if interest rates increase, or to terminate the advance and extend additional credit on new terms. The FHLBNY may hedge a convertible advance by entering into a cancelable derivative where the FHLBNY pays fixed and receives variable. 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 derivative on the put date, which would normally occur in a rising rate environment, and the FHLBNY can terminate the advance and extend additional credit 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 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 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. 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 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. The Bank has not elected the FVO for any mortgage loans.
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 records the fair values of mortgage loan delivery commitments on the balance sheet with an offset to current period earnings. Fair values of the mortgage delivery commitments were de minimis for all periods reported.

 

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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 naturally amortized into interest income over the life of the advance.
Forward Settlements — There were no forward settled securities at September 30, 2009 and December 31, 2008 that would settle outside the shortest period of time for the settlement of such securities.
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 Accumulated other comprehensive income (loss) 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.
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 treatment 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 has a de minimis affect on 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 as hedges to either advances, investments, or consolidated obligations. 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 — At September 30, 2009 and December 31, 2008, economic hedges were 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 derivatives. The FHLBNY believes the operational cost of designating the basis hedges in a qualifying hedge under the accounting standards for derivatives and hedging would outweigh the benefits of applying hedge accounting. (2) Interest rate caps to hedge balance sheet risk were considered freestanding derivatives. (3) Interest rate swaps hedging interest rate risk within the balance sheet. (4) Interest rate swaps that had been accounted under the provisions of the accounting standards for derivatives and hedging but had been de-designated from hedge accounting as they were assessed as being not highly effective hedges. (5) Interest rate swaps executed to offset the fair value changes of bonds designated in accordance with the accounting standards on the fair value option for financial assets and liabilities. Changes in fair values of all freestanding derivatives are recorded in Other income as a Net realized and unrealized gain (loss) from derivatives and hedging activities. The FHLBNY is not a derivatives dealer and does not trade derivatives for short-term profit.

 

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Cash Flow hedges
There were no material amounts for the first, second, or third quarters in 2009 and 2008 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. No cash flow hedges were outstanding at September 30, 2009 and December 31, 2008. 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 Accumulated other comprehensive income and reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings.
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 to 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 FHLBNY established several small grantor trusts related to employee benefits programs.
The notional amounts of derivatives are not recorded as assets or liabilities in the Statements of Condition, rather the fair values of all derivatives are recorded as either derivative asset or 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 foreign currency swaps, of which the FHLBNY has none).
All derivatives are recorded on the Statements of Condition at their estimated fair value 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 interest-rate risk or balance sheet risk. Such derivatives are designated as economic hedges either because a qualifying hedge is not available, the hedge is not able to demonstrate that it 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 Accumulated other comprehensive income (loss) 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 under the accounting standards for derivatives and hedging. 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.

 

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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: (4) offset embedded options in assets and liabilities, (5) hedge the market value of existing assets, liabilities, and anticipated transactions; or (6) reduce funding costs.
The following tables present notional amounts and fair values of derivative instruments as of September 30, 2009 and December 31, 2008 (in thousands):
                         
    September 30, 2009  
    Notional Amount of     Derivative     Derivative  
    Derivatives     Assets     Liabilities  
Fair value of derivatives instruments
                       
Derivatives in fair value hedging relationships
                       
Interest rate swaps
  $ 97,418,662     $ 1,077,145     $ (4,655,105 )
 
                 
Total derivatives in hedging relationships
  $ 97,418,662     $ 1,077,145     $ (4,655,105 )
 
                 
 
                       
Derivatives not designated as hedging instruments
                       
Interest rate swaps
  $ 32,341,126     $ 199,206     $ (79,515 )
Interest rate caps or floors
    2,282,000       66,637       (8,787 )
Mortgage delivery commitments
    11,843       35        
Other*
    2,665,000       4,123       (652 )
 
                 
Total derivatives not designated as hedging instruments
  $ 37,299,969     $ 270,001     $ (88,954 )
 
                 
Total derivatives before netting and collateral adjustments
  $ 134,718,631     $ 1,347,146     $ (4,744,059 )
 
                 
 
Netting adjustments
          $ (1,338,054 )   $ 1,338,054  
Cash collateral and related accrued interest
                  2,534,261  
 
                   
Total collateral and netting adjustments
          $ (1,338,054 )   $ 3,872,315  
 
                   
Total reported on the Statements of Condition
          $ 9,092     $ (871,744 )
 
                   
     
*Other:   Comprised of $2.4 billion notional of swaps in economic hedges of debt designated under the FVO, and $0.3 billion swaps intermediated for members.

 

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    December 31, 2008  
    Notional Amount of     Derivative     Derivative  
    Derivatives     Assets     Liabilities  
Fair value of derivatives instruments
                       
Derivatives in fair value hedging relationships
                       
Interest rate swaps
  $ 84,582,796     $ 1,640,507     $ (6,117,173 )
 
                 
Total derivatives in hedging relationships
  $ 84,582,796     $ 1,640,507     $ (6,117,173 )
 
                 
 
                       
Derivatives not designated as hedging instruments
                       
Interest rate swaps
  $ 39,691,142     $ 207,243     $ (361,836 )
Interest rate caps or floors
    2,357,000       16,318       (8,360 )
Mortgage delivery commitments
    10,395       2       (110 )
Other*
    1,283,000       25,558       (18,734 )
 
                 
Total derivatives not designated as hedging instruments
  $ 43,341,537     $ 249,121     $ (389,040 )
 
                 
Total derivatives before netting and collateral adjustments
  $ 127,924,333     $ 1,889,628     $ (6,506,213 )
 
                 
 
                       
Netting adjustments
          $ (1,808,183 )   $ 1,808,183  
Cash collateral and related accrued interest
            (61,209 )     3,836,370  
 
                   
Total collateral and netting adjustments
          $ (1,869,392 )   $ 5,644,553  
 
                   
Total reported on the Statements of Condition
          $ 20,236     $ (861,660 )
 
                   
     
*Other:   Comprised of $1.0 billion notional of swaps in economic hedges of debt designated under the FVO, and $0.3 billion swaps intermediated for members.

 

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The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income for the three and nine months ended September 30, 2009 and 2008 (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    Gain (Loss)     Gain (Loss)     Gain (Loss)     Gain (Loss)  
Derivatives designated as hedging instruments
                               
Interest rate swaps
                               
Advances
  $ 182     $ 5,259     $ (5,107 )   $ 3,621  
Consolidated obligations-bonds
    167       6,604       18,187       2,619  
 
                       
 
                               
Net gain (loss) related to fair value hedge ineffectiveness
  $ 349     $ 11,863     $ 13,080     $ 6,240  
 
                       
 
                               
Net gain (loss) related to cash flow hedge ineffectiveness
  $     $     $     $ (9 )
 
                       
Derivatives not designated as hedging instruments
                               
Economic hedges
                               
Interest rate swaps
                               
Advances
  $ (1,475 )   $ (44 )   $ 3,887     $ 1,066  
Consolidated obligations-bonds
    28,420       (23,375 )     101,662       (41,517 )
Consolidated obligations-discount notes
    (5,711 )     (2,829 )     409       (5,723 )
Member intermediation
    (16 )     68       (189 )     66  
Balance sheet — Macro hedges swaps
    210       19,983       2,617       19,983  
Accrued interest-swaps
    18,362       (20,745 )     (37,772 )     (36,915 )
Accrued interest-intermediation
    20       2       64       5  
Caps and floors
                               
Advances
    (305 )     (578 )     (1,056 )     (1,531 )
Balance sheet
    19,196       (7,626 )     50,613       (4,621 )
Accrued interest-options
    (1,786 )     (19 )     (3,731 )     99  
Mortgage delivery commitments
    47       141       (49 )     17  
Swaps under fair value option
                               
Consolidated obligations-bonds
    1,549       (2,356 )     (5,825 )     (2,356 )
Accrued interest on FVO swaps
    779             903        
 
                       
Net gain (loss) related to derivatives not designated as hedging instruments
  $ 59,290     $ (37,378 )   $ 111,533     $ (71,427 )
 
                       
 
                               
Net gain (loss) on derivatives and hedging activities
  $ 59,639     $ (25,515 )   $ 124,613     $ (65,196 )
 
                       

 

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The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives for the three months ended September 30, 2009 and 2008 (in thousands):
                                                                 
    Three months ended September 30,  
    2009     2008  
                            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     Income     Derivative     Hedged Item     Impact     Income  
 
                                                               
Derivatives designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
  $ (582,983 )   $ 583,165     $ 182     $ (503,185 )   $ (335,331 )   $ 340,590     $ 5,259     $ (171,690 )
Consolidated obligations-bonds
    98,668       (98,501 )     167       151,467       10,563       (3,959 )     6,604       118,620  
Consolidated obligations-notes
                                               
 
                                               
 
                                                               
Fair value hedges ineffectiveness
  $ (484,315 )   $ 484,664     $ 349     $ (351,718 )   $ (324,768 )   $ 336,631     $ 11,863     $ (53,070 )
 
                                                               
Cash flow hedges ineffectiveness
  $     $     $     $     $     $     $     $  
 
                                                               
Derivatives not designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
  $ (1,475 )   $     $ (1,475 )   $     $ (44 )   $     $ (44 )   $  
Consolidated obligations-bonds
    28,420             28,420             (23,375 )           (23,375 )      
Consolidated obligations-notes
    (5,711 )           (5,711 )           (2,829 )           (2,829 )      
Member intermediation
    (16 )           (16 )           68             68        
Balance sheet — Macro hedges swaps
    210             210             19,983             19,983        
Accrued interest-swaps
    18,362             18,362             (20,745 )           (20,745 )      
Accrued interest-intermediation
    20             20             2             2        
Caps and floors
                                                               
Advances
    (305 )           (305 )           (578 )           (578 )      
Balance sheet
    19,196             19,196             (7,626 )           (7,626 )      
Accrued interest-options
    (1,786 )           (1,786 )           (19 )           (19 )      
Mortgage delivery commitments
    47             47             141             141        
 
                                               
 
                                                               
Total
  $ (427,353 )   $ 484,664     $ 57,311     $ (351,718 )   $ (359,790 )   $ 336,631     $ (23,159 )   $ (53,070 )
 
                                               

 

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The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives for the nine months ended September 30, 2009 and 2008 (in thousands):
                                                                 
    Nine months ended September 30,  
    2009     2008  
                            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     Income     Derivative     Hedged Item     Impact     Income  
 
Derivatives designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
  $ 1,419,019     $ (1,424,126 )   $ (5,107 )   $ (1,252,775 )   $ (337,111 )   $ 340,732     $ 3,621     $ (341,522 )
Consolidated obligations-bonds
    (418,734 )     436,921       18,187       384,150       (44,921 )     47,540       2,619       288,228  
Consolidated obligations-notes
                      474                          
 
                                               
 
                                                               
Fair value hedges ineffectiveness
  $ 1,000,285     $ (987,205 )   $ 13,080     $ (868,151 )   $ (382,032 )   $ 388,272     $ 6,240     $ (53,294 )
 
                                                               
Cash Flow hedges ineffectiveness
  $     $     $     $     $ (9 )   $     $ (9 )   $  
 
Derivatives not designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
  $ 3,887     $     $ 3,887     $     $ 1,066     $     $ 1,066     $  
Consolidated obligations-bonds
    101,662             101,662             (41,517 )           (41,517 )      
Consolidated obligations-notes
    409             409             (5,723 )           (5,723 )      
Member intermediation
    (189 )           (189 )           66             66        
Balance sheet — Macro hedges swaps
    2,617             2,617             19,983             19,983        
Accrued interest-swaps
    (37,772 )           (37,772 )           (36,915 )           (36,915 )      
Accrued interest-intermediation
    64             64             5             5        
Caps and floors
                                                               
Advances
    (1,056 )           (1,056 )           (1,531 )           (1,531 )      
Balance sheet
    50,613             50,613             (4,621 )           (4,621 )      
Accrued interest-options
    (3,731 )           (3,731 )           99             99        
Mortgage delivery commitments
    (49 )           (49 )           17             17        
 
                                               
 
                                                               
Total
  $ 1,116,740     $ (987,205 )   $ 129,535     $ (868,151 )   $ (451,112 )   $ 388,272     $ (62,840 )   $ (53,294 )
 
                                               

 

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The effect of cash flow hedge related derivative instruments for the three and nine months ended September 30, 2009 and 2008 were as follows (in thousands):
                                                                 
    Three months ended September 30,  
    2009     2008  
    OCI     OCI  
    Gains/(Losses)     Gains/(Losses)  
            Location:     Amount     Ineffectiveness             Location:     Amount     Ineffectiveness  
    Recognized in     Reclassified to     Reclassified to     Recognized in     Recognized in     Reclassified to     Reclassified to     Recognized in  
    OCI 1     Earnings 1     Earnings 1     Earnings     OCI 1, 2     Earnings 1     Earnings 1     Earnings  
 
The effect of cash flow hedge related to Interest rate swaps
                                                               
Advances
  $     Interest Income   $     $     $     Interest Income   $     $  
Consolidated obligations-bonds
        Interest Expense     1,898               61     Interest Expense     1,667        
 
                                                   
 
Total
  $             $ 1,898     $     $ 61             $ 1,667     $  
 
                                                   
     
1   Effective portion
                                                                 
    Nine months ended September 30,  
    2009     2008  
    OCI     OCI  
    Gains/(Losses)     Gains/(Losses)  
            Location:     Amount     Ineffectiveness             Location:     Amount     Ineffectiveness  
    Recognized in     Reclassified to     Reclassified to     Recognized in     Recognized in     Reclassified to     Reclassified to     Recognized in  
    OCI 1     Earnings 1     Earnings 1     Earnings     OCI 1, 2     Earnings 1     Earnings     Earnings  
 
                                                               
The effect of cash flow hedge related to Interest rate swaps
                                                               
Advances
  $     Interest Income   $     $     $     Interest Income   $     $  
Consolidated obligations-bonds
        Interest Expense     5,687             (6,109 )   Interest Expense     4,345       9  
 
                                                   
 
Total
  $             $ 5,687     $     $ (6,109 )           $ 4,345     $ 9  
 
                                                   
     
1   Effective portion
     
2   Represents effective portion of basis adjustments to OCI during the period from cash flow hedging transactions.

 

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Note 16. Fair Values of Financial Instruments
Items Measured at Fair Value on a Recurring Basis
The following table presents for each hierarchy level, the FHLBNY’s assets and liabilities that were measured at fair value on its Statements of Condition at September 30, 2009 and December 31, 2008
(in thousands):
                                         
    September 30, 2009  
                                    Netting  
    Total     Level 1     Level 2     Level 3     Adjustments  
Assets
                                       
Available-for-sale securities
  $ 2,362,592     $     $ 2,362,592     $     $  
Derivative assets
    9,092               1,347,146               (1,338,054 )
 
                             
 
                                       
Total assets at fair value
  $ 2,371,684     $     $ 3,709,738     $     $ (1,338,054 )
 
                             
 
                                       
Liabilities
                                       
Consolidated obligations:
                                       
Bonds
  $ (2,385,968 )   $     $ (2,385,968 )   $     $  
Derivative liabilities
    (871,744 )           (4,744,059 )           3,872,315  
 
                             
 
                                       
Total liabilities at fair value
  $ (3,257,712 )   $     $ (7,130,027 )   $     $ 3,872,315  
 
                             
                                         
    December 31, 2008  
                                    Netting  
    Total     Level 1     Level 2     Level 3     Adjustments  
Assets
                                       
Available-for-sale securities
  $ 2,861,869     $     $ 2,861,869     $     $  
Derivative assets
    20,236             1,386,859             (1,366,623 )
 
                             
 
                                       
Total assets at fair value
  $ 2,882,105     $     $ 4,248,728     $     $ (1,366,623 )
 
                             
 
                                       
Liabilities
                                       
Consolidated obligations:
                                       
Bonds
  $ (998,942 )   $     $ (998,942 )   $     $  
Derivative liabilities
    (861,660 )           (5,978,026 )           5,116,366  
 
                             
 
                                       
Total liabilities at fair value
  $ (1,860,602 )   $     $ (6,976,968 )   $     $ 5,116,366  
 
                             

 

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Items Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities would be measured at fair value on a nonrecurring basis, and for the FHLBNY, such items may include mortgage loans in foreclosure, or mortgage loans and held-to-maturity securities written down to fair value. Certain private-label held-to-maturity MBS were written down to fair value as a result of OTTI during the three quarters ended September 30, 2009. The fair value of MBS for which a non-recurring change in fair value has been recorded at September 30, 2009 (in thousands):
                                                 
                                    Credit Loss *  
                                    September 30, 2009  
    Fair Value     Level 1     Level 2     Level 3     Three months     Nine months  
Held-to-maturity securities
                                               
Private-label residential MBS
  $ 125,771     $     $     $ 125,771     $ 3,683     $ 14,276  
 
                                   
Total
  $ 125,771     $     $     $ 125,771     $ 3,683     $ 14,276  
 
                                   
     
*   Note: The credit losses recognized in the current year third quarter of $3.7 million were associated with the held-to-maturity (“HTM”) securities determined to be OTTI at September 30, 2009. The credit impaired HTM securities were recorded in the Statements of Condition at their total fair values of $125.8 million at September 30, 2009. Cumulative credit losses of $14.3 million include credit losses on HTM securities that were previously impaired. For HTM securities that were previously credit impaired but no additional credit impairment were deemed necessary in the current quarter, the securities were recorded- consistent with accounting rules-at their carrying values and not re-adjusted to their fair values.

 

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Estimated fair values — Summary Tables
The Bank early adopted the new guidance on interim disclosures about fair value of financial instruments as of January 1, 2009. The FHLBNY has consistently presented estimated fair value disclosures in interim financial statements in prior periods, although it has not been required to under pre-existing GAAP disclosure requirements, as it believed fair values provided useful information to investors and its stockholders with respect to significant changes in the estimated fair values of the FHLBNY’s financial instruments.
The carrying value and estimated fair values of the FHLBNY’s financial instruments as of September 30, 2009 and December 31, 2008 were as follows (in thousands):
                                 
    September 30, 2009     December 31, 2008  
    Carrying     Estimated     Carrying     Estimated  
Financial Instruments   Value     Fair Value     Value     Fair Value  
Assets
                               
Cash and due from banks
  $ 1,189,158     $ 1,189,158     $ 18,899     $ 18,899  
Interest-bearing deposits
                12,169,096       12,170,681  
 
                               
Federal funds sold
    3,900,000       3,899,997              
Available-for-sale securities
    2,362,592       2,362,592       2,861,869       2,861,869  
Held-to-maturity securities
                               
Long-term securities
    10,478,027       10,596,548       10,130,543       9,934,473  
Certificates of deposit
    2,000,000       2,000,003       1,203,000       1,203,328  
Advances
    95,944,732       96,375,258       109,152,876       109,421,358  
Mortgage loans, net
    1,336,228       1,402,028       1,457,885       1,496,329  
Accrued interest receivable
    354,934       354,934       492,856       492,856  
Derivative assets
    9,092       9,092       20,236       20,236  
Other financial assets
    4,224       4,224       2,713       2,713  
 
                               
Liabilities
                               
Deposits
    2,275,971       2,275,983       1,451,978       1,452,648  
Consolidated obligations:
                               
Bonds
    69,670,836       70,032,687       82,256,705       82,533,048  
Discount notes
    38,385,244       38,396,793       46,329,906       46,408,907  
Mandatorily redeemable capital stock
    127,882       127,882       143,121       143,121  
Accrued interest payable
    337,221       337,221       426,144       426,144  
Derivative liabilities
    871,744       871,744       861,660       861,660  
Other financial liabilities
    33,784       33,784       38,594       38,594  

 

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The following table summarizes the activity related to consolidated obligation bonds for which the Bank elected the fair value option (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Balance, beginning of the period
  $ 550,303     $     $ 998,942     $  
New transaction elected for fair value option
    1,835,000       589,000       2,385,000       589,000  
Maturities and terminations
                (983,000 )      
Change in fair value
    (426 )     (3,582 )     (8,653 )     (3,582 )
Change in accrued interest*
    1,091             (6,321 )      
 
                       
 
                               
Balance, end of the period
  $ 2,385,968     $ 585,418     $ 2,385,968     $ 585,418  
 
                       
     
*   De minimis amounts of change in accrued interest in 2008.
The following table presents the change in fair value include in the Statements of Income for the consolidated obligation bonds designated in accordance with the accounting standards on the fair value option for financial assets and liabilities (in thousands):
                                                 
    Three months ended September 30,  
    2009     2008  
                    Total change in                     Total change in  
    Interest expense on     Net gain(loss) due     fair value included     Interest expense on     Net gain(loss) due     fair value included  
    consolidated     to changes in fair     in current period     consolidated     to changes in fair     in current period  
    obligation bonds     value     earnings     obligation bonds     value     earnings  
 
                                               
Consolidated obligations-bonds
  $ (1,091 )   $ 426     $ (665 )   $     $ 3,582     $ 3,582  
 
                                   
                                                 
    Nine months ended September 30,  
    2009     2008  
                    Total change in                     Total change in  
    Interest expense on     Net gain(loss) due     fair value included     Interest expense on     Net gain(loss) due     fair value included  
    consolidated     to changes in fair     in current period     consolidated     to changes in fair     in current period  
    obligation bonds     value     earnings     obligation bonds     value     earnings  
 
                                               
Consolidated obligations-bonds
  $ (2,380 )   $ 8,653     $ 6,273     $     $ 3,582     $ 3,582  
 
                                   
The following table compares the aggregate fair value and aggregate remaining contractual fair value and aggregate remaining contractual principal balance outstanding of consolidated obligation bonds for which the fair value option has been elected (in thousands):
                         
    September 30, 2009  
                    Fair value  
    Principal Balance     Fair value     over/(under)  
 
                       
Consolidated obligations-bonds
  $ 2,385,000     $ 2,385,968     $ 968  
 
                 
                         
    December 31, 2008  
                    Fair value  
    Principal Balance     Fair value     over/(under)  
 
                       
Consolidated obligations-bonds
  $ 983,000     $ 998,942     $ 15,942  
 
                 

 

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Notes to Estimated Fair Values of financial instruments
The fair value of financial instruments 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.
Investment securities
The fair value of mortgage-backed investment securities is estimated by management using information from specialized pricing services that use pricing models or quoted prices of securities with similar characteristics. 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. 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 securities that are traded in sufficient volumes in the secondary market. The valuation of the Bank’s private-label securities that are all designated as held-to-maturity may require pricing services to use significant inputs that are subjective and are generally considered to be Level 3 because the inputs may not be market based and observable. Beginning with the current year third quarter, the FHLBNY requests prices for all mortgage-backed securities from four specific third-party vendors. Prior to the change, the FHLBNY used three vendors. The adoption of the fourth pricing vendor had no material impact on the financial results, financial position or cash flows of the Bank. Depending on the number of prices received from the four vendors for each security, the FHLBNY selects a median or average price. The Bank’s pricing methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. In certain limited instances (i.e., prices are outside of variance thresholds or the third-party services do not provide a price), the FHLBNY will obtain a price from securities dealers that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants.

 

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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 as a result of a recognition of OTTI during the three quarters in 2009. The OTTI impaired securities are classified in the table of items measured at fair value on a nonrecurring basis as Level 3 financial instruments in accordance with the accounting standards for fair value measurements and disclosures, and valuation hierarchy as of September 30, 2009. This determination was made based on management’s view that the OTTI private-label instruments and certain other private-label MBS may not have an active market because of the specific vintage of the impaired securities as well as inherent conditions surrounding the trading of private-label mortgage-backed securities. Fair values of these securities were determined by management using third party specialized vendor pricing services that made appropriate adjustments to observed prices of comparable securities that were being transacted in orderly market. Fair values of the OTTI securities recorded in the Statements of Condition at September 30, 2009 were $125.8 million.
The fair value of housing finance agency bonds is estimated by management using information primarily from specialized dealers.
For more information, see Significant Accounting Policies and Estimates in Note 1 for corroboration and other analytical procedures performed by the FHLBNY. Examples of securities priced under such a valuation technique, and which are classified within Level 2 of the valuation hierarchy and valued using the “market approach” as defined under the accounting standards for fair value measurements and disclosures, include GSE issued collateralized mortgage obligations and money market funds.
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, 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 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” as defined in the accounting standards for fair value measurements and disclosures. 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 based and observable.
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.

 

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Derivative assets and liabilities
The FHLBNY’s derivatives are traded in the over-the-counter market and are valued using discounted cash flow models that use as their basis, readily observable and market based inputs. Significant inputs include interest rates and volatilities. 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 accounting standard for fair value measurements and disclosures clarified that the valuation of derivative assets and liabilities must reflect the value of the instrument including the values associated with counterparty risk and must also take into account the company’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 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 that no credit adjustments were deemed necessary to the recorded fair value of derivative assets and derivative liabilities in the Statements of Conditions at September 30, 2009 and December 31, 2008.
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 based on 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 that is available to the public and published by the Office of Finance, and (2) LIBOR curve and volatilities. Model adjustments that are not “market-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.

 

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Note 17. Commitments and contingencies
The FHLBanks have joint and several liability for all the consolidated obligations issued on their behalf. Accordingly, should one or more of the FHLBanks be unable to repay their participation in the consolidated obligations, each of the other FHLBanks could be called upon to repay all or part of such obligations, as determined or approved by the Finance Agency. Neither the FHLBNY nor any other FHLBank has ever had to assume or pay 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. Under the amended 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, 2009 and December 31, 2008. The par amount of the twelve FHLBanks’ outstanding consolidated obligations, including the FHLBNY’s, were approximately $1.0 trillion and $1.3 trillion at September 30, 2009 and December 31, 2008.
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 $891.2 million and $908.6 million as of September 30, 2009 and December 31, 2008, respectively 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 were recorded in other liabilities and were not significant as of September 30, 2009 and December 31, 2008. 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.
During the third quarter of 2008, each FHLBank, including the FHLBNY, entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (GSECF), as authorized by the Housing Act. The GSECF is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF are considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings are agreed to at the time of issuance. Loans under the Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which consists of FHLBank advances to members that have been collateralized in accordance with regulatory standards and mortgage-backed securities issued by Fannie Mae or Freddie Mac. Each FHLBank is required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible collateral updated on a weekly basis. As of September 30, 2009 and December 31, 2008, the FHLBNY had provided the U.S. Treasury listings of advance collateral amounting to $17.8 billion and $16.3 billion, which provides for maximum borrowings of $15.5 billion and $14.2 billion at September 30, 2009 and December 31, 2008. The amount of collateral can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of September 30, 2009, no FHLBank had drawn on this available source of liquidity. This temporary authorization expires December 31, 2009 and supplements the existing limit of $4.0 billion.

 

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Under the MPF program, the Bank was unconditionally obligated to purchase $12.0 million and $10.4 million in mortgage loans at September 30, 2009 and December 31, 2008. Commitments are generally for periods not to exceed 45 days. Such commitments entered into after June 30, 2003 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 $494.3 million and $246.9 million as of September 30, 2009 and December 31, 2008.
The FHLBNY generally executes derivatives with major banks and broker-dealers and generally 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 pledged $2.5 billion and $3.8 billion in cash as collateral at September 30, 2009 and December 31, 2008, and these amounts were reported as a component of Derivative liabilities. At September 30, 2009 and December 31, 2008, the FHLBNY was also exposed to credit risk associated with outstanding derivative transactions measured by the replacement cost of derivatives in a gain position. The Bank’s credit exposure at September 30, 2009 as defined above was below the threshold agreements with derivative counterparties and no collateral was required to be pledged by counterparties. At December 31, 2008, the Bank’s credit exposure was reduced by cash collateral of $61.2 million delivered by derivatives counterparties and held by the Bank. The amount was recorded as a reduction to Derivative assets at December 31, 2008.
Net rental expense and the cost of operating leases for the three and nine months ended September 30, 2009 and 2008 were not material. The lease agreements for FHLBNY premises provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBNY’s results of operations or financial condition.

 

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The following table summarizes contractual obligations and contingencies as of September 30, 2009 (in thousands):
                                         
    September 30, 2009  
    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 par 1
  $ 35,806,100     $ 24,730,595     $ 4,900,530     $ 3,335,050     $ 68,772,275  
Mandatorily redeemable capital stock 1
    82,076       38,724       2,123       4,959       127,882  
Premises (lease obligations) 2
    3,060       6,120       5,635       7,011       21,826  
 
                             
 
                                       
Total contractual obligations
    35,891,236       24,775,439       4,908,288       3,347,020       68,921,983  
 
                             
 
                                       
Other commitments
                                       
Standby letters of credit
    863,242       4,937       15,255       7,778       891,212  
Consolidated obligation-bonds/ discount notes traded not settled
    2,302,700                         2,302,700  
Investment securities traded not settled
    25,000                         25,000  
Open delivery commitments (MPF)
    11,843                         11,843  
 
                             
 
                                       
Total other commitments
    3,202,785       4,937       15,255       7,778       3,230,755  
 
                             
 
                                       
Total obligations and commitments
  $ 39,094,021     $ 24,780,376     $ 4,923,543     $ 3,354,798     $ 72,152,738  
 
                             
     
1   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. Callable bonds contain exercise date or a series of exercise dates that may result in a shorter redemption period.
 
2   Immaterial amount of commitments for equipment leases not included.
The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses was required.

 

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Note 18. Related party transactions
The FHLBNY is a cooperative and the members own almost all of the stock of the Bank. Stock that is 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.
Debt Transfers
During the current year and prior year three quarters, there was no transfer of consolidated obligation bonds to other FHLBanks. Generally, when debt is transferred, it is exchanged for a cash price that represents the fair market value of the debt. Additionally, no debt was transferred to the FHLBNY from another FHLBank for the first three quarters of 2009 and 2008.
At 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 current year or prior year three quarters ended September 30.
Loans to other Federal Home Loan Banks
In the current year third quarter, the FHLBNY extended an overnight loan of $400.0 million to another FHLBank for one day. No loans were made to another FHLBank in the current year prior two quarters. In the prior year, the Bank made four overnight loans for a total of $661.0 million. Generally, loans made to other FHLBanks are uncollateralized.
Borrowings from other Federal Home Loan Banks
In the current year three quarters, the FHLBNY had not borrowed funds from another FHLBank that were material. In the prior year three quarters, the FHLBNY had borrowed eight overnight loans for a total of $1.3 billion. The FHLBNY borrows from other FHLBanks, generally for a period of one day and are not collateralized.

