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EX-31.01 - EXHIBIT 31.01 - Federal Home Loan Bank of New Yorkc08089exv31w01.htm
EX-31.02 - EXHIBIT 31.02 - Federal Home Loan Bank of New Yorkc08089exv31w02.htm
EX-32.02 - EXHIBIT 32.02 - Federal Home Loan Bank of New Yorkc08089exv32w02.htm
EX-32.01 - EXHIBIT 32.01 - Federal Home Loan Bank of New Yorkc08089exv32w01.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, 2010
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-51397
Federal Home Loan Bank of New York
(Exact name of registrant as specified in its charter)
     
Federal   13-6400946
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
101 Park Avenue, New York, N.Y.   10178
(Address of principal executive offices)   (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, 2010 was 45,957,753.
 
 

 

 


 

FEDERAL HOME LOAN BANK OF NEW YORK
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
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 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 par value of capital stock)
As of September 30, 2010 and December 31, 2009
                 
    September 30, 2010     December 31, 2009  
Assets
               
Cash and due from banks (Note 3)
  $ 69,471     $ 2,189,252  
Federal funds sold
    4,095,000       3,450,000  
Available-for-sale securities, net of unrealized gains (losses) of $23,816 at September 30, 2010 and ($3,409) at December 31, 2009 (Note 5)
    3,373,781       2,253,153  
Held-to-maturity securities (Note 4)
               
Long-term securities
    8,221,246       10,519,282  
Advances (Note 6)
    85,697,171       94,348,751  
Mortgage loans held-for-portfolio, net of allowance for credit losses of $5,537 at September 30, 2010 and $4,498 at December 31, 2009 (Note 7)
    1,267,687       1,317,547  
Accrued interest receivable
    305,763       340,510  
Premises, software, and equipment
    14,550       14,792  
Derivative assets (Note 16)
    32,425       8,280  
Other assets
    16,444       19,339  
 
           
 
               
Total assets
  $ 103,093,538     $ 114,460,906  
 
           
 
               
Liabilities and capital
               
 
               
Liabilities
               
Deposits (Note 8)
               
Interest-bearing demand
  $ 3,660,132     $ 2,616,812  
Non-interest bearing demand
    9,725       6,499  
Term
    60,400       7,200  
 
           
 
               
Total deposits
    3,730,257       2,630,511  
 
           
 
               
Consolidated obligations, net (Note 10)
               
Bonds (Includes $10,761,236 at September 30, 2010 and $6,035,741 at December 31, 2009 at fair value under the fair value option)
    74,918,893       74,007,978  
Discount notes (Includes $1,755,901 at September 30, 2010 and $0 at December 31, 2009 at fair value under the fair value option)
    17,787,908       30,827,639  
 
           
 
               
Total consolidated obligations
    92,706,801       104,835,617  
 
           
 
               
Mandatorily redeemable capital stock (Note 11)
    67,348       126,294  
 
               
Accrued interest payable
    277,647       277,788  
Affordable Housing Program (Note 12)
    137,995       144,489  
Payable to REFCORP (Note 12)
    20,560       24,234  
Derivative liabilities (Note 16)
    784,498       746,176  
Other liabilities
    101,448       72,506  
 
           
 
               
Total liabilities
    97,826,554       108,857,615  
 
           
 
               
Commitments and Contingencies (Notes 10, 12, 16 and 18)
               
 
               
Capital (Note 11)
               
Capital stock ($100 par value), putable, issued and outstanding shares:
               
46,636 at September 30, 2010 and 50,590 at December 31, 2009
    4,663,606       5,058,956  
Retained earnings
    701,215       688,874  
Accumulated other comprehensive income (loss) (Note 13)
               
Net unrealized gain (loss) on available-for-sale securities
    23,815       (3,409 )
Non-credit portion of OTTI on held-to-maturity securities, net of accretion
    (96,043 )     (110,570 )
Net unrealized loss on hedging activities
    (17,732 )     (22,683 )
Employee supplemental retirement plans (Note 15)
    (7,877 )     (7,877 )
 
           
 
               
Total capital
    5,266,984       5,603,291  
 
           
 
               
Total liabilities and capital
  $ 103,093,538     $ 114,460,906  
 
           
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 Income — Unaudited (in thousands, except per share data)
For the three and nine months ended September 30, 2010 and 2009
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Interest income
                               
Advances (Note 6)
  $ 173,459     $ 240,573     $ 477,303     $ 1,094,089  
Interest-bearing deposits (Note 3)
    1,699       1,014       3,766       19,054  
Federal funds sold
    2,253       1,864       6,600       1,933  
Available-for-sale securities (Note 5)
    7,580       6,590       23,128       22,881  
Held-to-maturity securities (Note 4)
                               
Long-term securities
    84,242       111,232       274,686       355,916  
Certificates of deposit
          851             1,392  
Mortgage loans held-for-portfolio (Note 7)
    16,333       17,405       49,689       54,679  
Loans to other FHLBanks and other
          1             1  
 
                       
 
                               
Total interest income
    285,566       379,530       835,172       1,549,945  
 
                       
 
                               
Interest expense
                               
Consolidated obligations-bonds (Note 10)
    147,097       191,708       448,669       783,695  
Consolidated obligations-discount notes (Note 10)
    11,456       31,647       33,069       173,228  
Deposits (Note 8)
    959       516       2,813       2,002  
Mandatorily redeemable capital stock (Note 11)
    879       1,807       3,051       5,478  
Cash collateral held and other borrowings (Note 19)
    14             14       49  
 
                       
 
                               
Total interest expense
    160,405       225,678       487,616       964,452  
 
                       
 
                               
Net interest income before provision for credit losses
    125,161       153,852       347,556       585,493  
 
                       
 
                               
Provision for credit losses on mortgage loans
    231       598       1,137       1,966  
 
                       
 
                               
Net interest income after provision for credit losses
    124,930       153,254       346,419       583,527  
 
                       
 
                               
Other income (loss)
                               
Service fees
    1,297       1,101       3,472       3,181  
Instruments held at fair value — Unrealized (loss) gain (Note 17)
    55       426       (12,612 )     8,653  
 
                               
Total OTTI losses
    (498 )     (30,169 )     (4,573 )     (118,160 )
Net amount of impairment losses reclassified (from) to
Accumulated other comprehensive loss
    (2,569 )     26,486       (3,164 )     103,884  
 
                       
Net impairment losses recognized in earnings
    (3,067 )     (3,683 )     (7,737 )     (14,276 )
 
                       
 
                               
Net realized and unrealized (loss) gain on derivatives and hedging activities (Note 16)
    8,444       59,639       (3,344 )     124,613  
Net realized gain from sale of available-for-sale securities (Note 5)
                708       721  
Other
    (624 )     (39 )     (1,493 )     59  
 
                       
 
                               
Total other income (loss)
    6,105       57,444       (21,006 )     122,951  
 
                       
 
                               
Other expenses
                               
Operating
    21,657       17,810       61,245       53,970  
Finance Agency and Office of Finance
    2,036       1,834       6,447       5,663  
 
                       
 
                               
Total other expenses
    23,693       19,644       67,692       59,633  
 
                       
 
                               
Income before assessments
    107,342       191,054       257,721       646,845  
 
                       
 
                               
Affordable Housing Program (Note 12)
    8,852       15,780       21,350       53,363  
REFCORP (Note 12)
    19,698       35,055       47,274       118,696  
 
                       
 
                               
Total assessments
    28,550       50,835       68,624       172,059  
 
                       
 
                               
Net income
  $ 78,792     $ 140,219     $ 189,097     $ 474,786  
 
                       
 
                               
Basic earnings per share (Note 14)
  $ 1.71     $ 2.70     $ 3.98     $ 8.93  
 
                       
 
                               
Cash dividends paid per share
  $ 1.15     $ 1.40     $ 3.60     $ 3.54  
 
                       
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 Capital — Unaudited (in thousands, except per share data)
For the nine months ended September 30, 2010 and 2009
                                                 
                            Accumulated                
    Capital Stock1             Other             Total  
    Class B     Retained     Comprehensive     Total     Comprehensive  
    Shares     Par Value     Earnings     Income (Loss)     Capital     Income (Loss)  
 
                                               
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, net of accretion
                      (100,463 )     (100,463 )     (100,463 )
Net unrealized gains 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          
 
                                     
 
                                               
Balance, December 31, 2009
    50,590     $ 5,058,956     $ 688,874     $ (144,539 )   $ 5,603,291          
 
                                               
Proceeds from sale of capital stock
    13,902       1,390,257                   1,390,257          
Redemption of capital stock
    (17,553 )     (1,755,299 )                 (1,755,299 )        
Shares reclassified to mandatorily redeemable capital stock
    (303 )     (30,308 )                 (30,308 )        
Cash dividends ($3.60 per share) on capital stock
                (176,756 )           (176,756 )        
Net Income
                189,097             189,097     $ 189,097  
Net change in Accumulated other comprehensive income (loss):
                                               
Non-credit portion of OTTI on held-to-maturity securities, net of accretion
                      14,527       14,527       14,527  
Net unrealized gains on available-for-sale securities
                      27,224       27,224       27,224  
Hedging activities
                      4,951       4,951       4,951  
 
                                   
 
                                          $ 235,799  
 
                                             
Balance, September 30, 2010
    46,636     $ 4,663,606     $ 701,215     $ (97,837 )   $ 5,266,984          
 
                                     
     
1   Putable stock
The accompanying notes are an integral part of these unaudited financial statements.

 

5


Table of Contents

Federal Home Loan Bank of New York
Statements of Cash Flows — Unaudited (in thousands)
For the nine months ended September 30, 2010 and 2009
                 
    Nine months ended  
    September 30,  
    2010     2009  
Operating activities
               
 
               
Net Income
  $ 189,097     $ 474,786  
 
           
 
               
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
    (45,715 )     (95,490 )
Concessions on consolidated obligations
    9,666       4,977  
Premises, software, and equipment
    4,201       4,020  
Provision for credit losses on mortgage loans
    1,137       1,966  
Net realized (gains) from redemption of held-to-maturity securities
          (281 )
Net realized (gains) from sale of available-for-sale securities
    (708 )     (440 )
Credit impairment losses on held-to-maturity securities
    7,737       14,276  
Change in net fair value adjustments on derivatives and hedging activities
    406,975       68,323  
Change in fair value adjustments on financial instruments held at fair value
    12,612       (8,653 )
Net change in:
               
Accrued interest receivable
    34,747       137,921  
Derivative assets due to accrued interest
    23,230       184,842  
Derivative liabilities due to accrued interest
    (21,895 )     (250,161 )
Other assets
    2,856       4,830  
Affordable Housing Program liability
    (6,494 )     22,373  
Accrued interest payable
    3,235       (95,244 )
REFCORP liability
    (3,674 )     33,912  
Other liabilities
    7,933       (5,759 )
 
           
Total adjustments
    435,843       21,412  
 
           
Net cash provided by operating activities
    624,940       496,198  
 
           
Investing activities
               
Net change in:
               
Interest-bearing deposits
    (1,607,030 )     13,471,204  
Federal funds sold
    (645,000 )     (3,900,000 )
Deposits with other FHLBanks
    (29 )     (84 )
Premises, software, and equipment
    (3,959 )     (4,823 )
Held-to-maturity securities:
               
Long-term securities
               
Purchased
    (174,048 )     (2,754,476 )
Repayments
    2,482,959       2,283,149  
In-substance maturities
          38,251  
Net change in certificates of deposit
          (797,000 )
Available-for-sale securities:
               
Purchased
    (1,957,867 )     (613 )
Proceeds
    838,129       420,607  
Proceeds from sales
    33,398       132,095  
Advances:
               
Principal collected
    165,792,738       320,102,436  
Made
    (155,157,849 )     (308,324,718 )
Mortgage loans held-for-portfolio:
               
Principal collected
    155,621       235,596  
Purchased and originated
    (106,769 )     (117,152 )
Loans to other FHLBanks
               
Loans made
    (27,000 )     (400,000 )
Principal collected
    27,000       400,000  
 
           
Net cash provided by investing activities
    9,650,294       20,784,472  
 
           
The accompanying notes are an integral part of these unaudited financial statements.

 

6


Table of Contents

Federal Home Loan Bank of New York
Statements of Cash Flows — Unaudited (in thousands)
For the nine months ended September 30, 2010 and 2009
                 
    Nine months ended  
    September 30,  
    2010     2009  
Financing activities
               
Net change in:
               
Deposits and other borrowings 1
  $ 844,546     $ 531,109  
Consolidated obligation bonds:
               
Proceeds from issuance
    52,284,617       35,112,667  
Payments for maturing and early retirement
    (52,088,457 )     (47,224,995 )
Net proceeds on bonds transferred from other FHLBanks
    224,664        
Consolidated obligation discount notes:
               
Proceeds from issuance
    89,819,657       814,559,648  
Payments for maturing
    (102,848,990 )     (822,438,650 )
Capital stock:
               
Proceeds from issuance
    1,390,257       2,693,233  
Payments for redemption / repurchase
    (1,755,299 )     (3,136,345 )
Redemption of Mandatorily redeemable capital stock
    (89,254 )     (15,673 )
Cash dividends paid 2
    (176,756 )     (191,405 )
 
           
Net cash used by financing activities
    (12,395,015 )     (20,110,411 )
 
           
Net (decrease) increase in cash and due from banks
    (2,119,781 )     1,170,259  
Cash and due from banks at beginning of the period
    2,189,252       18,899  
 
           
Cash and due from banks at end of the period
  $ 69,471     $ 1,189,158  
 
           
 
               
Supplemental disclosures:
               
Interest paid
  $ 492,994     $ 1,161,678  
Affordable Housing Program payments 3
  $ 27,844     $ 30,990  
REFCORP payments
  $ 50,948     $ 84,784  
Transfers of mortgage loans to real estate owned
  $ 970     $ 1,091  
Portion of non-credit OTTI (gains) losses on held-to-maturity securities
  $ (3,164 )   $ 103,884  
     
1   Cash flows from derivatives containing financing elements were considered as a financing activity — $330,004 and $227,796 cash out-flows for the nine months ended 2010 and 2009.
 
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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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 estate 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 issuances 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 (For more information, see Note 11 — Capital, Capital ratios, and Mandatorily redeemable capital stock). 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 because 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. For more information, see Note 19 — Related party transactions.
The FHLBNY’s primary business is making collateralized advances to members which is the principal factor that impacts the financial condition of the FHLBNY.
Since July 30, 2008, the FHLBNY has been 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 Federal Housing Finance Board (“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.
The Finance Agency’s mission statement is to provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and to support a stable and liquid mortgage market. However, while the Finance Agency establishes regulations governing the operations of the FHLBanks, the Bank 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 taxes.
Assessments
Resolution Funding Corporation (“REFCORP”) Assessments. Although the FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate taxes, it is required to make payments to REFCORP.
Congress established REFCORP 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 the Affordable Housing Program, but before the assessment for 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.

 

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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 assessments and other information to the Resolution Funding Corporation, which then performs the calculations for each quarter end.
Affordable Housing Program (“AHP”) 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 defined net income. Regulatory defined net income is GAAP net income before (1) interest expense related to mandatorily redeemable capital stock, and (2) 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.
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.
These unaudited financial statements should be read in conjunction with the FHLBNY’s audited financial statements for the year ended December 31, 2009, included in Form 10-K filed on March 25, 2010.
See Note 1 — Significant Accounting Policies and Estimates in Notes to the Financial Statements of the Federal Home Loan Bank of New York filed on Form 10-K on March 25, 2010, which contains a summary of the Bank’s significant accounting policies and estimates.
Note 1. 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 standard 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. In January 2010, the Financial Accounting Standards Board (“FASB”) provided further guidelines effective January 1, 2010, that required enhanced disclosures about fair value measurements that the FHLBNY adopted in the 2010 first quarter. For more information, see Note 17 — Fair Values of financial instruments.
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 or entry price.
Valuation Techniques - Three valuation techniques are prescribed under the fair value measurement standards — Market approach, Income approach and Cost approach. Valuation techniques for which sufficient data is available and that are appropriate under the circumstances should be used.
In determining fair value, FHLBNY uses various valuation methods, including both the market and income approaches.
    Market approach — This technique uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
    Income approach — This technique uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted), based on assumptions used by market participants. The present value technique used to measure fair value depends on the facts and circumstances specific to the asset or liability being measured and the availability of data.

 

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    Cost approach — This approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost).
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.
In its Statements of Condition at September 30, 2010 and December 31, 2009, the FHLBNY measured and recorded fair values using the above guidance for derivatives, available-for-sale securities, and certain consolidated obligation bonds and discount notes that were designated under the fair value option accounting (“FVO”). Certain held-to-maturity securities determined to be credit impaired or other-than-temporarily impaired (“OTTI”) at September 30, 2010 and December 31, 2009 were measured and recorded at their fair values on a non-recurring basis.
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. For additional information, see Note 16 - 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 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. The agreements include collateral thresholds that reflect the net credit differential between the FHLBNY and its derivative counterparties. On a contract-by-contract basis, the collateral and netting arrangements sufficiently mitigated the impact of the credit differential between the FHLBNY and its derivative 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 — The FHLBNY measures and records fair values of available-for-sale securities in the Statements of Condition in accordance with the fair value measurement standards. Changes in the values of available-for-sale securities are recorded in Accumulated other comprehensive income (loss) (“AOCI”), a component of members’ capital, with an offset to the recorded value of the investments in the Statements of Condition. The Bank’s investments classified as available-for-sale (“AFS”) are comprised of mortgage-backed securities that are GSE issued variable-rate collateralized mortgage obligations and are marketable at their recorded fair values. A small percentage of the AFS portfolio at September 30, 2010 and December 31, 2009 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 websites and the units were marketable at recorded fair values.
The fair values of these investment securities are 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.
See Note 17 — Fair Values of financial instruments — for additional disclosures about fair values and Levels associated with assets and liabilities recorded on the Bank’s Statements of Condition at September 30, 2010 and December 31, 2009.

 

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Fair Value of held-to-maturity securities 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 when there is evidence of other-than-temporary impairment. In accordance with the guidance on recognition and presentation of other-than-temporary impairment, certain held-to-maturity mortgage-backed securities were determined to be credit impaired at September 30, 2010 and December 31, 2009 and the securities were recorded at their fair values in the Statements of Condition at those dates. For more information, see Note 4 — Held-to-maturity securities and Note 17 — Fair Values of financial instruments.
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 the fair value option (“FVO”) allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for the selected 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 had elected the FVO designation for certain consolidated obligations. At September 30, 2010 and December 31, 2009, the Bank had designated certain consolidated obligation debt under the FVO and recorded their fair values in the Statements of Condition at those dates. The changes in fair values of the designated bonds are economically hedged by interest rate swaps. See Note 17 — Fair Values of financial instruments for more information.
Investments
Early adoption by the FHLBNY of the guidance on disclosures about the fair value of financial instruments at January 1, 2009 required the Bank to incorporate certain clarifications and definitions in its investment policies. The guidance amended the pre-existing accounting rules for investments in debt and equity securities, and the guidance was primarily intended to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary impairment (“OTTI”) event and to more effectively communicate when an OTTI event has occurred. The guidance was 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. Such investments are recorded at amortized cost basis, which includes adjustments made to the cost of an investment for accretion and amortization of discounts and premiums, 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) and recognized in AOCI; the adjusted amortized cost basis is the carrying value of the OTTI security as reported in the Statements of Condition. Carrying value for a held-to-maturity security that is not OTTI is its amortized cost basis.
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 in any period in this report.
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.
Available-for-sale securities - The FHLBNY classifies investments that it may sell before maturity as available-for-sale and carries them at fair value.
Until available-for-sale securities are sold, changes in fair values are recorded in AOCI as Net unrealized gain or (loss) on available-for-sale securities. If available-for-sale securities had been hedged under a fair value hedge qualifying for hedge accounting, the FHLBNY would record the portion of the change in fair 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 AOCI 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 for hedge accounting, the FHLBNY would record the effective portion of the change in value of the derivative related to the risk being hedged in AOCI 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 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 (“OTTI”) - Accounting and Governance Policies — Impairment analysis, 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 in part on the underlying collateral within the structure of the security and the cash flows expected to be collected on the security. A security is considered impaired if its fair value is less than its amortized cost basis. 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 cash flow 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 being evaluated for 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 and discounted using the forward rates.
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 AOCI. For securities designated as held-to-maturity, the amount of OTTI recorded in AOCI 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 AOCI 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.
For OTTI securities that were previously impaired and have subsequently incurred additional credit losses, those credit losses are reclassified out of non-credit losses in AOCI and charged to 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.
OTTI FHLBank System 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 for adoption of the guidance for recognition and presentation of OTTI. The goal of the guidance is to promote consistency among all FHLBanks in the process for determining and presenting OTTI for private-label MBS.
Beginning with the second quarter of 2009, consistent with the objectives of the Finance Agency, the FHLBanks formed an OTTI Governance Committee (“OTTI Committee”) with the responsibility for reviewing and approving 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 further in the section “Impairment analysis of mortgage-backed securities”.
FHLBank System Pricing Committee - In an effort to achieve consistency among the FHLBanks’ 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 conformed its pre-existing methodology for estimating the fair value of mortgage-backed securities starting with the interim period 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., when prices are outside of variance thresholds or the third-party services do not provide a price), the FHLBNY obtains a price from securities dealers that may be 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 at implementation of the policy as of September 30, 2009 and thereafter.

 

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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. The FHLBNY performs cash flow credit impairment tests on all of its private-label insured securities, and the analysis of the MBS protected by such third-party insurance looks first to the performance of the underlying security, and considers its embedded credit enhancements in the form of excess spread, overcollateralization, and credit subordination, to determine the collectability of all amounts due. If the embedded credit enhancement 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 shortfall 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 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 resources could sustain bond insurance losses. The methodology establishes boundaries that can be used on a consistent basis, and includes both quantitative factors and qualitative considerations that management utilizes to estimate the period of time that it is probable that the Bank’s insured securities will receive cash flow support from the monolines.
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.
Up until March 31, 2010, both Ambac Assurance Corp (“Ambac”), and MBIA Insurance Corp (“MBIA”), the two primary bond insurers for the FHLBNY, had been paying claims in order to meet any cash flow deficiency within the structure of the insured securities. On March 24, 2010, Ambac, with the consent of the Commissioner of Insurance for the State of Wisconsin (the “Commissioner”), entered into a temporary injunction to suspend payments to bond holders and to create a segregated account for bondholders. As a result, payments from Ambac to trustees of certain insured bonds owned by the FHLBNY were also temporarily suspended. The amounts suspended were not significant as of September 30, 2010. MBIA is continuing to meet claims for bonds owned by the FHLBNY.
Within the boundaries set in the methodology outlined above, which are reassessed at each quarter, the Bank believes it is appropriate to assert whether or not insurer credit support can be relied upon over a certain period of time. For Ambac that support period ended at March 31, 2010 (no-reliance after that date) based on the FHLBNY’s analysis of the temporary injunction by the Commissioner. In March 2010, S&P revised its counterparty credit rating on Ambac to “R” from below investment grade. S&P’s rating action was consistent with the level of regulatory intervention at Ambac. MBIA is currently rated below investment grade. As with all assumptions, changes to these assumptions (if bond insurers are deemed fully viable and able to fulfill their insurance obligations for bonds owned by the FHLBNY) may result in materially different outcomes.
For reasons outlined in previous paragraphs, 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 in future periods. 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.
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 the intent 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 basis of the FHLBNY’s private-label MBS will be recovered in future periods, beginning with the quarter ended September 30, 2009 and thereafter, the Bank performed OTTI analysis by cash flow testing 100 percent of its private-label MBS. In the first two quarters of 2009, the FHLBNY’s methodology was to analyze all its private-label MBS to isolate securities that were considered to be at risk of OTTI and to perform cash flow analysis on securities at risk of OTTI.

 

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Cash flow analysis derived from the FHLBNY’s own assumptions - Assessment for OTTI employed by the FHLBNY’s own techniques and assumptions were determined primarily using historical performance data of the 53 private-label MBS at September 30, 2010. These assumptions and performance measures were benchmarked by comparing to (1) performance parameters from “market consensus”, and (2) the assumptions and parameters provided by the OTTI Committee for the FHLBNY’s private-label MBS, which represented about 50 percent of the FHLBNY’s private-label MBS portfolio.
The internal process calculates the historical average of each bond’s prepayments, defaults, and loss severities, and considered other factors such as delinquencies and foreclosures. Management’s assumptions are 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 considers 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.
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 performs another analysis to assess the financial strength of the monoline insurers. The results of the insurer financial analysis (“monoline burn-out period”) are 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 burnout period (an end date for credit support), is then input to the cash flow model. The end date, also referred to as the burnout date, provides the necessary information as an input to the cash flow model for the continuation of cash flows up until the burnout date. Any cash flow shortfalls that occur beyond the “burn-out” date are considered to be not recoverable and the insured security is then deemed to be credit impaired.
Each bond’s performance parameters, primarily prepayments, defaults and loss severities, and bond insurance financial guarantee predictors, as calculated by the Bank’s internal approach are then input into the specialized bond cash flow model that allocates 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 enhancements for the senior securities are derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
Role and scope of the OTTI Governance Committee
Beginning with the third quarter of 2009, the OTTI Committee has adopted guidelines that each FHLBank should assess credit impairment by cash flow testing of 100 percent of private-label securities. Of the 53 private-label MBS owned by the FHLBNY, approximately 50 percent of MBS backed by sub-prime loans, home equity loans, and manufactured housing loans were deemed to be outside the scope of the OTTI Committee because sufficient loan level collateral data was not available to determine the assumptions under the OTTI Committee’s approach described below. The remaining securities were modeled in the OTTI Committee common platform. The FHLBNY developed key modeling assumptions and forecasted cash flows using the FHLBNY’s own assumptions for 100 percent 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 FHLBanks of San Francisco and Chicago to perform cash flow analyses for the securities within the scope of the OTTI Committee as a means of benchmarking the FHLBNY’s own cash flow analysis. At September 30, 2010 and December 31, 2009, FHLBanks of San Francisco and Chicago cash flow tested approximately 50 percent of the FHLBNY’s private-label MBS. Although the FHLBNY has engaged the two FHLBanks to perform the cash flow analysis, the FHLBNY 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 FHLBanks of San Francisco and Chicago performed cash flow analysis for the FHLBNY’s private-label securities in scope using two third-party models to establish the modeling assumptions and calculate the forecasted cash flows in the structure of the MBS. 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 Bank’s housing price forecast as of September 30, 2010 assumed current-to-trough home price declines ranging from 0 percent to 10 percent over the 3- to 9-month period beginning July 1, 2010. Thereafter, home prices are projected to remain flat in the first year, and increase 1 percent in the second year, 3 percent in the third year, 4 percent in the fourth year, 5 percent in the fifth year, 6 percent in the sixth year and 4 percent in each subsequent year.
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.

 

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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.
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 U.S. 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 conventional mortgage loans from its participating members, hereafter 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, 2010 and December 31, 2009. 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 percent 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 was estimated to be $11.6 million and $13.9 million at September 30, 2010 and December 31, 2009. 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. 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 and paid monthly after the FHLBNY has accrued 12 months of credit enhancement fees.
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.
The FHLBNY records credit enhancement fees as a reduction to 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. 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, which is the fair value of the mortgage loan on settlement date.
The FHLBNY places a conventional mortgage loan (conventional loans do not include VA and FHA insured loans) on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. When a conventional 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 following summarizes (1) nature of credit risk inherent in the MPF portfolio, (2) how risk is analyzed and assessed in arriving at the allowance for credit loss, and (3) changes, if any, to the methodology to estimate allowance for credit losses.
The Bank reviews 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 classified either under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due, are separated from the aggregate pool and evaluated separately for impairment.
The allowances for credit losses on mortgage loans were $5.5 million and $4.5 million as of September 30, 2010 and December 31, 2009. The Bank’s analysis of the MPF portfolio concluded that the risks within the portfolio were materially the same for all MPF loans, and further segmentation and disaggregation was not necessary.
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.

 

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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 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, would have reserves established only in the event of a default of a PFI, and would be based on aging, collateral value and estimated costs to recover any uninsured portion of the MPF loan.
Derivatives
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors if the derivative counterparties default and the related collateral, if any, is of insufficient value to the FHLBNY. Accounting for derivatives is addressed under accounting standards for derivatives and hedging. All derivatives are recognized on the balance sheet at their estimated fair values, including accrued unpaid interest as either a derivative asset or a derivative liability net of cash collateral received from and pledged to derivative counterparties.
Each derivative is designated as one of the following:
  (1)   a qualifying 1 hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a “fair value” hedge);
  (2)   a qualifying 1 hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge);
  (3)   a non-qualifying 1 hedge of an asset or liability (“economic hedge”) for asset-liability management purposes; or
  (4)   a non-qualifying 1 hedge of another derivative (an “intermediation” hedge) that is offered as a product to members or used to offset other derivatives with non-member counterparties.
1   Note: The terms “qualifying” and “non-qualifying” refer to accounting standards for derivatives and hedging.
The FHLBNY had no foreign currency assets, liabilities or hedges at September 30, 2010 or December 31, 2009.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current period’s earnings in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are reported in AOCI, a component of equity, until earnings are affected by the variability of the cash flows of the hedged transaction (i.e., until the recognition of interest on a variable rate asset or liability is recorded in earnings).
The FHLBNY records derivatives on trade date, but records the associated hedged consolidated obligations and advances on settlement date. Hedge accounting commences on trade date, at which time subsequent changes to the derivative’s fair value are recorded along with the offsetting changes in the fair value of the hedged item attributable to the risk being hedged. On settlement date, the basis adjustments to the hedged item’s carrying amount are combined with the principal amounts and the basis becomes part of the total carrying amount of the hedged item.
The FHLBNY has defined its market settlement conventions for hedged items to be five business days or less for advances and thirty calendar days or less, using a next business day convention, for consolidated obligations bonds and discount notes. These market settlement conventions are the shortest period possible for each type of advance and consolidated obligation from the time the instruments are committed to the time they settle.
The FHLBNY considers hedges of committed advances and consolidated obligation bonds eligible for the “short cut” provisions, under accounting standards for derivatives and hedging, as long as settlement of the committed asset or liability occurs within the market settlement conventions for that type of instrument. A short-cut hedge is a highly effective hedging relationship that uses an interest rate swap as the hedging instrument to hedge a recognized asset or liability and that meets the criteria under the accounting standards for derivatives and hedging to qualify for an assumption of no ineffectiveness.
To meet the short-cut provisions that assume no ineffectiveness, the fair value of the swap approximates zero on the date the FHLBNY designates the hedge.
For both fair value and cash flow hedges that qualify for hedge accounting treatment, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction) are recorded in current period’s earnings in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The differentials between accruals of interest income and expense on derivatives designated as fair value or cash flow hedges that qualify for hedge accounting treatment are recognized as adjustments to the interest income or expense of the hedged advances and consolidated obligations.