 

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The following tables summarize outstanding balances with related parties at September 30, 2009 and December 31, 2008, and transactions for the three and nine months ended September 30, 2009 and 2008 (in thousands):
Related Party: Outstanding Assets, Liabilities and Capital
                                 
    September 30, 2009     December 31, 2008  
    Related     Unrelated     Related     Unrelated  
Assets
                               
Cash and due from banks
  $     $ 1,189,158     $     $ 18,899  
Interest-bearing deposits
                      12,169,096  
Federal funds sold
          3,900,000              
Available-for-sale securities
          2,362,592             2,861,869  
Held-to-maturity securities
                               
Long-term securities
          10,478,027             10,130,543  
Certificates of deposit
          2,000,000             1,203,000  
Advances
    95,944,732             109,152,876        
Mortgage loans 1
          1,336,228             1,457,885  
Accrued interest receivable
    308,036       46,898       433,755       59,101  
Premises, software, and equipment
          14,596             13,793  
Derivative assets 2
          9,092             20,236  
Other assets 3
    237       14,720       153       18,685  
 
                       
 
                               
Total assets
  $ 96,253,005     $ 21,351,311     $ 109,586,784     $ 27,953,107  
 
                       
 
                               
Liabilities and capital
                               
Deposits
  $ 2,275,971     $     $ 1,451,978     $  
Consolidated obligations
          108,056,080             128,586,611  
Mandatorily redeemable capital stock
    127,882             143,121        
Accrued interest payable
    42       337,179       814       425,330  
Affordable Housing Program 4
    144,822             122,449        
Payable to REFCORP
          38,692             4,780  
Derivative liabilities 2
          871,744             861,660  
Other liabilities 5
    27,125       63,990       31,003       44,750  
 
                       
 
                               
Total liabilities
  $ 2,575,842     $ 109,367,685     $ 1,749,365     $ 129,923,131  
 
                       
 
                               
Capital
    5,660,789             5,867,395        
 
                       
 
                               
Total liabilities and capital
  $ 8,236,631     $ 109,367,685     $ 7,616,760     $ 129,923,131  
 
                       
     
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.

 

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Related Party: Income and Expense transactions
                                 
    Three months ended  
    September 30, 2009     September 30, 2008  
    Related     Unrelated     Related     Unrelated  
Interest income
                               
Advances
  $ 240,573     $     $ 678,896     $  
Interest-bearing deposits 1
          1,014             3,240  
Federal funds sold
          1,864             21,316  
Available-for-sale securities
          6,590             24,441  
Held-to-maturity securities
                               
Long-term securities
          111,232             138,412  
Certificates of deposit
          851             51,287  
Mortgage loans 2
          17,405             19,316  
Loans to other FHLBanks and other
    1             30        
 
                       
 
                               
Total interest income
  $ 240,574     $ 138,956     $ 678,926     $ 258,012  
 
                       
 
                               
Interest expense
                               
Consolidated obligations
  $     $ 223,355     $     $ 769,703  
Deposits
    516             7,370        
Mandatorily redeemable capital stock
    1,807             1,950        
Cash collateral held and other borrowings
                2       240  
 
                       
 
                               
Total interest expense
  $ 2,323     $ 223,355     $ 9,322     $ 769,943  
 
                       
 
                               
Service fees
  $ 1,101     $     $ 934     $  
 
                       
     
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, 2009     September 30, 2008  
    Related     Unrelated     Related     Unrelated  
Interest income
                               
Advances
  $ 1,094,089     $     $ 2,211,823     $  
Interest-bearing deposits 1
          19,054             17,086  
Federal funds sold
          1,933             69,921  
Available-for-sale securities
          22,881             57,016  
Held-to-maturity securities
                               
Long-term securities
          355,916             396,660  
Certificates of deposit
          1,392             212,525  
Mortgage loans 2
          54,679             58,348  
Loans to other FHLBanks and other
    1             33        
 
                       
 
                               
Total interest income
  $ 1,094,090     $ 455,855     $ 2,211,856     $ 811,556  
 
                       
 
                               
Interest expense
                               
Consolidated obligations
  $     $ 956,923     $     $ 2,511,381  
Deposits
    2,002             33,235        
Mandatorily redeemable capital stock
    5,478             8,884        
Cash collateral held and other borrowings
          49       162       820  
 
                       
 
                               
Total interest expense
  $ 7,480     $ 956,972     $ 42,281     $ 2,512,201  
 
                       
 
                               
Service fees
  $ 3,181     $     $ 2,422     $  
 
                       
     
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.

 

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Note 19. Segment information and 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 which 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.
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 is 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.

 

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The top five advance holders at September 30, 2009, December 31, 2008 and September 30, 2008, and associated interest income are summarized as follows (dollars in thousands):
                                             
    September 30, 2009  
                        Percentage of        
                Par     Total Par Value     Interest Income  
    City   State     Advances     of Advances     Three months     Nine months  
 
                                           
Hudson City Savings Bank 1
  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 1
  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 Life Insurance Company of America
  Newark   NJ     3,500,000       3.8       22,448       71,473  
 
                                   
 
                                           
Total
              $ 48,747,232       53.2 %   $ 383,167     $ 1,199,918  
 
                                   
     
1   Officer of member bank also serves on the Board of Directors of the FHLBNY.
                                     
    December 31, 2008  
                        Percentage of        
                Par     Total Par Value     Interest  
    City   State     Advances     of Advances     Income  
 
                                   
Hudson City Savings Bank 1
  Paramus   NJ   $ 17,525,000       17.0 %   $ 671,146  
Metropolitan Life Insurance Company
  New York   NY     15,105,000       14.6       260,420  
Manufacturers and Traders Trust Company
  Buffalo   NY     7,999,689       7.7       257,649  
New York Community Bank
  Westbury   NY     7,796,517       7.5       337,019  
Astoria Federal Savings and Loan Assn.
  Long Island City   NY     3,738,000       3.6       151,066  
 
                             
 
                                   
Total
              $ 52,164,206       50.4 %   $ 1,677,300  
 
                             
     
1   As of December 31, 2008 Officer of member bank also served on the Board of Directors of the FHLBNY.
                                             
    September 30, 2008  
                        Percentage of        
                Par     Total Par Value     Interest Income  
    City   State     Advances     of Advances     Three months     Nine months  
 
                                           
Hudson City Savings Bank 1
  Paramus   NJ   $ 16,775,000       16.5 %   $ 174,289     $ 494,241  
Metropolitan Life Insurance Company
  New York   NY     10,230,000       10.1       52,746       151,855  
New York Community Bank
  Westbury   NY     8,513,619       8.4       80,807       257,201  
Manufacturers and Traders Trust Company
  Buffalo   NY     8,204,802       8.1       63,175       192,037  
Merrill Lynch Bank & Trust Co., FSB
  New York   NY     6,200,000       6.1       14,891       32,494  
 
                                   
 
                                           
Total
              $ 49,923,421       49.2 %   $ 385,908     $ 1,127,828  
 
                                   
     
1   As of September 30, 2008 Officer of member bank also served on the Board of Directors of the FHLBNY.

 

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The following table summarizes capital stock held by members who were beneficial owners of more than 5% of the FHLBNY’s outstanding capital stock as of September 30, 2009 and December 31, 2008 (shares in thousands):
                     
        Number     Percent  
    September 30, 2009   of shares     of total  
Name of beneficial owner   Principal Executive Office Address   owned     capital stock  
Hudson City Savings Bank 1
  West 80 Century Road Paramus, NJ 07652     8,770       16.64 %
Metropolitan Life Insurance Company
  200 Park Ave New York, NY 10166     7,689       14.59  
New York Community Bank 1
  615 Merrick Ave Westbury, NY 11590     4,140       7.85  
Manufacturers and Traders Trust Company
  One M&T Plaza Buffalo, NY 14203     3,174       6.02  
 
               
 
                   
 
        23,773       45.10 %
 
               
     
1   Officer of member bank also serves on the Board of Directors of the FHLBNY.
                     
        Number     Percent  
    December 31, 2008   of shares     of total  
Name of beneficial owner   Principal Executive Office Address   owned     capital stock  
Hudson City Savings Bank*
  West 80 Century Road, Paramus, NJ 07652     8,656       15.11 %
Metropolitan Life Insurance Company
  200 Park Ave., New York, NY 10166     8,302       14.49  
Manufacturers and Traders Trust Company
  One M & T Plaza, Buffalo, NY 14203     4,327       7.55  
New York Community Bank
  615 Merrick Avenue, Westbury, NY 11590     3,928       6.86  
 
               
 
                   
 
        25,213       44.01 %
 
               
     
*   As of December 31, 2008, officer of member bank served as a member of the Board of Directors of the FHLBNY.

 

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Note 20. Subsequent events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be 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, nonrecognized subsequent events).

The FHLBNY has evaluated subsequent events through November 13, 2009, which is the date its interim financial statements were issued.

Monoline support - Of the 15 securities determined to have OTTI, 11 are insured by Ambac Assurance Corp, and two are insured by MBIA Insurance Corp. The Bank analyzed the bond insurers as going-concerns as well as their financial strength to assess their ability to perform under their contractual obligations for the securities owned by the FHLBNY. All bond insurers are currently performing under the terms of their contractual agreements with respect to the FHLBNY’s insured bonds. However, estimation of an insurer’s financial strength over a long time horizon requires significant judgment and assumptions. The estimation process includes predicting when the insurers may no longer have the ability to perform under their contractual agreements and then comparing the timing and amounts of cash flow shortfalls of securities that are credit impaired to when insurer protection may not be available.

The Bank’s “Bond insurer analysis” is outlined under Significant Accounting Policies and Estimates in Note 1, and in Note 4 Held-to-maturity securities, and the analysis concluded at September 30, 2009 that the projected time horizon for Ambac Assurance Corp to provide full insurance protection with respect to 11 insured bonds was 83 months, or through July 31, 2016. For two bonds insured by MBIA Insurance Corp., full protection was projected to be provided for 31 months, or through March 31, 2012. The Bank refers to these dates as the “guarantee ignore dates”, implying that security cash flow shortfalls after that date would not receive any credit protection from the two bond insurers.

On November 9, 2009, Ambac Financial Group Inc., the parent company of Ambac Assurance Corp., and MBIA Inc., the parent company of MBIA Insurance Corp., issued interim financial statements for the quarter ended September 30, 2009. The FHLBNY’s review of the interim financial statements noted the worsening operating conditions of the parent companies. The Bank’s monoline analysis and methodology relies on the claims paying ability of Ambac Assurance Corp and MBIA Insurance Corp to project the “guarantee ignore dates” described above, and based on publicly available financial information, the Bank’s monoline analysis did not indicate that any significant changes to the “guarantee ignore dates” were warranted.

As a result of the issuance of the interim financial statements of MBIA Inc., and Ambac Financial Group Inc., there have been a series of articles in the financial news media about the worsening financial condition of the two bond insurers. An article purported that Ambac Financial Group Inc., was likely to file for bankruptcy protection. State insurance regulators indicated that the insurance subsidiary (Ambac Assurance Corp.) was not subject to federal bankruptcy proceedings and that state law would govern. The FHLBNY prepared an analysis of its exposure on the basis of a scenario in which one or both bond insurers would cease to cover any cash flow shortfalls on the FHLBNY’s insured MBS. The analysis indicated that under this scenario, the FHLBNY would have recognized additional credit losses of approximately $7.0 million on a pre-assessment basis as of September 30, 2009.

Termination of nonqualified supplemental pension plans — Three nonqualified supplemental pension plans were terminated effective November 10, 2009, and will have no effect on the Bank’s financial results, financial position or cash flows for all reported periods.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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.

 

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Executive Overview
This overview of management’s discussion and analysis highlights 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 27, 2009.
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 intermediate-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 that FHLBank’s mission, and they re-evaluate these strategies and initiatives from time to time.

 

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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 the 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.
Third Quarter 2009 Highlights
The FHLBNY reported current year third quarter Net income of $140.2 million, or $2.70 per share, compared with $39.8 million, or $0.79 per share for the prior year third quarter.
Net income for the current year third quarter benefited from $59.6 million fair value gains principally from favorable fair value changes of interest rate swaps and interest rate caps designated in economic hedges of certain GSE floating-rate MBS. Fair value gains of interest rate swaps were primarily from swaps that had matured or were nearing maturity. When interest rate swaps are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are unrealized will generally reverse over time, and fair value changes will sum to zero. Favorable fair value changes of purchased caps also designated as an economic hedge of the balance sheet were also a significant component of the recorded gains in the current year third quarter. Long-term rates have been rising and in this interest rate environment, purchased caps will show favorable fair value gains. Such gains are unrealized and will also reverse if the caps are held to their contractual maturities.
Net interest income in the current year third quarter was $153.3 million, slightly lower than $157.7 million in the prior year period. Net interest income is the primary contributor to Net Income for the FHLBNY. Favorable increases from higher intermediation volume of interest-bearing assets, principally advance volume, was offset by the impact of unfavorable rate related changes in the current year third quarter compared to prior year period. The Bank earned considerably lower interest income from investing its members’ capital to fund interest-earning assets in the low interest rate environment in the current year third quarter. The cost of debt, relative to yields from invested assets, continued to decline, and the interest margin in the current year third quarter widened from the prior year period and partly offset the unfavorable impact of rate related changes, although margins appear to be gradually narrowing. The Bank funded a significant percentage of its balance sheet assets utilizing a mix of discount notes and short-term debt at advantageous spreads, although the Bank has reduced its reliance on discount notes in the current year quarter because of tightening spreads making discount notes less advantageous. Discount notes have maturities ranging from overnight to 365 days.

 

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FHLBanks’ issuances of long-term debt continued to be impacted by the general dislocation in the capital markets, and factors outside the control of the FHLBanks have generally made it 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 remained 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. That scenario appears to be gradually changing at least with respect to funding costs for 5-year and shorter maturity debt.
An other-than-temporary impairment (“OTTI”) of $3.7 million was recorded as a charge to earnings recorded in Other income (loss) in the current year third quarter. In the first two quarters, the Bank had also recorded a charge of $10.6 million. In the third quarter, management determined that three held-to-maturity private-label MBS had become credit impaired, and the Bank recognized a credit impairment of $1.5 million. The Bank’s impairment assessment of certain MBS that were previously determined to be OTTI also resulted in the recognition of $2.2 million in additional credit impairment charges, for a total charge of $3.7 million recorded through earnings in the current year. The charges represented the credit loss component of OTTI. The non-credit component of OTTI associated with the impairment in the third quarter was $26.5 million and was recorded as a loss in Accumulated other comprehensive income (loss). Although thirteen of the fifteen securities that have been impaired through the current year third quarter 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 impaired securities would not be fully supported by the two bond insurers. See Significant Accounting Policies and Estimates in Note 1 and Note 4 Held-to-maturity securities for more information about impairment methodology and bond insurer analysis.
Operating Expenses were $17.8 million for the current year third quarter, up by 7.6%, or $1.3 million, from the prior year third quarter. The Bank’s contribution towards the operating expenses of the Office of Finance and the Finance Agency was $1.8 million in the current year third quarter, up by 35.9% from $1.4 million for the prior year period.
REFCORP assessments were $35.1 million in current year third quarter, up by $25.1 million from the prior year third quarter. AHP assessments were $15.8 million, up by $11.1 million from the prior year period. Assessments are calculated on Net income before assessments and the increases were due to higher Net income in current year third quarter compared to prior year period.
Cash dividends of $1.40 per share of capital stock (5.6% annualized return on capital stock) was paid in the current year third quarter, compared to cash dividend of $1.62 per share of capital stock (6.50% annualized return on capital stock) paid in the prior year period.
Advances borrowed by members stood at $95.9 billion at September 30, 2009, a decline of $13.2 billion from the outstanding balance at December 31, 2008. Compared to balances at December 31, 2008, short-term fixed-rate advances, adjustable-rate advances, and overnight borrowings declined at September 30, 2009.

 

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Shareholders’ equity, the sum of Capital stock, Retained earnings, and Accumulated other comprehensive income (loss) was $5.7 billion at September 30, 2009, a decline of $206.6 million from December 31, 2008, primarily as a result of decline in members’ Capital stock. Capital stock at September 30, 2009 was $5.1 billion, a decline of $443.6 million as compared to December 31, 2008. The decrease in Capital stock was consistent with 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. Retained earning were $666.2 million, up by $283.4 million from December 31, 2008. Dividends paid out of retained earnings amounted to $191.4 million in the current year three quarters, compared to $250.1 million in the prior year periods.
Accumulated other comprehensive income (loss), also a component of shareholders’ equity was a loss of $147.6 million at September 30, 2009 compared to a loss of $101.2 million at December 31, 2008, and comprised of net unrealized losses from cash flow hedging activities, additional liabilities on employee pension plans, net unrealized fair value losses on available-for-sale securities, and non-credit component of OTTI on held-to-maturity securities.
Year-to-date 2009 Highlights
The FHLBNY reported year-to-date Net income of $474.8 million, or $8.93 per share, compared with $214.0 million, or $4.55 per share for the prior year period.
Net interest income was $583.5 million for the current year period, up $114.8 million to $468.7 million from the prior year period. The primary drivers were (1) an increase in transaction volume in the current year period, and (2) a decline in debt costs relative to earnings from advances to members and investments. Increased use of short-term debt and discount notes, which continued to be issued to investors at advantageous spreads, resulted in improved net interest margin. The favorable gains were partly offset by lower earnings from the deployment of member capital to fund interest earning-assets because of the lower interest rate environment in the current year period.
Net realized and unrealized gain (loss) from derivatives and hedging activities was a gain of $124.6 million in the current period. In contrast, the Bank recorded a loss of $65.2 million from derivatives and hedging activities for the prior year period.
The Bank’s analysis of its investments determined that fifteen held-to-maturity private-label MBS were credit impaired and to be OTTI, and $14.3 million was recorded as a charge to Other income (loss) in the current year period. Although thirteen securities are insured by Ambac and MBIA, the Bank’s analysis of the two bond insurers concluded that future credit losses due to projected collateral shortfalls of the impaired securities would not be fully supported by the two bond insurers. The non-credit component of OTTI recorded in Accumulated other comprehensive income through the third quarter was $103.9 million.

 

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2009 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 financial crises in the U.S. markets and economy and the global economic slowdown is expected to continue through 2009 and 2010. The resulting loss of confidence across global and local markets has created liquidity crises in the financial markets. In response to these circumstances, the U.S. Treasury, the Federal Reserve System and the FDIC have taken a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including capital injections, guarantees of bank liabilities and the acquisition of illiquid assets from banks. These U.S. government initiatives through guarantees in the capital markets may have resulted in structural changes in the debt market, which in turn may have far-reaching impact on the ability of the FHLBanks to compete for funds in the financial markets. We are unable at this time to predict the outcome of these changes.
The outlook for the remainder of 2009 is also predicated on the direction of the U.S. economy, particularly the slowdown in the housing market, as well as the continued uncertainties in the financial markets. Against that backdrop, management of the Bank believes it is also difficult to predict member demand for advances, which are the primary focus of the FHLBNY’s operations and the principal factor that impacts its operating results. Earnings in 2008 were adversely impacted by the provision for credit losses resulting from the bankruptcy filing of Lehman Brothers Holdings Inc. and its subsidiary Lehman Brothers Special Financing Inc. Bankruptcy proceedings are ongoing.
A credit OTTI charge of $3.7 million was recorded for the FHLBNY’s MBS portfolios in the third quarters of 2009, which increased the cumulative credit impairment losses recognized to $14.3 million through the current year third quarter. Impairment was recorded despite the fact that many of the credit impaired bonds are insured by bond insurers, Ambac and MBIA, because it was deemed unlikely that MBIA and Ambac would be able to perform under their contractual obligations to support all projected future cash flow shortfalls. 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, or if the presumption of the ability of monoline insurers to support the insured securities that are considered to be dependent on insurance is negatively impacted by their future financial performance, additional other-than-temporary impairment may occur in future periods. Recognition of additional credit impairment would negatively impact the FHLBNY’s Net income.
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, the interest rate environment, and the outlook for the economy. Members may choose to prepay advances, which may incur 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, which a member is required to purchase 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 and the FHLBNY cannot renew outstanding advances or provide new advances to former members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight advance lending.

 

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In the FHLBNY’s membership district, the housing markets in New York and New Jersey appear to have fared relatively better than the housing market in general so far; some forecasts are predicting that the New York and New Jersey housing markets may yet experience further downturn. The Puerto Rico economy has been in recession for several years and forecasts are that it will continue.
The FHLBNY earns income from investing its members’ capital to fund interest-earning assets. The two principal factors that impact earnings from capital are the average amount of capital outstanding in a period and the interest rate environment in the period. 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. On the other hand, if member borrowings continue to grow, capital will grow and provide a higher potential for earnings.
The FHLBNY’s primary source of funds is the sale of consolidated obligations in the capital markets, and its 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, if at all, 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. Following the conservatorship of Fannie Mae and Freddie Mac, market pricing of FHLBank issued debt indicates that market participants believe that obligations of the two GSEs offer lower credit risk than FHLBank debt obligations, which are generally grouped into the same GSE asset class as Fannie Mae and Freddie Mac. As a result, investors are more likely to require a premium to acquire FHLBank debt relative to debt issued by Fannie Mae and Freddie Mac. The cost of the FHLBanks’ longer-term debt has also increased sharply relative to LIBOR as investors were only willing to purchase debt with very short-term maturities. To the extent the FHLBanks receive sub-optimal funding, the Bank’s member institutions may in turn 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 Bank’s member institutions’ borrowing choices may also be limited.
A significant amount of FHLBank bonds have matured through the third quarter of 2009 and refunding needs have been significant for medium and long-term bonds. If the bond market cannot support future issuances of medium and long-term bonds, it will put greater pressure on the FHLBank bonds and investors may demand higher yields. Alternatively, the FHLBanks may resort to the issuance of discount notes, which have maturities of up to a year only, to fill any refunding gap. Discount notes may themselves face increased challenges as competition increases from Treasury bills as the Treasury funds multiple programs implemented for the current crises. The impact of the recession may reduce member demand for liquidity and may reduce the pressure on the FHLBanks to refinance maturing bonds in 2009.

 

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Selected financial data are presented below (Unaudited)
                                                 
Statements of Condition   September 30,     December 31,  
(dollars in millions)   2009     2008     2007     2006     2005     2004  
 
                                               
Investments (1)
  $ 18,741     $ 14,195     $ 25,034     $ 20,503     $ 20,945     $ 17,271  
Interest bearing balance at FRB **
          12,169                          
Advances
    95,945       109,153       82,090       59,012       61,902       68,507  
Mortgage loans
    1,336       1,458       1,492       1,483       1,467       1,178  
Total assets
    117,604       137,540       109,245       81,579       84,761       87,347  
Deposits and borrowings
    2,276       1,452       1,606       2,266       2,650       2,297  
Consolidated obligations
    108,056       128,587       101,117       74,234       77,279       80,157  
Mandatorily redeemable capital stock
    128       143       239       110       18       127  
AHP liability
    145       122       119       102       91       82  
REFCORP liability
    39       5       24       17       14       10  
Capital stock
    5,142       5,586       4,368       3,546       3,590       3,655  
Retained earnings
    666       383       418       369       291       223  
Equity to asset ratio (2)
    4.81 %     4.27 %     4.35 %     4.79 %     4.58 %     4.44 %
                                                                         
    Three months ended     Nine months ended        
Statements of Condition   September 30,     September 30,     Years ended December 31,  
Averages (dollars in millions)   2009     2008     2009     2008     2008     2007     2006     2005     2004  
 
                                                                       
Investments (1)
  $ 19,764     $ 24,592     $ 5,053     $ 3,429     $ 2,253     $ 22,155     $ 19,431     $ 19,347     $ 16,292  
Interest bearing balance at FRB **
                8,062             1,322                          
Advances
    96,704       93,246       100,574       88,040       92,617       65,454       64,658       63,446       65,289  
Mortgage loans
    1,357       1,454       1,403       1,466       1,465       1,502       1,471       1,360       928  
Total assets
    120,754       120,599       128,215       114,537       119,710       89,961       86,319       85,254       84,344  
Interest-bearing deposits and other borrowings
    2,083       1,653       2,006       1,998       2,003       2,202       1,709       2,100       1,971  
Consolidated obligations
    109,125       111,452       116,171       104,937       109,691       82,233       79,314       77,629       76,105  
Mandatorily redeemable capital stock
    128       154       135       174       166       146       51       56       238  
AHP liability
    139       123       132       122       122       108       95       84       83  
REFCORP liability
    23       8       23       10       6       10       9       7       4  
Capital stock
    5,195       5,046       5,315       4,701       4,923       3,771       3,737       3,604       3,554  
Retained earnings
    611       388       522       391       381       362       314       251       159  
 
Operating Results and other data   Three months ended     Nine months ended        
(dollars in millions)   September 30,     September 30,     Years ended December 31,  
(except earnings and dividends per share)   2009     2008     2009     2008     2008     2007     2006     2005     2004  
 
                                                                       
Net interest income (3)
  $ 154     $ 158     $ 585     $ 469     $ 694     $ 499     $ 470     $ 395     $ 268  
Net income
    140       40       475       214       259       323       285       230       161  
Dividends paid in cash (6)
    74       76       191       250       294       273       208       162       66  
AHP expense
    16       5       53       25       30       37       32       26       19  
REFCORP expense
    35       10       119       53       65       81       71       58       40  
Return on average equity* (4)
    9.79 %     2.95 %     11.06 %     5.68 %     4.95 %     7.85 %     7.04 %     5.97 %     4.34 %
Return on average assets*
    0.46 %     0.13 %     0.50 %     0.25 %     0.22 %     0.36 %     0.33 %     0.27 %     0.19 %
Operating expenses
  $ 18     $ 17     $ 54     $ 49     $ 66     $ 67     $ 63     $ 59     $ 51  
Operating expenses ratio* (5)
    0.06 %     0.05 %     0.06 %     0.06 %     0.06 %     0.07 %     0.07 %     0.07 %     0.06 %
Earnings per share
  $ 2.70     $ 0.79     $ 8.93     $ 4.55     $ 5.26     $ 8.57     $ 7.63     $ 6.36     $ 4.55  
Dividend per share
  $ 1.40     $ 1.62     $ 3.54     $ 5.67     $ 6.55     $ 7.51     $ 5.59     $ 4.50     $ 1.83  
Headcount (Full/part time)
    259       251       259       251       251       246       232       221       210  
     
(1)   Investments include held-to-maturity securities, available for-sale securities, Federal funds, and loans to other FHLBanks.
 
(2)   Equity to asset ratio is capital stock plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets.
 
(3)   Net interest income is net interest income before the provision for credit losses on mortgage loans.
 
(4)   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).
 
(5)   Operating expenses as a percentage of total average assets.
 
(6)   Excludes dividends paid to non members classified as interest expense under the accounting standards for certain financial instruments with characteristics of both liabilities and equity.
 
*   Annualized.
 
**   FRB program commenced in October 2008. On July 1, 2009, the Bank was no longer eligible to collect interest on excess balances. The average balance is annualized YTD.

 

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Results of Operations
The following section provides a comparative discussion of the FHLBNY’s results of operations for the current year and prior year third quarter and year-to-date periods. For a discussion of the significant 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 27, 2009.
The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations, and is 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, realized and unrealized gains and losses from derivatives and hedging activities, losses from the recognition of credit impairment on investments, and earnings from shareholders’ capital.
Net income
The FHLBNY reported current year third quarter Net income of $140.2 million, or $2.70 per share, compared with Net income of $39.8 million, or $0.79 per share in the prior year period. Current year-to-date Net income was $474.8 million, or $8.93 per share, compared with prior year period Net income of $214.0 million, or $4.55 per share.
Net interest income in the current year third quarter was $153.3 million, slightly lower than $157.7 million in the prior year period. Net interest income is the primary contributor to Net Income for the FHLBNY. Favorable increases from higher intermediation volume of interest-bearing assets, principally advance volume, was offset by the impact of unfavorable rate related changes in the current year third quarter compared to prior year period. The Bank earned lower interest income from investing its members’ capital to fund interest-earning assets in the lower interest rate environment in the current year third quarter. The cost of debt, relative to yields from invested assets, continued to decline, and interest margin in the current year third quarter widened from the prior year period and partly offset the impact of rate related unfavorable changes, although margins appear to be gradually narrowing. The Bank funded a significant percentage of its balance sheet assets utilizing a mix of discount notes and short-term debt at advantageous spreads. Discount notes have maturities ranging from overnight to 365 days. In the current year third quarter, the Bank has reduced its reliance on discount notes, relative to prior periods because of tightening spreads making discount notes less advantageous.
Net interest income was $583.5 million for the current year-to-date period, up by $114.8 million from the prior year period. The primary driver was the decline in debt costs relative to earnings from advances to members and investments as the Bank issued greater amounts of discount notes during most of the first two quarters of the current year at advantageous spreads to finance a significant percentage of its balance sheet assets.

 

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The credit portion of OTTI of $3.7 million was recorded as a charge to current year third quarter earnings, and represented the credit loss component of OTTI on (1) Three private-label held-to-maturity MBS, two insured by Ambac, and one uninsured security deemed to be credit impaired in the current year third quarter, and (2) Seven private-label held-to-maturity securities insured by Ambac and MBIA that had been previously deemed to be OTTI.
All ten securities, including the insured securities, were determined to be credit impaired, as it was deemed unlikely that the two bond insurers would be able to perform under their contractual obligation to support projected shortfall in expected cash flows to be collected. On a year-to-date basis, the Bank has recorded $14.3 million in credit impairment charges through earnings.
Reported Net realized and unrealized loss from derivative and hedging activities (“hedging activities” or “derivative and hedging activities”) was a gain of $59.6 million in the current year third quarter in contrast to a loss of $25.5 million in the prior year period. On a year-to-date basis, the Bank recorded a gain of $124.6 million compared to a loss of $65.2 million in the prior year period. In order to manage the FHLBNY’s interest rate risk profile, management of the FHLBNY routinely uses derivatives to manage the interest rate risk inherent in the Bank’s assets and liabilities. The hedging gains were primarily due to (1) Favorable fair value changes of interest rate swaps and options designated as economic hedges of debt issued by the FHLBNY, and (2) Reversal of unfavorable fair value changes recorded in the prior year periods. When derivative instruments are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are unrealized will generally reverse over time.
Operating expenses were $17.8 million for the current year third quarter, up by $1.3 million from the prior year period. On a year-to-date basis, Operating expenses were $54.0 million, up from $49.5 million in the prior year period. REFCORP assessments were $35.1 million in current year third quarter, up by $25.1 million from the prior year period. AHP assessments were $15.8 million, up by $11.1 million from the prior year period. On a year-to-date basis, the combined REFCORP and AHP assessments were $172.1 million in the current year period, up from $78.3 million in the prior year period. Assessments are calculated on Net income before assessments and the increases were due to higher Net income in current year periods compared to prior year periods.
The annualized return on average equity (“ROE”), which is Net income divided by average Capital stock, Retained earnings, and Accumulated other comprehensive income, in the current year third quarter was 9.8% compared with 3.0% for the prior year period. On a year-to-date basis, ROE was 11.1% for the current year period, compared to 5.7% for the prior year period.