 

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Changes in the fair value of a derivative not qualifying for hedge accounting are recorded in current period earnings with no fair value adjustment to the asset or liability being hedged. Both the net interest and the fair value adjustments on the derivative are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. Interest income and expense and changes in fair values of derivatives designated as economic hedges (also referred to as standalone hedges), or when executed as intermediated derivatives for members are also recorded in the manner described above.
The FHLBNY routinely issues debt to investors and makes advances to members in which a derivative instrument is “embedded”. Upon execution of these transactions, the FHLBNY assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance or debt (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. If the FHLBNY determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate, standalone instrument with the same terms would qualify as a derivative instrument, the embedded derivative would be separated from the host contract as prescribed for hybrid financial instruments under accounting standards for derivatives and hedge accounting, and carried at fair value. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, the changes in fair value would be reported in current earnings (such as an investment security classified as “trading”; or, if the FHLBNY cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the balance sheet at fair value and no portion of the contract would be designated as a hedging instrument). The FHLBNY had no financial instruments with embedded derivatives that required bifurcation at September 30, 2010, September 30, 2009 or at December 31, 2009.
When hedge accounting is discontinued because the FHLBNY determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBNY continues to carry the derivative on the balance sheet at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield methodology.
When hedge accounting is discontinued because the FHLBNY determines that the derivative no longer qualifies as an effective cash flow hedge of an existing hedged item, the FHLBNY continues to carry the derivative on the balance sheet at its fair value and reclassifies the basis adjustment in AOCI to earnings when earnings are affected by the existing hedge item, which is the original forecasted transaction. Under limited circumstances, when the FHLBNY discontinues cash flow hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period plus the following two months, but it is probable the transaction will still occur in the future, the gain or loss on the derivative remains in AOCI and is recognized into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within two months after that, the gains and losses that were included in AOCI are recognized immediately in earnings.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the FHLBNY would continue to carry the derivative on the balance sheet at its fair value, removing from the balance sheet any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
Cash Collateral associated with Derivative Contracts
The Bank reports derivative assets and derivative liabilities in its Statements of Condition after giving effect to legally enforceable master netting agreements with derivative counterparties, which include interest receivable and payable on derivative contracts and the fair values of the derivative contracts. The Bank records cash collateral received and paid in the Statements of Condition as Derivative assets and liabilities in the following manner — Cash collateral pledged by the Bank is reported as a deduction to Derivative liabilities; cash collateral received from derivative counterparties is reported as a deduction to Derivative assets. No securities were either pledged or received as collateral for derivatives at September 30, 2010 and December 31, 2009.
Amortization of Premiums and Accretion of Discounts
The FHLBNY estimates prepayments for purposes of amortizing premiums and accreting discounts associated with mortgage-backed securities. Because actual prepayments of MBS often deviate from the estimates, the FHLBNY periodically recalculates the effective yield to reflect actual prepayments to date. Adjustments of the effective yields for mortgage-backed securities are recorded on a retrospective basis, meaning as if the new estimated life of the security had been known at its original acquisition date. Changes in interest rates have a direct impact on prepayment speeds and estimated life, which will result in yield adjustments and can be a source of income volatility. Reductions in interest rates generally accelerate prepayments, which accelerate the amortization of premiums and reduce current earnings. Typically, declining interest rates also accelerate the accretion of discounts, thereby increasing current earnings. On the other hand, in a rising interest rate environment, prepayments will generally extend over a longer period, shifting some of the premium amortization and discount accretion to future periods.
The Bank uses the contractual method to amortize premiums and accrete discounts on mortgage loans held-for-portfolio. The contractual method recognizes the income effects of premiums and discounts in a manner that is reflective of the actual behavior of the mortgage loans during the period in which the behavior occurs while also reflecting the contractual terms of the assets without regard to changes in estimated prepayments based upon assumptions about future borrower behavior.

 

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Note 2. Recently issued accounting policies and interpretations.
Accounting for the Consolidation of Variable Interest Entities - In June 2009, the Financial Accounting Standards Board (“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 has evaluated its operations and investments and has concluded that it has no VIEs and this pronouncement did not impact its financial statements, results of operations and cash flows.
Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements — In January 2010, the FASB issued amended guidance for fair value measurements and disclosures. The amended guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Furthermore, this update requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (January 1, 2010 for the FHLBNY), except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 (January 1, 2011 for the FHLBNY), and for interim periods within those fiscal years. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Early adoption is permitted. The FHLBNY adopted this guidance as of January 1, 2010. Adoption of the guidance resulted in increased financial statement footnote disclosures only. It did not impact the Statements of Condition, Operations, Cash Flows, or Changes in Capital or the determination of fair value.
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 sales 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 the 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 has evaluated the effect of the adoption of this guidance and has concluded that adoption had no impact on its financial statements, results of operations and cash flows.

 

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Note 3. 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 the Federal Reserve Banks of approximately $1.0 million as of September 30, 2010 and December 31, 2009. 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 $50.3 million and $29.3 million as of September 30, 2010 and December 31, 2009. The Bank includes member reserve balances in Other liabilities in the Statements of Condition.
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 deposit issued by highly rated banks and financial institutions (none at September 30, 2010 and December 31, 2009). At September 30, 2010 and December 31, 2009, the FHLBNY had pledged MBS of $3.0 million and $2.0 million (amortized cost basis) to the FDIC in connection with deposits maintained by the FDIC at the FHLBNY.
Mortgage-backed securities - The FHLBNY’s investments in MBS are predominantly government sponsored enterprise issued securities. The carrying value 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 “GSEs”) and a U.S. government agency at September 30, 2010 was $6.6 billion, or 88.2% of the total MBS classified as held-to-maturity. The comparable carrying value of GSE issued MBS at December 31, 2009 was $8.7 billion, or 89.1% of the total MBS classified as held-to-maturity. The carrying values (amortized cost less non-credit component of OTTI) of privately issued mortgage- and asset-backed securities at September 30, 2010 and December 31, 2009 were $0.9 billion and $1.1 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.
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 were $740.3 million and $751.8 million at September 30, 2010 and December 31, 2009.

 

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Major Security Types
The amortized cost basis, the gross unrecognized holding gains and losses, the fair values of held-to-maturity securities, and OTTI recognized in AOCI were as follows (in thousands):
                                                 
    September 30, 2010  
    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
  $ 939,289     $     $ 939,289     $ 54,613     $     $ 993,902  
Freddie Mac
    269,514             269,514       15,240             284,754  
 
                                   
Total pools of mortgages
    1,208,803             1,208,803       69,853             1,278,656  
 
                                   
 
                                               
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                                               
Fannie Mae
    1,854,693             1,854,693       58,691             1,913,384  
Freddie Mac
    3,184,866             3,184,866       106,422             3,291,288  
Ginnie Mae
    127,167             127,167       751             127,918  
 
                                   
Total CMOs/REMICs
    5,166,726             5,166,726       165,864             5,332,590  
 
                                   
 
                                               
Commercial Mortgage-Backed Securities
                                               
Freddie Mac
    173,969             173,969       12,556             186,525  
Ginnie Mae
    48,953             48,953       2,152             51,105  
 
                                   
Total commercial mortgage-backed securities
    222,922             222,922       14,708             237,630  
 
                                   
 
                                               
Non-GSE MBS
                                               
CMOs/REMICs
    338,995       (2,014 )     336,981       7,464       (1,618 )     342,827  
Commercial MBS
                                   
 
                                   
Total non-federal-agency MBS
    338,995       (2,014 )     336,981       7,464       (1,618 )     342,827  
 
                                   
 
                                               
Asset-Backed Securities
                                               
Manufactured housing (insured)
    182,711             182,711             (22,141 )     160,570  
Home equity loans (insured)
    265,230       (68,589 )     196,641       30,217       (3,064 )     223,794  
Home equity loans (uninsured)
    191,646       (25,440 )     166,206       15,665       (24,451 )     157,420  
 
                                   
Total asset-backed securities
    639,587       (94,029 )     545,558       45,882       (49,656 )     541,784  
 
                                   
 
                                               
Total MBS
  $ 7,577,033     $ (96,043 )   $ 7,480,990     $ 303,771     $ (51,274 )   $ 7,733,488  
 
                                   
 
                                               
Other
                                               
State and local housing finance agency obligations
  $ 740,256     $     $ 740,256     $ 2,537     $ (86,326 )   $ 656,466  
Certificates of deposit
                                   
 
                                   
Total other
  $ 740,256     $     $ 740,256     $ 2,537     $ (86,326 )   $ 656,466  
 
                                   
 
                                               
Total Held-to-maturity securities
  $ 8,317,289     $ (96,043 )   $ 8,221,246     $ 306,308     $ (137,600 )   $ 8,389,954  
 
                                   
                                                 
    December 31, 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
  $ 1,137,514     $     $ 1,137,514     $ 38,378     $     $ 1,175,892  
Freddie Mac
    335,368             335,368       12,903             348,271  
 
                                   
Total pools of mortgages
    1,472,882             1,472,882       51,281             1,524,163  
 
                                   
 
                                               
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
                                               
Fannie Mae
    2,609,254             2,609,254       70,222       (2,192 )     2,677,284  
Freddie Mac
    4,400,003             4,400,003       128,952       (3,752 )     4,525,203  
Ginnie Mae
    171,531             171,531       245       (1,026 )     170,750  
 
                                   
Total CMOs/REMICs
    7,180,788             7,180,788       199,419       (6,970 )     7,373,237  
 
                                   
 
                                               
Ginnie Mae-CMBS
    49,526             49,526       62             49,588  
 
                                   
 
                                               
Non-GSE MBS
                                               
CMOs/REMICs
    447,367       (2,461 )     444,906       2,437       (7,833 )     439,510  
Commercial MBS
                                   
 
                                   
Total non-federal-agency MBS
    447,367       (2,461 )     444,906       2,437       (7,833 )     439,510  
 
                                   
 
                                               
Asset-Backed Securities
                                               
Manufactured housing (insured)
    202,278             202,278             (37,101 )     165,177  
Home equity loans (insured)
    307,279       (79,445 )     227,834       12,795       (25,136 )     215,493  
Home equity loans (uninsured)
    217,981       (28,664 )     189,317       3,436       (34,804 )     157,949  
 
                                   
Total asset-backed securities
    727,538       (108,109 )     619,429       16,231       (97,041 )     538,619  
 
                                   
 
                                               
Total MBS
  $ 9,878,101     $ (110,570 )   $ 9,767,531     $ 269,430     $ (111,844 )   $ 9,925,117  
 
                                   
 
                                               
Other
                                               
State and local housing finance agency obligations
  $ 751,751     $     $ 751,751     $ 3,430     $ (11,046 )   $ 744,135  
Certificates of deposit
                                   
 
                                   
Total other
  $ 751,751     $     $ 751,751     $ 3,430     $ (11,046 )   $ 744,135  
 
                                   
 
                                               
Total Held-to-maturity securities
  $ 10,629,852     $ (110,570 )   $ 10,519,282     $ 272,860     $ (122,890 )   $ 10,669,252  
 
                                   

 

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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 as follows (in thousands):
                                                 
    September 30, 2010  
    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 finance agency obligations
  $ 140,035     $ (13,210 )   $ 181,819     $ (73,116 )   $ 321,854     $ (86,326 )
 
                                   
Total Non-MBS
    140,035       (13,210 )     181,819       (73,116 )     321,854       (86,326 )
 
                                   
MBS Investment Securities
                                               
MBS — Other US Obligations
                                               
Ginnie Mae
                                   
MBS-GSE
                                               
Fannie Mae
                                   
Freddie Mac
                                   
 
                                   
Total MBS-GSE
                                   
 
                                   
MBS-Private-Label
                606,453       (100,911 )     606,453       (100,911 )
 
                                   
Total MBS
                606,453       (100,911 )     606,453       (100,911 )
 
                                   
Total
  $ 140,035     $ (13,210 )   $ 788,272     $ (174,027 )   $ 928,307     $ (187,237 )
 
                                   
                                                 
    December 31, 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 finance agency obligations
  $ 212,112     $ (8,611 )   $ 43,955     $ (2,435 )   $ 256,067     $ (11,046 )
 
                                   
Total Non-MBS
    212,112       (8,611 )     43,955       (2,435 )     256,067       (11,046 )
 
                                   
MBS Investment Securities
                                               
MBS — Other US Obligations
                                               
Ginnie Mae
    122,359       (1,020 )     2,274       (6 )     124,633       (1,026 )
MBS-GSE
                                               
Fannie Mae
    780,645       (2,192 )                 780,645       (2,192 )
Freddie Mac
    814,881       (3,752 )                 814,881       (3,752 )
 
                                   
Total MBS-GSE
    1,595,526       (5,944 )                 1,595,526       (5,944 )
 
                                   
MBS-Private-Label
    113,140       (1,523 )     765,445       (196,134 )     878,585       (197,657 )
 
                                   
Total MBS
    1,831,025       (8,487 )     767,719       (196,140 )     2,598,744       (204,627 )
 
                                   
Total
  $ 2,043,137     $ (17,098 )   $ 811,674     $ (198,575 )   $ 2,854,811     $ (215,673 )
 
                                   
Impairment analysis of GSE issued securities - The FHLBNY evaluates its individual securities issued by Fannie Mae, Freddie Mac and 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, 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”)
Management evaluates its investments for OTTI on a quarterly basis, under amended OTTI guidance issued by the Financial Accounting Standards Board (“FASB”) in the 2009 first quarter. This amended OTTI guidance, which the FHLBNY early adopted in the 2009 first quarter, results in only the credit portion of OTTI securities being recognized in earnings. The noncredit portion of OTTI, which represent fair value losses of OTTI securities, is recognized in AOCI. Prior to 2009, if impairment was determined to be other-than-temporary, the impairment loss recognized in earnings was equal to the entire difference between the security’s amortized cost basis and its fair value. Prior to 2009, the FHLBNY had no impaired securities. Beginning with the quarter ended September 30,

 

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2009, and thereafter, the FHLBNY performed its OTTI analysis by cash flow testing 100 percent of it private-label MBS.
Base case (best estimate) assumptions and adverse case scenarios — In evaluating its private-label MBS for OTTI, the FHLBNY develops a base case assumption about future changes in home prices, prepayments, default and loss severities. The base case assumptions are the Bank’s best estimate of the performance parameters of its private-label MBS. The assumptions are then input to an industry standard bond cash flow model that generates expected cash flows based on various security classes in the securitization structure of each private-label MBS. See Note 1 for information with respect to critical estimates and assumptions about the Bank’s impairment methodologies. In addition to evaluating its private-label MBS under a base case scenario, the FHLBNY also performs a cash flow analysis for each security determined to be OTTI under a more stressful performance scenario. For more information, see Table: “Adverse case scenario — September 30, 2010” that summarizes the base case assumptions and OTTI results under an adverse case scenario.
Third-party Bond Insurers (Monoline insurers) — 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. The FHLBNY performs cash flow credit impairment tests on all of its private-label insured securities, and the analysis of the MBS protected by such third-party insurance looks first to the performance of the underlying security, and considers its embedded credit enhancements in the form of excess spread, overcollateralization, and credit subordination, to determine the collectability of all amounts due. If the embedded credit enhancement 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.
The two primary monoline insurers, Ambac and MBIA, 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 shortfall 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. Predicting when bond insurers may no longer have the ability to perform under their contractual agreements is a key impairment measurement parameter which the FHLBNY continually adjusts to factor the changing operating conditions at Ambac and MBIA. MBIA is currently rated below investment grade. Ambac’s rating was recently updated from below investment grade to “R”, which is indicative of regulatory intervention, as Ambac is under conservatorship. Financial information, cash flows and results of operations from the two monolines are closely monitored and analyzed by the management of FHLBNY. Based on on-going analysis of Ambac and MBIA at each interim period in 2009 and the three quarters ended September 30, 2010, the FHLBNY management has shortened the period it believes the two monolines can continue to provide insurance support as a result of the changing operating conditions at Ambac and MBIA. The FHLBNY performs this analysis and makes a re-evaluation of the bond insurance support period quarterly.
Up until March 31, 2010, both Ambac Assurance Corp. (“Ambac”) and MBIA Insurance Corp (“MBIA”), the two primary bond insurers for the FHLBNY, had been paying claims in order to meet any current cash flow deficiency within the structure of the insured securities. As of September 30, 2010, MBIA is continuing to meet claims. On March 24, 2010, Ambac, with the consent of the Commissioner of Insurance for the State of Wisconsin (the “Commissioner”), entered into a temporary injunction to suspend payments to bond holders and to create a segregated account for bond holders, which had no effect on payments due from Ambac through March 31, 2010. As a result, payments from Ambac to trustees of certain insured bonds owned by the FHLBNY were suspended. The amounts suspended were not material. Changes to these and other key assumptions may result in materially different outcomes and the realization of additional other-than-temporary impairment charges in the future.
OTTI at September 30, 2010 — To assess whether the entire amortized cost basis of the Bank’s private-label MBS will be recovered, the Bank performed cash flow analysis for 100 percent of the FHLBNY’s private-label MBS outstanding at September 30, 2010. Cash flow assessments identified credit impairment on four HTM private-label mortgage-backed securities, and $3.1 million of other-than-temporary impairment (“OTTI”) was recorded as a charge to earnings in the 2010 third quarter. All four securities had been previously determined to be OTTI, and the additional impairment (or re-impairment) in the 2010 third quarter was due to further deterioration in the credit performance metrics of the securities. The non-credit portion of OTTI recorded in AOCI was not significant. In the 2010 first two quarters, the FHLBNY had recorded a credit impairment charge of $4.6 million.

 

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The tables below contain summary analysis of securities1 that were deemed OTTI in the three quarters of 2010 (in thousands):
                                                                 
                                    Quarter Ended     Nine Months Ended  
    Quarter ended September 30, 2010     September 30, 2010     September 30, 2010  
    Insurer MBIA     Insurer Ambac     OTTI     OTTI  
Security           Fair             Fair     Credit     Non-credit2     Credit     Non-credit2  
Classification   UPB     Value     UPB     Value     Loss     Loss     Loss     Loss  
 
                                                               
HEL Subprime*
  $ 31,876     $ 15,050     $ 16,341     $ 8,233     $ (3,067 )   $ (2,569 )   $ (7,737 )   $ (3,164 )
 
                                               
Total
  $ 31,876     $ 15,050     $ 16,341     $ 8,233     $ (3,067 )   $ (2,569 )   $ (7,737 )   $ (3,164 )
 
                                               
     
*   HEL Subprime — MBS supported by home equity loans.
                                                 
    Quarter ended June 30, 2010  
    Insurer MBIA     Insurer Ambac     OTTI  
Security           Fair             Fair     Credit     Non-credit2  
Classification   UPB     Value     UPB     Value     Loss     Loss  
 
                                               
HEL Subprime*
  $ 20,976     $ 9,044     $ 37,456     $ 22,564     $ (1,270 )   $ (1,068 )
 
                                   
Total
  $ 20,976     $ 9,044     $ 37,456     $ 22,564     $ (1,270 )   $ (1,068 )
 
                                   
     
*   HEL Subprime — MBS supported by home equity loans.
                                                 
    Quarter ended March 31, 2010  
    Insurer MBIA     Insurer Ambac     OTTI  
Security           Fair             Fair     Credit     Non-credit2  
Classification   UPB     Value     UPB     Value     Loss     Loss  
 
                                               
HEL Subprime*
  $ 21,637     $ 9,730     $ 45,476     $ 26,015     $ (3,400 )   $ 473  
 
                                   
Total
  $ 21,637     $ 9,730     $ 45,476     $ 26,015     $ (3,400 )   $ 473  
 
                                   
     
*   HEL Subprime — MBS supported by home equity loans.
 
1   At September 30, 2010, the total carrying value of the securities prior to OTTI was $22.7 million. The carrying values and fair values of OTTI securities in a loss position prior to OTTI were $8.6 million and $8.1 million also at September 30, 2010.
 
2   Represents net amount of impairment losses reclassified (from) to AOCI to earnings as a result of additional credit losses on securities that had been previously determined to be OTTI.
With respect to the Bank’s remaining investments, the Bank believes no OTTI exists, other than those already recognized. The Bank’s conclusion is based upon multiple factors — bond issuer MBIA’s continued satisfaction its obligations under the contractual terms of the securities; the estimated performance of the underlying collateral; and the evaluation of the fundamentals of the issuer’s financial condition. Management has not made a decision to sell such securities at September 30, 2010. Management also has 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, 2010. However, without continued recovery in 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 bond insurer MBIA to support certain insured securities is further negatively impacted by the insurer’s future financial performance, additional OTTI may be recognized in future periods.

 

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OTTI at December 31, 2009 — In the third quarter of 2009 and at December 31, 2009, the FHLBNY cash flow tested 100 percent of its private-label MBS to identify credit impairment. Certain uninsured bonds were also determined to be credit impaired based on cash flow shortfall in the interim periods of 2009. In many instances, the FHLBNY’s cash flow analysis observed additional credit impairment also referred to as credit re-impairments. Observed historical performance parameters of certain securities had deteriorated in 2009, and these factors had increased loss severities in the cash flow analyses of those private-label MBS.
The tables provide summary analysis of the securities that were deemed OTTI in the fourth quarter of 2009 and cumulatively through December 31, 2009 (in thousands):
                                                                                 
    At December 31, 2009     Quarter ended December 31, 2009  
    Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross Unrecognized Losses  
Security           Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
                                                                               
HEL Subprime*
  $     $     $ 89,092     $ 53,027     $ 20,118     $ 12,874     $ (6,540 )   $ (16,212 )   $     $ (2,663 )
 
                                                           
Total
  $     $     $ 89,092     $ 53,027     $ 20,118     $ 12,874     $ (6,540 )   $ (16,212 )   $     $ (2,663 )
 
                                                           
     
*   HEL Subprime — MBS supported by home equity loans.
                                                                                 
    Year ended December 31, 2009     Year ended December 31, 2009  
    Insurer MBIA     Insurer Ambac     Uninsured     OTTI     Gross Unrecognized Losses  
Security           Fair             Fair             Fair     Credit     Non-credit     Less than     More than  
Classification   UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
                                                                               
RMBS-Prime*
  $     $     $     $     $ 54,295     $ 51,715     $ (438 )   $ (2,766 )   $ (1,187 )   $  
HEL Subprime*
    34,425       17,161       198,532       127,470       80,774       53,783       (20,378 )     (117,330 )           (13,674 )
 
                                                           
Total
  $ 34,425     $ 17,161     $ 198,532     $ 127,470     $ 135,069     $ 105,498     $ (20,816 )   $ (120,096 )   $ (1,187 )   $ (13,674 )
 
                                                           
     
*   RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans.
September 30, 2009 — Based on the management’s determination of expected cash flow shortfall of certain securities insured by Ambac concurrently with the determination that Ambac’s claim paying ability would not be sufficient in future periods, management concluded that the securities had become OTTI. The cumulative credit losses recognized year-to-date September 30, 2009 was $14.3 million.
The table below summarizes the key characteristics of the securities that were deemed OTTI in the third quarter of 2009 (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   UPB     Value     UPB     Value     UPB     Value     Loss     Loss     12 months     12 months  
 
                                                                               
HEL Subprime*
  $ 13,304     $ 7,680     $ 121,435     $ 79,700     $ 62,460     $ 38,392     $ (3,683 )   $ (26,486 )   $     $ (30,169 )
 
                                                           
Total
  $ 13,304     $ 7,680     $ 121,435     $ 79,700     $ 62,460     $ 38,392     $ (3,683 )   $ (26,486 )   $     $ (30,169 )
 
                                                           
     
*   HEL Subprime — MBS supported by home equity loans.
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 AOCI (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
Beginning balance
  $ 25,486     $ 10,593     $ 20,816     $  
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
    3,067       2,224       7,737        
Increases in cash flows expected to be collected, recognized over the remaining life of the securities
                       
 
                       
Ending balance
  $ 28,553     $ 14,276     $ 28,553     $ 14,276  
 
                       

 

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Key Base Assumptions — September 30, 2010
The table below summarizes the weighted average and range of Key Base Assumptions for securities determined to be OTTI in the 2010 third quarter:
                                                 
    Key Base Assumption - OTTI Securities  
    CDR     CPR     Loss Severity %  
Security Classification   Range     Average     Range     Average     Range     Average  
 
                                               
HEL Subprime*
    5.8-6.5       6.3       2.0-3.0       2.3       100.0-100.0       100.0  
     
*   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.
Adverse case scenario — September 30, 2010
The FHLBNY evaluated its private-label MBS under a base case (or best estimate) scenario, and under more adverse external assumptions. The stress test scenario and associated results do not represent the Bank’s current expectations and therefore should not be construed as a prediction of the Bank’s future results, market conditions or the actual performance of these securities. The results of the adverse case scenario are presented below alongside the FHLBNY’s base case scenario for the credit impaired securities (the base case) (in thousands):
                                 
    Quarter ended September 30, 2010  
    Actual Results - Base Case Scenario     Pro-forma Results - Adverse Case Scenario  
            OTTI related to             OTTI related to  
    UPB     credit loss     UPB     credit loss  
RMBS Prime
  $     $     $     $  
Alt-A
                3,338       (76 )
HEL Subprime
    48,217       (3,067 )     145,758       (7,228 )
 
                       
 
                               
Total
  $ 48,217       (3,067 )   $ 149,096       (7,304 )
 
                       
Third-party Bond Insurer (Monoline insurer support)
The FHLBNY has identified certain MBS that have been determined to be 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.
Monoline Analysis and Methodology - The two monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. A 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 “coverage 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 claims 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 (name changed in 2009 to Assured Guaranty Municipal Corp.) as adequate, and MBIA and Ambac as “at risk”. The Bank analyzed Ambac and MBIA and their financial strength to perform with respect to their contractual obligations for the securities owned by the FHLBNY. As of September 30, 2010, MBIA and Assured Guaranty Municipal “AGM” were performing under the terms of their contractual agreements with respect to the FHLBNY’s insured bonds. As discussed previously, Ambac has suspended payments under regulatory orders, and the FHLBNY believes the suspension is temporary. 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 requires significant judgment.

 

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The monoline analysis methodology resulted in the following “Burnout Period” time horizon dates for Ambac and MBIA:
                 
    Burnout Period  
    Ambac     MBIA  
September 30, 2010
               
Burnout period (months)
          9  
Coverage ignore date
    9/30/2010       6/30/2011  
 
               
December 31, 2009
               
Burnout period (months)
    18       18  
Coverage ignore date
    6/30/2011       6/30/2011  
 
               
September 30, 2009
               
Burnout period (months)
    83       31  
Coverage ignore date
    7/31/2016       3/31/2012  
Note 5. Available-for-sale securities.
Major Security types - 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, 2010  
    Amortized                     Gross     Gross        
    Cost     OTTI     Carrying     Unrealized     Unrealized     Fair  
    Basis     in OCI     Value     Gains     Losses     Value  
 
                                               
Cash equivalents
  $ 1,174     $     $ 1,174     $     $     $ 1,174  
Equity funds
    8,361             8,361       75       (1,136 )     7,300  
Fixed income funds
    3,928             3,928       420             4,348  
Mortgage-backed securities
                                               
CMO-Floating
    3,336,502             3,336,502       24,675       (218 )     3,360,959  
 
                                   
Total
  $ 3,349,965     $     $ 3,349,965     $ 25,170     $ (1,354 )   $ 3,373,781  
 
                                   
                                                 
    December 31, 2009  
    Amortized                     Gross     Gross        
    Cost     OTTI     Carrying     Unrealized     Unrealized     Fair  
    Basis     in OCI     Value     Gains     Losses     Value  
 
 
Cash equivalents
  $ 1,230     $     $ 1,230     $     $     $ 1,230  
Equity funds
    8,995             8,995       57       (1,561 )     7,491  
Fixed income funds
    3,672             3,672       196             3,868  
Mortgage-backed securities
                                               
CMO-Floating
    2,242,665             2,242,665       6,937       (9,038 )     2,240,564  
 
                                   
Total
  $ 2,256,562     $     $ 2,256,562     $ 7,190     $ (10,599 )   $ 2,253,153  
 
                                   
There were no AFS mortgage-backed securities supported by commercial loans at September 30, 2010 and December 31, 2009.

 

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Unrealized Losses — MBS securities classified as available-for-sale securities (in thousands):
                                                 
    September 30, 2010  
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
MBS Investment Securities
                                               
MBS-GSE
                                               
Fannie Mae
  $ 68,494     $ (83 )   $     $     $ 68,494     $ (83 )
Freddie Mac
    79,386       (135 )                 79,386       (135 )
 
                                   
Total MBS-GSE
    147,880       (218 )                 147,880       (218 )
 
                                   
Total Temporarily Impaired
  $ 147,880     $ (218 )   $     $     $ 147,880     $ (218 )
 
                                   
                                                 
    December 31, 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  
MBS Investment Securities
                                               
MBS-GSE
                                               
Fannie Mae
  $     $     $ 1,006,860     $ (6,394 )   $ 1,006,860     $ (6,394 )
Freddie Mac
                662,237       (2,644 )     662,237       (2,644 )
 
                                   
Total MBS-GSE
                1,669,097       (9,038 )     1,669,097       (9,038 )
 
                                   
Total Temporarily Impaired
  $     $     $ 1,669,097     $ (9,038 )   $ 1,669,097     $ (9,038 )
 
                                   
Amortized cost of AFS 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, 2010 and December 31, 2009. No AFS securities were hedged at September 30, 2010 and December 31, 2009. Amortization of discounts recorded to income were $1.2 million and $1.4 million for the third quarters ended 2010 and 2009, and $6.3 million and $3.9 million for the nine months ended September 30, 2010 and September 30, 2009.
Management of the FHLBNY has concluded that gross unrealized losses at September 30, 2010 and December 31, 2009, as summarized in the table above, were caused by interest rate changes, credit spreads 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.
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, 2010 or subsequently. 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, 2010 and December 31, 2009. 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, equity and fixed-income 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, 2010 and December 31, 2009.

 

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Note 6. Advances.
Redemption terms
Contractual redemption terms and yields of advances were as follows (dollars in thousands):
                                                 
    September 30, 2010     December 31, 2009  
            Weighted2                     Weighted2        
            Average     Percentage             Average     Percentage  
    Amount     Yield     of Total     Amount     Yield     of Total  
 
                                               
Overdrawn demand deposit accounts
  $       %     %   $ 2,022       1.20 %     %
Due in one year or less
    21,921,391       2.11       27.37       24,128,022       2.07       26.59  
Due after one year through two years
    8,986,235       2.93       11.22       10,819,349       2.73       11.92  
Due after two years through three years
    7,713,074       2.95       9.63       10,069,555       2.91       11.10  
Due after three years through four years
    4,767,042       3.01       5.95       5,804,448       3.32       6.40  
Due after four years through five years
    4,081,962       3.00       5.10       3,364,706       3.19       3.71  
Due after five years through six years
    8,590,664       4.34       10.72       2,807,329       3.91       3.09  
Thereafter
    24,042,443       3.74       30.01       33,742,269       3.78       37.19  
 
                                   
 
                                               
Total par value
    80,102,811       3.11 %     100.00 %     90,737,700       3.06 %     100.00 %
 
                                       
 
                                               
Discount on AHP advances 1
    (50 )                     (260 )                
Hedging adjustments
    5,594,410                       3,611,311                  
 
                                           
 
                                               
Total
  $ 85,697,171                     $ 94,348,751                  
 
                                           
     
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, 2010 and December 31, 2009.
 