 

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Interest Income
Interest income from advances and investments in mortgage-backed securities are the principal source of income for the FHLBNY. Changes in both rate and intermediation volume (average interest-yielding assets) explain the change in the current year from the prior year.
The principal components of interest income are summarized below (dollars in thousands):
                                                 
    Three months ended September 30,     Nine months ended September 30,  
                    Percentage                     Percentage  
    2009     2008     Variance     2009     2008     Variance  
Interest Income
                                               
Advances
  $ 240,573     $ 678,896       (64.56 )%   $ 1,094,089     $ 2,211,823       (50.53 )%
Interest-bearing deposits
    1,014       3,240       (68.70 )     19,054       17,086       11.52  
Federal funds sold
    1,864       21,316       (91.26 )     1,933       69,921       (97.24 )
Available-for-sale securities
    6,590       24,441       (73.04 )     22,881       57,016       (59.87 )
Held-to-maturity securities
                                               
Long-term securities
    111,232       138,412       (19.64 )     355,916       396,660       (10.27 )
Certificates of deposit
    851       51,287       (98.34 )     1,392       212,525       (99.35 )
Mortgage loans held-for-portfolio
    17,405       19,316       (9.89 )     54,679       58,348       (6.29 )
Loans to other FHLBanks and other
    1       30       (96.67 )     1       33       (96.97 )
 
                                   
 
                                               
Total interest income
  $ 379,530     $ 936,938       (59.49 )%   $ 1,549,945     $ 3,023,412       (48.74 )%
 
                                   
Impact of hedging advances — Cash flows from interest rate swaps are a critical component of interest income earned from 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 convertible or 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. In the current year and prior year periods, 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 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):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Advance Interest Income
                               
Advance interest income before adjustment for interest rate swaps
  $ 743,687     $ 850,236     $ 2,345,699     $ 2,551,947  
Net interest adjustment from interest rate swaps 1
    (503,114 )     (171,340 )     (1,251,610 )     (340,124 )
 
                       
 
                               
Total Advance interest income reported
  $ 240,573     $ 678,896     $ 1,094,089     $ 2,211,823  
 
                       
     
1   Interest portion only
In an interest rate hedge of fixed-rate advances, the swaps are structured to effectively convert the combined cash flows of the advances and the swaps to LIBOR-based cash flows. In compliance with the terms of the swap agreement, the FHLBNY pays the swap counterparty fixed-rate cash flows, which typically mirrors the coupon on the advance. In return, the swap counterparty pays the FHLBNY a pre-determined spread plus the prevailing LIBOR, which by agreement re-sets generally every three months. In the table above, the unfavorable cash flow patterns of the interest rate swaps are 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 it overall net interest spread objective.

 

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Under GAAP, net interest adjustments from derivatives as reported in the table above may be offset against the hedged financial instrument (e.g. advance) only if the derivative is in a hedge qualifying relationship. If the hedge does not qualify, and the Bank designates the hedge as an economic hedge, the net interest adjustments from derivatives are not recorded with the advance. Instead, the net interest adjustments from swaps are recorded in Other income (loss) as a Net realized and unrealized gains and losses from 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 in the current year or prior year periods related to swaps associated with advances.
Interest Expense
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 may be short, medium- and long-term, 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 generally issued to fund advances and investments with shorter-interest rate reset characteristics.
The principal categories of Interest Expense are summarized below (dollars in thousands):
                                                 
    Three months ended September 30,     Nine months ended September 30,  
                    Percentage                     Percentage  
    2009     2008     Variance     2009     2008     Variance  
Interest Expense
                                               
Consolidated obligations-bonds
  $ 191,708     $ 628,394       (69.49 )%   $ 783,695     $ 1,952,228       (59.86 )%
Consolidated obligations-discount notes
    31,647       141,309       (77.60 )     173,228       559,153       (69.02 )
Deposits
    516       7,370       (93.00 )     2,002       33,235       (93.98 )
Mandatorily redeemable capital stock
    1,807       1,950       (7.33 )     5,478       8,884       (38.34 )
Cash collateral held and other borrowings
          242       (100.00 )     49       982       (95.01 )
 
                                   
 
                                               
Total interest expense
  $ 225,678     $ 779,265       (71.04 )%   $ 964,452     $ 2,554,482       (62.24 )%
 
                                   
Interest expense is principally the coupon payments to investors holding the Bank’s consolidated obligation debt. Recorded interest expense in the Statements of Income is adjusted for the cash flows associated with interest rate swaps in which 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. The Bank generally hedges its long-term fixed-rate bonds and almost all fixed-rate callable bonds in hedges that qualify for hedge accounting. In the current year and prior year periods, the Bank economically hedged certain floating-rate bonds that were not indexed to 3-month LIBOR. The Bank also economically hedged certain short-term fixed-rate debt and discount notes because it believed that the hedges would not be highly effective in offsetting changes in the fair values of the debt and the swap.

 

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Impact of hedging debt — Cash flows from interest rate swaps are an important component of interest expense on 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 convert 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 issued to indices other than 3-month LIBOR (Prime, Federal funds, 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 the impact of interest rate swaps (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Consolidated bonds and discount notes-Interest expense
                               
Bonds-Interest expense before adjustment for swaps
  $ 343,175     $ 747,014     $ 1,167,845     $ 2,240,456  
Discount notes-Interest expense before adjustment for swaps
    31,647       141,309       173,702       559,153  
Net interest adjustment for interest rate swaps 1
    (151,467 )     (118,620 )     (384,624 )     (288,228 )
 
                       
 
                               
Total Consolidated bonds and discount notes-interest expense reported
  $ 223,355     $ 769,703     $ 956,923     $ 2,511,381  
 
                       
     
1   Interest portion only
Generally, in an interest rate hedge of fixed-rate debt, the swaps are structured to effectively convert the combined cash flows of the consolidated obligation bonds and the swaps to 3-month LIBOR-based cash flows. In compliance with the terms of the swap agreement, the FHLBNY pays the swap counterparty generally 3-month LIBOR (which re-sets every 3 month to prevailing 3-month LIBOR) adjusted for a fixed spread. In return, the swap counterparty pays the FHLBNY fixed-rate cash flows, which typically mirrors the coupon on the bonds. In the table above, the favorable cash flow patterns of the interest rate swaps are indicative of the declining LIBOR rates (the FHLBNY’s obligation) compared to fixed-rate obligation of the swap counterparty. The Bank is generally indifferent to changes in the cash flow patterns as it typically hedges its fixed-rate advances to effectively receive LIBOR based floating-rate cash flows, and achieves it overall net interest spread objective.
Under GAAP, net interest adjustments from derivatives (as reported in the table above) may be offset against the hedged financial instrument (e.g. consolidated obligation bonds and discount notes) only if the derivative is in a hedge qualifying relationship. If the hedge does not qualify, the Bank designates the hedge as an economic hedge, the net interest adjustments from derivatives are not recorded with the hedged debt. Instead, the net interest adjustments from swaps are recorded in Other income (loss) as a Net realized and unrealized gains and losses from derivatives and hedging activities. Thus, the accounting designation of a hedge may have a significant impact on reported Interest expense from consolidated obligation bonds and discount notes.

 

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In the current year third quarter and year-to-date periods, significant amounts of bonds and discount notes were hedged on an economic basis primarily because of the uncertainty whether the hedges would be highly effective in offsetting changes in fair values of the debt and the derivatives. Generally, all floating-rate bonds indexed to the Federal Funds Effective rate, the Prime Rate, and the 1-month LIBOR rates were hedged on an economic basis. Certain longer-term discount notes (which have maturities up to one year) were also hedged on an economic basis, as were certain short-term fixed-rate bonds, all for the reason that the Bank was not certain that the hedges would be highly effective. The net interest adjustments were a favorable cash flows of $19.1 million, associated with all economic swaps. On a GAAP basis, the favorable adjustments were not recorded to reduce Interest expense and were instead recorded as gain from hedging activities in Other income as a Net realized and unrealized gains and losses from derivatives and hedging activities. The impact on Net Income was zero. In the prior year period, the net interest adjustments were unfavorable and the impact to Interest expense and hedging activities was in reverse. Unfavorable net interest adjustments from swaps designated as economic hedges of debt was $20.7 million that could not be recorded under GAAP to increase Interest expense, but had to recorded as a loss from hedging activities in the prior year period. Impact on Net Income was also zero.
On a year-to-date basis, the net interest from swaps designated as economic hedges were $36.9 million unfavorable adjustments for the current year and the prior year periods. Under GAAP, the unfavorable adjustments could not be recorded as an increase to Interest expense. Instead the adjustments were recorded as a loss from hedging activities. The impact on Net income would sum to zero.
Net interest income
Net interest income is the principal source of revenue for the Bank, and represents the difference between income from interest-earning assets and interest expense paid on interest-bearing liabilities. Net interest income is impacted by a variety of factors — 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 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’s deploys the hedging strategies to protect future Net interest income, but may reduce income in the short-run, although 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 are non-interest bearing, is another important consideration 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 and 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.

 

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Net interest income after provision for credit losses on mortgage loans was $153.3 million for the current year third quarter, slightly down from $157.7 million from the prior year third quarter. Net interest income is the principal source of revenue for the Bank. It represents the difference between income from interest-earning assets and interest expense paid on interest-bearing liabilities. Volume, as measured by average earning assets minus interest costing liabilities, was higher in the current year third quarter relative to prior year period and contributed $34.9 million in higher Net interest income. The favorable contribution from volume increases were offset by unfavorable rate related changes in yields from earning assets minus yields paid on liabilities, which resulted in a decline in Net interest income by $38.8 million in the current year third quarter. The Bank earned lower interest income from investing its members’ capital to fund interest-earning assets in the low interest rate environment in the current year third quarter.
On a year-to-date basis, Net interest income after provision for credit losses on mortgage loans was $583.5 million for the current year period, up 24.5% or $114.8 million from the prior year period. Volume increased, primarily from advances, and contributed $98.8 million to the increase. Rate related changes in yields from earning assets minus yields paid on interest costing liabilities was also favorable and contributed $17.7 million. Decline in debt costs relative to earnings from advances to members and investments was a factor in improved Net interest margin as the Bank, reacting to market place demand for shorter-term bonds, increased issuances of short-term debt and discount notes to fund its assets at a net favorable spread. The Bank earned lower interest income from investing its members’ capital to fund interest-earning assets in the lower interest rate environment in the current year period relative to prior year period.

 

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The following tables summarize key changes in the components of Net interest income (dollars in thousands):
                         
    Three months ended September 30,  
                    Percentage  
    2009     2008     Variance  
Interest Income
                       
Advances
  $ 240,573     $ 678,896       (64.56 )%
Interest-bearing deposits
    1,014       3,240       (68.70 )
Federal funds sold
    1,864       21,316       (91.26 )
Available-for-sale securities
    6,590       24,441       (73.04 )
Held-to-maturity securities
                       
Long-term securities
    111,232       138,412       (19.64 )
Certificates of deposit
    851       51,287       (98.34 )
Mortgage loans held-for-portfolio
    17,405       19,316       (9.89 )
Loans to other FHLBanks and other
    1       30       (96.67 )
 
                 
 
                       
Total interest income
    379,530       936,938       (59.49 )
 
                 
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    191,708       628,394       (69.49 )
Consolidated obligations-discount notes
    31,647       141,309       (77.60 )
Deposits
    516       7,370       (93.00 )
Mandatorily redeemable capital stock
    1,807       1,950       (7.33 )
Cash collateral held and other borrowings
          242       (100.00 )
 
                 
 
                       
Total interest expense
    225,678       779,265       (71.04 )
 
                 
 
                       
Net interest income before provision for credit losses
  $ 153,852     $ 157,673       (2.42 )%
 
                 
                         
    Nine months ended September 30,  
                    Percentage  
    2009     2008     Variance  
Interest Income
                       
Advances
  $ 1,094,089     $ 2,211,823       (50.53 )%
Interest-bearing deposits
    19,054       17,086       11.52  
Federal funds sold
    1,933       69,921       (97.24 )
Available-for-sale securities
    22,881       57,016       (59.87 )
Held-to-maturity securities
                       
Long-term securities
    355,916       396,660       (10.27 )
Certificates of deposit
    1,392       212,525       (99.35 )
Mortgage loans held-for-portfolio
    54,679       58,348       (6.29 )
Loans to other FHLBanks and other
    1       33       (96.97 )
 
                 
 
                       
Total interest income
    1,549,945       3,023,412       (48.74 )
 
                 
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    783,695       1,952,228       (59.86 )
Consolidated obligations-discount notes
    173,228       559,153       (69.02 )
Deposits
    2,002       33,235       (93.98 )
Mandatorily redeemable capital stock
    5,478       8,884       (38.34 )
Cash collateral held and other borrowings
    49       982       (95.01 )
 
                 
 
                       
Total interest expense
    964,452       2,554,482       (62.24 )
 
                 
 
                       
Net interest income before provision for credit losses
  $ 585,493     $ 468,930       24.86 %
 
                 

 

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The Bank deploys hedging strategies to protect future net interest income. With an interest rate swap strategy, the Bank generally attempts to convert its fixed-rate interest income and expense to 3-month LIBOR (floating-rate cash flows), and certain floating-rate debt not linked to 3-month LIBOR. The Bank is generally indifferent to net swap interest expense or income since the interest-rate exchange between the Bank and swap counterparties are designed to achieve the Bank’s Net interest rate spread objectives when considered together with the hedged assets and liabilities.
Net interest accruals of derivatives designated in a fair value or cash flow hedge qualifying under the derivatives and hedge accounting rules are recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities, and may have a significant impact on Net interest income.
Under GAAP, net interest adjustments from derivatives (as reported in the table below) may be offset against the hedged financial instrument (e.g. advances, consolidated obligation bonds and discount notes) only if the derivative is in a qualifying hedge relationship. If the hedge does not qualify and the Bank designates the hedge as an economic hedge, the net interest adjustments from the derivatives are not recorded with the hedged asset or liability. Instead, the net interest adjustments from swaps are recorded in Other income (loss) as a Net realized and unrealized gains and losses from derivatives and hedging activities. Thus, the accounting designation of a hedge may have a significant impact on reported Net interest income.
The following table summarizes Net interest adjustments from hedge qualifying interest-rate swaps to Net interest income (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
 
                               
Interest Income
  $ 882,644     $ 1,108,278     $ 2,801,555     $ 3,363,536  
Net interest adjustment from interest rate swaps
    (503,114 )     (171,340 )     (1,251,610 )     (340,124 )
 
                       
Reported Interest Income
    379,530       936,938       1,549,945       3,023,412  
 
                       
 
                               
Interest Expense
    377,145       897,885       1,349,076       2,842,710  
Net interest adjustment from interest rate swaps
    (151,467 )     (118,620 )     (384,624 )     (288,228 )
 
                       
Reported Interest Expense
    225,678       779,265       964,452       2,554,482  
 
                       
 
                               
Net Interest income (Margin)
  $ 153,852     $ 157,673     $ 585,493     $ 468,930  
 
                       
 
                               
Net interest adjustment — interest rate swaps
  $ (351,647 )   $ (52,720 )   $ (866,986 )   $ (51,896 )
 
                       

 

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A significant amount of swaps were designated as economic hedges of consolidated obligation debt in a hedge 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. Under GAAP, interest income or expense from such derivatives are recorded as derivative gains and losses in Other income (loss) as a Net realized and unrealized gain (loss) from derivatives and hedging activities. In the current year third quarter, on an economic basis, the impact of derivatives would have been to increase Net interest income before provision for credit losses by $19.1 million, and to increase net interest spread by 7 basis points to 52 basis points. In contrast, in the prior year period, Net interest income before provision for credit losses on an economic basis would have been lower by $20.7 million, and net interest spread lower by 7 basis points to 30 basis points. On a year-to-date basis, the impact increased GAAP reported Net interest income by $36.9 in the current year and prior year periods, and had the effect of improving reported net interest spread by 5 basis points. On an economic basis, such interest accrual adjustments on swaps designated as economic hedges would not have been recorded as hedging gains and losses in Other income as a Net realized and unrealized gain (loss) from derivatives and hedging activities, and the impact on Net income would sum to zero.
The following table contrasts Net interest income, Net income spread and Return on earning assets between GAAP and economic basis1 (dollar amounts in thousands):
                                                 
    Three months ended September 30, 2009     Three months ended September 30, 2008  
    Amount     ROA     Net Spread     Amount     ROA   Net Spread  
 
                                               
GAAP net interest income
  $ 153,852       0.51 %     0.45 %   $ 157,673       0.52 %     0.37 %
 
                                               
Interest income (expense)
                                               
Swaps not designated in a hedging relationship
    19,141       0.06       0.07       (20,745 )     (0.07 )     (0.07 )
 
                                   
 
                                               
Economic net interest income
  $ 172,993       0.57 %     0.52 %   $ 136,928       0.45 %     0.30 %
 
                                   
                                                 
    Nine months ended September 30, 2009     Nine months ended September 30, 2008  
    Amount     ROA     Net Spread     Amount     ROA     Net Spread  
 
                                               
GAAP net interest income
  $ 585,493       0.61 %     0.53 %   $ 468,930       0.55 %     0.37 %
 
                                               
Interest income (expense)
                                               
Swaps not designated in a hedging relationship
    (36,869 )     (0.03 )     (0.05 )     (36,915 )     (0.04 )     (0.05 )
 
                                   
 
                                               
Economic net interest income
  $ 548,624       0.58 %     0.48 %   $ 432,015       0.51 %     0.32 %
 
                                   
     
1   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.

 

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Earnings from member capital — The FHLBNY earns income from investing its members’ capital to fund interest-earning assets. Member capital increased in the current year third quarter and year-to-date relative to prior year periods when the surge in advances borrowed by members occurred in the fourth quarter of 2008. As a result, deployed capital, which is capital stock, retained earnings and net non-interest bearing liabilities grew and provided the FHLBNY with a significant source of income. The lower interest rate environment in the current year periods had an adverse rate related impact on earnings from member capital. An average $8.8 billion in deployed capital in the current year third quarter earned a yield of 1.25%, the annualized yield on aggregate interest-earning assets in the third quarter. In contrast, in the prior year third quarter, the Bank’s average deployed capital was $6.7 billion, significantly lower than the average in the current year, but earned a higher yield of 3.11%. Based on an assumption that deployed capital was invested to earn 1.25%, the annualized yield on aggregate earning assets in current year third quarter, and 3.11% in the prior year period, the Bank would have earned $27.6 million from deployed capital in current year third quarter, down from $51.7 million in the prior year period. Typically, the Bank earns relatively greater income in a higher interest rate environment on a given amount of average deployed capital. On a year-to-date basis, the contrast from earnings from deployed capital in the current year period compared to prior year period would have been more significant. In the current year period year-to-date, would have earned $111.5 million compared to $178.1 million in the prior year period.

 

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Spread/Yield Analysis:
The following table summarizes the Bank’s net interest income and net interest yield and provides an attribution of changes in rates and volumes of the FHLBNY’s interest-earning assets and interest-bearing liabilities for the third quarters of 2009 and 2008:
                                                 
    Three months ended  
    September 30, 2009     September 30, 2008  
            Interest                     Interest        
    Average     Income/             Average     Income/        
(dollars in thousands)   Balance     Expense     Rate 1     Balance     Expense     Rate 1  
Earning Assets:
                                               
Advances
  $ 96,703,710     $ 240,573       0.99 %   $ 93,245,965     $ 678,896       2.90 %
Certificates of deposit and others
    4,105,978       1,866       0.18       7,759,515       54,527       2.80  
Federal funds sold and other overnight funds
    5,105,043       1,864       0.14       3,911,620       21,316       2.17  
Investments
    12,907,450       117,822       3.62       13,548,202       162,853       4.78  
Mortgage and other loans
    1,360,907       17,405       5.07       1,464,801       19,346       5.25  
 
                                   
 
                                               
Total interest-earning assets
  $ 120,183,088     $ 379,530       1.25 %   $ 119,930,103     $ 936,938       3.11 %
 
                                   
 
                                               
Funded By:
                                               
Consolidated obligations-bonds
  $ 69,604,012     $ 191,708       1.09     $ 86,739,278     $ 628,394       2.88  
Consolidated obligations-discount notes
    39,520,933       31,647       0.32       24,712,661       141,309       2.27  
Interest-bearing deposits and other borrowings
    2,084,189       516       0.10       1,672,191       7,612       1.81  
Mandatorily redeemable capital stock
    127,964       1,807       5.60       153,827       1,950       5.04  
 
                                   
 
                                               
Total interest-bearing liabilities
    111,337,098       225,678       0.80 %     113,277,957       779,265       2.74 %
 
                                           
 
                                               
Capital and other non-interest- bearing funds
    8,845,990                     6,652,146                
 
                                   
 
                                               
Total Funding
  $ 120,183,088     $ 225,678             $ 119,930,103     $ 779,265          
 
                                       
 
                                               
Net Interest Income/Spread
          $ 153,852       0.45 %           $ 157,673       0.37 %
 
                                       
 
                                               
Net Interest Margin
                                               
(Net interest income/Earning Assets)
                    0.51 %                     0.52 %
 
                                           
     
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.

 

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The following table summarizes the Bank’s Net interest income and net interest yield and provides an attribution of changes in rates and volumes of the FHLBNY’s interest-earning assets and interest-bearing liabilities for the nine months ended September 30, 2009 and 2008:
                                                 
    Nine months ended  
    September 30, 2009     September 30, 2008  
            Interest                     Interest        
    Average     Income/             Average     Income/        
(dollars in thousands)   Balance     Expense     Rate 1     Balance     Expense     Rate 1  
Earning Assets:
                                               
Advances
  $ 100,573,968     $ 1,094,089       1.45 %   $ 88,040,082     $ 2,211,823       3.36 %
Certificates of deposit and others
    3,244,842       20,447       0.84       8,668,826       229,611       3.54  
Federal funds sold and other overnight funds
    9,640,541       1,933       0.03       3,475,434       69,921       2.69  
Investments
    12,660,109       378,797       4.00       12,191,208       453,676       4.97  
Mortgage and other loans
    1,404,958       54,679       5.20       1,470,088       58,381       5.30  
 
                                   
 
                                               
Total interest-earning assets
  $ 127,524,418     $ 1,549,945       1.62 %   $ 113,845,638     $ 3,023,412       3.55 %
 
                                   
 
                                               
Funded By:
                                               
Consolidated obligations-bonds
  $ 71,387,598     $ 783,695       1.47     $ 78,654,860     $ 1,952,228       3.32  
Consolidated obligations-discount notes
    44,783,185       173,228       0.52       26,281,678       559,153       2.84  
Interest-bearing deposits and other borrowings
    2,040,807       2,051       0.13       2,044,758       34,217       2.24  
Mandatorily redeemable capital stock
    135,084       5,478       5.42       174,156       8,884       6.81  
 
                                   
 
                                               
Total interest-bearing liabilities
    118,346,674       964,452       1.09 %     107,155,452       2,554,482       3.18 %
 
                                           
 
                                               
Capital and other non-interest- bearing funds
    9,177,744                     6,690,186                
 
                                   
 
                                               
Total Funding
  $ 127,524,418     $ 964,452             $ 113,845,638     $ 2,554,482          
 
                                   
 
                                               
Net Interest Income/Spread
          $ 585,493       0.53 %           $ 468,930       0.37 %
 
                                       
 
                                               
Net Interest Margin
                                               
(Net interest income/Earning Assets)
                0.61 %                     0.55 %
 
                                           

 

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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 table presents 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):
                         
    Three months ended  
    September 30, 2009 vs. September 30, 2008  
    Increase (decrease)  
    Volume     Rate     Total  
Interest Income
                       
Advances
  $ 25,244     $ (463,567 )   $ (438,323 )
Certificates of deposit and others
    (25,744 )     (26,947 )     (52,691 )
Federal funds sold and other overnight funds
    6,522       (25,974 )     (19,452 )
Investments
    (7,724 )     (37,307 )     (45,031 )
Mortgage loans and other loans
    (1,376 )     (535 )     (1,911 )
 
                 
 
                       
Total interest income
    (3,078 )     (554,330 )     (557,408 )
 
                 
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    (124,479 )     (312,207 )     (436,686 )
Consolidated obligations-discount notes
    84,907       (194,569 )     (109,662 )
Deposits and borrowings
    1,881       (8,977 )     (7,096 )
Mandatorily redeemable capital stock
    (329 )     186       (143 )
 
                 
 
                       
Total interest expense
    (38,020 )     (515,567 )     (553,587 )
 
                 
 
                       
Changes in Net Interest Income
  $ 34,942     $ (38,763 )   $ (3,821 )
 
                 
                         
    Nine months ended  
    September 30, 2009 vs. September 30, 2008  
    Increase (decrease)  
    Volume     Rate     Total  
Interest Income
                       
Advances
  $ 314,598     $ (1,432,332 )   $ (1,117,734 )
Certificates of deposit and others
    (143,533 )     (65,664 )     (209,197 )
Federal funds sold and other overnight funds
    123,919       (191,907 )     (67,988 )
Investments
    17,433       (92,312 )     (74,879 )
Mortgage loans and other loans
    (2,584 )     (1,085 )     (3,669 )
 
                 
 
                       
Total interest income
    309,833       (1,783,300 )     (1,473,467 )
 
                 
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    (180,209 )     (988,324 )     (1,168,533 )
Consolidated obligations-discount notes
    393,265       (779,190 )     (385,925 )
Deposits and borrowings
    (66 )     (32,100 )     (32,166 )
Mandatorily redeemable capital stock
    (1,991 )     (1,415 )     (3,406 )
 
                 
 
                       
Total interest expense
    210,999       (1,801,029 )     (1,590,030 )
 
                 
 
                       
Changes in Net Interest Income
  $ 98,834     $ 17,729     $ 116,563  
 
                 

 

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Non-Interest Income (Loss)
The principal components of non-interest income are described below:
Service fees — Service fees are derived primarily from providing correspondent banking services to members and fees earned on standby letters of credit. Service fees have declined over the years due to declining demand for such services. The Bank does not consider income from such services as a significant element of its operations.
Net realized and unrealized gain (loss) on derivatives and hedging activities — The Bank may designate a derivative as either a hedge of the fair value of a recognized fixed-rate asset or liability or an unrecognized firm commitment (fair value hedge), a forecasted transaction, or the variability of future cash flows of a floating-rate asset or liability (cash flow hedge). The Bank may also designate a derivative in 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 changes in the fair value of the derivative is not entirely offset by changes in the fair value of the hedged asset or liability, the net impact from hedging activities is recorded as hedge ineffectiveness.
Net interest accruals of derivatives designated in a 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 Accumulated other comprehensive income (loss).
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 determined 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 change 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.