2   The weighted 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.
Impact of putable advances on advance maturities
The Bank offers putable advances to members. With a putable advance, the Bank effectively purchases a put option from the member that allows the Bank to terminate the fixed-rate advance, which is normally exercised when interest rates have increased from those prevailing at the time the advance was made. When the Bank exercises the put option, it will offer to extend additional credit to members at the then prevailing market rates and terms. Typically, the Bank will hedge putable advances with cancellable interest rate swaps with matching terms and will sell the exercise option that will allow swap counterparties to terminate the swaps at the same predetermined exercise dates as the advances. As of September 30, 2010 and December 31, 2009, the Bank had putable advances outstanding totaling $36.7 billion and $41.4 billion, representing 45.8% and 45.6% of par amounts of advances outstanding at those dates.
The table below offers a view of the advance portfolio with the possibility of the exercise of the put option that is controlled by the FHLBNY, and put dates are summarized into similar maturity tenors as the previous table that summarizes advances by contractual maturities (dollars in thousands):
                                 
    September 30, 2010     December 31, 2009  
            Percentage             Percentage  
    Amount     of Total     Amount     of Total  
 
                               
Overdrawn demand deposit accounts
  $       %   $ 2,022       %
Due or putable in one year or less1
    54,584,453       68.14       56,978,134       62.79  
Due or putable after one year through two years
    8,609,985       10.75       14,082,199       15.52  
Due or putable after two years through three years
    7,276,674       9.08       8,991,805       9.91  
Due or putable after three years through four years
    4,532,542       5.66       5,374,048       5.92  
Due or putable after four years through five years
    2,474,462       3.09       2,826,206       3.12  
Due or putable after five years through six years
    777,664       0.97       158,329       0.18  
Thereafter
    1,847,031       2.31       2,324,957       2.56  
 
                       
 
                               
Total par value
    80,102,811       100.00 %     90,737,700       100.00 %
 
                           
 
                               
Discount on AHP advances
    (50 )             (260 )        
Hedging adjustments
    5,594,410               3,611,311          
 
                           
 
                               
Total
  $ 85,697,171             $ 94,348,751          
 
                           
     
1   Due or putable in one year or less includes two callable advances.

 

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Note 7. Mortgage loans held-for-portfolio.
Mortgage Partnership Finance program loans, or (MPF) constitute 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, 2010     December 31, 2009  
            Percentage             Percentage  
    Amount     of Total     Amount     of Total  
Real Estate:
                               
Fixed medium-term single-family mortgages
  $ 344,781       27.20 %   $ 388,072       29.43 %
Fixed long-term single-family mortgages
    918,967       72.50       926,856       70.27  
Multi-family mortgages
    3,827       0.30       3,908       0.30  
 
                       
 
                               
Total par value
    1,267,575       100.00 %     1,318,836       100.00 %
 
                           
 
                               
Unamortized premiums
    10,027               9,095          
Unamortized discounts
    (4,700 )             (5,425 )        
Basis adjustment 1
    322               (461 )        
 
                           
 
                               
Total mortgage loans held-for-portfolio
    1,273,224               1,322,045          
Allowance for credit losses
    (5,537 )             (4,498 )        
 
                           
Total mortgage loans held-for-portfolio after allowance for credit losses
  $ 1,267,687             $ 1,317,547          
 
                           
     
1   Represents fair value basis of open and closed delivery commitments.
The estimated fair values of the mortgage loans as of September 30, 2010 and December 31, 2009 are reported in Note 17 — Fair Values of financial instruments.
The FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers (See Note 1 — Significant Accounting Policies and Estimates). The first layer is typically 100 basis points but varies with the particular MPF program. The amount of the first layer, or First Loss Account or “FLA”, was estimated as $11.6 million and $13.9 million at September 30, 2010 and December 31, 2009. The FLA is not recorded or reported as a reserve for loan losses as it serves as a memorandum or information account. The FHLBNY is responsible for absorbing the first layer. The second layer is that amount of credit obligations that the Participating Financial Institution (“PFI”) has taken on which will equate the loan to a double-A rating. The FHLBNY pays a Credit Enhancement fee to the PFI for taking on this obligation. The FHLBNY assumes all residual risk. Credit Enhancement fees accrued were $0.4 million for the third quarters of 2010 and 2009, and $1.1 million and $1.2 million for the nine months ended September 30, 2010 and 2009, and were reported as a reduction to mortgage loan interest income. The amount of charge-offs in each period reported was insignificant and it was not necessary for the FHLBNY to recoup any losses from the PFIs.
The following provides roll-forward analysis 1 of the allowance for credit losses (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Beginning balance
  $ 5,392     $ 2,760     $ 4,498     $ 1,406  
Charge-offs
    (97 )           (131 )     (14 )
Recoveries
    11             33        
Provision for credit losses on mortgage loans
    231       598       1,137       1,966  
 
                       
Ending balance
  $ 5,537     $ 3,358     $ 5,537     $ 3,358  
 
                       
     
1   Disaggregation was deemed not necessary since the risk characteristics of loans within the MPF program are materially the same.
As of September 30, 2010 and December 31, 2009, the FHLBNY had $25.1 million and $16.0 million of non-accrual conventional loans. Mortgage loans are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements. As of September 30, 2010 and December 31, 2009, the FHLBNY had no investment in impaired mortgage loans, other than the non-accrual loans.
The following table summarizes mortgage loans held-for-portfolio past due 90 days or more and still accruing interest (in thousands):
                 
    September 30, 2010     December 31, 2009  
 
               
Secured by 1-4 family
  $ 668     $ 570  
 
           
The past due loans still accruing were VA and FHA insured loans.

 

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Note 8. Deposits.
The FHLBNY accepts demand, overnight and term deposits from its members, qualifying non-members and U.S. government instrumentalities.
The following table summarizes term deposits (in thousands):
                 
    September 30, 2010     December 31, 2009  
 
               
Due in one year or less
  $ 60,400     $ 7,200  
 
           
 
               
Total term deposits
  $ 60,400     $ 7,200  
 
           
Note 9. Borrowings.
Securities sold under agreements to repurchase
The FHLBNY did not have any securities sold under agreement to repurchase as of September 30, 2010 and December 31, 2009. Terms, amounts and outstanding balances of borrowings from other Federal Home Loan Banks are described under Note 19 — Related party transactions.
Note 10. Consolidated obligations.
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their fiscal agent. Consolidated bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. Discount notes sell at less than their face amount and are redeemed at par value when they mature.
The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. Although it has never occurred, to the extent that an FHLBank would make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine.
Based on management’s review, the FHLBNY has no reason to record actual or contingent liabilities with respect to the occurrence of events or circumstances that would require the FHLBNY to assume an obligation on behalf of other FHLBanks. The par amounts of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations held by the FHLBanks, were approximately $0.8 trillion and $0.9 trillion as of September 30, 2010 and December 31, 2009.
Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located.
The FHLBNY met the qualifying unpledged asset requirements at each reporting dates as follows:
                 
    September 30, 2010     December 31, 2009  
 
               
Percentage of unpledged qualifying assets to consolidated obligations
    111 %     109 %
 
           
General Terms
FHLBank consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices include the London Interbank Offered Rate (“LIBOR”), Constant Maturity Treasury (“CMT”), 11th District Cost of Funds Index (“COFI”), and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate bonds may also contain certain features that may result in complex coupon payment terms and call options.
When such consolidated obligations are issued, the FHLBNY may enter into derivatives containing offsetting features that effectively convert the terms of the bond to those of a simple variable- or fixed-rate bond. Consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also include Optional Principal Redemption Bonds (callable bonds) that the FHLBNY may redeem in whole or in part at its discretion on predetermined call dates, according to the terms of the bond offerings.
With respect to interest payment terms, consolidated bonds may also have step-up, or step-down terms. Step-up bonds generally pay interest at increasing fixed rates for specified intervals over the life of the bond. Step-down bonds pay interest at decreasing fixed rates. These bonds generally contain provisions enabling the FHLBNY to call bonds at its option on predetermined exercise dates at par.

 

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The following summarizes consolidated obligations issued by the FHLBNY and outstanding (in thousands):
                 
    September 30, 2010     December 31, 2009  
 
               
Consolidated obligation bonds-amortized cost
  $ 73,847,021     $ 73,436,939  
Fair value basis adjustments
    1,060,537       572,537  
Fair value basis on terminated hedges
    1,099       2,761  
Fair value option valuation adjustments and accrued interest
    10,236       (4,259 )
 
           
 
               
Total Consolidated obligation-bonds
  $ 74,918,893     $ 74,007,978  
 
           
 
               
Discount notes-amortized cost
  $ 17,784,192     $ 30,827,639  
Fair value option valuation adjustments
    3,716        
 
           
 
               
Total Consolidated obligation-discount notes
  $ 17,787,908     $ 30,827,639  
 
           
Redemption Terms of consolidated obligation bonds
The following is a summary of consolidated bonds outstanding by year of maturity (dollars in thousands):
                                                 
    September 30, 2010     December 31, 2009  
            Weighted                     Weighted        
            Average     Percentage             Average     Percentage  
Maturity   Amount     Rate 1     of total     Amount     Rate 1     of total  
 
                                               
One year or less
  $ 38,972,100       1.10 %     52.86 %   $ 40,896,550       1.34 %     55.75 %
Over one year through two years
    15,731,695       1.13       21.34       15,912,200       1.69       21.69  
Over two years through three years
    9,337,130       2.24       12.66       7,518,575       2.28       10.25  
Over three years through four years
    3,409,600       2.99       4.62       3,961,250       3.49       5.40  
Over four years through five years
    3,224,775       3.12       4.37       2,130,300       4.27       2.90  
Over five years through six years
    498,000       3.71       0.68       644,350       5.15       0.88  
Thereafter
    2,556,200       4.33       3.47       2,294,700       5.06       3.13  
 
                                   
 
                                               
 
    73,729,500       1.56 %     100.00 %     73,357,925       1.87 %     100.00 %
 
                                       
 
                                               
Bond premiums
    145,239                       112,866                  
Bond discounts
    (27,718 )                     (33,852 )                
Fair value basis adjustments
    1,060,537                       572,537                  
Fair value basis adjustments on terminated hedges
    1,099                       2,761                  
Fair value option valuation adjustments and accrued interest
    10,236                       (4,259 )                
 
                                           
 
                                               
 
  $ 74,918,893                     $ 74,007,978                  
 
                                           
     
1   Weighted average rate represents the weighted average coupons of bonds, unadjusted for swaps. The weighted average coupon of bonds outstanding at September 30, 2010 and December 31, 2009 represent contractual coupons payable to investors.
Amortization of bond premiums and discounts resulted in net reduction of interest expense of $8.3 million and $8.7 million for the 2010 third quarter and the same period in 2009, and $22.6 million and $22.5 million for the nine months ended September 30, 2010 and 2009. Amortization of basis adjustments from terminated hedges were $1.7 million and $1.8 million, and were recorded as an expense in the 2010 third quarter and the same period in 2009, and $4.9 million and $5.3 million for the nine months ended September 30, 2010 and 2009.
Debt extinguished
No debt was retired in the first or third quarter of 2010 or in all quarters in 2009. In the second quarter of 2010, the Bank extinguished $250.0 million of consolidated obligation bond at an insignificant gain.
Transfers of consolidated obligation bonds to other FHLBanks
The Bank may transfer certain bonds at negotiated market rates to other FHLBanks to meet the FHLBNY’s asset and liability management objectives. During the 2010 third quarter, the bank assumed debt from another FHLBank totaling $193.9 million (par amounts). There was no transfer of consolidated obligation bonds to other FHLBanks or assumption of debt in the prior two quarters of 2010. Generally, when debt is transferred in exchange for a cash price that represents the fair market values of the debt. No debt was transferred to the FHLBNY or assumed from another FHLBank for the first three quarters of 2009. For more information, also, see Note 19 — Related party transactions.
When debt is transferred, at trade date, the transferring bank notifies the Office of Finance of a change in primary obligor for the transferred debt.
Impact of callable bonds on consolidated obligation bond maturities
The Bank issues callable bonds to investors. With a callable bond, the Bank effectively purchases an option from the investor that allows the Bank to terminate the consolidated obligation bond at pre-determined option exercise dates, which is normally exercised when interest rates have decreased from those prevailing at the time the bonds were issued. Typically, the Bank will hedge callable bonds with cancellable interest rate swaps with matching terms and will sell the exercise option that will allow swap counterparties to terminate the swaps at the same predetermined exercise dates as the bonds. As of September 30, 2010 and December 31, 2009, the Bank had callable bonds totaling $8.5 billion and $11.7 billion, representing 11.5% and 15.9% of par amounts of consolidated bonds outstanding at those dates.

 

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The following summarizes bonds outstanding by year of maturity or next call date (dollars in thousands):
                                 
    September 30, 2010     December 31, 2009  
            Percentage             Percentage  
    Amount     of total     Amount     of total  
Year of Maturity or next call date
                               
Due or callable in one year or less
  $ 45,488,400       61.70 %   $ 50,481,350       68.82 %
Due or callable after one year through two years
    14,465,695       19.62       11,352,200       15.48  
Due or callable after two years through three years
    6,537,130       8.87       4,073,575       5.55  
Due or callable after three years through four years
    2,659,600       3.61       3,606,250       4.91  
Due or callable after four years through five years
    2,579,775       3.50       1,325,800       1.81  
Due or callable after five years through six years
    232,700       0.31       529,050       0.72  
Thereafter
    1,766,200       2.39       1,989,700       2.71  
 
                       
 
                               
 
    73,729,500       100.00 %     73,357,925       100.00 %
 
                           
 
                               
Bond premiums
    145,239               112,866          
Bond discounts
    (27,718 )             (33,852 )        
Fair value basis adjustments
    1,060,537               572,537          
Fair value basis adjustments on terminated hedges
    1,099               2,761          
Fair value option valuation adjustments and accrued interest
    10,236               (4,259 )        
 
                           
 
                               
 
  $ 74,918,893             $ 74,007,978          
 
                           
Discount notes
Consolidated obligation discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par when they mature.
The FHLBNY’s outstanding consolidated discount notes were as follows (dollars in thousands):
                 
    September 30, 2010     December 31, 2009  
 
               
Par value
  $ 17,791,522     $ 30,838,104  
 
           
 
               
Amortized cost
  $ 17,784,192     $ 30,827,639  
Fair value option valuation adjustments
    3,716        
 
           
 
               
Total
  $ 17,787,908     $ 30,827,639  
 
           
 
               
Weighted average interest rate
    0.19 %     0.15 %
 
           
Note 11. Capital, Capital ratios, and Mandatorily redeemable capital stock.
Capital
The FHLBanks, including the FHLBNY, have a cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. The member’s stock requirement is generally based on its use of FHLBNY products, subject to a minimum membership requirement, as prescribed by the FHLBank Act and the FHLBNY Capital Plan. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. It is not publicly traded. An option to redeem capital stock that is greater than a member’s minimum requirement is held by both the member and the FHLBNY.
Under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and the Finance Agency’s capital regulations, the FHLBNY’s Capital Plan offers two sub-classes of Class B capital stock, Class B1 and Class B2. Class B1 stock is issued to meet membership stock purchase requirements. Class B2 stock is issued to meet activity-based requirements. The FHLBNY requires member institutions to maintain Class B1 stock based on a percentage of the member’s mortgage-related assets and Class B2 stock based on a percentage of advances and acquired member assets outstanding with the FHLBank and certain commitments outstanding with the FHLBank. Class B1 and Class B2 stockholders have the same voting rights and dividend rates.
Members can redeem Class A stock by giving six months’ notice, and redeem Class B stock by giving five year’s notice. Only “permanent” capital, defined as retained earnings and Class B stock, satisfies the FHLBank risk-based capital requirement. In addition, the GLB Act specifies a 5.0 percent minimum leverage ratio based on total capital and a 4.0 percent minimum capital ratio that does not include the 1.5 weighting factor applicable to the permanent capital that is used in determining compliance with the 5.0 percent minimum leverage ratio.

 

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Capital Plan under GLB Act
The FHLBNY implemented its current capital plan on December 1, 2005 through the issuance of Class B stock. The conversion was considered a capital exchange and was accounted for at par value. Members’ capital stock held immediately prior to the conversion date was automatically exchanged for an equal amount of Class B Capital Stock, comprised of Membership Stock (referred to as “Subclass B1 Stock”) and Activity-Based Stock (referred to as “Subclass B2 Stock”).
Any member that withdraws from membership must wait five years from the divestiture date for all capital stock that is held as a condition of membership unless the institution has cancelled its notice of withdrawal prior to that date and before being readmitted to membership in any FHLBank. Commencing in 2008, the Bank at its discretion may repay a non-member’s membership stock before the end of the five-year waiting period.
The FHLBNY is subject to risk-based capital rules. Specifically, the FHLBNY is subject to three capital requirements under its capital plan. First, the FHLBNY must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, its market risk, and operations risk capital requirements calculated in accordance with the FHLBNY policy, rules, and regulations of the Finance Agency. Only permanent capital, defined as Class B stock and retained earnings, satisfies this risk-based capital requirement. The Finance Agency may require the FHLBNY to maintain a 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 4.0% total capital-to-asset ratio and at least a 5.0% leverage ratio at all times. The leverage ratio is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 time divided by total assets. The FHLBNY was in compliance with the aforementioned capital rules and requirements for all periods presented.
The FHLBNY’s capital plan allows the FHLBNY to recalculate the membership stock purchase requirement any time after 30 days subsequent to a merger. The plan also permits the FHLBNY to use a zero mortgage asset base in performing the calculation, which recognizes the fact that the corporate entity that was once its member no longer exists. Under the plan, the FHLBNY could determine that all of the membership stock formerly held by the member becomes excess stock, which gives the FHLBNY the discretion, but not the obligation, to repurchase that stock prior to the expiration of the five-year notice period.
Capital Ratios
The following table summarizes the Bank’s risk-based capital ratios (dollars in thousands):
                                 
    September 30, 2010     December 31, 2009  
    Required 4     Actual     Required 4     Actual  
Regulatory capital requirements:
                               
Risk-based capital1
  $ 473,275     $ 5,432,169     $ 606,716     $ 5,874,125  
Total capital-to-asset ratio
    4.00 %     5.27 %     4.00 %     5.14 %
Total capital2
  $ 4,123,742     $ 5,437,706     $ 4,578,436     $ 5,878,623  
Leverage ratio
    5.00 %     7.91 %     5.00 %     7.70 %
Leverage capital3
  $ 5,154,677     $ 8,153,790     $ 5,723,045     $ 8,815,685  
     
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 Actual “Risk-based capital” times 1.5 plus allowance for loan losses.
 