 

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Redemption of Extinguishment of debt — The Bank retires debt principally to reduce future debt costs when the associated asset is either prepaid or terminated early. Typically, debt retirement is associated with the prepayments of advances and commercial mortgage-backed securities for which the Bank may receive prepayment fees. 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.
Non-Interest Income
The following table summarizes non-interest income (loss) (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Other income (loss):
                               
Service fees
  $ 1,101     $ 934     $ 3,181     $ 2,422  
Instruments held at fair value — Unrealized gain
    426       3,582       8,653       3,582  
 
                               
Total OTTI losses
    (30,169 )           (118,160 )      
Portion of loss recognized in other comprehensive income
    26,486             103,884        
 
                       
Net impairment losses recognized in earnings
    (3,683 )           (14,276 )      
 
                       
 
                               
Net realized and unrealized gain (loss) on derivatives and hedging activities
    59,639       (25,515 )     124,613       (65,196 )
Net realized gain from sale of available-for-sale and held-to-maturity securities
                721       1,058  
Provision for derivative counterparty credit losses
          (64,523 )           (64,523 )
Other
    (39 )     92       59       (42 )
 
                       
Total other income (loss)
  $ 57,444     $ (85,430 )   $ 122,951     $ (122,699 )
 
                       

 

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Net impairment losses recognized in earnings on held-to-maturity securities - Other-than-temporary impairment
An other-than-temporary impairment (“OTTI”) of $3.7 million was recorded as a charge to Other income (loss) in the current year third quarter. In the first two quarters, the Bank had also recorded a charge of $10.6 million. In the third quarter, management determined that three held-to-maturity private-label MBS had become credit impaired, and the Bank recognized a credit impairment of $1.5 million. The Bank’s impairment assessment of certain MBS that were previously determined to be OTTI also resulted in the recognition of $2.2 million in additional credit impairment charges, for a total charge of $3.7 million recorded through earnings in the current year third quarter. The charges represented the credit loss component of OTTI. The non-credit component of OTTI associated with the impairment in the third quarter was $26.5 million and was recorded as a loss in Accumulated other comprehensive income (loss). Although thirteen of the fifteen securities that have been impaired through the current year third quarter 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 impaired securities would not be fully supported by the two bond insurers.
On a year-to-date basis, the Bank’s analysis of its investments determined that fifteen held-to-maturity private-label MBS were credit impaired and to be OTTI, and $14.3 million was recorded as a charge to Other income (loss). The non-credit component of OTTI recorded in Accumulated other comprehensive income through the third quarter was $103.9 million. The Bank did not experience any OTTI during 2008 or 2007.
The table below summarizes the sources of the credit losses recognized year-to-date September 30, 2009 (dollars in thousands):
                                                                                         
            September 30, 2009  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
RMBS-Prime*
    1     $     $     $     $     $ 56,867     $ 54,687     $ (438 )   $ (2,766 )   $ (3,204 )   $  
HEL Subprime*
    14       35,616       20,653       181,995       117,651       62,461       38,392       (13,838 )     (101,118 )           (114,956 )
 
                                                                 
Total
    15     $ 35,616     $ 20,653     $ 181,995     $ 117,651     $ 119,328     $ 93,079     $ (14,276 )   $ (103,884 )   $ (3,204 )   $ (114,956 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
                                                                                         
            Q3 2009 activity  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
RMBS-Prime*
        $     $     $     $     $     $     $     $     $     $  
HEL Subprime*
    10       13,304       7,680       121,435       79,700       62,460       38,392       (3,683 )     (26,486 )           (30,169 )
 
                                                                 
Total
    10     $ 13,304     $ 7,680     $ 121,435     $ 79,700     $ 62,460     $ 38,392     $ (3,683 )   $ (26,486 )   $     $ (30,169 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
Bond insurer counterparty risks - The current weakened financial condition of Ambac Assurance Corp., (“Ambac”) and MBIA Insurance Corp (“MBIA”) creates a risk that these counterparties will fail to fulfill their claims paying obligations for certain insured private-label MBS owned by the FHLBNY. The FHLBNY has determined that the two monoline insurers are at risk with respect to their claims paying ability, and has also determined that the FHLBNY may rely on the two bond insurers to remain as viable financial guarantors until July 31, 2016 with respect to Ambac, and March 31, 2012 with respect to MBIA. The FHLBNY’s cash flow assessment has determined that absent bond insurance, certain private-label MBS will experience credit impairment in future periods, and has deemed such MBS as OTTI, and recorded credit impairment losses. If the financial condition of the two bond insurers worsens, it could result in a shortening of the length of time the securities could rely on the two bond insurers for cash flow support. This in turn would result in the recognition of additional credit impairment losses on securities already deemed OTTI.
The following table summarizes MBS insured by MBIA and Ambac, and identifies additional credit losses should the two bond insurers fail to provide any support effective September 2009. The analysis below is a point in time analysis and forecasted credit losses may be greater should the underlying collateral within the insured MBS perform worse than expected as of September 30, 2009 (in thousands):
                                                         
            September 30, 2009              
            Insurer MBIA     Cumulative OTTI Recorded     Additional  
    No. of     Amortized     Carrying     Fair     Credit     Non-credit     Credit losses if zero  
Ratings   Securities     Cost Basis     Value     Value     Loss     Loss     insurance assumed  
Impaired
    2     $ 30,242     $ 20,600       20,653     $ (5,370 )   $ (10,075 )   $ (1,036 )
Unimpaired
    1       2,948       2,948       2,337                    
 
                                         
Total
    3     $ 33,189     $ 23,548     $ 22,990     $ (5,370 )   $ (10,075 )   $ (1,036 )
 
                                         
                                                         
            September 30, 2009              
            Insurer Ambac     Cumulative OTTI Recorded     Additional  
    No. of     Amortized     Carrying     Fair     Credit     Non-credit     Credit losses if zero  
Ratings   Securities     Cost Basis     Value     Value     Loss     Loss     insurance assumed  
Impaired
    11     $ 174,462     $ 109,189       117,651     $ (7,411 )   $ (68,040 )   $ (5,804 )
Unimpaired
    2       36,400       36,400       22,853                    
 
                                         
Total
    13     $ 210,862     $ 145,590     $ 140,504     $ (7,411 )   $ (68,040 )   $ (5,804 )
 
                                         

 

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Earnings impact of Instruments held at fair value
Under the accounting standards on the fair value option (“FVO”) for financial assets and liabilities, the FHLBNY elected to carry certain consolidated obligation bonds at fair value. The Bank records the unrealized gains and losses on these liabilities in instruments held at fair value. In general, transactions elected for the fair value option are in economic hedge relationships. The notional amounts of interest rate swaps executed and outstanding at September 30, 2009 and 2008 were $2.4 billion and $589.0 million and were executed to offset the fair value volatility of consolidated obligation bonds elected under the fair value option.
The fair value adjustments on consolidated obligation bonds carried at fair value in the current year third quarter resulted in net unrealized gain of $0.4 million recorded in earnings, compared to a gain of $3.6 million in the prior year period. On a year-to-date basis, net fair value gains of $8.7 million were recorded in the current year period compared to $3.6 million in the prior year period. Gains in the current year-to-date period primarily represented the reversal of bonds that were in net unrealized loss positions at the beginning of the current year. When bonds recorded at fair value are held to maturity, their cumulative fair value changes sum to zero at maturity. These gains were partially offset by losses on derivatives that economically hedged the debt.
Earnings impact of derivatives and hedging activities — Net realized and unrealized gain (loss) from derivatives and hedging activities.
The FHLBNY reported the following net gains (losses) from derivatives and hedging activities (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Earnings impact of derivatives and hedging activities gain (loss):
                               
Derivatives designated as hedging instruments
                               
Cash flow hedges-ineffectiveness
  $     $     $     $ (9 )
Fair value hedges-ineffectiveness
    349       11,863       13,080       6,240  
Derivatives not designated as hedging instruments
                               
Economic hedges-fair value changes-options
    18,891       (8,204 )     49,557       (6,152 )
Net interest income-options
    (1,786 )     (19 )     (3,731 )     99  
Economic hedges-fair value changes-MPF delivery commitments
    47       141       (49 )     17  
Fair value changes-economic hedges 1
    21,218       (26,180 )     105,769       (46,108 )
Net interest expense-economic hedges 1
    18,382       (20,743 )     (37,708 )     (36,910 )
Balance sheet — Macro hedges swaps
    210       19,983       2,617       19,983  
Derivatives designated under fair value option
                               
Fair value changes-interest rate swaps/Bonds
    2,328       (2,356 )     (4,922 )     (2,356 )
 
                       
 
                               
Net impact on derivatives and hedging activities
  $ 59,639     $ (25,515 )   $ 124,613     $ (65,196 )
 
                       
     
1   Includes de minimis amount of net gains on member intermediated swaps.

 

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Key components of hedging activities recorded in the Statements of Income for the current and prior year second quarter and year-to-date recorded as a Net realized and unrealized gain (loss) from hedging activities are described below.
The recorded hedging gains for the current year quarter were primarily due to: — (1) Favorable changes in fair values of interest rate swaps designated in economic hedges of consolidated obligation bonds. (2) Favorable changes in fair values of interest rate caps designated in economic hedges of the balance sheet. In a rising rate environment, purchased caps will show favorable fair value gains. Such gains are unrealized and will also reverse if the caps are held to their contractual maturities. (3) Income recorded due to favorable cash flows associated with the interest rate exchange agreements of swaps designated as economic hedges.
Hedge ineffectiveness resulting from qualifying hedges of advances and consolidated obligation liabilities under the accounting standards for derivatives and hedging were not significant in the current year third quarter. Hedge ineffectiveness is typically the difference between changes in fair values of interest rate swaps and hedged consolidated obligation bonds and advances.
The recorded hedging gains for the year-to-date current year period were also primarily due to favorable changes in the fair values of interest rate swaps designated in economic hedges of consolidated obligation bonds and favorable changes in the fair values of interest rate caps, as well as the reversal of previously recognized unrealized net fair value losses on interest rate swaps. Favorable changes in the current year-to-date period were partly offset by unfavorable expense related to the cash flows (interest accruals) associated with the interest rate exchange agreements of swaps designated as economic hedges.
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 the Statements of Income 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 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 result in exchanges of cash payments or receipts. If a derivative is 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. In the current quarter, net cash flows were favorable and gains were recorded, in contrast to unfavorable net cash flows for the current year-to-date period.
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 a debt or 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 structure of a derivative and the hedged financial instrument.

 

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Economic hedges
  Interest rate swaps — In the current year three quarters, the primary economic hedges were : (1) Interest rate “Basis swaps” that synthetically converted floating-rate funding based on Prime rate, Federal funds rate, and the 1-month LIBOR rate to 3-month LIBOR rate. (2) Interest rate swaps hedging balance sheet risk. (3) Interest rate swaps hedging discount notes. (4) Interest-rate swaps hedging short-term fixed-rate consolidated obligation bonds. Changes in the fair values of interest rate swaps in economic hedges, often referred to as “one-sided marks” resulted in a net favorable fair value gains of $42.1 million in the current year third quarter and $65.8 million year-to-date. As described in the previous paragraph, most of the net fair value gains are reversal of previously recorded fair value losses. Included in the net gain were favorable cash flows (interest accruals) of $19.1 million recorded as income in the current year third quarter associated with the interest rate swaps in economic hedges; in contrast, on a year-to-date basis, included in the net gain the cash flow accrual was a loss of $36.9 million due to unfavorable cash flows associated with interest rate swaps designated in economic hedges.
  Interest rate caps — were also designated as economic hedges, and fair value changes of purchased caps resulted also contributed to recorded fair value gains from derivatives and hedging activities in the current year third quarter. The Bank has $1.9 billion (notional amount) in purchased interest rate caps and mitigates certain balance sheet risk metrics. The fair values of the caps were recorded as derivative assets in the Statements of Condition with an offset in the Statements of Income as Net realized and unrealized gain (loss) from derivatives and hedging activities. In a rising interest rate environment at September 30, 2009, relative to December 31, 2008, the fair values of interest rate caps exhibited favorable fair value gains, which will reverse over the contractual life of the caps if held to maturity.
Qualifying hedges under the accounting standards for derivatives and hedging
Net fair value changes from qualifying hedges under the accounting standards for derivatives and hedging resulted in recorded net fair value gain of $0.3 million in current year third quarter and $13.1 million year-to-date 2009. Typically, gains and losses in a qualifying hedge represent hedge ineffectiveness due to changes in fair values of hedged advances and debt from changes in the benchmark rate (LIBOR for the Bank) that are not entirely offset by changes in the fair values of the swaps.
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 Accumulated other comprehensive income (loss) in the Statements of Condition (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
Accumulated other comprehensive income/(loss) from cash flow hedges   2009     2008     2009     2008  
 
Beginning of period
  $ (26,402 )   $ (33,698 )   $ (30,191 )   $ (30,215 )
Net hedging transactions
          61             (6,100 )
Reclassified into earnings
    1,898       1,667       5,687       4,345  
 
                       
 
                               
End of period
  $ (24,504 )   $ (31,970 )   $ (24,504 )   $ (31,970 )
 
                       

 

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Cash Flow Hedges
There were no material amounts for the current or prior year first quarters that were reclassified from Accumulated other comprehensive income (loss) 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 $7.1 million of net losses recorded in Accumulated other comprehensive income (loss) will be recognized as a charge to earnings.
Debt Extinguishment
The Bank retired $500.0 million of consolidated obligation bond in the current year third quarter at a loss of $69.5 thousand. No debt was retired or transferred in the prior two quarters of 2009.
Other Expenses (Non-Interest Expense)
The primary components of Other expenses are Operating expenses and Assessments. Operating expenses included the administrative and overhead costs of operating the Bank and the operating costs of providing advances and managing collateral associated with the advances, managing the investment portfolios, and providing correspondent banking services to members.
The FHLBanks, including the FHLBNY, fund the cost of the Office of Finance, a joint office of the FHLBanks that facilitates issuing and servicing the consolidated obligations of the FHLBanks, preparation of the combined quarterly and annual financial reports, and certain other functions. The FHLBanks are also assessed the operating expenses of the Finance Agency, the regulator of the FHLBanks.
The following table sets forth the principal components of Other expenses (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
Other expenses:
                               
Operating
  $ 17,810     $ 16,549     $ 53,970     $ 49,489  
Finance Agency and Office of Finance
    1,834       1,350       5,663       4,268  
 
                       
Total other expenses
  $ 19,644     $ 17,899     $ 59,633     $ 53,757  
 
                       

 

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Operating Expenses
The following table summarizes the major categories of operating expenses (dollars in thousands):
                                 
    Three months ended September 30,  
            Percentage of             Percentage of  
    2009     total     2008     total  
 
                               
Salaries and employee benefits
  $ 12,075       67.80 %   $ 11,134       67.28 %
Temporary workers
    3       0.02       115       0.69  
Occupancy
    1,128       6.33       1,092       6.60  
Depreciation and leasehold amortization
    1,369       7.69       1,217       7.35  
Computer service agreements and contractual services
    1,395       7.83       945       5.71  
Professional and legal fees
    356       2.00       642       3.88  
Other*
    1,484       8.33       1,404       8.49  
 
                       
 
                               
Total operating expenses
  $ 17,810       100.00 %   $ 16,549       100.00 %
 
                       
                                 
    Nine months ended September 30,  
            Percentage of             Percentage of  
    2009     total     2008     total  
 
                               
Salaries and employee benefits
  $ 36,036       66.77 %   $ 33,515       67.72 %
Temporary workers
    128       0.24       220       0.44  
Occupancy
    3,273       6.06       3,097       6.26  
Depreciation and leasehold amortization
    4,020       7.45       3,575       7.22  
Computer service agreements and contractual services
    4,670       8.65       3,162       6.39  
Professional and legal fees
    1,144       2.12       1,604       3.24  
Other*
    4,699       8.71       4,316       8.73  
 
                       
 
                               
Total operating expenses
  $ 53,970       100.00 %   $ 49,489       100.00 %
 
                       
     
*   Other primarily represents — audit fees, Director fees and expenses, Insurance and telecommunications
Assessments
Each FHLBank is required to set aside a portion of earnings to fund its Affordable Housing Program (“AHP”) and to satisfy its Resolution Funding Corporation assessment (“REFCORP”). AHP assessments are set aside from Net income for future grants and contributions towards the program. REFCORP expenses are paid to the United States Treasury.
Both the REFCORP and AHP assessments are based on income and the increases reflect the change in pre-assessment income for the current year third quarter and year-to-date compared to the prior year periods.

 

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Financial Condition: Assets, Liabilities, and Capital
                                 
                    Net change in     Net change in  
(Dollars in thousands)   September 30, 2009     December 31, 2008     dollar amount     percentage  
Assets
                               
Cash and due from banks
  $ 1,189,158     $ 18,899     $ 1,170,259       NM %
Interest-bearing deposits
          12,169,096       (12,169,096 )     (100.00 )
Federal funds sold
    3,900,000             3,900,000       100.00  
Available-for-sale securities
    2,362,592       2,861,869       (499,277 )     (17.45 )
Held-to-maturity securities
                               
Long-term securities
    10,478,027       10,130,543       347,484       3.43  
Certificates of deposit
    2,000,000       1,203,000       797,000       66.25  
Advances
    95,944,732       109,152,876       (13,208,144 )     (12.10 )
Mortgage loans held-for-portfolio
    1,336,228       1,457,885       (121,657 )     (8.34 )
Accrued interest receivable
    354,934       492,856       (137,922 )     (27.98 )
Premises, software, and equipment
    14,596       13,793       803       5.82  
Derivative assets
    9,092       20,236       (11,144 )     (55.07 )
Other assets
    14,957       18,838       (3,881 )     (20.60 )
 
                       
 
                               
Total assets
  $ 117,604,316     $ 137,539,891     $ (19,935,575 )     (14.49 )%
 
                       
 
                               
Liabilities
                               
Deposits
                               
Interest-bearing demand
  $ 2,255,403     $ 1,333,750     $ 921,653       69.10 %
Non-interest bearing demand
    4,968       828       4,140       500.00  
Term
    15,600       117,400       (101,800 )     (86.71 )
 
                       
 
                               
Total deposits
    2,275,971       1,451,978       823,993       56.75  
 
                       
 
                               
Consolidated obligations
                               
Bonds
    69,670,836       82,256,705       (12,585,869 )     (15.30 )
Discount notes
    38,385,244       46,329,906       (7,944,662 )     (17.15 )
 
                       
Total consolidated obligations
    108,056,080       128,586,611       (20,530,531 )     (15.97 )
 
                       
 
                               
Mandatorily redeemable capital stock
    127,882       143,121       (15,239 )     (10.65 )
 
                               
Accrued interest payable
    337,221       426,144       (88,923 )     (20.87 )
Affordable Housing Program
    144,822       122,449       22,373       18.27  
Payable to REFCORP
    38,692       4,780       33,912       709.46  
Derivative liabilities
    871,744       861,660       10,084       1.17  
Other liabilities
    91,115       75,753       15,362       20.28  
 
                       
 
                               
Total liabilities
    111,943,527       131,672,496       (19,728,969 )     (14.98 )
 
                       
 
                               
Capital
    5,660,789       5,867,395       (206,606 )     (3.52 )
 
                       
 
                               
Total liabilities and capital
  $ 117,604,316     $ 137,539,891     $ (19,935,575 )     (14.49 )%
 
                       

 

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Balance sheet overview
At September 30, 2009, the FHLBNY’s Total assets were $117.6 billion, a decrease of $19.9 billion, or 14.5%, from December 31, 2008. 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.
Advances borrowed by members stood at $95.9 billion at September 30, 2009, a decline of $13.3 billion, or 12.1% from the outstanding balance at December 31, 2008. Member demand for advance borrowings in the current year third quarter has been concentrated in the longer-term fixed-rate advance products, and weak demand for short-term fixed-rate and adjustable-rate borrowings. It appears that members are attempting to lock-in longer maturity borrowings at prevailing interest rates. Outstanding amounts of short-term fixed-rate advances, adjustable-rate advances, and overnight borrowings declined at September 30, 2009 compared to outstanding balances at December 31, 2008. Decline of $1.5 billion in the recorded fair value basis of hedged advances from the amounts recorded at December 31, 2008 was another factor that explains the decline in advances as reported in the Statements of Condition at September 30, 2009.
At June 30, 2009, the Bank held $13.9 billion ($12.2 billion at December 31, 2008) in interest-earning demand balances at the FRB, which were reported as Interest-bearing deposits in the Statements of Condition. The liquid investment at the FRB is consistent with the Bank’s goals of maintaining liquidity for its members. Historically, the Bank has maintained a significant inventory of liquid Federal funds and short-term certificates deposits at highly rated financial institutions to ensure liquidity for its members’ borrowing needs, especially in the existing volatile credit markets. Commencing July, 1, 2009, the FRB will no longer pay interest to the FHLBNY for funds invested in excess of required reserves and it is likely that the Bank will utilize the federal funds market to achieve its goals of keeping liquid assets for its members needs.
Amortized cost basis of investments designated as available-for-sale MBS was $2.4 billion at September 30, 2009, down from $2.9 billion at December 31, 2008. Investments designated as available for sale were MBS issued by GSEs and are reported at their fair values. Fair values of MBS classified as available-for-sale were $2.4 billion at September 30, 2009, slightly down from $2.9 billion at December 31, 2008. Net unrealized fair value losses were $16.1 million at September 30, 2009, a significant improvement from net unrealized losses of $64.4 million at December 31, 2008.
Investments designated as held-to-maturity are recorded at carrying value. Carrying value is the amortized cost basis of the investment if a security is not determined to be OTTI. If a held-to-maturity security has been determined to be OTTI, amortized cost basis is adjusted to its fair value at the time of impairment and is the carrying value of the security. Carrying value is subsequently adjusted for accretion of non-credit portion of OTTI recorded in Accumulated other comprehensive income (loss). Carrying value is not subsequently adjusted to fair value unless additional OTTI is recognized. The carrying value of held-to-maturity MBS was $9.7 billion at September 30, 2009, slightly higher than $9.3 billion at December 31, 2008. The amortized cost basis of 15 held-to-maturity private label securities were determined to be OTTI because of evidence of credit impairment and were written down to their fair values at the OTTI determination dates. The cumulative credit impairment expenses recorded through earnings year-to-date September 30, 2009 was $14.3 million as a charge to earnings recorded in Other income (loss). The non-credit component of OTTI recorded in Accumulated other comprehensive income through the third quarter was $103.9 million. The Bank did not experience any OTTI during 2008 or 2007.
At September 30, 2009, balance sheet leverage of 20.8 times shareholders’ capital was lower from 23.4 times capital at December 31, 2008. The change in leverage reflects the Bank’s balance sheet management strategy of keeping the balance sheet change in line with the changes in member demand for advances. 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 remains 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.

 

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Advances
The FHLBNY’s primary business is making collateralized loans, known as “advances”, to members.
Reported book value of advances was $95.9 billion at September 30, 2009, compared to $109.2 billion at December 31, 2008. Advances outstanding have been steadily declining through the last three quarters — $100.5 billion at June 30, 2009, down from $104.5 billion at March 31, 2009. Advance book values include fair value basis adjustments of $4.3 billion at September 30, 2009, compared to $5.8 billion at December 31, 2008. Fair value basis adjustments are recorded under the hedge accounting provisions. Par amount of advances outstanding was $91.6 billion at September 30, 2009, compared to $103.4 billion at December 31, 2008.
The FHLBNY’s willingness to be a reliable provider of well-priced funds to our members reflects the FHLBNY’s ability to raise funding in the marketplace through the issuance of consolidated obligation bonds and discount notes to local and global investors.
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 incur 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, they no longer qualify for membership and the FHLBNY may not offer renewals or additional advances to non-members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight lending to members.

 

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Advances — Product Types
The following table summarizes par values of advances by product type (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
            Percentage             Percentage  
    Amounts     of total     Amounts     of total  
 
                               
Adjustable Rate Credit — ARCs
  $ 15,529,850       16.95 %   $ 20,205,850       19.55 %
Fixed Rate Advances
    72,008,539       78.61       71,860,685       69.51  
Short-Term Advances
    1,927,110       2.10       7,793,500       7.54  
Mortgage Matched Advances
    600,018       0.66       693,559       0.67  
Overnight Line of Credit (OLOC) Advances
    631,095       0.69       2,039,423       1.97  
All other categories
    905,397       0.99       786,710       0.76  
 
                       
 
                               
Total par value
    91,602,009       100.00 %     103,379,727       100.00 %
 
                           
 
                               
Discount on AHP Advances
    (275 )             (330 )        
Hedging adjustments
    4,342,998               5,773,479          
 
                           
 
                               
Total
  $ 95,944,732             $ 109,152,876          
 
                           
Compared to balances at December 31, 2008, Short-term fixed-rate advances, Adjustable-rate advances, and overnight borrowings declined at September 30, 2009.
Member demand for advance products
Adjustable Rate Advances (ARC Advances) — Demand for ARC advances in the current year has declined over the three quarters. Outstanding member borrowings were $20.2 billion at December 31, 2008, declined to $18.5 billion at March 31, 2009 and to $17.3 billion at June 30, 2009, and was $15.5 billion at September 30, 2009. 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 every reset date, including the final payment date.
Fixed-rate Advances Demand for long-term fixed-rate advances has been soft in the last two quarters after a strong first quarter. Earlier this year, primary demand was for fixed-rate advances collateralized by pledged securities. In the current year third quarter, fixed-rate advances collateralized by marketable securities declined slightly to $25.9 million from $26.4 billion, the outstanding balance at December 31, 2008. Demand for Repo Advances has been uneven through the three quarters. At March 31, 2009, borrowed amounts grew to $28.0 billion, and then declined to $26.1 billion at June 30, 2009. Repo Advances are offered at a pricing advantage to members in recognition of the value of the liquid security collateral. Changes in such borrowings are a reflection of member preference to inventory their securities holdings. A significant component of Fixed-rate advances is putable advances, also referred to as “Convertible Advances”. Putable advances also include Repo Advances that have put or “convertible” option features. Outstanding amounts of putable advances were $42.0 billion at September 30, 2009, $43.2 billion at June 30, 2009 and March 31, 2009, compared to $43.4 billion at December 31, 2008. Historically, Fixed-rate, putable advances have been more competitively priced relative to fixed-rate “bullet” advances because of the “put” feature that the Bank purchases from the member, driving down the coupon on the advance. In the present interest rate environment, the price advantage is not significant because of constraints in offering longer-term-advances that has also narrowed the price advantage of putable advances.

 

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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. Fixed-rate advances, comprising putable and non-putable advances were the largest category of advances at September 30, 2009 and December 31, 2008.
Short-term Advances — Demand for Short-term fixed-rate advances in the current year third quarter has been very weak and outstanding balances declined to $1.9 billion at September 30, 2009, a low point for the product, compared to $7.8 billion at December 31, 2008. Although demand for the product has been weak, balances declined unevenly during the year. In the first quarter of 2009, outstanding balances had declined to $4.6 billion. In the second quarter, because of stronger demand, balances grew to $5.2 billion.
Overnight Line of Credit (“OLOC Advances”) — Overnight borrowings were weak during the year and at September 30, 2009 and outstanding amounts declined.
The OLOC program gives members a short-term, flexible, readily accessible revolving line of credit for immediate liquidity needs. OLOC Advances mature on the next business day, at which time the advance is repaid.
Member demand for the OLOC Advances may also reflect the seasonal needs of certain member banks for their short-term liquidity requirements. Some large members also use OLOC advances to adjust their balance sheet in line with their own leverage targets.
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 the 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 in the current year third quarter. The former member is not considered to have a significant borrowing potential. There were no members acquired by non-members in the two previous quarters. In the prior year first three quarters, non-members acquired four members.
Prepayment of Advances
Early prepayment initiated by members and former members is another important factor that impacts advances to members. The FHLBNY charges a member a prepayment fee when the member prepays certain advances before the original maturity. Member initiated prepayments have not been a significant factor in the current year relative to last year. Par amounts of advances prepaid totaled $92.0 million in the third quarter and $72.0 million in the prior two quarters. In contrast, in the first three quarters of 2008, prepayments totaled $3.8 billion. The Bank recorded net prepayment fees of $0.5 million in the current year third quarter, and $20.5 million on a year-to-date basis. In the prior year first three quarters, net prepayment fees recorded was $20.0 million. For advances that are prepaid and hedged under hedge accounting rules, the FHLBNY generally terminates the hedging relationship upon prepayment and adjusts the prepayments fees received for the associated fair value basis of the hedged prepaid advance.

 

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Impact of Derivatives and hedging activities — advances
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. Net interest accruals from qualifying hedges under the derivatives and hedge accounting rules are recorded with interest income from advances in the Statements of Income. Fair value changes of qualifying hedged advances under the derivatives and hedge accounting rules are recorded as a Net realized and unrealized gain (loss) on derivative and hedging activities, a component of Other income (loss) also in the Statements of Income. An offset is recorded as fair value basis adjustment to the carrying amount of the advances in the Statements of Condition.
The Bank primarily hedges putable or convertible advances and certain “bullet” fixed-rate advances that qualify under the hedging provisions of the accounting standards for derivatives and hedging. Notional amounts of advances hedged by the use of interest rate swaps in economic hedges were not significant.
At September 30, 2009, $66.5 billion in interest rate swaps hedged advances (both economically and under the hedging provisions of the accounting standards for derivatives and hedging compared to $62.3 billion at December 31, 2008.
Derivative transactions are employed to hedge fixed-rate advances in the following manner and to achieve the following principal objectives:
The FHLBNY:
  makes extensive use of the derivatives to restructure interest rates on fixed-rate advances, both putable or convertible 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.

 

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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”. Fair value basis adjustments as measured under the hedging rules are impacted by both hedge volume and the interest rate environment and the volatility of the rate environment.
Hedge volume — At September 30, 2009 and December 31, 2008, almost all putable fixed-rate advances were hedged by interest rate swaps that qualified under fair value hedge accounting rules. The Bank also hedges certain long-term, single maturity (bullet) advances to hedge fair value risk from changes in the benchmark rate.
Hedge volume as measured by the amount of notional amounts of interest rate swaps outstanding that hedged advances, both economic and under hedging provisions of the accounting standards for derivatives and hedging, increased to $66.5 billion at September 30, 2009, compared to $62.3 billion at December 31, 2008. These amounts included notional amounts of swaps of $0.1 billion and $0.6 billion at September 30, 2009 and December 31, 2008 that were in an economic hedge of advances. Changes in fair values of the swaps designated as economic hedges were recorded through earnings without the offset of changes in the fair values of the advances.
The largest component of interest rate swaps hedging advances at September 30, 2009 was comprised of $40.1 billion in putable advances, slightly below $41.8 billion at December 31, 2008. Generally, the Bank hedges almost all putable advances with a cancellable interest rate swap. The put option in the advance is owned by the FHLBNY and mirrors the cancellable swap option terms owned by the swap counterparty. The Bank’s putable advance, also referred to as a convertible 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 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 prevailing market rates and at the then existing terms and conditions.
In addition, certain LIBOR-indexed advances have “capped” coupons that are in effect sold to borrowers. The fair value changes of the sold caps are offset by fair value changes of purchased options (caps) with mirror-image terms. Fair value changes of caps due to changes in the benchmark rate and option volatilities are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities in the Statements of Income. Notional amounts of purchased interest rate caps to “hedge” embedded caps were $0.4 billion and $0.5 billion at September 30, 2009 and December 31, 2008, and were designated as economic hedges of caps embedded in the variable-rate advances borrowed by members.
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 generate basis adjustments and these were insignificant at September 30, 2009 and December 31, 2008. Reported book value of advances at September 30, 2009 included net fair value basis gains of $4.3 billion at September 30, 2009, compared to $5.8 billion at December 31, 2008 and represented net fair value basis adjustments under hedge accounting rules, and were primarily unrealized gains.

 

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Unrealized fair value basis gains were consistent with the forward yield curves at September 30, 2009 and December 31, 2008 that were projecting forward rates below the fixed-rate coupons of advances that had been issued in prior periods at the then prevailing higher interest-rate environment. Since hedged advances are typically fixed-rate, in a declining interest rate environment relative to the coupons of the advances, fixed-rate advances will exhibit net unrealized fair value basis gains. At September 30, 2009 and December 31, 2008, 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.
Hedge volume as represented by the notional amounts of advances hedged in qualifying hedges increased at September 30, 2009 in line with the increase in hedged long-term fixed-rate advances compared to December 31, 2008. The notional amounts of swaps that were associated in hedging relationships under hedge accounting rules stood at $66.4 billion at September 30, 2009, up from $61.7 billion at December 31, 2008. The net fair value basis adjustments of hedged advances in an unrealized gain position declined to $4.3 billion at September 30, 2009 from $5.8 billion at December 31, 2008 primarily as a result of the steepening of the yield curve at September 30, 2009 relative to December 31, 2008. As an illustration, the yield of the 5-year swap curve was 2.32% at September 30, 2009 compared to 1.55% at December 31, 2008.
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.
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 prohibit the FHLBanks, including the FHLBNY, from investing in certain types of securities and limit the investment in mortgage- and asset-backed securities.
Limits on the size of the MBS portfolio are defined by Finance Agency regulations, which limits holding of MBS to 300% of capital. At September 30, 2009 and December 31, 2008, the Bank was within that limit.
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 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 limit. The expanded authority permitted MBS to be as much as 600% of the FHLBNY’s capital. Currently, the FHLBNY has not exercised the expanded authority provided under the temporary regulations to purchase MBS issued by Fannie Mae and Freddie Mac.
OTTI — In the current year third quarter based on the management’s determination of a decrease in cash flows expected to be collected (cash flow shortfall) three held-to-maturity private-label MBS were deemed credit impaired, and the Bank recognized a credit impairment charge to earnings of $1.5 million. The Bank’s credit impairment assessment of certain MBS that were previously determined to be OTTI also resulted in the recognition of $2.2 million in additional credit impairment charges, for a total charge of $3.7 million recorded through earnings in the current year third quarter. The charges represented the credit loss component of OTTI. The non-credit component of OTTI associated with the impairment in the third quarter was $26.5 million and was recorded as a loss in Accumulated other comprehensive income (loss). In all fifteen securities have been deemed OTTI through the current year third quarter. Thirteen impaired 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 impaired securities would not be fully supported by the two bond insurers.

 

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The cumulative credit impairment expenses recorded through earnings year-to-date September 30, 2009 was $14.3 million as a charge to earnings recorded in Other income (loss). The non-credit component of OTTI recorded in Accumulated other comprehensive income through the third quarter was $103.9 million. The Bank did not experience any OTTI during 2008 or 2007.
The tables below summarize the key characteristics of the OTTI securities at September 30, 2009 (dollars in thousands):
                                                                                         
            September 30, 2009  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
                                                                                       
RMBS-Prime*
    1     $     $     $     $     $ 56,867     $ 54,687     $ (438 )   $ (2,766 )   $ (3,204 )   $  
HEL Subprime*
    14       35,616       20,653       181,995       117,651       62,461       38,392       (13,838 )     (101,118 )           (114,956 )
 
                                                                 
Total
    15     $ 35,616     $ 20,653     $ 181,995     $ 117,651     $ 119,328     $ 93,079     $ (14,276 )   $ (103,884 )   $ (3,204 )   $ (114,956 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
The table below summarizes the key characteristics of the securities that were deemed OTTI in the third quarter of 2009 (dollars in thousands):
                                                                                         
            Q3 2009 activity  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
                                                                                       
RMBS-Prime*
        $     $     $     $     $     $     $     $     $     $  
HEL Subprime*
    10       13,304       7,680       121,435       79,700       62,460       38,392       (3,683 )     (26,486 )           (30,169 )
 
                                                                 
Total
    10     $ 13,304     $ 7,680     $ 121,435     $ 79,700     $ 62,460     $ 38,392     $ (3,683 )   $ (26,486 )   $     $ (30,169 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.

 

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The following table summarizes changes in investments by categories (including held-to-maturity securities, available-for-sale securities, and money market investments) between September 30, 2009 and December 31, 2008. Amounts are after writing down the amortized cost basis of held-to-maturity impaired securities to fair values at the time of impairment. No securities classified as available-for-sale are OTTI. (dollars in thousands):
                                 
    September 30,     December 31,     Dollar     Percentage  
    2009     2008     Variance     Variance  
 
                               
State and local housing agency obligations 1
  $ 791,187     $ 804,100     $ (12,913 )     (1.61 )%
Mortgage-backed securities
                               
Available-for-sale securities, at fair value
    2,350,308       2,851,682       (501,374 )     (17.58 )
Held-to-maturity securities, at carrying value
    9,686,840       9,326,443       360,397       3.86  
 
                       
 
    12,828,335       12,982,225       (153,890 )     (1.19 )
 
                               
Grantor trusts 2
    12,284       10,187       2,097       20.59  
Certificates of deposit 1
    2,000,000       1,203,000       797,000       66.25  
Federal funds sold
    3,900,000             3,900,000       NA  
 
                       
 
                               
Total investments
  $ 18,740,619     $ 14,195,412     $ 4,545,207       32.02 %
 
                       
     
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
At September 30, 2009 and December 31, 2008, investments with original contractual maturities that were long-term comprised of mortgage- and asset-backed securities, and investment in securities issued by state and local housing agencies. These investments were classified as either held-to-maturity or 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. Several grantor trusts have been established and owned by the FHLBNY to fund current and potential future payments to retirees for supplemental pension plan obligations. The trust funds are invested in fixed-income and equity funds, which were classified as available-for-sale.

 

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Mortgage-backed securities — By issuer
Composition of FHLBNY’s held-to-maturity mortgage-backed securities was as follows (carrying values; dollars in thousands):
                                 
    September 30,     Percentage     December 31,     Percentage  
    2009     of total     2008     of total  
 
                               
U.S. government sponsored enterprise residential mortgage-backed securities
  $ 8,303,785       85.72 %   $ 7,577,036       81.24 %
U.S. agency residential mortgage-backed securities
    187,470       1.94       6,325       0.07  
U.S. agency commercial mortgage-backed securities
    49,706       0.51              
Private-label issued securities backed by home equity loans
    454,461       4.69       636,466       6.83  
Private-label issued residential mortgage-backed securities
    482,874       4.99       609,908       6.54  
Private-label issued commercial mortgage-backed securities
                266,994       2.86  
Private-label issued securities backed by manufactured housing loans
    208,544       2.15       229,714       2.46  
 
                       
Total Held-to-maturity securities-mortgage-backed securities
  $ 9,686,840       100.00 %   $ 9,326,443       100.00 %
 
                       
Held-to-maturity mortgage- and asset-backed securities (“MBS”) — Government sponsored enterprise (“GSE”) and U.S. government agency issued MBS aggregated $8.5 billion and $7.6 billion at September 30, 2009 and December 31, 2008. They represented 88.2% and 81.3% of total MBS classified as held-to-maturity at those dates. Privately issued mortgage-backed securities made up 11.8% and 18.7% at September 30, 2009 and December 31, 2008 and included commercial mortgage- and asset-backed securities, and mortgage-pass-throughs and Real Estate Mortgage Investment Conduit bonds.
In the current year first three quarters, the Bank acquired $2.8 billion of GSE and U.S. government agency issued MBS for the held-to-maturity portfolio. Securities acquired were triple-A rated. The Bank’s conservative purchasing practice over the years is evidenced by the high concentration of mortgage-backed securities issued by a GSE.
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. In the current year third quarter, the Bank acquired $25.0 million of a bond issued by a housing agency.
Available-for-sale securities The FHLBNY classifies investments that it may sell before maturity as available-for-sale and carries them at fair value. Fair value changes are recorded in Accumulated other comprehensive income 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):
                                 
    September 30,     Percentage     December 31,     Percentage  
    2009     of total     2008     of total  
 
                               
Fannie Mae
  $ 1,626,069       69.19 %   $ 1,854,988       65.05 %
Freddie Mac
    724,239       30.81       996,694       34.95  
 
                       
Total AFS mortgage-backed securities
    2,350,308       100.00 %     2,851,682       100.00 %
 
                           
Grantor Trusts — Mutual funds
    12,284               10,187          
 
                           
Total Available-for-sale portfolio
  $ 2,362,592             $ 2,861,869          
 
                           
At September 30, 2009 and December 31, 2008, the entire AFS portfolio of mortgage-backed securities was comprised of securities issued by Fannie Mae and Freddie Mac.

 

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Held-to-maturity securities
Composition and fair values of the FHLBNY’s held-to-maturity securities were as follows (dollars in thousands):
                                                 
    September 30, 2009  
    Amortized                     Gross     Gross        
    Cost     OTTI     Carrying     Unrecognized     Unrecognized     Fair  
Issued, guaranteed or insured   Basis     in OCI     Value     Holding Gains     Holding Losses     Value  
Pools of Mortgages
                                               
Fannie Mae
  $ 1,194,202     $     $ 1,194,202     $ 47,563     $     $ 1,241,765  
Freddie Mac
    354,212             354,212       15,657             369,869  
 
                                   
Total pools of mortgages
    1,548,414             1,548,414       63,220             1,611,634  
 
                                   
 
                                               
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                                               
Fannie Mae
    2,370,747             2,370,747       70,184       (4,176 )     2,436,755  
Freddie Mac
    4,384,624             4,384,624       132,871       (7,914 )     4,509,581  
Ginnie Mae
    187,470             187,470       148       (1,432 )     186,186  
 
                                   
Total CMOs/REMICs
    6,942,841             6,942,841       203,203       (13,522 )     7,132,522  
 
                                   
 
                                               
Ginnie Mae-CMBS
    49,706             49,706       263             49,969  
 
                                               
Non-GSE MBS
                                               
CMOs/REMICs
    485,419       (2,545 )     482,874       2,533       (10,732 )     474,675  
Commercial mortgage-backed securities
                                   
 
                                   
Total non-federal-agency MBS
    485,419       (2,545 )     482,874       2,533       (10,732 )     474,675  
 
                                   
 
                                               
Asset-Backed Securities
                                               
Manufactured housing (insured)
    208,544             208,544             (46,536 )     162,008  
Home equity loans (insured)
    324,833       (74,915 )     249,918       8,515       (34,559 )     223,874  
Home equity loans (uninsured)
    227,546       (23,003 )     204,543             (44,662 )     159,881  
 
                                   
Total asset-backed securities
    760,923       (97,918 )     663,005       8,515       (125,757 )     545,763  
 
                                   
Total mortgage-backed securities
  $ 9,787,303     $ (100,463 )   $ 9,686,840     $ 277,734     $ (150,011 )   $ 9,814,563  
 
                                   
 
                                               
Other
                                               
State and local housing finance agency obligations
    791,187             791,187       5,325       (14,527 )     781,985  
Certificates of deposit
    2,000,000             2,000,000       3             2,000,003  
 
                                   
Total other
  $ 2,791,187     $   $ 2,791,187     $ 5,328     $ (14,527 )   $ 2,781,988  
 
                                   

 

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    December 31, 2008  
    Amortized     Gross     Gross        
    Cost     Unrealized     Unrealized     Fair  
Issued, guaranteed or insured   Basis     Holding Gains     Holding Losses     Value  
Pools of Mortgages
                               
Fannie Mae
  $ 1,400,058     $ 26,789     $     $ 1,426,847  
Freddie Mac
    422,088       7,860             429,948  
 
                       
Total pools of mortgages
    1,822,146       34,649             1,856,795  
 
                       
 
                               
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                               
Fannie Mae
    2,032,051       51,138       (125 )     2,083,064  
Freddie Mac
    3,722,840       101,595       (30 )     3,824,405  
Ginnie Mae
    6,325             (187 )     6,138  
 
                       
Total CMOs/REMICs
    5,761,216       152,733       (342 )     5,913,607  
 
                       
 
                               
Ginnie Mae-CMBS
                       
 
                               
Non-GSE MBS
                               
CMOs/REMICs
    609,907             (42,706 )     567,201  
Commercial mortgage-backed securities
    266,994       149       (127 )     267,016  
 
                       
Total non-federal-agency MBS
    876,901       149       (42,833 )     834,217  
 
                       
 
                               
Asset-Backed Securities
                               
Manufactured housing (insured)
    229,714             (75,418 )     154,296  
Home equity loans (insured)
    376,587             (144,957 )     231,630  
Home equity loans (uninsured)
    259,879             (79,112 )     180,767  
 
                       
Total asset-backed securities
    866,180             (299,487 )     566,693  
 
                       
Total mortgage-backed securities
  $ 9,326,443     $ 187,531     $ (342,662 )   $ 9,171,312  
 
                       
 
                               
Other
                               
State and local housing finance agency obligations
    804,100       6,573       (47,512 )     763,161  
Certificates of deposit
    1,203,000       328             1,203,328  
 
                       
Total other
  $ 2,007,100     $ 6,901     $ (47,512 )   $ 1,966,489  
 
                       

 

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External rating information of the held-to-maturity portfolio was as follows. (Carrying value in thousands):
                                                 
    September 30, 2009  
                                    Below        
                                    Investment        
    AAA-rated     AA-rated     A-rated     BBB-rated     Grade     Total  
 
                                               
Long-term securities
                                               
Mortgage-backed securities
  $ 9,078,224     $ 315,823     $ 72,762     $ 32,564     $ 187,467     $ 9,686,840  
State and local housing bonds
    73,313       638,509       23,145       56,220             791,187  
 
                                   
 
                                               
Total Long-term securities
    9,151,537       954,332       95,907       88,784       187,467       10,478,027  
 
                                   
 
                                               
Short-term securities
                                               
Certificates of deposit
          1,000,000       1,000,000                   2,000,000  
 
                                   
 
                                               
Total
  $ 9,151,537     $ 1,954,332     $ 1,095,907     $ 88,784     $ 187,467     $ 12,478,027  
 
                                   
                                         
    December 31, 2008  
    AAA-rated     AA-rated     A-rated     BBB-rated     Total  
 
                                       
Long-term securities
                                       
Mortgage-backed securities
  $ 8,705,952     $ 229,714     $ 192,678     $ 198,099     $ 9,326,443  
State and local housing bonds
    74,881       672,999             56,220       804,100  
 
                             
 
Total Long-term securities
    8,780,833       902,713       192,678       254,319       10,130,543  
 
                             
Short-term securities Certificates of deposit
          628,000       575,000             1,203,000  
 
                             
 
                                       
Total
  $ 8,780,833     $ 1,530,713     $ 767,678     $ 254,319     $ 11,333,543  
 
                             
Rating information of the available-for-sale portfolios was as follows. (Fair values in thousands):
                                                 
    September 30, 2009  
    AAA-rated     AA-rated     A-rated     BBB-rated     Unrated     Total  
 
                                               
Available-for-sale securities
                                               
Mortgage-backed securities
  $ 2,350,308     $     $     $     $     $ 2,350,308  
Other — Grantor trusts
                            12,284       12,284  
 
                                   
 
                                               
Total
  $ 2,350,308     $     $     $     $ 12,284     $ 2,362,592  
 
                                   
                                                 
    December 31, 2008  
    AAA-rated     AA-rated     A-rated     BBB-rated     Unrated     Total  
 
                                               
Available-for-sale securities
                                               
Mortgage-backed securities
  $ 2,851,682     $     $     $     $     $ 2,851,682  
Other — Grantor trusts
                            10,187       10,187  
 
                                   
 
                                               
Total
  $ 2,851,682     $     $     $     $ 10,187     $ 2,861,869  
 
                                   
Fair values of investment securities
In an effort to achieve consistency among all of the FHLBanks of the pricing of investments of 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 during the quarter ended September 30, 2009. Under the approved methodology, the Bank requests prices for all mortgage-backed securities from four specific third-party vendors, and, depending on the number of prices received for each security, selects a median or average price as defined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. In certain limited instances (i.e., prices are outside of variance thresholds or the third-party services do not provide a price), the Bank will obtain a price from securities dealers that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. Prices for CUSIPs held in common with other FHLBanks are reviewed for consistency.
Prior to the adoption of the new pricing methodology, 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.

 

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In adopting this common methodology, the fair values of mortgage-backed investment securities are estimated by FHLBNY’s management who 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. 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. 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 securities that are traded in sufficient volumes in the secondary market. The valuation of the Bank’s private-label securities that are 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 because the inputs may not be market based and observable. Private-label securities are classified as held-to-maturity and are recorded in the balance sheet at their carrying values. For a comparison of carrying values and fair values of held-to-maturity securities, see tables above. Through the three quarters in 2009, fifteen held-to-maturity private-label mortgage-backed securities were deemed to be credit impaired and to be OTTI. The fair values of the OTTI securities recorded as the carrying values of the securities credit impaired at September 30, 2009 was $125.8 million and were considered to be the equivalent of Level 3 financial instruments within the fair value hierarchy under the accounting standards for fair value measurements and disclosures. This determination was made based on management’s view that the OTTI private-label instruments may not have an active market because of the specific vintage of the impaired securities as well as inherent conditions surrounding the trading of private-label mortgage-backed securities; fair values of the securities were determined by management using third party specialized vendor pricing services that made appropriate adjustments to observed prices of comparable securities that were being transacted in an orderly market.
For more information about the corroboration and other analytical procedures performed by the FHLBNY, see Significant Accounting Policies and Significant Estimates in Note 1, and Note 16 Fair Values of Financial Instruments. Examples of securities priced under such a valuation technique, which are classified within Level 2 of the valuation hierarchy and valued using the “market approach” as defined in the accounting standards for fair value measurements and disclosures, include GSE issued collateralized mortgage obligations and money market funds.
The FHLBNY conducts a review and evaluation of the securities portfolio to determine, based on the creditworthiness of the securities and including any underlying collateral and/or insurance provisions of the security, if the decline, if any, in the fair value of a security below its carrying value is other-than-temporary. Based on detailed credit analysis on a security level, the Bank has concluded that other than the fifteen securities determined to be credit impaired, gross unrealized losses for the remainder of Bank’s investment securities were primarily caused by interest rate changes, credit spread widening and reduced liquidity and the securities were temporarily impaired as defined under the new guidance for recognition and presentation of other-than-temporary impairment. For information about the Bank’s Impairment Analysis and conclusions, investment ratings, and investment quality see Asset Quality and Concentration — Advances, Investment securities, Mortgage loans, and Counterparty risks in this MD&A. Also, see Note 4 — Held-to-maturity securities and Note 5 — Available-for-sale securities.

 

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Contractual maturities — Mortgage-backed securities
The amortized cost basis and estimated fair values of held-to-maturity securities by contractual maturity are shown below (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
                                 
    September 30, 2009     December 31, 2008  
    Amortized     Fair     Amortized     Fair  
    Cost Basis     Value     Cost Basis     Value  
State and local housing agency obligations
                               
Due in one year or less
  $     $     $     $  
Due after one year through five years
    14,985       15,191       17,665       18,209  
Due after five years through ten years
    62,065       63,002       60,400       55,060  
Due after ten years
    714,137       703,792       726,035       689,892  
 
                       
State and local housing agency obligations
    791,187       781,985       804,100       763,161  
 
                       
 
                               
Mortgage-backed securities
                               
Due in one year or less
                257,999       258,120  
Due after one year through five years
    2,872       2,839              
Due after five years through ten years
    1,147,404       1,183,248       1,142,000       1,149,541  
Due after ten years
    8,637,027       8,628,476       7,926,444       7,763,651  
 
                       
Mortgage-backed securities
    9,787,303       9,814,563       9,326,443       9,171,312  
 
                       
 
                               
Certificates of deposit
                               
Due in one year or less
    2,000,000       2,000,003       1,203,000       1,203,328  
 
                       
Certificates of deposit
    2,000,000       2,000,003       1,203,000       1,203,328  
 
                       
 
                               
Total held-to-maturity securities
  $ 12,578,490     $ 12,596,551     $ 11,333,543     $ 11,137,801  
 
                       
Short-term investments
The FHLBNY typically maintains substantial investments in high quality, short- and intermediate-term financial instruments, such as certificates of deposits and 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 invests in certificates of deposits with maturities not exceeding 270 days and issued by major financial institutions; certificates of deposits are recorded at amortized cost basis as held-to maturity investment. Cash pledged to derivative counterparties to meet collateral requirements are interest bearing and are reported as a deduction (netting adjustment) to Derivative liabilities in the Statements of Condition.

 

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Investments — Policies and practices
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. Finance Agency regulations further limit the mortgage-backed and asset-backed investments of each FHLBank to 300% of that FHLBank’s capital. The FHLBNY was within the 300% limit for all periods reported. The FHLBNY’s held-to-maturity securities consisted of mortgage-backed and residential asset-backed securities, and housing finance agency bonds.
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. The FHLBNY’s practice is not to lend unsecured funds to members, including overnight Federal funds sold and certificates of deposits. 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, 2009 and at December 31, 2008.
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.

 

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Mortgage Loans Held-for-Portfolio
At September 30, 2009, the portfolio of mortgage loans was 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 recently filed Form 10-K on March 27, 2009. 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.
Paydowns outpaced acquisitions in the current year first three quarters and as a result, the MPF portfolio declined relative to December 31, 2008. The FHLBNY does not expect the MPF loans to increase substantially, and the Bank provides this product to its members as another alternative for its members to sell their mortgage production.
The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
            Percentage of             Percentage of  
    Amount     Total     Amount     Total  
Real Estate:
                               
Fixed medium-term single-family mortgages
  $ 406,055       30.38 %   $ 467,845       32.15 %
Fixed long-term single-family mortgages
    926,537       69.32       983,493       67.58  
Multi-family mortgages
    3,934       0.30       4,009       0.27  
 
                       
 
Total par value
    1,336,526       100.00 %     1,455,347       100.00 %
 
                           
 
                               
Unamortized premiums
    9,257               10,662          
Unamortized discounts
    (5,641 )             (6,310 )        
Basis adjustment 1
    (556 )             (408 )        
 
                           
 
                               
Total mortgage loans held-for-portfolio
    1,339,586               1,459,291          
Allowance for credit losses
    (3,358 )             (1,406 )        
 
                           
Total mortgage loans held-for-portfolio after allowance for credit losses
  $ 1,336,228             $ 1,457,885          
 
                           
     
1   Represents fair value basis of open and closed delivery commitments.
Debt Financing Activity and Consolidated Obligations
Consolidated obligations, which are the joint and several obligations of the FHLBanks, are the principal funding source for the FHLBNY’s operations and consist of consolidated bonds and consolidated discount notes. Discount notes are consolidated obligations with maturities 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.

 

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The two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP. 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.
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 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. 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 obligations-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’ 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 obligations- bonds upon agreement of eight of the 12 FHLBanks.
In the third quarter of 2008, each FHLBank (including the FHLBNY) entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (GSECF), as authorized by the Housing Act. The GSECF is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF will be considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings will be agreed to at the time of issuance. Loans under the Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which consists of FHLBank advances to members that have been collateralized in accordance with regulatory standards and mortgage-backed securities issued by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. Each FHLBank is required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible collateral, updated on a weekly basis. As of September 30, 2009 and December 31, 2008, the FHLBNY had provided the U.S. Treasury with listings of advance collateral amounting to $17.8 billion and $16.3 billion. The amount of collateral can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of December 31, 2008 and at the date of this Form 10-Q report, no FHLBank has drawn on this available source of liquidity.

 

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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 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.
Highlights — Debt issuance and funding management
The primary source of funds for the FHLBNY continued to be through issuance of consolidated obligation bonds and discount notes. Reported amounts of consolidated obligations outstanding, comprising of bonds and discount notes, at September 30, 2009 and December 31, 2008 were $108.1 billion and $128.6 billion, and funded 91.9% and 93.5% of Total assets at those dates. These financing ratios have remained substantially unchanged over the years at around 90%, indicative of the stable funding strategy pursued by the FHLBNY to rely on FHLBank debt for financing its activities.
Investor demand for FHLBank debt — The cost of term debt issuance has continued to be under pressure in the current year first three quarters. Key investors from Asia have continued to reduce acquisitions of FHLBank debt and have very limited participation in in recent debt issuances. Following the conservatorship of Fannie Mae and Freddie Mac, market pricing of FHLBank issued debt indicated that market participants believe that obligations of the two GSEs offer lower credit risk than FHLBank debt obligations, which are generally grouped into the same GSE asset class as Fannie Mae and Freddie Mac. As a result, investors are more likely to require a premium to acquire FHLBank debt relative to debt issued by Fannie Mae and Freddie Mac. GSE debt pricing itself has been under competitive pressure with the FDIC announcing guarantees to debt offered by commercial banks and other financial institutions. However, the Federal Reserve’s program of purchasing GSE debt for up to $200 billion has helped to narrow the spreads of GSE debt to U.S. Treasuries from the levels existing earlier in the year.
Money market funds and other domestic fund managers have stepped up to become key investors of FHLBank short-term debt. While this has positive implications for demand for FHLBank debt, it has put further pressure on sharply increased demand for even shorter bond maturities. Money funds appear to be maintaining average investment maturities of 50 days with a ceiling of 90 days as mandated under certain regulatory provisions.

 

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All of these factors and the general dislocation in the capital markets are counteracting efforts by the FHLBanks to issue debt with maturities longer than one year. These factors, outside the control of the FHLBanks, have generally made it 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 remained 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. That scenario appears to be gradually changing at least with respect to funding costs for 5-year and shorter maturity debt. In the second and third quarters of the current year, the FHLBanks have been successfully placing more term debt in the form of Global Bond offerings and callables, but it is too early to predict if this trend will continue. Domestic banks, flush with cash, and the more active international investors have been participants in the market for FHLBank debt. However, the FHLBanks continue to be disproportionately exposed to the money fund industry, and in response the FHLBank debt issuances have continued to maintain the short-term issuance practices implemented late last year.
Unless investors recommit to the term funding market in sufficient volume, the FHLBanks will continue to meet funding needs in the very short end of the funding market. Investor demand in the first two quarters of 2009 had been for ultra-short-term bullet and callable bonds, short-term floating-rate bonds, discount notes. In the third quarter, demand appears to have shifted away from floaters and ultra short-term discount notes.
Bonds with a one-year maturity and a short lockout call option had traditionally been in demand because of their attractive pricing, and offered an alternative investment to 3-month discount notes. Since the market dislocation and up until June 2009, demand had been very weak. However, in the third quarter of 2009, short lockout callables (with call dates as short as 3 month from issue date) have been in demand once again as investors see a pricing advantage over similar maturity discount notes. Short-term bonds with no call options with maturities of up to two years have also been popular with investors. Much of the demand has been from money funds that were experiencing bond maturities. The money fund sector continues to be significant acquirer of FHLBank discount notes as a safe, high-quality, liquid investment that has been attractively priced on a risk-adjusted basis relative to U.S. Treasury bills. For fund managers, discount notes are fundamental to balancing investment returns and protecting the $1.00 constant net asset value for money funds, since discount notes mature at a par amount of $1.00 as well. In the current year third quarter, discount note pricing has narrowed to the one month LIBOR index, making it a less attractive funding instrument for the FHLBanks, relative to prior periods. Also in the third quarter of 2009, short-term LIBOR rates reset lower and resulted in the tightening of discount note spreads to LIBOR on a range of short-term maturities, from overnight to 12 months. From the 12-month point and beyond, the yield curve steepens. Demand for callable step-up bonds in a variety of maturities has been steady and the FHLBanks have responded by increasing the issuance of such bond structures. Issuance of simple floating rate bonds have been almost non-existent because of weak demand and unattractive pricing. Floaters indexed to Fed Funds were issued early in the third quarter but this bond structure has not been in demand because coupons were perceived as less attractive by investors relative their popularity with investors in 2008.

 

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Funding tactical changes — To accommodate members’ funding needs at reasonable spreads, the FHLBNY has been responsive to investor preferences and changing demands, the FHLBNY has continued to make tactical adjustments to the FHLBNY funding strategies. In the first two quarters of 2009 in response to strong investor demand for shorter-term FHLBank bonds and discount notes, the FHLBNY sharply increased its issuances of discount notes and short-term “bullet” bonds, which are non-callable with a single maturity at end. In the third quarter, as discount note pricing became relatively unattractive, the FHLBNY reduced its issuances of discount notes. The FHLBNY will continue to refine and adjust its funding tactics and as conditions in the debt market changes, the FHLBNY will also react promptly. The principal tactical funding strategy changes employed in executing issuances of debt were:
  In response to market demand for shorter-term debt in the first two quarters of 2009, the Bank had increased its issuance of discount notes, which have maturities from overnight to 365 days. The upward trends in issuance volume of discount notes at that time were illustrative of the tactical adjustments adopted by the FHLBNY to changing conditions earlier in the year. Average outstanding balances of discount notes, a measure of volume, was $24.7 billion in the third quarter of 2008. It increased to $34.5 billion in the fourth quarter of 2008. In the first and second quarters of 2009, volume rose dramatically to $46.2 billion and $48.7 billion.
  In the third quarter of 2009, as one month LIBOR reset lower, discount note pricing became relatively unattractive as spreads to LIBOR tightened, and average outstanding balances of discount notes was allowed to decline to $38.8 billion. The utilization rate of discount notes to fund total assets is another useful measurement indicator of the Bank’s funding tactics. At March 31, 2009, discount notes outstanding were $48.7 billion, and funded 38.0% of the total assets at that date; at June 30, 2009, outstanding balance was $47.3 billion and funded 36.6% of total assets. At September 30, 2009, outstanding balance was $38.4 billion and funded 32.6 % of total assets, compared to $46.3 billion at December 31, 2008, which funded 33.7% of total assets.
  In the first two quarters of 2009, the FHLBNY had also relied more on overnight and very short-term discount notes to take advantage of lower funding costs of overnight issuance of discount notes. In the third quarter of 2009, the FHLBNY reduced its issuance of overnight discount notes, partly as a result of the Federal Reserve’s action to eliminate interest on excess reserves, partly as a result of tightening of spreads, and partly because the FHLBNY determined that term discount notes would better match its regulatory liquidity profile. At June 30, 2009, overnight discount notes outstanding were $11.3 billion. In contrast, overnight discount notes declined to $1.5 billion at September 30, 2009.
  Floating-rate bonds outstanding at September 30, 2009 declined during the third quarter, a trend observed during most of the earlier two quarters. Maturing bonds were not replaced because of unfavorable spreads demanded by investors and compared to other GSE issued LIBOR-indexed floaters. In 2008, the FHLBNY had issued short-term floating-rate bonds, indexed to rates other than 3-month LIBOR and had swapped the coupons back to 3-month LIBOR.
  Reacting to investor preference for shorter term debt, the FHLBNY increased the issuance of medium-term non-callable bonds. Investors have been receptive to FHLBanks’ non-callable bonds compared to alternative debt available in the capital markets and execution pricing has been relatively more favorable for the FHLBank bonds. At June 30, 2009, fixed-rate non-callable bonds were $41.5 billion. In the third quarter, the FHLBNY increased issuances of non-callable bonds to replace maturing discount notes and outstanding balances rose to $47.5 billion at September 30, 2009. The outstanding balance was $36.4 billion at December 31, 2008.

 

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  FHLBank callable-bonds, which have been traditionally considered by investors to be competitively priced, were under price pressure in 2008 and in the first two quarters of 2009, and the Bank’s use of funding with callable debt had declined because of the erosion of their price advantage. In the first two quarters, investor preferences were for short maturity bullet bonds and floaters primarily due to demand from the domestic money funds. In the current year third quarter, short lock-out callables were in demand by investors who saw a yield advantage over similar maturity discount notes; issuance volume increased and outstanding balances grew from $3.3 billion at June 30, 2009 to $4.8 billion at September 30, 2009. The outstanding balance at December 31, 2008 was also $4.8 billion.
Debt extinguishment — No debt was transferred to another FHLBank in the current year first three quarters. In the current year third quarter, the FHLBNY retired $0.5 billion through a debt buyback from an unrelated financial institution at a loss of $69.5 thousand.
Consolidated obligation bonds
The following summarizes types of bonds issued and outstanding (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
            Percentage of             Percentage of  
    Amount     Total     Amount     Total  
 
Fixed-rate, non-callable
  $ 47,549,475       69.14 %   $ 36,367,875       44.92 %
Fixed-rate, callable
    4,839,800       7.04       4,828,300       5.96  
Step Up, non-callable
    73,000       0.10              
Step Up, callable
    2,192,500       3.19       73,000       0.09  
Step Down, callable
                15,000       0.02  
Single-index floating rate
    14,117,500       20.53       39,670,000       49.01  
 
                       
 
                               
Total par value
    68,772,275       100.00 %     80,954,175       100.00 %
 
                           
 
                               
Bond premiums
    112,091               63,737          
Bond discounts
    (34,980 )             (39,529 )        
Fair value basis adjustments
    817,374               1,254,523          
Fair value basis adjustments on terminated hedges
    3,108               7,857          
Fair value option valuation adjustments and accrued interest
    968               15,942          
 
                           
 
                               
Total bonds
  $ 69,670,836             $ 82,256,705          
 
                           
Funding Mix
The FHLBNY has consistently demonstrated the ability to seek out the most attractively priced funding the capital market has to offer by being flexible in the debt structure the Bank is willing to offer to meet the borrowing needs of its members and to achieve management’s asset/liability goals. As investor demand in the current year third quarter shifted from discount notes and floating-rate debt to fixed-rate “bullet” and callable debt, the FHLBNY has also been opportunistic in pursuing the debt structure most in demand at a reasonable price consistent with the Bank’s asset/liability match.
In the current year first three quarters, the FHLBNY issued fixed-rate and discount notes in a mix of issuances to achieve its asset/liability management goals and be responsive to the changing market dynamics. The funding fix has resulted in a greater diversity of debt structures and funding alternatives, indicative of the flexibility of the Bank’s funding tactics in a volatile environment. The issuance of bonds has been the primary financing vehicle for the Bank, although the use of term and overnight discount notes remain a vital source of funding requirements because of the ease of issuance of discount notes as a flexible funding tool for day-to-day operations.