4   Required minimum.
The Finance Agency has indicated that the accounting treatment for certain shares determined to be mandatorily redeemable will not be included in the definition of total capital for purposes of determining the Bank’s compliance with regulatory capital requirements, calculating mortgage securities investment authority (300 percent of total capital), calculating unsecured credit exposure to other GSEs (100 percent of total capital), or calculating unsecured credit limits to other counterparties (various percentages of total capital depending on the rating of the counterparty).
Mandatorily Redeemable Capital 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.
In accordance with the accounting guidance, 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 are accrued and also classified as a liability in the Statements of Condition and reported as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments, once settled, is reflected as financing cash outflows in the Statements of Cash Flows.

 

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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, 2010 and December 31, 2009, mandatorily redeemable capital stock of $67.3 million and $126.3 million were held by former members who had attained non-member status by virtue of being acquired by non-members. A small number of members had also become non-members by relocating their charters to outside the FHLBNY’s membership district.
Anticipated redemptions of mandatorily redeemable capital stock were as follows (in thousands):
                 
    September 30, 2010     December 31, 2009  
 
               
Redemption less than one year
  $ 45,708     $ 102,453  
Redemption from one year to less than three years
    14,650       16,766  
Redemption from three years to less than five years
    2,037       2,118  
Redemption after five years or greater
    4,953       4,957  
 
           
 
               
Total
  $ 67,348     $ 126,294  
 
           
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.
Note 12. 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 percent of regulatory defined income for the specific purpose of calculating AHP and REFCORP assessments. The FHLBNY charges the amount set aside for AHP to income and recognizes it as a liability. The FHLBNY relieves the AHP liability as members use the subsidies. If the result of the aggregate 10 percent 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 as of September 30, 2010 or at December 31, 2009.
Income for the purposes of calculating assessments is GAAP Net income before assessments, and before interest expense related to mandatorily redeemable capital stock, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation by the Finance Agency. 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. A FHLBank reduces its AHP liability as members use subsidies.
The following table provides roll-forward information with respect to changes in Affordable Housing Program liabilities (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Beginning balance
  $ 144,074     $ 140,037     $ 144,489     $ 122,449  
Additions from current period’s assessments
    8,852       15,780       21,350       53,363  
Net disbursements for grants and programs
    (14,931 )     (10,995 )     (27,844 )     (30,990 )
 
                       
 
                               
Ending balance
  $ 137,995     $ 144,822     $ 137,995     $ 144,822  
 
                       

 

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Note 13. Total comprehensive income.
Total comprehensive income is comprised of Net income and Accumulated other comprehensive income (loss) (“AOCI”), which includes unrealized gains and losses on available-for-sale securities, cash flow hedging activities, employee supplemental retirement plans, and the non-credit portion of OTTI on HTM securities.
Changes in AOCI and total comprehensive income were as follows for the three and nine months ended September 30, 2010 and 2009 (in thousands):
                                                         
    Three months ended September 30  
            Non-credit                     Accumulated                
    Available-     OTTI on HTM     Cash     Supplemental     Other             Total  
    for-sale     securities,     flow     Retirement     Comprehensive     Net     Comprehensive  
    securities     net of accretion     hedges     Plans     Income (Loss)     Income     Income  
 
                                                       
Balance, June 30, 2009
  $ (10,129 )   $ (77,159 )   $ (26,402 )   $ (6,550 )   $ (120,240 )                
 
                                                       
Net change
    (5,956 )     (23,304 )     1,898             (27,362 )   $ 140,219     $ 112,857  
 
                                         
 
                                                       
Balance, September 30, 2009
  $ (16,085 )   $ (100,463 )   $ (24,504 )   $ (6,550 )   $ (147,602 )                
 
                                             
 
                                                       
Balance, June 30, 2010
  $ 20,182     $ (101,877 )   $ (19,614 )   $ (7,877 )   $ (109,186 )                
 
                                                       
Net change
    3,633       5,834       1,882             11,349     $ 78,792     $ 90,141  
 
                                         
 
                                                       
Balance, September 30, 2010
  $ 23,815     $ (96,043 )   $ (17,732 )   $ (7,877 )   $ (97,837 )                
 
                                             
                                                         
    Nine months ended September 30  
            Non-credit                     Accumulated                
    Available-     OTTI on HTM     Cash     Supplemental     Other             Total  
    for-sale     securities,     flow     Retirement     Comprehensive     Net     Comprehensive  
    securities     net of accretion     hedges     Plans     Income (Loss)     Income     Income  
 
                                                       
Balance, December 31, 2008
  $ (64,420 )   $     $ (30,191 )   $ (6,550 )   $ (101,161 )                
 
                                                       
Net change
    48,335       (100,463 )     5,687             (46,441 )   $ 474,786     $ 428,345  
 
                                         
 
                                                       
Balance, September 30, 2009
  $ (16,085 )   $ (100,463 )   $ (24,504 )   $ (6,550 )   $ (147,602 )                
 
                                             
 
                                                       
Balance, December 31, 2009
  $ (3,409 )   $ (110,570 )   $ (22,683 )   $ (7,877 )   $ (144,539 )                
 
                                                       
Net change
    27,224       14,527       4,951             46,702     $ 189,097     $ 235,799  
 
                                         
 
                                                       
Balance, September 30, 2010
  $ 23,815     $ (96,043 )   $ (17,732 )   $ (7,877 )   $ (97,837 )                
 
                                             
Note 14. 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,  
    2010     2009     2010     2009  
 
                               
Net income
  $ 78,792     $ 140,219     $ 189,097     $ 474,786  
 
                       
 
                               
Net income available to stockholders
  $ 78,792     $ 140,219     $ 189,097     $ 474,786  
 
                       
 
                               
Weighted average shares of capital
    46,800       53,233       48,429       54,505  
Less: Mandatorily redeemable capital stock
    (685 )     (1,280 )     (910 )     (1,351 )
 
                       
Average number of shares of capital used to calculate earnings per share
    46,115       51,953       47,519       53,154  
 
                       
 
                               
Net earnings per share of capital
  $ 1.71     $ 2.70     $ 3.98     $ 8.93  
 
                       
Basic and diluted earnings per share of capital are the same. The FHLBNY has no dilutive potential common shares or other common stock equivalents.

 

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Note 15. 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.
On January 1, 2009, the Bank offered a Nonqualified Deferred Compensation Plan to certain officer employees and to the members of the Board of Directors of the Bank. Participants in the plan would elect to defer all or a portion of their compensation earned for a minimum period of five years. This benefit plan and other nonqualified supplemental pension plans were terminated effective November 10, 2009. Plan terminations had no material effect on the Bank’s financial results, financial position or cash flows for all reported periods.
Retirement Plan Expenses — Summary
The following table presents employee retirement plan expenses for the periods ended (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Defined Benefit Plan
  $ 4,000     $ 1,441     $ 6,623     $ 4,324  
Benefit Equalization Plan (defined benefit)
    570       515       1,710       1,544  
Defined Contribution Plan and BEP Thrift
    528       582       1,137       1,366  
Postretirement Health Benefit Plan
    281       251       843       753  
 
                       
 
                               
Total retirement plan expenses
  $ 5,379     $ 2,789     $ 10,313     $ 7,987  
 
                       
The increase in 2010 expenses was primarily due to a short fall payment on the Defined Benefit Plan.
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,  
    2010     2009     2010     2009  
Service cost
  $ 163     $ 153     $ 489     $ 458  
Interest cost
    279       263       837       789  
Amortization of unrecognized prior service cost
    (17 )     (36 )     (50 )     (108 )
Amortization of unrecognized net loss
    145       135       434       405  
 
                       
 
                               
Net periodic benefit cost
  $ 570     $ 515     $ 1,710     $ 1,544  
 
                       
Key assumptions and other information for the actuarial calculations to determine benefit obligations for the FHLBNY’s BEP plan were as follows (dollars in thousands):
                 
    September 30, 2010     December 31, 2009  
 
               
Discount rate *
    5.87 %     5.87 %
Salary increases
    5.50 %     5.50 %
Amortization period (years)
    8       8  
Benefits paid during the year
  $ (739 )**   $ (537 )
     
*   The discount rate was based on the Citigroup Pension Liability Index at December 31, 2009 and adjusted for duration.
 
**   Forecast for the year.

 

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Postretirement Health Benefit Plan
The FHLBNY has a postretirement health benefit plan for retirees called the Retiree Medical Benefit Plan. Employees over the age of 55 are eligible provided they have completed ten years of service after age 45.
Components of the net periodic benefit cost for the postretirement health benefit plan were (in thousands):
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Service cost (benefits attributed to service during the period)
  $ 157     $ 139     $ 470     $ 417  
Interest cost on accumulated postretirement health benefit obligation
    229       217       687       651  
Amortization of loss
    78       78       235       234  
Amortization of prior service cost/(credit)
    (183 )     (183 )     (549 )     (549 )
 
                       
 
                               
Net periodic postretirement health benefit cost
  $ 281     $ 251     $ 843     $ 753  
 
                       
Key assumptions and other information to determine obligation for the FHLBNY’s postretirement health benefit plan were as follows:
                 
    September 30, 2010     December 31, 2009  
Weighted average discount rate at the end of the year
    5.87 %     5.87 %
 
               
Health care cost trend rates:
               
Assumed for next year
    10.00 %     10.00 %
Pre 65 Ultimate rate
    5.00 %     5.00 %
Pre 65 Year that ultimate rate is reached
    2016       2016  
Post 65 Ultimate rate
    6.00 %     6.00 %
Post 65 Year that ultimate rate is reached
    2016       2016  
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, 2009 and adjusted for duration.

 

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Note 16. 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 callable swaps to potentially adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The FHLBNY uses derivatives in three ways: by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction that qualifies for hedge accounting treatment; by acting as an intermediary; or by designating the derivative as an asset-liability management hedge (i.e., an “economic hedge”). For example, the FHLBNY uses derivatives in its overall interest-rate risk management to adjust the interest-rate sensitivity of consolidated obligations to approximate more closely the interest-rate sensitivity of assets (both advances and investments), and/or to adjust the interest-rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest-rate sensitivity of liabilities. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, the FHLBNY also uses derivatives: to manage embedded options in assets and liabilities; to hedge the market value of existing assets and liabilities and anticipated transactions; to hedge the duration risk of prepayable instruments; and to reduce funding costs where possible.
In an economic hedge, a derivative hedges specific or non-specific underlying assets, liabilities or firm commitments, but the hedge does not qualify for hedge accounting under the accounting standards for derivatives and hedging; it is, however, an acceptable hedging strategy under the FHLBNY’s risk management program. These strategies also comply with the Finance Agency’s regulatory requirements prohibiting speculative use of derivatives. An economic hedge introduces the potential for earnings variability due to the changes in fair value recorded on the derivatives that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. The FHLBNY will execute an interest rate swap to match the terms of an asset or liability that is elected under the Fair Value Option and the swap is also considered as an economic hedge to mitigate the volatility of the FVO designated asset or liability due to change in the full fair value of the designated asset or liability. In the third quarter of 2008 and periodically thereafter, the FHLBNY elected the FVO for certain consolidated obligation debt and executed interest rate swaps to offset the fair value changes of the bonds.
The FHLBNY, consistent with Finance Agency’s regulations, enters into derivatives to manage the market risk exposures inherent in otherwise unhedged assets and funding positions. The FHLBNY utilizes derivatives in the most cost efficient manner and may enter into derivatives as economic hedges that do not qualify for hedge accounting under the accounting standards for derivatives and hedging. As a result, when entering into such non-qualified hedges, the FHLBNY recognizes only the change in fair value of these derivatives in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities with no offsetting fair value adjustments for the hedged asset, liability, or firm commitment.
Hedging activities
Consolidated Obligations - The FHLBNY manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflows on the derivative with the cash outflow on the consolidated obligation. While consolidated obligations are the joint and several obligations of the FHLBanks, one or more FHLBanks may individually serve as counterparties to derivative agreements associated with specific debt issues. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for one or more FHLBanks, and each of those FHLBanks could simultaneously enter into a matching derivative in which the counterparty pays to the FHLBank fixed cash flows designed to mirror in timing and amount the cash outflows the FHLBank pays on the consolidated obligations. When such transactions qualify for hedge accounting they are treated as fair value hedges under the accounting standards for derivatives and hedging. The FHLBNY has also elected the Fair Value Option (“FVO”) for certain consolidated obligation bonds and these were measured under the accounting standards for fair value measurements, as economic hedges, and to mitigate the volatility resulting from changes in fair values of bonds designated under the FVO, the Bank has also executed interest rate swaps.
The FHLBNY had issued variable-rate consolidated obligations bonds indexed to 1 month-LIBOR, the U.S. Prime rate, or Federal funds rate and simultaneously execute interest-rate swaps (“basis swaps”) to hedge the basis risk of the variable rate debt to 3-month LIBOR, the FHLBNY’s preferred funding base. The interest rate basis swaps were accounted as economic hedges of the floating-rate bonds because the FHLBNY deemed that the operational cost of designating the hedges under accounting standards for derivatives and hedge accounting would outweigh the accounting benefits.
The issuance of the consolidated obligation fixed-rate bonds to investors and the execution of interest rate swaps typically results in cash flow pattern in which the FHLBNY has effectively converted the bonds’ fixed cash flows to variable cash flows that closely match the interest payments it receives on short-term or variable-rate advances. From time-to-time, this intermediation between the capital and swap markets has permitted the FHLBNY to raise funds at a lower cost than would otherwise be available through the issuance of simple fixed- or floating-rate consolidated obligations in the capital markets. The FHLBNY does not issue consolidated obligations denominated in currencies other than U.S. dollars.
Advances - With a putable advance borrowed by a member, the FHLBNY may purchase from the member a put option that enables the FHLBNY to effectively convert an advance from fixed-rate to floating-rate by exercising the put option and terminating the advance at par on the pre-determined put exercise dates. Typically, the FHLBNY will exercise the option in a rising interest rate environment. The FHLBNY may hedge a putable advance by entering into a cancelable interest rate swap in which the FHLBNY pays to the swap counterparty fixed-rate cash flows and receives variable-rate cash flows. This type of hedge is treated as a fair value hedge under the accounting standards for derivatives and hedging. The swap counterparty can cancel the swap on the put date, which would

 

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normally occur in a rising rate environment, and the FHLBNY can terminate the advance and extend additional credit to the member on new terms.
The optionality embedded in certain financial instruments held by the FHLBNY can create interest-rate risk. When a member prepays an advance, the FHLBNY could suffer lower future income if the principal portion of the prepaid advance were reinvested in lower-yielding assets that would continue to be funded by higher-cost debt. To protect against this risk, the FHLBNY generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. When the Bank offers advances (other than short-term) that 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 were de minimis for all periods reported.
The FHLBNY may also hedge a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be added to the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
If a hedged firm commitment no longer qualified as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings. There were no material amounts of gains and losses recognized due to disqualification of firm commitment hedges for the three and nine months ended September 30, 2010, or in 2009.
Forward Settlements - There were no forward settled securities at September 30, 2010 and December 31, 2009 that would settle outside the shortest period of time for the settlement of such securities.
Anticipated Debt Issuance - The FHLBNY enters into interest-rate swaps on the anticipated issuance of debt to “lock in” a spread between the earning asset and the cost of funding. The swap is terminated upon issuance of the debt instrument, and amounts reported in AOCI are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued.
Intermediation - To meet the hedging needs of its members, the FHLBNY acts as an intermediary between the members and the other counterparties. This intermediation allows smaller members access to the derivatives market. The derivatives used in intermediary activities do not qualify for hedge accounting under the accounting standards for derivatives and hedging, and are separately marked-to-market through earnings. The net impact of the accounting for these derivatives does not significantly affect the operating results of the FHLBNY.
Derivative agreements in which the FHLBNY is an intermediary may arise when the FHLBNY: (1) enters into offsetting derivatives with members and other counterparties to meet the needs of its members, and (2) enters into derivatives to offset the economic effect of other derivative agreements that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate swaps in which the FHLBNY was an intermediary was $550.0 million and $320.0 million as of September 30, 2010 and December 31, 2009. Fair values of the swaps sold to members net of the fair values of swaps purchased from derivative counterparties were not material at September 30, 2010 and December 31, 2009. Collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBNY as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBNY.
Economic hedges - In the three and nine months ended September 30, 2010 and in 2009, economic hedges comprised primarily of: (1) Short- and medium-term interest rate swaps that hedged the basis risk (Prime rate, Fed fund rate, and the 1-month LIBOR index) of variable-rate bonds issued by the FHLBNY. These swaps were considered freestanding and changes in the fair values of the swaps were recorded through income. The FHLBNY believes the operational cost of designating the basis hedges in a qualifying hedge would outweigh the benefits of applying hedge accounting. (2) Interest rate caps acquired in the second quarter of 2008 to hedge balance sheet risk, primarily certain capped floating-rate investment securities, were considered freestanding derivatives with fair value changes recorded through Other income (loss) as a Net realized and unrealized gain or loss on derivatives and hedging activities. (3) Interest rate swaps hedging balance sheet risk. (4) Interest rate swaps that had previously qualified as hedges under the accounting standards for derivatives and hedging, but had been subsequently de-designated from hedge accounting as they were assessed as being not highly effective hedges. (5) Interest rate swaps executed to offset the fair value changes of bonds designated under the FVO.