 

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Hedge ratio, or the percentage of debt hedged versus debt not hedged, and the mix between the use of non-cancellable and cancellable interest rate swaps to hedge bonds reflects the Bank’s balance sheet management preferences and the attractiveness of the pricing of cancellable swaps. The ratio of discount notes to bonds is another balance sheet management tool and that too is predicated on factors such as asset-liability cash-gap management and the attractiveness of the pricing of discount notes. In prior years, the use of term discount notes generally had declined because of the relative pricing advantage of issuing floating-rate, LIBOR-indexed debt or by issuing short-term callable debt and swapping out the fixed-rate cash flows for LIBOR-indexed cash flows by the simultaneous execution of cancellable interest rate swaps.
In the current year first two quarters, the Bank increased its holdings of term discount notes mainly because of favorable investor demand and pricing relative to term funding. In the third quarter, discount note issuance was reduced. Still, consolidated obligation bonds remained the primary financing basis for the FHLBNY.
Fixed-rate non-callable bonds — With the decline in balance sheet assets at September 30, 2009, relative to December 31, 2008, the Bank reduced its outstanding debt. While over all debt declined, the amount and percentage of fixed-rate non-callable bonds, also referred to as “bullet bonds”, increased and represented 69.1% of total par amounts of debt outstanding at September 30, 2009. The comparable percentage of non-callable debt to total debt was 44.9% at December 31, 2008.
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 callable debt.
Fixed-rate callable bonds — 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. The Bank may also issue callable debt on an unswapped basis in a financing strategy to match the estimated prepayment characteristics of mortgage-backed securities and mortgage loans held-for-portfolio. As estimated lives and prepayment speeds of MBS and mortgage loans change with changes in the interest rate environment, those same factors are also likely to impact the call exercise feature of callable debt. These factors tend to shorten or lengthen the effective lives of the debt with changes in the interest rate environment, thereby achieving an offset to the prepayment options of MBS and mortgage loans.
In the current year third quarter the FHLBanks may be seeing the beginning of an increased investor appetite for callable FHLBank bonds. The use of callable debt had declined over the years as investor demand for term debt had been very soft and the pricing advantage offered to investors for selling the call option tended to narrow as the term of the bond shortened. Spreads to both U.S. Treasury securities and LIBOR had widened and the unfavorable trend continued through the current year first two quarters. The Bank’s acquisition of fixed-rate mortgage-backed securities has been very selective, another factor that limited the FHLBNY’s issuance of callable bonds, which offers a call structure that could be matched to the paydown structures of mortgage-backed securities. Still another factor has been the increased frequency of callable bond redemptions associated with the calls on the associated interest rate swaps. Increased call frequency has been the result of declining interest rates and as a result, outstanding amounts of fixed-rate callable debt were allowed to decline as maturing or called bonds were replaced by non-callable bonds. In the current year third quarter, FHLBank callable bonds saw encouraging investor demand for fixed-rate and step-up callable bonds. Additionally, the pricing of short lockout callables were an attractive alternative to 3-month discount notes to investors and the FHLBNY. All these factors have tended to result in an increase in outstanding balances at September 30, 2009 compared to June 30, 2009.

 

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Floating-rate bonds — Generally, maturing floating-rate bonds were not replaced in the current year first three quarters and outstanding debt declined at September 30, 2009 relative to June 30, 2009 and December 31, 2008. Floating-rate bonds were extensively used in 2008, when the Bank issued floating-rate debt, indexed to 1-month LIBOR, Prime, and Fed effective rates, an innovative shift in funding tactics to take advantage of the historical wide spread between 3-month LIBOR and other indices. 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.
Impact of hedging fixed-rate 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 (None were outstanding at December 31, 2008 or September 30, 2009).
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.

 

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  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.
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 Item 3 Quantitative and Qualitative Disclosures 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 advances. The Bank recorded net unrealized fair value losses of $0.8 billion and $1.3 billion as part of the carrying values of consolidated obligation bonds in the Statements of Condition at September 30, 2009 and December 31, 2008. Under the derivatives and hedge accounting provisions, the reported carrying value of consolidated obligation bonds is adjusted for changes in their fair value basis attributable to the risk being hedged. Carrying values of bonds designated under the fair value option, are also adjusted for valuation adjustments to recognize changes in the full fair value of the bonds elected under the fair value option and measured under the accounting standards for fair value measurements and disclosures. These valuation adjustments were not material at September 30, 2009 or December 31, 2008.
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 of September 30, 2009 and December 31, 2008, the Bank had hedged $31.0 billion ($25.3 billion non-callable; $5.7 billion callable) and $22.0 billion ($20.0 billion non-callable; $2.0 billion callable) of fixed-rate consolidated bonds to hedge fair value risk from changes in the benchmark rate. Almost all callable bonds were hedged by cancellable swaps at September 30, 2009 and December 31, 2008. These hedges were in qualifying hedge relationships under the provisions of the accounting standards for derivatives and hedging, which effectively converted 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. Under the terms of the call option, the Bank has the right to terminate the bond at agreed upon dates.
At September 30, 2009, outstanding par value of consolidated obligation bonds elected under the fair value option was $2.4 billion compared to $983.0 million at December 31, 2008.

 

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The following summarizes debt that were economically hedged by interest-rate swaps with matching terms at September 30, 2009:
Floating-rate debt — At September 30, 2009, the FHLBNY had executed economic hedges of $9.6 billion of 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 comparable floating-rate debt that was economically hedged at December 31, 2008 was $25.0 billion. Hedges deemed at inception as economic do not generate basis adjustments on the hedged instruments since their carrying values are not adjusted for fair value changes.
Fixed-rate debt — The Bank had economic hedges of $12.9 billion of short-term fixed-rate debt at September 30, 2009 compared to $4.5 billion at December 31, 2008. 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 bonds and accounted for the derivatives as freestanding derivatives.
Impact of changes in interest rate The carrying amounts of consolidated obligations bonds included fair value basis losses of $0.8 billion at September 30, 2009, compared to fair value basis losses of $1.3 billion at December 31, 2008. Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, and the value and implied volatility of call options of callable bonds.
Fair value basis losses at September 30, 2009 and December 31, 2008 were consistent with the forward yield curves at those dates that were projecting forward rates below the fixed-rate coupons of bonds hedged under the derivatives and hedge accounting rules and bonds designated under the FVO. Most of the hedged bonds had been issued in prior periods at the then prevailing higher interest-rate environment. Since such bonds are typically fixed-rate, in a declining interest rate environment, fixed-rate bonds exhibit unrealized fair value basis losses recorded under the derivatives and hedge accounting rules. 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. The net fair value basis adjustments of hedged consolidated obligation bonds in an unrealized loss position at September 30, 2009 declined relative to December 31, 2008 primarily as a result of the steepening of the forward yield curve at September 30, 2009 relative to December 31, 2008. As an illustration, the yield of a 5-year swap curve was 2.32% at September 30, 2009 compared to 1.55% at December 31, 2008.
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 used discount notes to fund short-term advances, longer-term advances with short repricing intervals, convertible advances and money market investments.

 

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The following summarizes discount notes issued and outstanding (dollars in thousands):
                 
    September 30, 2009     December 31, 2008  
 
               
Par value
  $ 38,406,688     $ 46,431,347  
 
           
 
               
Amortized cost
  $ 38,385,244     $ 46,329,545  
Fair value basis adjustments
          361  
 
           
 
               
Total
  $ 38,385,244     $ 46,329,906  
 
           
 
               
Weighted average interest rate
    0.26 %     1.00 %
 
           
In the current year first two quarters, the Bank had increased its holdings of term discount notes mainly because of favorable investor demand and pricing relative to term funding. In the current year third quarter, discount notes pricing was relatively less attractive as a funding vehicle given alternative funding options and the Bank reduced its reliance on discount notes, particularly the use of overnight discount notes, partly as a result of the Federal Reserve’s action to eliminate interest on excess reserves, partly as a result of tightening of spreads, and partly because the FHLBNY determined that term discount notes would better match it’s regulatory liquidity profile. In the current year first two quarters, the Bank issued $736.2 billion of discount notes; in contrast, in the third quarter the Bank issued only $82.4 billion.
Generally, discount notes are utilized in funding short-term advances, some long-term advances as well as held-to-maturity and money market investments. The efficiency of issuing discount notes continues to be another factor in its use as a popular funding vehicle 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. The importance of the instrument in day-to-day funding operations is illustrated by the very significant volume of the cash flows generated by discount note issuance. For the current year first three quarters, the Bank issued $814.6 billion in discount notes. In the same period, cash flows from the issuance of consolidated obligation bonds were $35.1 billion. Contrasting transaction volumes between bonds and discount notes provides an indication that discount notes continued to be an important source of short-term funding.
As of September 30, 2009, there were no discount note hedges under the accounting standards for derivatives and hedging; at December 31, 2008, the Bank had hedged $779.0 million of discount notes to hedge fair value risk from changes in the benchmark rate in qualifying hedge relationships under the derivatives and hedge accounting rules. The Bank generally hedges discount notes in economic hedges to convert the fixed-rate exposure of the discount notes to a variable-rate exposure, generally indexed to 3-month LIBOR. At September 30, 2009 and December 31, 2008, the Bank had also had executed economic hedges of $7.5 billion and $7.5 billion of discount notes to mitigate fair value risk.
Deposit Liabilities
Deposit liabilities comprised of member deposits and, from 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. Total deposits at September 30, 2009 were $2.3 billion including demand and term, up from $1.5 billion at December 31, 2008. Fluctuations in member deposits have little impact on the Bank and are not a significant source of liquidity for the Bank.
Borrowings from other FHLBanks — The Bank borrows from other FHLBanks, generally for a period of one day. There were no borrowings outstanding at September 30, 2009 or December 31, 2008.

 

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Stockholders’ Capital, Capital Ratios, and Mandatorily Redeemable Capital Stock
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.
Stockholders’ Capital — Stockholders’ Capital comprised of capital stock, retained earnings and Accumulated other comprehensive income (loss), and decreased by $206.6 million to $5.7 billion at September 30, 2009 from $5.9 billion at December 31, 2008.
Capital stock — Capital stock, par value $100, was $5.1 billion at September 30, 2009, down from $5.6 billion at December 31, 2008. The decrease 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 our 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 borrowings and its practice of redeeming excess capital stock.
Retained earnings — Retained earnings rose to $666.2 million at September 30, 2009 compared to $382.9 million at December 31, 2008. Net income year-to-date September 30, 2009 was $474.8 million, and $191.4 million in dividend payments were made to members. Net income year-to-date prior year was $214.0 million, and dividend payments were $250.1 million. For more information about the Bank’s retained earning policy, refer to the section Retained Earnings and Dividend Policy in the Bank’s most recently Form 10-K filed on March 27, 2009.
Accumulated other comprehensive income — Accumulated other comprehensive income (loss) was a net loss of $147.6 million at September 30, 2009 compared to a loss of $101.2 million at December 31, 2008. These amounts comprised of: (1) Net unrealized fair value losses on available-for-sale securities of $16.1 million ($64.4 million at December 31, 2008); (2) Net unrealized losses from cash flow hedges of $24.5 million ($30.2 million at December 31, 2008), principally from terminated hedges of anticipated issuances of debt; these unrealized losses will be recorded as an expense over the terms of the hedged bonds as a yield adjustment to the fixed coupons of the debt. Over the next 12 months it is expected that $7.1 million of net losses will be reclassified as a charge to earnings; (3) Minimum additional actuarially determined liabilities due on the Bank’s supplemental pension plans of $6.6 million at September 30, 2009 and December 31, 2008; and (4) Non-credit component of OTTI on credit impaired held-to-maturity mortgage-backed securities of a loss $100.5 million at September 30, 2009, net of accretion, and $0 at December 31, 2008.

 

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Mandatorily redeemable capital stock — The FHLBNY’s capital stock is redeemable at the option of both the member and the FHLBNY subject to certain conditions. Dividends related to capital stock classified as mandatorily redeemable are accrued at an estimated dividend rate and reported as interest expense in the Statements of Income. Redeemable capital stock is generally accounted in accordance with accounting standards for distinguishing liabilities from equity in case of certain financial instruments with characteristics of both liabilities and equity. Mandatorily redeemable capital stock at September 30, 2009 and December 31, 2008 represented stock held primarily by former members who were no longer members by virtue of being acquired by members of other FHLBanks. Under existing practice, such stock will be repaid 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.
Voluntary withdrawal from membership — No member had notified the FHLBNY at September 30, 2009 or at December 31, 2008 of their intention to voluntarily withdraw from membership. No member’s or non-member’s redemption request remained pending at September 30, 2009 or December 31, 2008.
Members acquired by non-members — The Bank reclassifies stock of members to a liability on the day the member’s charter is dissolved.
The following table provides rollforward information with respect to changes in mandatorily redeemable capital stock liabilities (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
 
Beginning balance
  $ 128,254     $ 169,302     $ 143,121     $ 238,596  
Capital stock subject to mandatory redemption reclassified from equity
    434             434       64,759  
Redemption of mandatorily redeemable capital stock 1
    (806 )     (25,804 )     (15,673 )     (159,857 )
 
                       
 
                               
Ending balance
  $ 127,882     $ 143,498     $ 127,882     $ 143,498  
 
                       
 
                               
Accrued interest payable
  $ 1,807     $ 2,513     $ 1,807     $ 2,513  
 
                       
     
1   Redemption includes repayment of excess stock.
(The annualized rate accrual is at 5.6% for September 30, 2009 and 6.50% for September 30, 2008)
In the current year first two quarters no amount of mandatorily redeemable stock were classified as a liability as no member was acquired by a non-member. In the third quarter, one member was acquired by a non-member and $0.4 million of stock was reclassified to a liability. In the prior year first three quarters four members were acquired by non-members and $64.8 million of capital was reclassified from capital to a liability.
Capital stock held by non-members will be repaid at maturity of the advances borrowed by non-members. In accordance with Finance Agency regulations, non-members cannot renew their advance borrowings at maturity. Such capital is considered mandatorily redeemable in accordance with accounting standards for distinguishing liabilities from equity in case of certain financial instruments with characteristics of both liabilities and equity.

 

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Under the provisions of the Bank’s Capital Plan, a notice of intent to withdraw from membership must be provided to the FHLBNY five years prior to the withdrawal date. At the end of such a five-year period, the FHLBNY will redeem the capital stock unless it is needed to meet any applicable minimum stock investment requirements. Under current practice, the FHLBNY redeems all stock in excess of that required to support outstanding advances. The practice of redeeming excess capital stock also applies to the redemption of mandatorily redeemable stock held by former members in excess of amounts required to support advances outstanding to the former members. Typically, mandatorily redeemable capital stock would remain outstanding as a liability until the stock is no longer required to support outstanding advances to the former member, which is generally at maturity of the advance.
Derivative Instruments
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 FHLBNY established several small grantor trusts related to employee benefits programs.
The notional amounts of derivatives are not recorded as assets or liabilities in the Statements of Condition, 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 value 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 derivatives and hedge accounting rules. In an economic hedge, the Bank retains or executes derivative contracts, which are economically effective in reducing risk, because a qualifying hedge was not available, or the hedge was not able to demonstrate that it would be highly effective on an ongoing basis as a qualifying hedge, or the cost of a qualifying hedge was not economical. Interest income and interest expense from interest rate swaps used for hedging are reported together with interest on the instrument being hedged. Any changes in the fair value of a derivative are recorded in current period earnings or in Accumulated other comprehensive income (loss), depending on the hedge designation.
The FHLBNY uses derivatives in three ways: (1) as fair value or cash flow hedges 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 economic hedges, 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 and advances 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: offset embedded options in assets and liabilities; to hedge the market value of existing assets, liabilities, and anticipated transactions; or to reduce funding costs. For additional information, see Note 15 — Derivatives and Hedging activities.

 

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The following table summarizes the principal derivatives hedging strategies (millions):
                         
            September 30, 2009     December 31, 2008  
Derivatives/Terms   Hedging Strategy   Accounting Designation   Notional Amount     Notional Amount  
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   $ 142     $ 618  
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   $ 40,590     $ 41,824  
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   Fair Value Hedge   $ 2,329     $ 1,405  
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   Fair Value Hedge   $ 23,407     $ 18,444  
Purchased interest rate cap
  To offset the cap embedded in the variable rate advance   Economic Hedge of fair value risk   $ 390     $ 465  
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   $ 12,948     $ 4,515  
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   $ 5,758     $ 2,148  
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   $ 448     $ 373  
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   $ 24,887     $ 19,609  
Receive fixed, pay floating interest rate swap (non-callable)
  To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate.   Fair Value Hedge   $     $ 779  
Receive fixed, pay floating interest rate swap (non-callable)
  To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate.   Economic Hedge of fair value risk   $ 7,526     $ 7,509  
Basis swap
  To convert non-LIBOR index to LIBOR to reduce interest rate sensitivity and repricing gaps.   Economic Hedge of cash flows   $ 3,785     $ 14,360  
Basis swap
  To convert 1M LIBOR index to 3M LIBOR to reduce interest rate sensitivity and repricing gaps.   Economic Hedge of cash flows   $ 5,840     $ 10,590  
Receive fixed, pay floating interest rate swap no longer cancelable
  Fixed rate callable bond converted to a LIBOR floating rate; matched to callable bond accounted for under fair value option.   Fair Value Option   $     $ 400  
Receive fixed, pay floating interest rate swap with an option to call at the swap counterparty’s option
  Fixed rate callable bond converted to a LIBOR floating rate; matched to callable bond accounted for under fair value option.   Fair Value Option   $ 2,385     $ 583  
Pay fixed, receive floating interest rate swap
  Economic hedge on the Balance Sheet   Economic Hedge   $ 1,050     $ 1,050  
Receive fixed, pay floating interest rate swap
  Economic hedge on the Balance Sheet   Economic Hedge   $ 1,050     $ 1,050  
Purchased interest rate cap
  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   $ 280     $ 300  

 

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Derivative 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):
                                 
    September 30, 2009     December 31, 2008  
            Estimated             Estimated  
    Notional     Fair Value     Notional     Fair Value  
Interest rate swaps
                               
Derivatives in fair value hedging relationships
  $ 97,418,662     $ (3,547,978 )   $ 84,582,796     $ (4,531,004 )
 
                       
Total derivatives designated as hedging instruments
  $ 97,418,662     $ (3,547,978 )   $ 84,582,796     $ (4,531,004 )
 
                       
Derivatives not designated as hedging instruments
    32,341,126       50,183       39,691,142       (76,412 )
Derivatives designated under fair value option
    2,385,000       1,874       983,000       7,699  
Interest rate caps/floors
                               
Economic-fair value changes
    2,282,000       58,777       2,357,000       8,174  
Mortgage delivery commitments (MPF)
                               
Economic-fair value changes
    11,843       35       10,395       (108 )
Other
                               
Intermediation
    280,000       295       300,000       484  
 
                       
Total
  $ 134,718,631     $ (3,436,814 )   $ 127,924,333     $ (4,591,167 )
 
                       
 
                               
Total derivatives, excluding accrued interest
          $ (3,436,814 )           $ (4,591,167 )
Cash collateral pledged to counteparties
            2,534,261               3,836,370  
Cash collateral received from counterparties
                          (61,209 )
Accrued interest
            39,901               (25,418 )
 
                           
 
                               
Net derivative balance
          $ (862,652 )           $ (841,424 )
 
                           
 
                               
Net derivative asset balance
          $ 9,092             $ 20,236  
Net derivative liability balance
            (871,744 )             (861,660 )
 
                           
 
                               
Net derivative balance
          $ (862,652 )           $ (841,424 )
 
                           

 

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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 categories of “Fair value,” “Commitment,” and “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 under the derivatives and hedge accounting rules but were an approved risk management strategy.
The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands):
                                 
    September 30, 2009     December 31, 2008  
            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
  $ 66,325,882     $ (4,354,109 )   $ 61,673,607     $ (5,758,653 )
Consolidated obligations-fair value hedges
    31,092,780       806,131       22,909,189       1,227,649  
Derivatives not designated as hedging instruments
                               
Advances-economic hedges
    531,729       (968 )     1,082,700       (24,520 )
Consolidated obligations-economic hedges
    30,099,397       56,439       36,973,442       (45,884 )
MPF loan-commitments
    11,843       35       10,395       (108 )
Balance sheet
    1,892,000       58,777       1,892,000       8,164  
Intermediary positions-economic hedges
    280,000       295       300,000       484  
Balance sheet — Macro hedges swaps
    2,100,000       (5,288 )     2,100,000       (5,998 )
Derivatives designated under fair value option
                               
Interest rate swaps-consolidated obligations-bonds
    2,385,000       1,874       983,000       7,699  
 
                       
 
                               
Total notional and fair value
  $ 134,718,631     $ (3,436,814 )   $ 127,924,333     $ (4,591,167 )
 
                       
 
                               
Total derivatives, excluding accrued interest
          $ (3,436,814 )           $ (4,591,167 )
Cash collateral pledged to counterparties
            2,534,261               3,836,370  
Cash collateral received from counterparties
                          (61,209 )
Accrued interest
            39,901               (25,418 )
 
                           
 
                               
Net derivative balance
          $ (862,652 )           $ (841,424 )
 
                           
 
                               
Net derivative asset balance
          $ 9,092             $ 20,236  
Net derivative liability balance
            (871,744 )             (861,660 )
 
                           
 
                               
Net derivative balance
          $ (862,652 )           $ (841,424 )
 
                           

 

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Asset Quality and Concentration — Advances, Investment securities, Mortgage loans, and Counterparty risks
The FHLBNY incurs credit risk — the risk 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 Bank faced an event of default in 2008 with the bankruptcy of one of its derivative counterparties. 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 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. LBSF was a counterparty to FHLBNY on multiple derivative transactions with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF. The FHLBNY had deposited $509.6 million with LBSF in cash as collateral. The LBSF default was unforeseen and despite the Bank’s risk management practices and policies — selection of counterparties with strong reputation, collateral requirements and credit monitoring, and other processes, the default caused the Bank to reserve $64.5 million as a charge to income in the third quarter of 2008 as the bankruptcy of LBHI and LBSF made the timing and the amount of the recovery uncertain.
The following table sets forth five-year history of the FHLBNY’s advances and mortgage loan portfolios as of September 30, 2009 and December 31 for the years ended 2004 through 2008 (in thousands):
                                                 
    September 30,     December 31,  
    2009     2008     2007     2006     2005     2004  
 
Advances
  $ 95,944,732     $ 109,152,876     $ 82,089,667     $ 59,012,394     $ 61,901,534     $ 68,507,487  
 
                                   
Mortgage loans before allowance for credit losses
  $ 1,339,586     $ 1,459,291     $ 1,492,261     $ 1,484,012     $ 1,467,525     $ 1,178,590  
 
                                   
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 credit 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.

 

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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 arising 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.

 

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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 review 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.
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 convertible advances made to individual members. There were no past due advances and all advances were current at September 30, 2009 and December 31, 2008. 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, 2009 and December 31, 2008, the Bank had advances of $48.7 billion and $52.2 billion outstanding to five member institutions, representing 53.2% and 50.4% of total advances outstanding, and sufficient collateral was held to cover the advances to these institutions.

 

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Top Five Advance Holders
The following table summarizes the top five advance holders (dollars in thousands):
Top five advance holders at September 30, 2009
                                                 
    September 30, 2009  
                            Percentage of        
                    Par     Total Par Value     Interest Income  
    City     State     Advances     of Advances     Three months     Nine months  
 
Hudson City Savings Bank 1
  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 1
  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 Life Insurance Company of America
  Newark   NJ     3,500,000       3.8       22,448       71,473  
 
                                       
 
                                               
Total
                  $ 48,747,232       53.2 %   $ 383,167     $ 1,199,918  
 
                                       
     
1   Officer of member bank also serves on the Board of Directors of the FHLBNY.
Top five advance holders at September 30, 2008
                                                 
    September 30, 2008  
                            Percentage of        
                    Par     Total Par Value     Interest Income  
    City     State     Advances     of Advances     Three months     Nine months  
 
Hudson City Savings Bank 1
  Paramus   NJ   $ 16,775,000       16.5 %   $ 174,289     $ 494,241  
Metropolitan Life Insurance Company
  New York   NY     10,230,000       10.1       52,746       151,855  
New York Community Bank
  Westbury   NY     8,513,619       8.4       80,807       257,201  
Manufacturers and Traders Trust Company
  Buffalo   NY     8,204,802       8.1       63,175       192,037  
Merrill Lynch Bank & Trust Co., FSB
  New York   NY     6,200,000       6.1       14,891       32,494  
 
                                       
 
                                               
Total
                  $ 49,923,421       49.2 %   $ 385,908     $ 1,127,828  
 
                                       
     
1   As of September 30, 2008, Officer of member bank also served on the Board of Directors of the FHLBNY.
Top five advance holders at December 31, 2008
                                         
    December 31, 2008  
                            Percentage of        
                    Par     Total Par Value     Interest  
    City     State     Advances     of Advances     Income  
 
Hudson City Savings Bank *
  Paramus   NJ   $ 17,525,000       17.0 %   $ 671,146  
Metropolitan Life Insurance Company
  New York   NY     15,105,000       14.6       260,420  
Manufacturers and Traders Trust Company
  Buffalo   NY     7,999,689       7.7       257,649  
New York Community Bank
  Westbury   NY     7,796,517       7.5       337,019  
Astoria Federal Savings and Loan Assn.
  Long Island City   NY     3,738,000       3.6       151,066  
 
                                 
 
                                       
Total
                  $ 52,164,206       50.4 %   $ 1,677,300  
 
                                 
     
*   At December 31, 2008, officer of member bank also served on the Board of Directors of the FHLBNY.

 

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Advances outstanding to former members are summarized as below (in thousands):
                 
    Ultimate   Member of   Advances  
Former Member   Acquiree Bank   FHLB   as of September 30, 2009  
Citizens Bank, National Association
  RBS Citizens, National Association   Boston   $ 1,250,000  
Independence Community Bank
  Sovereign Bank   Pittsburgh     510,000  
The Yardville National Bank
  PNC Bank, N.A.   Pittsburgh     215,000  
Summit Bank
  Bank of America, N.A.   Atlanta     201,499  
Susquehanna Patriot Bank
  Susquehanna Bank   Pittsburgh     100,000  
Others
  Various   Various     87,514  
 
             
 
               
Total
          $ 2,364,013  
 
             
                 
    Ultimate   Member of   Advances  
Former Member   Acquiree Bank   FHLB   as of December 31, 2008  
Citizens Bank, National Association
  RBS Citizens, National Association   Boston   $ 1,500,000  
Independence Community Bank
  Sovereign Bank   Pittsburgh     575,000  
The Yardville National Bank
  PNC Bank, N.A.   Pittsburgh     223,000  
Summit Bank
  Bank of America, N.A.   Atlanta     215,516  
Susquehanna Patriot Bank
  Susquehanna Bank   Pittsburgh     100,000  
Others
  Various   Various     89,154  
 
             
 
               
Total
          $ 2,702,670  
 
             

 

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Investment quality
At September 30, 2009, long-term investments were principally comprised of (1) Mortgage-backed securities classified as held-to-maturity at a carrying value of $9.7 billion, of which 88.2% comprised of securities issued by government sponsored enterprises and U.S. government agency, (2) Available-for-sale securities at fair value basis of $2.4 billion, entirely of GSE issued mortgage-backed securities. In addition, the FHLBNY had investments of $791.2 million in primary public and private placements of taxable obligations of state and local housing finance authorities classified as held-to-maturity.
The FHLBNY’s short-term investments consisted of certificates of deposits with maturities not exceeding one year issued by major financial institutions, and Federal funds sold.
The FHLBNY’s investments are summarized below (dollars in thousands):
                                 
    September 30,     December 31,     Dollar     Percentage  
    2009     2008     Variance     Variance  
 
State and local housing agency obligations 1
  $ 791,187     $ 804,100     $ (12,913 )     (1.61 )%
Mortgage-backed securities
                               
Available-for-sale securities, at fair value
    2,350,308       2,851,682       (501,374 )     (17.58 )
Held-to-maturity securities, at carrying value
    9,686,840       9,326,443       360,397       3.86  
 
                       
 
    12,828,335       12,982,225       (153,890 )     (1.19 )
 
                               
Grantor trusts 2
    12,284       10,187       2,097       20.59  
Certificates of deposit 1
    2,000,000       1,203,000       797,000       66.25  
Federal funds sold
    3,900,000             3,900,000       NA  
 
                       
 
                               
Total investments
  $ 18,740,619     $ 14,195,412     $ 4,545,207       32.02 %
 
                       
     
1   Classified as held-to-maturity securities, at carrying value.
 
2   Classified as available-for-sale securities, at fair value represent investments in registered mutual funds and other fixed-income securities maintained under the grantor trusts.
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.
Mortgage-backed securities — Mortgage-backed securities were classified as either Available-for-sale or Held-to-maturity.
Available-for-sale — At September 30, 2009 and December 31, 2008, all MBS classified as available-for-sale were rated triple-A by a Nationally Recognized Statistical Rating Organization (“NRSRO”). All available-for-sale securities were securities issued by Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corp (“Freddie Mac”).
Held-to-maturity — At September 30, 2009, Fannie Mae and Freddie Mac and a government agency issued securities made up 88.2% of MBS classified as held-to-maturity compared to 81.3% at December 31, 2008.

 

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The following tables contain information about credit ratings of the Bank’s investments in held-to-maturity and available-for-sale securities at September 30, 2009 and December 31, 2008 (in thousands):
External ratings — Held-to-maturity securities — September 30, 2009:
                                                 
            NRSRO Ratings - September 30, 2009  
                                            Below  
    Carrying                                     Investment  
Issued, guaranteed or insured   Value     AAA     AA     A     BBB     Grade  
Pools of Mortgages
                                               
Fannie Mae
  $ 1,194,202     $ 1,194,202     $     $     $     $  
Freddie Mac
    354,212       354,212                          
 
                                   
Total pools of mortgages
    1,548,414       1,548,414                          
 
                                   
 
                                               
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                                               
Fannie Mae
    2,370,747       2,370,747                          
Freddie Mac
    4,384,624       4,384,624                          
Ginnie Mae
    187,470       187,470                          
 
                                   
Total CMOs/REMICs
    6,942,841       6,942,841                          
 
                                   
 
                                               
Ginnie Mae-CMBS
    49,706       49,706                          
 
                                               
Non-GSE MBS
                                               
CMOs/REMICs
    482,874       347,447       13,588       42,546             79,293  
Commercial mortgage-backed securities
                                   
 
                                   
Total non-federal-agency MBS
    482,874       347,447       13,588       42,546             79,293  
 
                                   
 
                                               
Asset-Backed Securities
                                               
Manufactured housing (insured)
    208,544             208,544                    
Home equity loans (insured)
    249,918       10,733       72,997       30,216       27,798       108,174  
Home equity loans (uninsured)
    204,543       179,083       20,694             4,766        
 
                                   
Total asset-backed securities
    663,005       189,816       302,235       30,216       32,564       108,174  
 
                                   
Total mortgage-backed securities
  $ 9,686,840     $ 9,078,224     $ 315,823     $ 72,762     $ 32,564     $ 187,467  
 
                                   
 
                                               
Other
                                               
State and local housing finance agency obligations
  $ 791,187     $ 73,313     $ 638,509     $ 23,145     $ 56,220     $  
Certificates of deposit
    2,000,000             1,000,000       1,000,000              
 
                                   
Total other
  $ 2,791,187     $ 73,313     $ 1,638,509     $ 1,023,145     $ 56,220     $  
 
                                   

 

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External ratings — Held-to-maturity securities — December 31, 2008:
                                         
    Carrying     NRSRO Ratings - December 31, 2008  
Issued, guaranteed or insured   Value     AAA     AA     A     BBB  
Pools of Mortgages
                                       
Fannie Mae
  $ 1,400,058     $ 1,400,058     $     $     $  
Freddie Mac
    422,088       422,088                    
 
                             
Total pools of mortgages
    1,822,146       1,822,146                    
 
                             
 
                                       
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                                       
Fannie Mae
    2,032,050       2,032,050                    
Freddie Mac
    3,722,840       3,722,840                    
Ginnie Mae
    6,325       6,325                    
 
                             
Total CMOs/REMICs
    5,761,215       5,761,215                    
 
                             
 
                                       
Non-GSE MBS
                                       
CMOs/REMICs
    609,908       509,056             62,401       38,451  
Commercial mortgage-backed securities
    266,994       266,994                    
 
                             
Total non-federal-agency MBS
    876,902       776,050             62,401       38,451  
 
                             
 
                                       
Asset-Backed Securities
                                       
Manufactured housing (insured)
    229,714             229,714              
Home equity loans (insured)
    376,587       86,662             130,277       159,648  
Home equity loans (uninsured)
    259,879       259,879                    
 
                             
Total asset-backed securities
    866,180       346,541       229,714       130,277       159,648  
 
                             
Total mortgage-backed securities
  $ 9,326,443     $ 8,705,952     $ 229,714     $ 192,678     $ 198,099  
 
                             
 
                                       
Other
                                       
State and local housing finance agency obligations
  $ 804,100     $ 74,881     $ 672,999     $     $ 56,220  
Certificates of deposit
    1,203,000             628,000       575,000        
 
                             
Total other
  $ 2,007,100     $ 74,881     $ 1,300,999     $ 575,000     $ 56,220  
 
                             

 

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External ratings — Available-for-sale securities — September 30, 2009:
                                 
            NRSRO Ratings - September 30, 2009  
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
    1,626,069       1,626,069              
Freddie Mac
    724,239       724,239              
Ginnie Mae
                       
 
                       
Total CMOs/REMICs
    2,350,308       2,350,308              
 
                       
 
                               
Non-GSE MBS
                               
CMOs/REMICs
                       
Commercial mortgage-backed securities
                       
 
                       
Total non-federal-agency MBS
                       
 
                       
 
                               
Asset-Backed Securities
                               
Manufactured housing (insured)
                       
Home equity loans (insured)
                       
Home equity loans (uninsured)
                       
 
                       
Total asset-backed securities
                       
 
                       
Total mortgage-backed securities
  $ 2,350,308     $ 2,350,308     $     $  
 
                       

 

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External ratings — Available-for-sale securities — December 31, 2008:
                                 
            NRSRO Ratings - December 31, 2008  
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
    1,854,988       1,854,988              
Freddie Mac
    996,694       996,694              
Ginnie Mae
                       
 
                       
Total CMOs/REMICs
    2,851,682       2,851,682              
 
                       
 
                               
Non-GSE MBS
                               
CMOs/REMICs
                       
Commercial mortgage-backed securities
                       
 
                       
Total non-federal-agency MBS
                       
 
                       
 
                               
Asset-Backed Securities
                               
Manufactured housing (insured)
                       
Home equity loans (insured)
                       
Home equity loans (uninsured)
                       
 
                       
Total asset-backed securities
                       
 
                       
Total mortgage-backed securities
  $ 2,851,682     $ 2,851,682     $     $  
 
                       
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 — All MBS outstanding at September 30, 2009 and December 31, 2008 and classified as AFS were issued by Fannie Mae and Freddie Mac.
Held-to-maturity securities — Comprised of 88.2% and 81.2% of MBS also issued by Fannie Mae, Freddie Mac and a government agency at September 30, 2009 and December 31, 2008.

 

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The following table summarizes the carrying value basis of held-to-maturity mortgage-backed securities by issuer (dollars in thousands):
                                 
    September 30,     Percentage     December 31,     Percentage  
    2009     of total     2008     of total  
 
U.S. government sponsored enterprise residential mortgage-backed securities
                               
Fannie Mae
  $ 3,564,949       36.80 %   $ 3,432,108       36.80 %
Freddie Mac
    4,738,836       48.92       4,144,928       44.44  
U.S. agency residential mortgage-backed securities
    187,470       1.94       6,325       0.07  
U.S. agency commercial mortgage-backed securities
    49,706       0.51              
Private-label issued securities
    1,145,879       11.83       1,743,082       18.69  
 
                       
Total Held-to-maturity securities-mortgage-backed securities
  $ 9,686,840       100.00 %   $ 9,326,443       100.00 %
 
                       
Non-agency Private label mortgage — and asset-backed securities
At September 30, 2009, the Bank also held MBS that were privately issued. All private-label MBS 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):
                                                 
    September 30, 2009     December 31, 2008  
          Variable                 Variable        
Private-label MBS   Fixed Rate     Rate     Total     Fixed Rate     Rate     Total  
Private-label RMBS
                                               
Prime
  $ 473,648     $ 4,643     $ 478,291     $ 596,430     $ 4,811     $ 601,241  
Alt-A
    7,471       3,838       11,309       9,129       4,177       13,306  
 
                                   
Total PL RMBS
    481,119       8,481       489,600       605,559       8,988       614,547  
 
                                   
 
                                               
Private-label CMBS
                                               
Prime
                      266,860             266,860  
 
                                   
Total PL CMBS
                      266,860             266,860  
 
                                   
 
                                               
Home Equity Loans
                                               
Subprime
    453,025       113,399       566,424       504,565       132,135       636,700  
 
                                   
Total Home Equity Loans
    453,025       113,399       566,424       504,565       132,135       636,700  
 
                                   
 
                                               
Manufactured Housing Loans
                                               
Subprime
    208,566             208,566       229,738             229,738  
 
                                   
Total Manufactured Housing Loans
    208,566             208,566       229,738             229,738  
 
                                   
Total UPB of private-label MBS
  $ 1,142,710     $ 121,880     $ 1,264,590     $ 1,606,722     $ 141,123     $ 1,747,845  
 
                                   
Unpaid principal balance (UPB) is also known as the current face or par amount of a mortgage-backed security.

 

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Impairment Analysis
Securities with a fair value below amortized cost basis are considered impaired. Determining whether a decline in fair value is OTTI requires significant judgment. The FHLBNY evaluates its individual held-to-maturity investment in private-label issued mortgage- and asset-backed securities for OTTI on a quarterly basis. As part of this process, the FHLBNY assesses if it has an intention to sell the security or it is more likely than not that it will be required to sell the impaired investment before recovery of its amortized cost basis.
To assess whether the entire amortized cost bases of the Bank’s private-label MBS will be recovered, the Bank performed cash flow analysis for 100% of the FHLBNY’s private-label MBS outstanding at September 30, 2009, including private-label MBS that were determined to be other-than-temporarily impaired in a previous reporting period. For more information about the Bank’s critical policies and procedures and the role of the OTTI Committee in the pricing and assessment of OTTI, see Note 1. Significant Accounting Policies and Estimates.
Based on the results of its cash flow analyses, the FHLBNY determined that it was likely that it will not fully recover the amortized cost bases of ten of its private-label MBS and, accordingly, these securities were deemed to be OTTI at September 30, 2009. The impaired securities included seven securities, with total unpaid principal balance of $124.7 million at September 30, 2009, that had previously been identified as OTTI and three securities, with total unpaid principal balance of $72.5 million at September 30, 2009, that were determined to be OTTI as of September 30, 2009. The cash flow analysis compared the present value of the cash flows expected to be collected from the ten securities to the securities’ amortized cost bases. The difference, the credit loss of $3.7 million, was recorded as a charge to current year third quarter earnings. The non-credit component of OTTI associated with the impairment in the third quarter was $26.5 million and was recorded as a loss in Accumulated other comprehensive income (loss). In all fifteen securities have been deemed OTTI through the current year third quarter. Thirteen impaired 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 impaired securities would not be fully supported by the two bond insurers.
The cumulative credit impairment expenses recorded through earnings year-to-date September 30, 2009 was $14.3 million as a charge to earnings recorded in Other income (loss). The non-credit component of OTTI recorded in Accumulated other comprehensive income through the third quarter was $103.9 million. The Bank did not experience any OTTI during 2008 or 2007.
At December 31, 2008, the FHLBNY’s screening and monitoring process, which included pricing, credit rating and credit enhancement coverage, had identified 21 private-label MBS with weak performance measures indicating the possibility of OTTI. Bonds selected through the screening process were cash flow tested for credit impairment. Fourteen of the securities were determined to be impaired absent bond insurer support to meet scheduled cash flows in the future. The remaining securities were considered to be only temporarily impaired based on cash flow analysis. Based on financial analysis of the bond insurers it was deemed that Ambac and MBIA had the ability to meet future claims, and the fourteen bonds were determined to be also temporarily impaired at December 31, 2008.

 

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In the first and second quarters of 2009, the FHLBNY also employed its screening procedures and identified private-label MBS with weaker performance measures. Bonds selected through the screening process were cash flow tested for credit impairment. Certain insured bonds that were determined to be credit impaired at December 31, 2008 absent insurer support were determined to be OTTI because of deteriorating financial conditions of MBIA and Ambac. First MBIA and then Ambac was downgraded and released financial information and results that the FHLBNY’s views resulted in the shortening of the bond insurance support period, a quantitative measure under the FHLBNY’s bond insurer analysis methodology. With the incremental shortening of the insurance support period of a credit impaired bond starting with the first quarter of 2009 because of deteriorating financial conditions at Ambac and MBIA, the FHLBNY recognized larger amounts of cash flow shortfalls at each of the quarters for certain insured bonds. Certain uninsured bonds were determined to be credit impaired also based on cash flow testing for credit impairment in the second and third quarters of 2009. Observed historical performance parameters of certain securities have deteriorated in 2009, and these factors have increased loss severities in the cash flow analyses of those private-label MBS.
The projected cash flows were based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined reflected the FHLBNY’s best estimate scenario.
Security vintage information — Industry analysis of delinquency performance of mortgage-backed securities indicates that loans supporting securities issued in 2005, 2006 and 2007 are exhibiting significantly higher delinquency rates than those supporting securities issued in earlier years. The FHLBNY believes the year of issuance or origination (vintage) of the collateral supporting MBS is an important factor in projecting cash flow performance and assessing their credit performance. The Bank’s private-label issued MBS (“PLMBS”) are relatively seasoned securities. At September 30, 2009 and December 31, 2008, the unpaid principal balances of securities issued in 2005 and 2006 totaled $159.2 million and $212.2 million, representing 12.5% and 12.1% of all private label MBS. The securities issued in 2005 and 2006 are residential mortgage-backed securities collateralized by loans to prime borrowers. One such residential mortgage-backed security issued in 2005 with an unpaid balance of $56.9 million has been determined to be OTTI. The fourteen other securities determined to be OTTI are MBS supported home equity loans collateralized by residential homes to subprime borrowers. These securities were all issued prior to 2005.
GSE issued securities — The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac or a government agency by considering the creditworthiness and performance of the debt securities and the strength of the GSE’s guarantees of the securities. Based on the Bank’s analysis, GSE and agency issued securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE and agency issued securities given the current levels of collateral and credit enhancements and guarantees that exist to protect the investments.
Remaining private-label held-to-maturity MBS — With respect to the Bank’s remaining investments, the Bank believes no OTTI exists. The Bank’s conclusion is based upon multiple factors: bond issuers’ continued satisfaction of their obligations under the contractual terms of the securities; the estimated performance of the underlying collateral; the evaluation of the fundamentals of the issuers’ financial condition; and the estimated support from the monoline insurers under the contractual terms of insurance. Management has not made a decision to sell such securities at September 30, 2009. Management has also concluded that it is more likely than not that it will not be required to sell such securities before recovery of the amortized cost basis of the securities. Based on factors outlined above, the FHLBNY believes that the remaining securities classified as held-to-maturity were not other-than-temporarily impaired as of September 30, 2009.

 

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However, without recovery in the near term such that liquidity returns to the mortgage-backed securities market and spreads return to levels that reflect underlying credit characteristics, or if the credit losses of the underlying collateral within the mortgage-backed securities perform worse than expected, or if the presumption of the ability of monoline insurers to support the insured securities identified at September 30, 2009 as dependent on insurance is negatively impacted by the insurers’ future financial performance, it would be likely that additional OTTI may be recognized in future periods.
The table below summarizes the key characteristics of the 15 OTTI securities at September 30, 2009) (dollars in thousands):
                                                                                         
            September 30, 2009  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
RMBS-Prime*
    1     $     $     $     $     $ 56,867     $ 54,687     $ (438 )   $ (2,766 )   $ (3,204 )   $  
HEL Subprime*
    14       35,616       20,653       181,995       117,651       62,461       38,392       (13,838 )     (101,118 )           (114,956 )
 
                                                                 
Total
    15     $ 35,616     $ 20,653     $ 181,995     $ 117,651     $ 119,328     $ 93,079     $ (14,276 )   $ (103,884 )   $ (3,204 )   $ (114,956 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
The table below summarizes the key characteristics of the securities that were deemed OTTI in the third quarter of 2009 (dollars in thousands):
                                                                                         
            Q3 2009 activity  
            Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross OTTI Losses  
Security                   Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   Count     UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
RMBS-Prime*
        $     $     $     $     $     $     $     $     $     $  
HEL Subprime*
    10       13,304       7,680       121,435       79,700       62,460       38,392       (3,683 )     (26,486 )           (30,169 )
 
                                                                 
Total
    10     $ 13,304     $ 7,680     $ 121,435     $ 79,700     $ 62,460     $ 38,392     $ (3,683 )   $ (26,486 )   $     $ (30,169 )
 
                                                                 
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
Bond insurer counterparty risks - The current weakened financial condition of Ambac Assurance Corp., (“Ambac”) and MBIA Insurance Corp (“MBIA”) creates a risk that these counterparties will fail to fulfill their claims paying obligations for certain insured private-label MBS owned by the FHLBNY. The FHLBNY has determined that the two monoline insurers are at risk with respect to their claims paying ability, and has also determined that the FHLBNY may rely on the two bond insurers to remain as viable financial guarantors until July 31, 2016 with respect to Ambac, and March 31, 2012 with respect to MBIA. The FHLBNY’s cash flow assessment has determined that absent bond insurance, certain private-label MBS will experience credit impairment in future periods, and has deemed such MBS as OTTI, and recorded credit impairment losses. If the financial condition of the two bond insurers worsens, it could result in a shortening of the length of time the securities could rely on the two bond insurers for cash flow support. This in turn would result in the recognition of additional credit impairment losses on securities already deemed OTTI.
The following table summarizes MBS insured by MBIA and Ambac, and identifies additional credit losses should the two bond insurers fail to provide any support effective September 2009. The analysis below is a point in time analysis and forecasted credit losses may be greater should the underlying collateral within the insured MBS perform worse than expected as of September 30, 2009 (in thousands):
                                                         
            September 30, 2009              
            Insurer MBIA     Cumulative OTTI Recorded     Additional  
    No. of     Amortized     Carrying     Fair     Credit     Non-credit     Credit losses if zero  
Ratings   Securities     Cost Basis     Value     Value     Loss     Loss     insurance assumed  
Impaired
    2     $ 30,242     $ 20,600       20,653     $ (5,370 )   $ (10,075 )   $ (1,036 )
Unimpaired
    1       2,948       2,948       2,337                    
 
                                         
Total
    3     $ 33,189     $ 23,548     $ 22,990     $ (5,370 )   $ (10,075 )   $ (1,036 )
 
                                         
                                                         
            September 30, 2009              
            Insurer Ambac     Cumulative OTTI Recorded     Additional  
    No. of     Amortized     Carrying     Fair     Credit     Non-credit     Credit losses if zero  
Ratings   Securities     Cost Basis     Value     Value     Loss     Loss     insurance assumed  
Impaired
    11     $ 174,462     $ 109,189       117,651     $ (7,411 )   $ (68,040 )   $ (5,804 )
Unimpaired
    2       36,400       36,400       22,853                    
 
                                         
Total
    13     $ 210,862     $ 145,590     $ 140,504     $ (7,411 )   $ (68,040 )   $ (5,804 )
 
                                         

 

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The following table presents additional information of the fair values and gross unrealized losses of PLMBS by year of securitization and external rating at September 30, 2009 (in thousands):
                                                                                 
    September 30, 2009                              
    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
  $ 70,033     $     $     $ 42,949     $     $ 27,084     $ 69,330     $ (4,547 )   $ 64,783     $  
2005
    89,168       32,301                         56,867       87,025       (924 )     86,101       (3,204 )
2004 and earlier
    319,090       305,225       13,865                         317,752       (4,653 )     313,454        
 
                                                           
Total RMBS Prime
    478,291       337,526       13,865       42,949             83,951       474,107       (10,124 )     464,338       (3,204 )
 
                                                           
 
                                                                               
Alt-A
                                                                               
2004 and earlier
    11,309       11,309                               11,312       (975 )     10,337        
 
                                                           
Total RMBS
    489,600       348,835       13,865       42,949             83,951       485,419       (11,099 )     474,675       (3,204 )
 
                                                           
 
                                                                               
CMBS
                                                                               
Prime
                                                                               
2004 and earlier
                                                           
 
                                                           
 
                                                                               
HEL
                                                                               
Subprime
                                                                               
2004 and earlier
    566,424       213,943       93,704       52,119       44,629       162,029       552,379       (168,624 )     383,755       (114,956 )
 
                                                           
 
                                                                               
Manufactured Housing Loans
                                                                               
Subprime
                                                                               
2004 and earlier
    208,566             208,566                         208,544       (46,536 )     162,008        
 
                                                           
Total PLMBS
  $ 1,264,590     $ 562,778     $ 316,135     $ 95,068     $ 44,629     $ 245,980     $ 1,246,342     $ (226,259 )   $ 1,020,438     $ (118,160 )
 
                                                           

 

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The following table presents additional information of the fair values and gross unrealized losses of PLMBS by year of securitization and external rating at December 31, 2008 (in thousands):
                                                                 
    December 31, 2008                        
    Unpaid Principal Balance                        
                                                    Gross        
    Ratings                                     Amortized     Unrealized        
Private-label MBS   Subtotal     Triple-A     Double-A     Single-A     Triple-B     Cost     (Losses)     Fair Value  
RMBS
                                                               
Prime
                                                               
2006
  $ 101,843     $     $     $ 62,968     $ 38,875     $ 100,851     $ (20,544 )   $ 80,308  
2005
    110,334       110,334                         108,254       (5,415 )     102,839  
2004
    168,166       168,166                         168,173       (8,363 )     159,810  
2003 and earlier
    220,898       220,898                         219,318       (6,722 )     212,596  
 
                                               
Total RMBS Prime
    601,241       499,398             62,968       38,875       596,596       (41,044 )     555,553  
 
                                               
 
                                                               
Alt-A
                                                               
2003 and earlier
    13,306       13,306                         13,310       (1,662 )     11,648  
 
                                               
Total RMBS
    614,547       512,704             62,968       38,875       609,906       (42,706 )     567,201  
 
                                               
 
                                                               
CMBS
                                                               
Prime
                                                               
2003 and earlier
    266,860       266,860                         266,994       (127 )     267,016  
 
                                               
 
                                                               
HEL
                                                               
Subprime
                                                               
2003 and earlier
    636,700       346,631             130,404       159,665       636,466       (224,069 )     412,397  
 
                                               
 
                                                               
Manufactured Housing Loans
                                                               
Subprime
                                                               
2003 and earlier
    229,738             229,738                   229,714       (75,418 )     154,296  
 
                                               
Total PLMBS
  $ 1,747,845     $ 1,126,195     $ 229,738     $ 193,372     $ 198,540     $ 1,743,080     $ (342,320 )   $ 1,400,910  
 
                                               

 

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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.
                                 
    September 30, 2009  
            Original              
    Weighted-     Weighted-     Weighted-     Weighted-Average  
    Average Market     Average Credit     Average Credit     Collateral  
Private-label MBS   Price 1     Support %     Support %     Delinquency %  
RMBS
                               
Prime
                               
2006
  $ 92.50       3.73 %     5.16 %     3.79 %
2005
    96.56       2.72       3.78       1.69  
2004 and earlier
    98.23       1.57       2.73       0.49  
 
                       
Total RMBS Prime
    97.08       2.10       3.28       1.20  
 
                               
Alt-A
                               
2004 and earlier
    91.40       10.56       32.08       8.66  
 
                       
Total RMBS
    96.95       2.30       3.95       1.37  
 
                       
 
                               
CMBS
                               
Prime
                               
2004 and earlier
                       
 
                       
 
                               
HEL
                               
Subprime
                               
2004 and earlier
    67.75       57.97       65.32       16.35  
 
                       
 
                               
Manufactured Housing Loans
                               
Subprime
                               
2004 and earlier
    77.68       58.01       55.91       3.54  
 
                       
Total Private-label MBS
  $ 80.69       36.42 %     40.00 %     8.44 %
 
                       
     
1   Represents weighted-average market price based on par equaling $100.00. Combined weighted-average collateral delinquency rates is calculated based on UPB amount.
Definitions:
Original Weighted-Average Credit Support percentage represents 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 percentage represents 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.

 

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Weighted-average collateral delinquency percentage represents 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.
                                 
    December 31, 2008  
            Original              
    Weighted-     Weighted-     Weighted-     Weighted-Average  
    Average Market     Average Credit     Average Credit     Collateral  
Private-label MBS   Price 1     Support %     Support %     Delinquency %  
RMBS
                               
Prime
                               
2006
  $ 78.85       3.71 %     4.56 %     0.86 %
2005
    93.21       2.68       3.26       1.00  
2004
    95.03       2.05       2.86       0.40  
2003 and earlier
    96.24       1.21       2.17       0.27  
 
                       
Total RMBS Prime
    92.40       2.14       2.97       0.54  
 
                               
Alt-A
                               
2003 and earlier
    87.54       10.22       31.60       10.56  
 
                       
Total RMBS
    92.30       2.31       3.59       0.76  
 
                       
 
                               
CMBS
                               
Prime
                               
2003 and earlier
    100.06       26.69       38.73        
 
                       
 
                               
HEL
                               
Subprime
                               
2003 and earlier
    64.77       58.31       65.66       12.53  
 
                       
 
                               
Manufactured Housing Loans
                               
Subprime
                               
2003 and earlier
    67.16       58.26       55.99       1.88  
 
                       
Total Private-label MBS
  $ 80.15       33.79 %     38.45 %     5.08 %
 
                       
     
1   Represents weighted-average market price based on par equaling $100.00. Combined weighted-average collateral delinquency rates will be calculated based on UPB amount.

 

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External ratings are just one factor that is considered in analyzing if a security is other-than-temporarily impaired. The table below compares delinquency percentage across PLMBS security types, ratings and gross unrealized losses. (dollars in thousands):
                                                 
    September 30, 2009     December 31, 2008  
            Gross     Weighted-Average             Gross     Weighted-Average  
    Amortized     Unrealized     Collateral     Amortized     Unrealized     Collateral  
Private-label MBS   Cost     (Losses)     Delinquency % 1     Cost     (Losses)     Delinquency % 1  
RMBS
                                               
Prime
                                               
Rated Triple A
  $ 336,135     $ (5,210 )     0.46 %   $ 495,744     $ (20,500 )     0.48 %
Rated Double A
    13,588                                
Rated Single A
    42,546       (1,801 )     2.64       62,401       (12,027 )     0.76  
Rated Triple B
                      38,451       (8,517 )     1.01  
Below Investment Grade
    81,838       (3,113 )     3.61                    
 
                                   
Total of RMBS Prime
    474,107       (10,124 )     1.20       596,596       (41,044 )     0.54  
 
                                   
 
Alt-A
                                               
Rated Triple A
    11,312       (975 )     8.66       13,310       (1,662 )     10.56  
 
                                   
Total of RMBS
    485,419       (11,099 )     1.37       609,906       (42,706 )     0.76  
 
                                   
 
                                               
CMBS
                                               
Prime
                                               
Rated Triple A
                      266,994       (127 )      
 
                                   
 
HEL
                                               
Subprime
                                               
Rated Triple A
    212,819       (62,676 )     16.73       346,541       (105,673 )     13.54  
Rated Double A
    93,690       (24,923 )     11.03                    
Rated Single A
    50,073       (17,953 )     15.58       130,277       (50,977 )     5.68  
Rated Triple B
    43,496       (15,848 )     11.71       159,648       (67,419 )     15.96  
Below Investment Grade
    152,301       (47,224 )     20.46                    
 
                                   
Total of HEL Subprime
    552,379       (168,624 )     16.35       636,466       (224,069 )     12.53  
 
                                   
 
                                               
Manufactured Housing Loans
                                               
Subprime
                                               
Rated Double A
    208,544       (46,536 )     3.54       229,714       (75,418 )     1.88  
 
                                   
Grand Total
  $ 1,246,342     $ (226,259 )     8.44 %   $ 1,743,080     $ (342,320 )     5.08 %
 
                                   
     
1   Weighted-average collateral delinquency rate is determined based on the underlying loans that are 60 days or more past due. The reported delinquency percentage represents weighted-average based on the dollar amounts of the individual securities in the category and their respective delinquencies. Combined weighted-average collateral delinquency rates are calculated based on UPB amount.

 

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Mortgage loans held-for-portfolio
Underwriting standards — Summarized below are the principal underwriting criteria for the Bank’s Mortgage Partnership Finance Program or MPF 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 though 17 of the Bank’s most recent Form 10-K filed on March 27, 2009.
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. 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% 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 provides a rollforward analysis of the memo First Loss Account (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
 
Beginning balance
  $ 13,948     $ 13,328     $ 13,765     $ 12,947  
Additions
    19       234       216       615  
Charge-offs
          (20 )     (14 )     (20 )
 
                       
 
Ending balance
  $ 13,967     $ 13,542     $ 13,967     $ 13,542  
 
                       
The First Loss Account (“FLA”) memorializes the first tier of credit exposure and is neither an indication of inherent losses in the loan portfolio nor a loan loss reserve.
Mortgage insurer risk — Credit enhancement is the obligation of the Participating Financial Institution (“PFI”). The PFI’s credit enhancement amount represents a contingent liability to pay the credit losses with respect to the loans purchased by the FHLBNY. In certain instances, the PFI is required under the MPF agreement to purchase supplemental mortgage insurance (“SMI”). The PFI may also require the borrower to purchase private mortgage insurance (“PMI”). Under the MPF program, all insurer providers are required to maintain a credit rating of double-A or better. If a PMI provider is downgraded, the FHLBNY may request the servicer to obtain replacement PMI coverage with a different provider. If a SMI provider is downgraded below a double-A rating, the PFI is required to replace the SMI policy or to provide its own undertaking equivalent to the SMI coverage. As of August 7, 2009, this requirement has been temporarily waived by the FHFA, the FHLBanks’ regulators, for a period of one year for existing loans and six months for new loans with certain conditions, including evaluation of the claims paying ability of SMI providers. This waiver recognizes the fact that currently there is no mortgage insurer that underwrites SMI is rated the second highest rating category or better by any Nationally Recognized Statistical Rating Organization (“NRSRO”).

 

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The FHLBNY has purchased certain loans for which the PFI has either purchased SMI or the borrower has purchased PMI from Mortgage Guaranty Insurance Corporation (“MGIC”). The amounts of such loans were not significant at September 30, 2009 or December 31, 2008. S&P rates MGIC as a double-B mortgage insurer.
The allowance for credit losses with respect to the mortgage loans held-for-portfolio was as follows (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
 
                               
Beginning balance
  $ 2,760     $ 879     $ 1,406     $ 633  
Charge-offs
          (4 )     (14 )     (4 )
Provision for credit losses on mortgage loans
    598       (31 )     1,966       215  
 
                       
 
Ending balance
  $ 3,358     $ 844     $ 3,358     $ 844  
 
                       
Nonperforming mortgage loans represent conventional mortgage loans that are placed on non-accrual and nonperforming status when the collection of contractual principal or interest from the borrower is 90 days or more past due. Loans (excluding Federal Housing Administration and Veterans Administration insured loans) that are 90 days or more past due are considered as non-accrual. Other than the non-accrual loans, no mortgage loans or advances were impaired at September 30, 2009 or December 31, 2008.
Nonperforming mortgage loans and mortgage loans 90 days or more past due and still accruing were as follows (in thousands):
                 
    September 30, 2009     December 31, 2008  
 
               
Mortgage loans, net of provisions for credit losses
  $ 1,336,228     $ 1,457,885  
 
           
 
Non-performing mortgage loans held-for-portfolio
  $ 12,642     $ 4,792  
 
           
 
Mortgage loans past due 90 days or more and still accruing interest
  $ 697     $ 507  
 
           
The FHLBNY’s interest contractually due and actually received for nonperforming mortgage loans held-for-portfolio was as follows (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
 
                               
Interest contractually due 1
  $ 200     $ 54     $ 505     $ 122  
Interest actually received
    179       46       452       102  
 
                       
 
Shortfall
  $ 21     $ 8     $ 53     $ 20  
 
                       
     
1   The Bank does not recognize interest received as income from uninsured loans past due 90-days or greater.

 

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Derivative Credit Risk Exposure
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 large banks and major broker-dealers. Some of these banks and broker-dealers 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 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.
The following table summarizes the FHLBNY’s credit exposure by counterparty credit rating (in thousands, except number of counterparties).
                                 