 

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The FHLBNY is not a derivatives dealer and does not trade derivatives for short-term profit.
Credit Risk - The FHLBNY is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The FHLBNY transacts most of its derivatives with major financial institutions. Some of these institutions or their affiliates buy, sell, and distribute consolidated obligations. The FHLBNY is also subject to operational risks in the execution and servicing of derivative transactions. The degree of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The FHLBNY manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Agency’s regulations. In determining credit risk, the FHLBNY considers accrued interest receivables and payables, and the legal right to offset assets and liabilities by counterparty.
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, but it does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors (“derivatives”) if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.
The FHLBNY uses collateral agreements to mitigate counterparty credit risk in derivatives. When the FHLBNY has more than one derivative transaction outstanding with a counterparty, and a legally enforceable master netting agreement exists with the counterparty, the exposure, less 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. At September 30, 2010 and December 31, 2009, the Bank’s credit exposure, representing derivatives in a fair value net gain position was approximately $32.4 million and $8.3 million after the recognition of any cash collateral held by the FHLBNY. The credit exposure at September 30, 2010 and December 31, 2009 included $25.0 million and $0.8 million in net interest receivable.
Derivative counterparties are also exposed to credit losses resulting from potential nonperformance risk of FHLBNY with respect to derivative contracts. Exposure to counterparties is measured by derivatives in a fair value loss position from the FHLBNY’s perspective, which from the counterparties’ perspective is a gain. At September 30, 2010 and December 31, 2009, derivatives in a net unrealized loss position, which represented the counterparties’ exposure to the potential non-performance risk of the FHLBNY, were $784.5 million and $746.2 million after deducting $3.8 billion and $2.2 billion of cash collateral pledged by the FHLBNY at those dates to the exposed counterparties. The FHLBNY is exposed to the risk of derivative counterparties defaulting on the terms of the derivative contracts and failing to return cash deposited with counterparties. If such an event were to occur, the FHLBNY would be forced to replace derivatives by executing similar derivative contracts with other counterparties. To the extent that the FHLBNY receives cash from the replacement trades that is less than the amount of cash deposited with the defaulting counterparty, the FHLBNY’s cash pledged is exposed to credit risk. Derivative counterparties holding the FHLBNY’s cash as pledged collateral were rated Single A or better at September 30, 2010, and based on credit analyses and collateral requirements, the management of the FHLBNY does not anticipate any credit losses on its derivative agreements.

 

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The following tables represented outstanding notional balances and estimated fair values of the derivatives outstanding at September 30, 2010 and December 31, 2009 (in thousands):
                         
    September 30, 2010  
    Notional Amount of             Derivative  
    Derivatives     Derivative Assets     Liabilities  
Fair value of derivatives instruments
                       
Derivatives designated in hedging relationships
                       
Interest rate swaps-fair value hedges
  $ 93,872,212     $ 1,260,136     $ (5,856,880 )
 
                 
Total derivatives in hedging instruments
  $ 93,872,212     $ 1,260,136     $ (5,856,880 )
 
                 
 
                       
Derivatives not designated as hedging instruments
                       
Interest rate swaps
  $ 27,582,914     $ 39,722     $ (9,624 )
Interest rate caps or floors
    1,900,000       23,650       (69 )
Mortgage delivery commitments
    20,675       28       (24 )
Other*
    550,000       10,726       (10,000 )
 
                 
Total derivatives not designated as hedging instruments
  $ 30,053,589     $ 74,126     $ (19,717 )
 
                 
 
                       
Total derivatives before netting and collateral adjustments
  $ 123,925,801     $ 1,334,262     $ (5,876,597 )
 
                 
Netting adjustments
          $ (1,301,837 )   $ 1,301,837  
Cash collateral and related accrued interest
                  3,790,262  
 
                 
Total collateral and netting adjustments
          $ (1,301,837 )   $ 5,092,099  
 
                   
Total reported on the Statements of Condition
          $ 32,425     $ (784,498 )
 
                   
                         
    December 31, 2009  
    Notional Amount of             Derivative  
    Derivatives     Derivative Assets     Liabilities  
 
                       
Fair value of derivatives instruments
                       
Derivatives designated in hedging relationships
                       
Interest rate swaps-fair value hedges
  $ 98,776,447     $ 854,699     $ (3,974,207 )
 
                 
Total derivatives in hedging instruments
  $ 98,776,447     $ 854,699     $ (3,974,207 )
 
                 
 
                       
Derivatives not designated as hedging instruments
                       
Interest rate swaps
  $ 33,144,963     $ 147,239     $ (73,450 )
Interest rate caps or floors
    2,282,000       77,999       (7,525 )
Mortgage delivery commitments
    4,210             (39 )
Other*
    320,000       1,316       (956 )
 
                 
Total derivatives not designated as hedging instruments
  $ 35,751,173     $ 226,554     $ (81,970 )
 
                 
 
                       
Total derivatives before netting and collateral adjustments
  $ 134,527,620     $ 1,081,253     $ (4,056,177 )
 
                 
Netting adjustments
          $ (1,072,973 )   $ 1,072,973  
Cash collateral and related accrued interest
                  2,237,028  
 
                 
Total collateral and netting adjustments
          $ (1,072,973 )   $ 3,310,001  
 
                   
Total reported on the Statements of Condition
          $ 8,280     $ (746,176 )
 
                   
     
*   Other: Comprised of swaps intermediated for members.
The categories -“Fair value”, “Mortgage delivery commitment”, and “1 Cash Flow” hedges — represent derivative transactions in hedging relationships. If any such hedges do not qualify for hedge accounting under the accounting standards for derivatives and hedging, they are classified as “Economic” hedges. Changes in fair values of economic hedges are recorded through the income statement without the offset of corresponding changes in the fair value of the hedged item. Changes in fair values of qualifying derivative transactions designated in fair value hedges are recorded through the income statement with the offset of corresponding changes in the fair values of the hedged items. The effective portion of changes in the fair values of derivatives designated in a qualifying cash flow hedge is recorded in AOCI.
     
1   None outstanding at September 30, 2010 and December 31, 2009.

 

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Impact of derivatives and hedging activities on earnings
Net realized and unrealized gain (loss) on derivatives and hedging activities
The FHLBNY carries all derivative instruments on the Statements of Condition at fair value as Derivative Assets and Derivative Liabilities.
If derivatives meet the hedging criteria under hedge accounting rules, including effectiveness measures, changes in fair value of the associated hedged financial instrument attributable to the risk being hedged (benchmark interest-rate risk, which is LIBOR for the FHLBNY) may also be recorded so that some or all of the unrealized fair value gains or losses recognized on the derivatives are offset by corresponding unrealized gains or losses on the associated hedged financial assets and liabilities. The net differential between fair value changes of the derivatives and the hedged items represent hedge ineffectiveness. Hedge ineffectiveness results represents the amounts by which the changes in the fair value of the derivatives differ from the changes in the fair values of the hedged items or the variability in the cash flows of forecasted transactions. The net ineffectiveness from hedges that qualify under hedge accounting rules are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income.
If derivatives do not qualify for the hedging criteria under hedge accounting rules, but are executed as economic hedges of financial assets or liabilities under a FHLBNY approved hedge strategy, only the fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income.
When the FHLBNY elects to measure certain debt under the accounting designation for Fair Value Option (“FVO”), the Bank will typically execute a derivative as an economic hedge of the debt. Fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income. Fair value changes of the debt designated under the FVO is also recorded in Other income as an unrealized (loss) or gain from Instruments held at fair value.
The components of hedging gains and losses for the three months ended September 30, 2010 and 2009 are summarized below (in thousands):
                                                                 
    Three months ended September 30,  
    2010     2009  
                            Effect of                             Effect of  
                            Derivatives on                             Derivatives on  
    Gain (Loss) on     Gain (Loss) on     Earnings     Net Interest     Gain (Loss) on     Gain (Loss) on     Earnings     Net Interest  
    Derivative     Hedged Item     Impact     Income 1     Derivative     Hedged Item     Impact     Income 1  
 
                                                               
Derivatives designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
  $ (880,233 )   $ 881,448     $ 1,215     $ (478,422 )   $ (582,983 )   $ 583,165     $ 182     $ (503,185 )
Consolidated obligations-bonds
    206,540       (208,047 )     (1,507 )     137,824       98,668       (98,501 )     167       151,467  
Consolidated obligations-discount notes
                                               
 
                                               
Net gain (loss) related to fair value hedge ineffectiveness
    (673,693 )     673,401       (292 )     (340,598 )     (484,315 )     484,664       349       (351,718 )
 
                                               
Derivatives not designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
    (1,203 )           (1,203 )           (1,475 )           (1,475 )      
Consolidated obligations-bonds
    6,753             6,753             28,420             28,420        
Consolidated obligations-discount notes
    (231 )           (231 )           (5,711 )           (5,711 )      
Member intermediation
    202             202             (16 )           (16 )      
Balance sheet-macro hedges swaps
                            210             210        
Accrued interest-swaps
    2,381             2,381             18,362             18,362        
Accrued interest-intermediation
    42             42             20             20        
Caps and floors
                                                               
Advances
    (19 )           (19 )           (305 )           (305 )      
Balance sheet
    (14,618 )           (14,618 )           19,196             19,196        
Accrued interest-options
                            (1,786 )           (1,786 )      
Mortgage delivery commitments
    257             257             47             47        
Swaps economically hedging instruments designated under FVO
                                                               
Consolidated obligations-bonds
    8,025             8,025             1,549             1,549        
Consolidated obligations-discount notes
    1,674             1,674                                
Accrued interest on swaps
    5,473             5,473             779             779        
 
                                               
Net gain (loss) related to derivatives not designated as hedging instruments
    8,736             8,736             59,290             59,290        
 
                                               
Total
  $ (664,957 )   $ 673,401     $ 8,444     $ (340,598 )   $ (425,025 )   $ 484,664     $ 59,639     $ (351,718 )
 
                                               
     
1   Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged — bonds, discount notes, and advances.

 

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The components of hedging gains and losses for the nine months ended September 30, 2010 and 2009 are summarized below (in thousands):
                                                                 
    Nine months ended September 30,  
    2010     2009  
                            Effect of                             Effect of  
                            Derivatives on                             Derivatives on  
    Gain (Loss) on     Gain (Loss) on     Earnings     Net Interest     Gain (Loss) on     Gain (Loss) on     Earnings     Net Interest  
    Derivative     Hedged Item     Impact     Income 1     Derivative     Hedged Item     Impact     Income 1  
 
                                                               
Derivatives designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
  $ (2,020,332 )   $ 2,020,771     $ 439     $ (1,519,392 )   $ 1,419,019     $ (1,424,126 )   $ (5,107 )   $ (1,252,775 )
Consolidated obligations-bonds
    492,043       (489,735 )     2,308       483,049       (418,734 )     436,921       18,187       384,150  
Consolidated obligations-discount notes
                                              474  
 
                                               
Net gain (loss) related to fair value
                                                               
hedge ineffectiveness
    (1,528,289 )     1,531,036       2,747       (1,036,343 )     1,000,285       (987,205 )     13,080       (868,151 )
 
                                               
Derivatives not designated as hedging instruments
                                                               
Interest rate swaps
                                                               
Advances
    (3,164 )           (3,164 )           3,887             3,887        
Consolidated obligations-bonds
    (29,762 )           (29,762 )           101,662             101,662        
Consolidated obligations-discount notes
    (4,331 )           (4,331 )           409             409        
Member intermediation
    357             357             (189 )           (189 )      
Balance sheet-macro hedges swaps
    173             173             2,617             2,617        
Accrued interest-swaps
    46,900             46,900             (37,772 )           (37,772 )      
Accrued interest-intermediation
    91             91             64             64        
Caps and floors
                                                               
Advances
    (418 )           (418 )           (1,056 )           (1,056 )      
Balance sheet
    (47,901 )           (47,901 )           50,613             50,613        
Accrued interest-options
    (2,598 )           (2,598 )           (3,731 )           (3,731 )      
Mortgage delivery commitments
    811             811             (49 )           (49 )      
Swaps economically hedging instruments designated under FVO
                                                               
Consolidated obligations-bonds
    10,381             10,381             (5,825 )           (5,825 )      
Consolidated obligations-discount notes
    2,448             2,448                                
Accrued interest on swaps
    20,922             20,922             903             903        
 
                                               
Net gain (loss) related to derivatives not designated as hedging instruments
    (6,091 )           (6,091 )           111,533             111,533        
 
                                               
Total
  $ (1,534,380 )   $ 1,531,036     $ (3,344 )   $ (1,036,343 )   $ 1,111,818     $ (987,205 )   $ 124,613     $ (868,151 )
 
                                               
     
1   Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged — bonds, discount notes, and advances.
Cash Flow hedges
There were no material amounts for the three and nine months ended September 30, 2010 and 2009 that were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. The maximum length of time over which the Bank typically hedges its exposure to the variability in future cash flows for forecasted transactions is between three and six months. There were no derivatives designated as cash flow hedges at September 30, 2010 and December 31, 2009.
The effective portion of the gain or loss on swaps designated and qualifying as a cash flow hedging instrument is reported as a component of AOCI and reclassified into earnings in the same period during which the hedged forecasted bond expenses affect earnings. The balances in AOCI from terminated cash flow hedges represented net realized losses of $17.7 million and $22.7 million at September 30, 2010 and December 31, 2009. At September 30, 2010, it is expected that over the next 12 months about $5.3 million ($6.9 million at December 31, 2009) of net losses recorded in AOCI will be recognized as a charge to earnings as a yield adjustment to interest expense of consolidated bonds.