    September 30, 2009  
                    Total Net        
    Number of     Notional     Exposure at     Net Exposure (3)  
Credit Rating   Counterparties     Balance     Fair Value     after Cash Collateral  
 
                               
AAA
    1     $ 14,153,165     $     $  
AA
    6       29,922,203              
A
    8       90,491,420              
Members (Notes 1 and 2)
    2       140,000       9,092       9,092  
Delivery Commitments
            11,843              
 
                       
 
                               
Total
    17     $ 134,718,631     $ 9,092     $ 9,092  
 
                       
                                 
    December 31, 2008  
                    Total Net        
    Number of     Notional     Exposure at     Net Exposure (3)  
Credit Rating   Counterparties     Balance     Fair Value     after Cash Collateral  
 
                               
AAA
    1     $ 9,167,456     $     $  
AA
    6       39,939,946              
A
    7       78,656,536       64,890       3,681  
Members (Notes 1 and 2)
    3       150,000       16,555       16,555  
Delivery Commitments
          10,395              
 
                       
 
                               
Total
    17     $ 127,924,333     $ 81,445     $ 20,236  
 
                       
Note 1:   Fair values of $9.1 million and $16.6 million comprising of intermediated transactions with members and interest-rate caps sold to members (with capped floating-rate advances) were collateralized at September 30, 2009 and December 31, 2008.
Note 2:  
The FHLBNY’s loan and collateral agreements with its members give the FHLBNY a security interest in the obligations of members, who are required to pledge collateral to secure advances and derivatives purchased by the FHLBNY as an intermediary on behalf of its members. The FHLBNY has also established collateral maintenance levels 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. 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 loan and collateral agreements with its members, the FHLBNY believes that its maximum credit exposure due to the intermediated transactions was $0 at September 30, 2009 and December 31, 2008.
Note 3:  
As reported in the Statements of Condition.

 

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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 — At September 30, 2009, the FHLBNY’s credit risk was $9.1 million after recognition of cash collateral held by the FHLBNY. The comparable exposure was $20.2 million at December 31, 2008. 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, 2009, the fair values of derivatives in a gain position were below the threshold and derivative counterparties pledged no cash to the FHLBNY. At December 31, 2008, derivative counterparties had pledged $61.2 million in cash as collateral to the FHLBNY.
At September 30, 2009, the FHLBNY had posted $2.5 billion in cash as collateral to derivative counterparties to mitigate derivatives in a net fair value liability (unfavorable) position. The FHLBNY is exposed to the extent that a counterparty may not re-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 replace the derivatives in a liability position (gain position for the acquiring counterparty) with another available counterparty in exchange for cash delivered to the FHLBNY. To the extent that the fair values of the replacement derivatives are less than the cash collateral posted, the FHLBNY may not receive cash equal to the amount posted received.
Derivative counterparty ratings — The Bank’s credit exposures at September 30, 2009, in a gain position were 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.
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.

 

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Despite these risk mitigating policies and processes, on September 15, 2008, an event of default occurred under outstanding derivative contracts with total notional amounts of $16.5 billion between Lehman Brothers Special Financing Inc. (“LBSF”) and the FHLBNY when credit support provider Lehman Brothers Holdings Inc. commenced a filing under Chapter 11 of the U.S. Bankruptcy Code on September 15, 2008. The Bank had deposited $509.6 million with LBSF as cash collateral. Since the default, the FHLBNY has replaced most of the derivatives that had been executed between LBSF and the FHLBNY through new agreements with other derivative counterparties. The Lehman bankruptcy proceedings are ongoing.
Liquidity
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. With the passage of the Housing Act on July 30, 2008, the U.S. Treasury was authorized to purchase obligations issued by the FHLBanks, in any amount deemed appropriate by the U.S. Treasury. This temporary authorization expires December 31, 2009 and supplements the existing facility of $4 billion. See Note 17 — Commitments and Contingencies for more information of the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (GSECF), which is designed to serve as a contingent source of liquidity for the FHLBanks via issuance of consolidated obligations to the U.S. Treasury.
The FHLBNY’s liquidity position remains in compliance with all regulatory requirements and it does not foresee any changes to that position.
Finance Agency Regulations — Liquidity
Beginning December 1, 2005, with the implementation of the Bank’s 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 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.
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 liquidity in excess of requirements is summarized in the table titled Contingency Liquidity.
Violations of the liquidity requirements would invoke non-compliance penalties under discretionary powers given to the Finance Agency under applicable regulations, which would include corrective actions.

 

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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 Bank is required to maintain certain liquidity measures in accordance with the FHLBank Act and policies developed by the FHLBNY management as approved by the FHLBNY’s Board of Directors.
The specific liquidity requirements applicable to the FHLBNY are described in the next three sections:
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 any other FHLBank, or from any other governmental instrumentality. The FHLBNY met these requirements for all periods reported.
Deposit liquidity is calculated daily. Quarterly average reserve requirements and actual reserves are summarized below (in millions):
                         
    Average Deposit     Average Actual        
For the quarters ended   Reserve Required     Deposit Liquidity     Excess  
September 30, 2009
  $ 2,189     $ 55,890     $ 53,701  
June 30, 2009
    2,190       57,886       55,696  
March 31, 2009
    1,753       63,267       61,514  
December 31, 2008
    2,022       66,246       64,224  
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 these requirements for all periods reported.

 

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The following table summarizes operational liquidity (in millions):
                         
    Average Balance Sheet     Average Actual        
For the quarters ended   Liquidity Requirement     Operational Liquidity     Excess  
September 30, 2009
  $ 18,348     $ 22,205     $ 3,857  
June 30, 2009
    11,925       25,904       13,979  
March 31, 2009
    9,543       20,893       11,350  
December 31, 2008
    8,226       14,827       6,601  
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 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. Contingency liquidity is reported daily. The FHLBNY met these requirements for all periods reported.
The following table summarizes contingency liquidity (in millions):
                         
    Average Five Day     Average Actual        
For the quarters ended   Requirement     Contingency Liquidity     Excess  
September 30, 2009
  $ 2,962     $ 16,676     $ 13,714  
June 30, 2009
    11,877       21,030       9,153  
March 31, 2009
    7,443       18,709       11,266  
December 31, 2008
    4,727       12,930       8,203  
Leverage and unpledged assets to debt requirements
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.
The FHLBNY met the qualifying unpledged asset requirements in each of the periods reported as follows (in thousands):
                 
    September 30, 2009     December 31, 2008  
Consolidated Obligations:
               
Bonds
  $ 69,670,836     $ 82,256,705  
Discount Notes
    38,385,244       46,329,906  
 
           
Total consolidated obligations
    108,056,080       128,586,611  
 
           
 
               
Unpledged assets
               
Cash
    1,189,158       18,899  
Less: Member pass-through reserves at the FRB
    (27,125 )     (31,003 )
Secured Advances 1
    95,944,732       109,152,876  
Investments 1
    18,740,856       26,364,661  
Mortgage loans
    1,336,228       1,457,885  
Accrued interest receivable on advances and investments
    354,934       492,856  
Less: Pledged Assets
    (2,178 )     (2,669 )
 
           
 
    117,536,605       137,453,505  
 
           
Excess unpledged assets
  $ 9,480,525     $ 8,866,894  
 
           
     
1   At September 30, 2009, the Bank pledged $2.2 million to the FDIC see Note 4- Held-to-maturity securities. The Bank also provided to the U.S. Treasury a listing of $17.8 billion in advances with respect to a lending agreement. See Note 17 — Commitments and Contingencies.

 

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Mortgage investment authority
Finance Agency investment regulations limit the holding of mortgage-backed securities to 300% of capital. The FHLBNY was in compliance with the regulations for all periods reported.
                                 
    September 30, 2009     December 31, 2008  
    Actual     Limits     Actual     Limits  
 
                               
Mortgage securities investment authority 1
    207 %     300 %     207 %     300 %
 
                       
     
1   The measurement date is on a one-month “look-back” basis.
On March 24, 2008, the Board of Directors of the Federal Housing Finance Board (Finance Board), the predecessor of 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 allows 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 Financial Management Policy limit.
All mortgage loans underlying any securities purchased under this authority must be originated after January 1, 2008. The Finance Board, the predecessor of the Finance Agency, believes 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 be 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.
The credit ratings of the FHLBNY and changes thereof were as follows at September 30, 2009.
Long Term:
                             
    Moody’s Investors Service   S & P  
Year   Outlook   Rating   Long-Term Outlook   Rating  
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                    
Short Term:
                     
    Moody’s Investors Service   S & P
Year   Outlook   Rating   Short-Term Outlook   Rating
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            

 

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Legislative and Regulatory Developments
Finance Agency Examination Guidance—Examination for Accounting Practices. On October 27, 2009, the Finance Agency issued examination guidance and standards, which are effective immediately, relating to the accounting practices (Examination Guidance) of Fannie Mae, Freddie Mac and the FHLBanks (collectively, the Housing GSEs), consistent with the safety and soundness responsibilities of the Finance Agency. The areas addressed by the Examination Guidance include: 1) accounting policies and procedures; 2) Audit Committee; 3) independent internal audit function; 4) accounting staff; 5) financial statements; 6) external auditor; and 7) review of audit and accounting functions. This Examination Guidance is not intended to be in conflict with statutes, regulations, and/or GAAP. Additionally, this Examination Guidance is not intended to relieve or minimize the decision-making responsibilities, or regulated duties and responsibilities of a Housing GSE’s management, Board of Directors or Committees thereof.
Principles for Executive Compensation at the FHLBanks and Office of Finance. On October 27, 2009, the Finance Agency issued Advisory Bulletin 2009-AB-02, which is effective immediately, outlining five guiding principles for sound incentive compensation practices to which the FHLBanks and the Office of Finance should adhere in setting executive compensation policies and practices. These principles are: 1) executive compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions; 2) executive incentive compensation should be consistent with sound risk management and preservation of the par value of the FHLBank’s capital stock; 3) a significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome-indicators; 4) a significant percentage of an executive’s incentive-based compensation should be deferred and made contingent upon performance over several years; and 5) the board of directors of each FHLBank and the Office of Finance should promote accountability and transparency in the process of setting compensation. In evaluating compensation at the FHLBanks and the Office of Finance, the Finance Agency will consider the extent to which an executive’s compensation is consistent with these principles.
FHLBank Directors’ Compensation and Expenses. On October 23, 2009, the Finance Agency issued a proposed rule to implement Section 1202 of the Housing Act, allowing each FHLBank to pay its directors reasonable compensation and expenses, subject to the authority of the Director of the Finance Agency (Director) to object to, and to prohibit prospectively, compensation and/or expenses that the Director determines are not reasonable. The proposed rule would add section 1261 to Title 12 of the Code of Federal Regulations, to articulate the general standard under which the FHLBanks may compensate their directors and to establish reporting requirements with respect to how the FHLBanks compensate their directors. The Finance Agency will accept written comments on or before December 7, 2009.
Temporary Liquidity Guarantee Program. On October 23, 2009, the FDIC published in the Federal Register a final rule concerning the termination of the Debt Guarantee Program (DGP), a component of the Temporary Liquidity Guarantee Program (TLGP). For most insured depository institutions and other entities participating in this program, the DGP concluded on October 31, 2009, with the FDIC’s guarantee expiring no later than December 31, 2012. The final rule establishes a limited six-month emergency guarantee facility for entities that (following the termination of the DGP) become unable to issue non-guaranteed debt to replace maturing senior unsecured debt due to market disruptions or other circumstances beyond their control. This emergency guarantee facility is available to qualified entities on an application basis and is subject to such restrictions and conditions as the FDIC deems appropriate. If an entity’s application is approved, the FDIC will guarantee the applicant’s senior unsecured debt issued on or before April 20, 2010. The FDIC’s guarantee of such debt will extend through the earliest of the mandatory conversion date (for mandatory convertible debt), the stated maturity date or December 31, 2012. Debt guaranteed under the emergency guarantee facility will be subject to an annualized assessment rate equal to a minimum of 300 basis points.

 

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FHLBanks’ Boards of Directors: Eligibility and Elections. On October 7, 2009, the Finance Agency adopted a final regulation, which became effective on November 6, 2009. The final regulation largely codifies the interim final regulation previously issued by the Finance Agency on September 26, 2008. Changes in the final regulation included provisions: (1) requiring each FHLBank’s board of directors to annually determine how many of its independent directors should be designated public interest directors (provided that each FHLBank at all times has at least two public interest directors); (2) stating that where an FHLBank’s board of directors acts to fill a member director vacancy that occurs mid-term, that eligible candidates for such a position must be officers or directors of a member institution at the time the FHLBank board of directors acts, not as of the prior year-end; and (3) permitting an FHLBank that nominates more than one nominee for each open independent director position to declare elected the nominee who receives the highest number of votes, even if the total votes received is less than 20 percent of the eligible votes.
Statement of Policy on Qualifications for Failed Bank Acquisitions. On September 2, 2009, the FDIC issued a final statement of policy, effective on August 26, 2009, providing guidance to private capital investors interested in acquiring or investing in failed insured depository institutions regarding the terms and conditions for such investments or acquisitions. This guidance applies to 1) private capital investors in certain companies that seek to assume deposit liabilities or both such deposit liabilities and assets from a failed insured depository institution and 2) private capital investors involved in applications for deposit insurance in conjunction with de novo charters issued in connection with the resolution of failed insured depository institutions. Additionally, this final statement of policy provides, among other measures, standards for capital support of an acquired depository institution; an agreement to a cross guarantee over substantially commonly-owned depository institutions; limits on transactions with affiliates; maintenance of continuity of ownership; and avoidance of secrecy law jurisdictions as investment channels, absent consolidated home country supervision.
Capital Classifications and Critical Capital Levels for the FHLBanks. The Finance Agency issued a final rule, effective August 4, 2009, to implement certain provisions of the Housing Act that require the Director of the Finance Agency to establish criteria based on the amount and type of capital held by an FHLBank for each of the following capital classifications: 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. The Finance Agency may, in its discretion, otherwise determine to classify an FHLBank as less-than-adequately capitalized. 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 11—Capital for the FHLBanks’ compliance with the final rule requirements.)
Board of Directors of FHLBank System Office of Finance. On August 4, 2009, the Finance Agency issued a proposed rule related to the reconstitution and strengthening of the Office of Finance Board of Directors. To achieve this goal, the proposed regulation would increase the size of the Office of Finance Board of Directors, create a fully independent audit committee, provide for the creation of other committees and set a method for electing independent directors, along with setting qualifications for these directors. The Office of Finance is governed by a board of directors, the composition and functions of which are determined by the Finance Agency’s regulations. Under existing Finance Agency regulation, the Office of Finance Board of Directors is made up of two FHLBank Presidents and one independent director (currently vacant). The Finance Agency has proposed that all twelve FHLBank Presidents be members of the Office of Finance Board of Directors, along with three to five independent directors. The independent directors would comprise the audit committee of the Office of Finance Board of Directors with oversight responsibility for the combined financial reports. Under the proposed rule, the audit committee of the Office of Finance would be responsible for ensuring that the FHLBanks adopt consistent accounting policies and procedures so that the combined financial reports will continue to be accurate and meaningful. On October 2, 2009, the Finance Agency extended the comment period for this proposed rule from October 5, 2009 to November 4, 2009.

 

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FHLBank Collateral for Advances and Interagency Guidance on Nontraditional Mortgage Products. On August 4 2009, the Finance Agency issued a notice of study and recommendations related to the FHLBanks’ advances collateral. The Housing Act requires the Director of the Finance Agency to conduct a study, which must be submitted to the U.S. Congress, on the extent to which loans and securities used as collateral to support FHLBank advances are consistent with the federal financial institution regulatory agencies’ interagency guidance on nontraditional mortgage products and the Finance Agency also addressed their statement on subprime mortgage lending. Furthermore, the study must consider and recommend any additional regulations, guidance, advisory bulletins or other administrative actions necessary to ensure that the FHLBanks are not supporting loans with predatory characteristics. Comments on this study and recommendations were due to the Finance Agency by October 5, 2009.
Affordable Housing Program Amendments: FHLBank Mortgage Refinancing Authority. On August 4, 2009, the Finance Agency published a second interim final rule related to authorization for the FHLBanks to provide the existing AHP subsidy through their members to assist in the refinancing of low or moderate income households’ mortgages under certain federal, state and local programs for targeted refinancing. The first interim final rule authorized such subsidies to those qualifying under the Hope for Homeowners Program. The second interim final rule expands the program to other government eligible programs, including the Making Home Affordable Refinancing program. The authority was provided in the Housing Act on a temporary basis until July 30, 2010. While this rule is effective immediately, the Finance Agency accepted public comments on the second interim final rule by October 5, 2009.
Record Retention. On August 4, 2009, the Finance Agency issued a proposed rule that would require Freddie Mac, Fannie Mae, the FHLBanks and the Office of Finance to establish and maintain a record retention program to ensure that records are readily accessible for examination and other supervisory purposes. This proposed regulation seeks to assure strong record maintenance and availability for the security of these entities and to facilitate effective supervision. Comments on this proposed rule were due to the Finance Agency by October 5, 2009.
Money Market Fund Reform. On July 8, 2009, the Securities and Exchange Commission (SEC) published a proposed rule on money market fund reform. The proposed reforms include the imposition of new liquidity requirements for money market funds. As proposed, agency securities, including certain FHLBank securities, would not be considered liquid assets for purposes of meeting the proposed liquidity requirements. If these requirements were adopted as proposed, money market fund demand for FHLBank consolidated discount notes could decrease. Comments on this proposed rule were due to the SEC by September 8, 2009.
Proposed Rule to Amend FHLBank Membership for Community Development Financial Institutions (CDFIs). On May 15, 2009, the Finance Agency published a proposed rule to amend its membership regulations to authorize non-federally insured CDFIs to become members of an FHLBank. The newly-eligible CDFIs include community development loan funds, community development venture capital funds and state-chartered credit unions without federal insurance. The proposed rule sets forth the eligibility and procedural requirements for CDFIs that wish to become members of an FHLBank. Comments on this proposed rule were due to the Finance Agency by July 14, 2009.

 

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Guidance for Determining Other-Than-Temporary Impairment. On April 28, 2009 and May 7, 2009, the Finance Agency provided the FHLBanks with guidance on the process for determining OTTI with respect to the FHLBanks’ holdings of private-label MBS and the FHLBanks’ first quarter 2009 adoption of new U.S. GAAP regarding OTTI on investment securities. The goal of this guidance was to promote consistency among all FHLBanks for determining OTTI for private-label MBS, based on the understanding that investors in the FHLBanks’ consolidated obligations could better understand and utilize the information in the FHLBanks’ combined financial reports if it is prepared on a more consistent basis. In order to achieve this goal and move to a common analytical framework, and recognizing that several FHLBanks intended to early adopt the new U.S. GAAP regarding OTTI on investment securities, the Finance Agency guidance required all FHLBanks to early adopt this new accounting treatment effective January 1, 2009 and, for purposes of making OTTI determinations beginning with the first quarter of 2009, to use a consistent set of key modeling assumptions and specified third-party models. For a discussion of the FHLBanks’ implementation of this OTTI guidance, see “Critical Accounting Estimates-OTTI for Investment Securities.”
During the second quarter of 2009, the FHLBanks created an OTTI Governance Committee with responsibility for reviewing and approving the key modeling assumptions, inputs and methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS. The OTTI Governance Committee charter was approved on June 11, 2009 and provides a formal process by which the FHLBanks can provide input on and approve these key OTTI assumptions.
In accordance with the guidance provided by the OTTI Governance Committee, an FHLBank may engage another FHLBank to perform the cash flow analyses underlying its OTTI determinations. Each FHLBank is responsible for making its own determination of impairment and the reasonableness of assumptions, inputs and methodologies used, as well as performing the required present value calculations using appropriate historical cost bases and yields. FHLBanks that hold common private-label MBS are required to consult with one another to ensure that any decision that a commonly-held private-label MBS is other-than-temporarily impaired, including the determination of fair value and the credit loss component of the unrealized loss, is consistent among those FHLBanks.
In order to promote consistency in the application of the assumptions and implementation of the OTTI methodology, the FHLBanks have established control procedures whereby the FHLBanks that are performing cash flow analyses select a sample group of private-label MBS and each perform cash flow analyses on all such test MBS, using the assumptions approved by the OTTI Governance Committee. These FHLBanks exchange and discuss the results and make any adjustments necessary to achieve consistency among their respective cash flow models.
Finance Agency Releases Its First Strategic Plan. On July 9, 2009, the Finance Agency released its first strategic plan since it was created. This strategic plan details the goals and objectives that will guide the Finance Agency over the next five years in its actions to restore the financial health of Fannie Mae and Freddie Mac, enhance the Federal Home Loan Bank System and contribute to the strength and stability of the United States’ housing finance market and affordable housing. This plan lists three goals of 1) safety and soundness, 2) housing mission and conservatorship, and 3) a resource management strategy which the Finance Agency will employ in fulfilling its mission to provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the FHLBanks to promote their safety and soundness, support housing finance and affordable housing and support a stable and liquid mortgage market.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management. Market risk or interest rate risk (“IRR”) is the risk of loss to 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 the FHLBNY could earn higher income by having higher IRR through greater mismatches between its assets and liabilities at the cost of potential significant falls 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 80 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 that 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 years in the rates unchanged case and to a range of +/- six years in the +/-200bps shock cases. Due to the low interest rate environment beginning in early 2008, the -200bps shock was restricted during the quarter end to -100bps for September 2008. The DOE downshock limits were adjusted in those cases to +/-5.00 years in September. In December 2008, March 2009, June 2009 and September 2009 rates were too low for a constrained downshock and the test was not performed.
    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.

 

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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 (note that, due to the on-going low interest rate environment there was no downshock measurement performed between the fourth quarter of 2008 and the third quarter of 2009):
                         
    Base Case DOE     -200bps DOE     +200bps DOE  
September 30, 2008
    0.39       -2.51       1.66  
December 31, 2008
    -2.05       N/A       1.44  
March 31, 2009
    -2.24       N/A       1.23  
June 30, 2009
    -0.83       N/A       1.67  
September 30, 2009
    -0.39       N/A       3.88  
The DOE has remained within its limits. Duration indicates any cumulative repricing/maturity imbalance in the FHLBNY’s financial assets and liabilities. A positive DOE indicates that, on average, the liabilities will reprice or mature sooner than the assets while a negative DOE indicates that, on average, the assets will reprice 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.
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; well within the limit:
         
    One Year Re-
    pricing Gap
September 30, 2008
  $3.359 Billion
December 31, 2008
  $9.764 Billion
March 31, 2009
  $7.593 Billion
June 30, 2009
  $5.936 Billion
September 30, 2009
  $5.480 Billion

 

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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 (note that, due to the on-going low interest rate environment the downshock measurement was not performed between the fourth quarter of 2008 and the third quarter of 2009):
                 
    Sensitivity in     Sensitivity in  
    the -200bps     the +200bps  
    Shock     Shock  
September 30, 2008
    3.18 %     -5.91 %
December 31, 2008
    N/A       24.73 %
March 31, 2009
    N/A       13.11 %
June 30, 2009
    N/A       0.43 %
September 30, 2009
    N/A       9.23 %
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 (note that, due to the on-going low interest rate environment the downshock measurement was not performed between the fourth quarter of 2008 and the third quarter of 2009):
                 
    Downshock     +200bps Change in  
    Change in MVE     MVE  
September 30, 2008
    -0.72 %     -2.50 %
December 31, 2008
    N/A       -0.43 %
March 31, 2009
    N/A       1.01 %
June 30, 2009
    N/A       -1.81 %
September 30, 2009
    N/A       -4.68 %
As noted, the potential declines under these shocks are within the FHLBNY’s limits of a maximum 10 percent.

 

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The following table displays the FHLBNY’s maturity/repricing gaps as of September 30, 2009 (in millions):
                                         
    Interest Rate Sensitivity  
    September 30, 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
  $ 10,354     $ 174     $ 410     $ 243     $ 540  
MBS Investments
    6,580       1,365       2,681       891       649  
Adjustable-rate loans and advances
    15,530                          
 
                             
Net unswapped
    32,464       1,539       3,091       1,134       1,190  
 
                                       
Fixed-rate loans and advances
    9,332       4,198       18,841       8,732       34,969  
Swaps hedging advances
    63,711       (3,449 )     (16,873 )     (8,448 )     (34,940 )
 
                             
Net fixed-rate loans and advances
    73,042       749       1,968       284       29  
Loans to other FHLBanks
                             
 
                             
 
                                       
Total interest-earning assets
  $ 105,506     $ 2,288     $ 5,059     $ 1,418     $ 1,218  
 
                             
 
                                       
Interest-bearing liabilities:
                                       
Deposits
  $ 2,287     $     $     $     $  
 
                                       
Discount notes
    36,617       1,768                    
Swapped discount notes
    1,576       (1,576 )                  
 
                             
Net discount notes
    38,193       192                    
 
                             
 
                                       
Consolidated Obligation Bonds
                                       
FHLB bonds
    19,320       18,270       23,178       4,839       3,242  
Swaps hedging bonds
    40,906       (16,855 )     (19,074 )     (3,637 )     (1,340 )
 
                             
Net FHLB bonds
    60,227       1,415       4,104       1,202       1,902  
 
                                       
Total interest-bearing liabilities
  $ 100,707     $ 1,607     $ 4,104     $ 1,202     $ 1,902  
 
                             
Post hedge gaps1:
                                       
Periodic gap
  $ 4,799     $ 681     $ 955     $ 216     $ (684 )
Cumulative gaps
  $ 4,799     $ 5,480     $ 6,436     $ 6,652     $ 5,968  
Note: Numbers may not add due to rounding.
     
1   Repricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the repricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity.

 

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The following tables display the FHLBNY’s maturity/repricing gaps as of December 31, 2008 (in millions):
                                         
    Interest Rate Sensitivity  
    December 31, 2008  
            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
  $ 18,298     $ 405     $ 404     $ 126     $ 259  
MBS Investments
    6,938       2,940       1,801       350       209  
Adjustable-rate loans and advances
    20,206                          
 
                             
Net unswapped
    45,442       3,345       2,206       475       468  
 
                                       
Fixed-rate loans and advances
    21,972       3,725       14,712       7,539       35,226  
Swaps hedging advances
    56,677       (2,842 )     (11,801 )     (6,864 )     (35,170 )
 
                             
Net fixed-rate loans and advances
    78,649       882       2,911       675       56  
Loans to other FHLBanks
                             
 
                             
 
                                       
Total interest-earning assets
  $ 124,091     $ 4,227     $ 5,117     $ 1,151     $ 524  
 
                             
 
                                       
Interest-bearing liabilities:
                                       
Deposits
  $ 1,497     $ 15     $     $     $  
 
Discount notes
    43,981       2,348                    
Swapped discount notes
    2,031       (2,031 )                  
 
                             
Net discount notes
    46,012       318                    
 
                             
 
                                       
Consolidated Obligation Bonds
                                       
FHLB bonds
    36,367       16,153       19,613       5,405       3,441  
Swaps hedging bonds
    32,833       (14,640 )     (13,571 )     (3,178 )     (1,445 )
 
                             
Net FHLB bonds
    69,200       1,513       6,043       2,227       1,996  
 
                                       
Total interest-bearing liabilities
  $ 116,709     $ 1,846     $ 6,043     $ 2,227     $ 1,996  
 
                             
Post hedge gaps1:
                                       
Periodic gap
  $ 7,382     $ 2,382     $ (926 )   $ (1,076 )   $ (1,472 )
Cumulative gaps
  $ 7,382     $ 9,764     $ 8,837     $ 7,761     $ 6,289  
Note: Numbers may not add due to rounding.
     
1   Repricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the repricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity.

 

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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, 2009. Based on this evaluation, they concluded that as of September 30, 2009, 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.

 

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Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, the FHLBNY is involved in disputes or regulatory inquiries that arise in the ordinary course of business. At the present time, there are no material pending legal proceedings against the FHLBNY.
Information about a legal proceeding involving certain property of the FHLBNY was previously disclosed in Part I, Item 3 of the FHLBNY’s 2008 Annual Report on Form 10-K filed on March 27, 2009. At that time, the FHLBNY reported that, on September 15, 2008, an event of default occurred under outstanding derivative contracts with a notional amount of $16.5 billion between Lehman Brothers Special Financing Inc. (“LBSF”) and the Bank when credit support provider Lehman Brothers Holdings Inc. (“LBHI”) commenced a case under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). LBSF commenced a case under Chapter 11 of the Bankruptcy Code on October 3, 2008. The Bank had pledged $509.6 million to LBSF in cash as collateral. The Bank had certain obligations due to LBSF as of September 30, 2008. The net amount that was due to the Bank after giving effect to obligations due to LBSF was approximately $64.5 million as of September 30, 2008. As such, the Bank has fully reserved the LBSF receivables as the bankruptcies of LBSF and LBHI make the timing and the amount of the recovery uncertain.
On September 22, 2009, the FHLBNY filed a proof of claim of $64.5 million as a creditor in connection with the bankruptcy proceedings. It is possible that, in the course of the bankruptcy proceedings, the FHLBNY may recover some amount in a future period. However, because the timing and the amount of such recovery remains uncertain, the Bank has not recorded any estimated gain in its financial statements. The amount that the Bank actually recovers will ultimately be decided in the course of the bankruptcy proceedings.
Item 1A. RISK FACTORS
In addition to the Risk Factor set forth below, please refer to the Risk Factor section in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 27, 2009. Except for the below discussion, there have been no material changes from risk factors previously disclosed in our Form 10-K.
The FHLBNY relies on monoline bond insurer counterparties to provide insurance against the credit impairment of investments in certain private-label mortgage backed securities held by the FHLBNY. However, the continuing weakened financial condition of Ambac Assurance Corp. (“Ambac”) and MBIA Insurance Corp (“MBIA”) creates a risk that these counterparties may fail to fulfill their obligations to reimburse the FHLBNY for claims under certain insurance policies. In turn, this may lead to the recognition of additional credit impairment on the FHLBNY’s portfolio of private-label insured mortgage-backed securities.
The FHLBNY has determined that Ambac and MBIA are at risk with respect to their claims paying ability and their ability to perform as a financial guarantor. As a result, the FHLBNY has determined that the FHLBNY may rely on these bond insurers to remain as viable financial guarantors until July 31, 2016 with respect to Ambac, and until March 31, 2012 with respect to MBIA. The Bank has determined that absent bond insurance, certain private-label MBS will experience credit impairment in future periods, and the FHLBNY has deemed such MBS as OTTI and has recorded credit impairment losses. If the ability of the two bond insurers to fulfill their obligations to the FHLBNY worsens, it could result in the shortening of the length of time the securities could rely on the two bond insurers for cash flow support in future periods. This in turn would result in the recognition of additional credit impairment losses on securities deemed to be OTTI at September 30, 2009.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See Current Report on Form 8-K filed on August 27, 2009, which describes the election of certain members of the Board of Directors of the Bank, each of whom was elected pursuant to rules governing the election of the Federal Home Loan Bank directors and which rules did not require the submission of a vote to security holders.
Item 5. OTHER INFORMATION
None.

 

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Item 6. EXHIBITS
         
Exhibit No.   Identification of Exhibit
       
 
  3.01    
Amended Bylaws (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed on September 23, 2009)
       
 
  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 by Chief Executive Officer
       
 
  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 by Chief Financial Officer
       
 
  32.01    
Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act 2002, 18 U.S.C. Section 1350
       
 
  32.02    
Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act 2002, 18 U.S.C. Section 1350

 

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SIGNATURES
Pursuant to the requirements of the Securities and 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)
 
 
  By:   /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 Principal Financial Officer) 
 
Date: November 13, 2009

 

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