 

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The effect of cash flow hedge related derivative instruments for the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands):
                                                                 
    Three months ended September 30,  
    2010     2009  
    OCI     OCI  
    Gains/(Losses)     Gains/(Losses)  
            Location:     Amount     Ineffectiveness             Location:     Amount     Ineffectiveness  
    Recorded in     Reclassified to     Reclassified to     Recognized in     Recorded in     Reclassified to     Reclassified to     Recognized in  
    OCI 1, 2     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       1,882                 Interest Expense       1,898          
 
                                                   
Total
  $             $ 1,882     $     $             $ 1,898     $  
 
                                                   
 
                                                               
                                                                 
    Nine months ended September 30,  
    2010     2009  
    OCI     OCI  
    Gains/(Losses)     Gains/(Losses)  
            Location:     Amount     Ineffectiveness             Location:     Amount     Ineffectiveness  
    Recorded in     Reclassified to     Reclassified to     Recognized in     Recorded in     Reclassified to     Reclassified to     Recognized in  
    OCI 1, 2     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
    (472 )   Interest Expense       5,423                 Interest Expense       5,687          
 
                                                   
Total
  $ (472 )           $ 5,423     $     $             $ 5,687     $  
 
                                                   
     
1   Effective portion
 
2   Represents effective portion of basis adjustments to AOCI from cash flow hedging transactions.

 

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Note 17. Fair Values of financial instruments.
Items Measured at Fair Value on a Recurring Basis
The following table presents for each hierarchy level (see note below), the FHLBNY’s assets and liabilities that were measured at fair value on its Statements of Condition at September 30, 2010 and December 31, 2009 (in thousands):
                                         
    September 30, 2010  
                                    Netting  
    Total     Level 1     Level 2     Level 3     Adjustments  
Assets
                                       
Available-for-sale securities
                                       
GSE issued MBS
  $ 3,360,959     $     $ 3,360,959     $     $  
Equity and bond funds
    12,822             12,822              
Derivative assets(a)
                                       
Interest-rate derivatives
    32,397             1,334,234             (1,301,837 )
Mortgage delivery commitments
    28             28              
 
                             
 
                                       
Total assets at fair value
  $ 3,406,206     $     $ 4,708,043     $     $ (1,301,837 )
 
                             
 
                                       
Liabilities
                                       
Consolidated obligations:
                                       
Discount notes (to the extent SFAS 159 is elected)
  $ (1,755,901 )   $     $ (1,755,901 )   $     $  
Bonds (to the extent SFAS 159 is elected) (b)
    (10,761,236 )           (10,761,236 )            
Derivative liabilities(a)
                                       
Interest-rate derivatives
    (784,474 )           (5,876,573 )           5,092,099  
Mortgage delivery commitments
    (24 )           (24 )            
 
                             
 
                                       
Total liabilities at fair value
  $ (13,301,635 )   $     $ (18,393,734 )   $     $ 5,092,099  
 
                             
                                         
    December 31, 2009  
                                    Netting  
    Total     Level 1     Level 2     Level 3     Adjustments  
Assets
                                       
Available-for-sale securities
                                       
GSE issued MBS
  $ 2,240,564     $     $ 2,240,564     $     $  
Equity and bond funds
    12,589             12,589              
Derivative assets(a)
                                       
Interest-rate derivatives
    8,280             1,081,253             (1,072,973 )
Mortgage delivery commitments
                             
 
                             
 
                                       
Total assets at fair value
  $ 2,261,433     $     $ 3,334,406     $     $ (1,072,973 )
 
                             
 
                                       
Liabilities
                                       
Consolidated obligations:
                                       
Discount notes (to the extent SFAS 159 is elected)
  $     $     $     $     $  
Bonds (to the extent SFAS 159 is elected) (b)
    (6,035,741 )           (6,035,741 )            
Derivative liabilities(a)
                                       
Interest-rate derivatives
    (746,137 )           (4,056,138 )           3,310,001  
Mortgage delivery commitments
    (39 )           (39 )            
 
                             
 
                                       
Total liabilities at fair value
  $ (6,781,917 )   $     $ (10,091,918 )   $     $ 3,310,001  
 
                             
     
    Level 1 — Quoted prices in active markets for identical assets.
 
    Level 2 — Significant other observable inputs.
 
    Level 3 — Significant unobservable inputs.
 
(a)   Derivative assets and liabilities were interest-rate contracts, except for de minimis amount of mortgage delivery contracts. Based on an analysis of the nature of the risk, the presentation of derivatives as a single class is appropriate.
 
(b)   Based on its analysis of the nature of risks of the FHLBNY’s debt measured at fair value, the FHLBNY has determined that presenting the debt as a single class is appropriate.
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities would be measured at fair value on a nonrecurring basis, and for the FHLBNY, such items may include mortgage loans in foreclosure, or mortgage loans and held-to-maturity securities written down to fair value, and real estate owned. At September 30, 2010, the Bank measured and recorded the fair values on a nonrecurring basis of HTM securities deemed to be OTTI; 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 — OTTI) in accordance with the guidance on recognition and presentation of other-than-temporary impairment. The nonrecurring measurement basis related to certain private-label HTM mortgage-backed securities determined to be OTTI at September 30, 2010, and were recorded at their fair values of $8.1 million and $42.9 million at September 30, 2010 and December 31, 2009. For more information also see Note 4 — Held-to-maturity securities.

 

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The following table summarizes the fair values of MBS for which a non-recurring change in fair value was recorded at September 30, 2010 (in thousands):
                                 
    September 30, 2010  
    Fair Value     Level 1     Level 2     Level 3  
Held-to-maturity securities
                               
Home equity loans
  $ 8,063     $     $     $ 8,063  
 
                       
Total
  $ 8,063     $     $     $ 8,063  
 
                       
Note: Certain OTTI securities were written down to their fair values ($8.1 million) when it was determined that their carrying values prior to write-down ($8.6 million) were in excess of their fair values. For Held-to-maturity securities that were previously credit impaired but no additional credit impairment were deemed necessary at September 30, 2010, the securities were recorded at their carrying values and not re-adjusted to their fair values.
The following table summarizes the fair values of MBS for which a non-recurring change in fair value was recorded at December 31, 2009 (in thousands):
                                 
    December 31, 2009  
    Fair Value     Level 1     Level 2     Level 3  
Held-to-maturity securities
                               
Home equity loans
  $ 42,922     $     $     $ 42,922  
 
                       
Total
  $ 42,922     $     $     $ 42,922  
 
                       
The following table summarizes the fair values of MBS for which a non-recurring change in fair value was recorded at September 30, 2009 (in thousands):
                                 
    September 30, 2009  
    Fair Value     Level 1     Level 2     Level 3  
Held-to-maturity securities
                               
Home equity loans
  $ 125,771     $     $     $ 125,771  
 
                       
Total
  $ 125,771     $     $     $ 125,771  
 
                       
Estimated fair values — Summary Tables
The carrying value and estimated fair values of the FHLBNY’s financial instruments as of September 30, 2010 and December 31, 2009 were as follows (in thousands):
                                 
    September 30, 2010     December 31, 2009  
    Carrying     Estimated     Carrying     Estimated  
Financial Instruments   Value     Fair Value     Value     Fair Value  
Assets
                               
Cash and due from banks
  $ 69,471     $ 69,471     $ 2,189,252     $ 2,189,252  
Federal funds sold
    4,095,000       4,094,993       3,450,000       3,449,997  
Available-for-sale securities
    3,373,781       3,373,781       2,253,153       2,253,153  
Held-to-maturity securities
                               
Long-term securities
    8,221,246       8,389,954       10,519,282       10,669,252  
Advances
    85,697,171       85,949,019       94,348,751       94,624,708  
Mortgage loans held-for-portfolio, net
    1,267,687       1,341,140       1,317,547       1,366,538  
Accrued interest receivable
    305,763       305,763       340,510       340,510  
Derivative assets
    32,425       32,425       8,280       8,280  
Other financial assets
    3,390       3,390       3,412       3,412  
 
                               
Liabilities
                               
Deposits
    3,730,257       3,730,263       2,630,511       2,630,513  
Consolidated obligations:
                               
Bonds
    74,918,893       75,261,195       74,007,978       74,279,737  
Discount notes
    17,787,908       17,788,224       30,827,639       30,831,201  
Mandatorily redeemable capital stock
    67,348       67,348       126,294       126,294  
Accrued interest payable
    277,647       277,647       277,788       277,788  
Derivative liabilities
    784,498       784,498       746,176       746,176  
Other financial liabilities
    57,242       57,242       38,832       38,832  

 

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Fair Value Option Disclosures
The following table summarizes the activity related to consolidated obligation bonds and notes for which the Bank elected the fair value option (in thousands):
                                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2010     2009     2010  
    Bonds     Discount notes*     Bonds     Discount notes*  
 
                                               
Balance, beginning of the period
  $ (9,763,246 )   $ (550,303 )   $ (1,753,688 )   $ (6,035,741 )   $ (998,942 )   $  
New transaction elected for fair value option
    (6,601,000 )     (1,835,000 )           (17,771,000 )     (2,385,000 )     (1,752,185 )
Maturities and terminations
    5,600,000                   13,060,000       983,000        
Change in fair value
    576       426       (521 )     (11,118 )     8,653       (1,494 )
Change in accrued interest
    2,434       (1,091 )     (1,692 )     (3,377 )     6,321       (2,222 )
 
                                   
 
                                               
Balance, end of the period
  $ (10,761,236 )   $ (2,385,968 )   $ (1,755,901 )   $ (10,761,236 )   $ (2,385,968 )   $ (1,755,901 )
 
                                   
     
*   Note: Discount notes were not designated under FVO at December 31, 2009
The following table presents the change in fair value included in the Statements of Income for the consolidated obligation bonds and notes designated in accordance with the accounting standards on the fair value option for financial assets and liabilities (in thousands):
                                                 
    Three months ended September 30,  
    2010     2009  
    Interest             Total change in fair             Net gain(loss)     Total change in  
    expense on     Net gain(loss)     value included in     Interest expense     due to     fair value included  
    consolidated     due to changes in     current period     on consolidated     changes in     in current period  
    obligations     fair value     earnings     obligations     fair value     earnings  
 
                                               
Consolidated obligations-bonds
  $ (10,926 )   $ 576     $ (10,350 )   $ (1,091 )   $ 426     $ (665 )
Consolidated obligations-discount notes
    (1,692 )     (521 )     (2,213 )                  
 
                                   
 
  $ (12,618 )   $ 55     $ (12,563 )   $ (1,091 )   $ 426     $ (665 )
 
                                   
                                                 
    Nine months ended September 30,  
    2010     2009  
    Interest                             Net gain(loss)     Total change in  
    expense on     Net gain(loss)     Total change in     Interest expense     due to     fair value included  
    consolidated     due to changes in     fair value included in     on consolidated     changes in     in current period  
    obligations     fair value     current period earnings     obligations     fair value     earnings  
 
                                               
Consolidated obligations-bonds
  $ (30,011 )   $ (11,118 )   $ (41,129 )   $ (2,380 )   $ 8,653     $ 6,273  
Consolidated obligations-discount notes
    (2,222 )     (1,494 )     (3,716 )                  
 
                                   
 
  $ (32,233 )   $ (12,612 )   $ (44,845 )   $ (2,380 )   $ 8,653     $ 6,273  
 
                                   

 

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The following table compares the aggregate fair value and aggregate remaining contractual principal balance outstanding of consolidated obligation bonds and notes for which the fair value option has been elected (in thousands):
                         
    September 30, 2010  
    Principal             Fair value  
    Balance     Fair value     over/(under)  
Consolidated obligations-bonds
  $ 10,751,000     $ 10,761,236     $ 10,236  
Consolidated obligations-discount notes
    1,752,185       1,755,901       3,716  
 
                 
 
  $ 12,503,185     $ 12,517,137     $ 13,952  
 
                 
                         
    December 31, 2009  
    Principal             Fair value  
    Balance     Fair value     over/(under)  
Consolidated obligations-bonds
  $ 6,040,000     $ 6,035,741     $ (4,259 )
Consolidated obligations-discount notes
                 
 
                 
 
  $ 6,040,000     $ 6,035,741     $ (4,259 )
 
                 
                         
    September 30, 2009  
    Principal             Fair value  
    Balance     Fair value     over/(under)  
Consolidated obligations-bonds
  $ 2,385,000     $ 2,385,968     $ 968  
Consolidated obligations-discount notes
                 
 
                 
 
  $ 2,385,000     $ 2,385,968     $ 968  
 
                 
Notes to Estimated Fair Values of financial instruments
The fair value of financial instruments that is an asset is defined as the price FHLBNY would receive to sell an asset in an orderly transaction between market participants at the measurement date. A financial liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair values are based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices are not available, valuation models and inputs are utilized. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or markets and the instruments’ complexity.
The fair values of financial assets and liabilities reported in the tables above are discussed below. For additional information also see Significant Accounting Policies and Estimates in Note 1. The Fair Value Summary Tables above do not represent an estimate of the overall market value of the FHLBNY as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
The estimated fair value amounts have been determined by the FHLBNY using procedures described below. Because an active secondary market does not exist for a portion of the FHLBNY’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change.
Cash and due from banks
The estimated fair value approximates the recorded book balance.
Interest-bearing deposits and Federal funds sold
The FHLBNY determines estimated fair values of certain short-term investments by calculating the present value of expected future cash flows from the investments. The discount rates used in these calculations are the current coupons of investments with similar terms.
Investment securities
In an effort to achieve consistency among all of the FHLBanks on the pricing of investments in mortgage-backed securities, in the third quarter of 2009 the FHLBanks formed the MBS Pricing Governance Committee, which was responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. Consistent with the guidance from the Governance Committee, the FHLBNY changed the methodology used to estimate the fair value of mortgage-backed securities as of September 30, 2009. Under the approved methodology, the Bank requests prices for all mortgage-backed securities from four specified third-party vendors, and depending on the number of prices received for each security, selected a median or average price as defined by the methodology. If four prices are received by the FHLBNY from the pricing vendors, the average of the middle two prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is subject to additional validation.

 

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The FHLBNY routinely performs a comparison analysis of pricing to understand pricing trends and to establish a means of validating changes in pricing from period-to-period. The computed prices are tested for reasonableness using tolerance thresholds. Prices within the established thresholds are generally accepted unless strong evidence suggests that using the median pricing methodology as described above would not be appropriate. Preliminary estimated fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis of all relevant facts and circumstances that a market participant would consider. The Bank also runs pricing through prepayment models to test the reasonability of pricing relative to changes in the implied prepayment options of the bonds. Separately, the Bank performs comprehensive credit analysis, including the analysis of underlying cash flows and collateral.
The FHLBNY believes such methodologies — valuation comparison, review of changes in valuation parameters, and credit analysis have been designed to identify the effects of the credit crisis, which has tended to reduce the availability of certain observable market pricing or has caused the widening of the bid/offer spread of certain securities.
Prior to the adoption of the new pricing methodology in the 2009 third quarter, the Bank used a similar process that utilized three third-party vendors and similar variance thresholds. This change in pricing methodology did not have a significant impact on the Bank’s estimated fair values of its mortgage-backed securities.
As of September 30, 2010, four vendor prices were received for substantially all of the FHLBNY’s MBS holdings and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supported the FHLBNY’s conclusion that the final computed prices were reasonable estimates of fair value. While the FHLBNY adopted this common methodology, the fair values of mortgage-backed investment securities are still estimated by FHLBNY’s management which remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used.
The four specialized pricing services use pricing models or quoted prices of securities with similar characteristics. The valuation techniques used by pricing services employ cash flow generators and option-adjusted spread models. Pricing spreads used as inputs in the models are based on new issue and secondary market transactions if the securities are traded in sufficient volumes in the secondary market. These pricing vendors typically employ valuation techniques that incorporate benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing, as may be deemed appropriate for the security. Such inputs into the pricing models employed by pricing services for most of the Bank’s investments are market based and observable and are considered Level 2 of the fair value hierarchy.
The valuation of the FHLBNY’s private-label securities, all designated as held-to-maturity, may require pricing services to use significant inputs that are subjective and may be considered to be Level 3 of the fair value hierarchy because of the current lack of significant market activity so that the inputs may not be market based and observable. At September 30, 2010 and December 31, 2009, all private-label mortgage-backed securities were classified as held-to-maturity and were recorded in the balance sheet at their carrying values. Carrying value of a security is the same as its amortized cost, unless the security is determined to be OTTI. In the period the security is determined to be OTTI, its carrying value is generally adjusted down to its fair value.
In accordance with the amended guidance under the accounting standards for investments in debt and equity securities, certain held-to-maturity private-label mortgage-backed securities were written down to their fair value at September 30, 2010 and December 31, 2009 as a result of a recognition of OTTI. For such HTM securities, their carrying values are recorded in the balance sheet at their fair values. The fair values and securities are classified on a nonrecurring basis as Level 3 financial instruments under the valuation hierarchy. This determination was made based on management’s view that the private-label instruments may not have an active market because of the specific vintage of the securities as well as inherent conditions surrounding the trading of private-label mortgage-backed securities.
The fair value of housing finance agency bonds is estimated by management using information primarily from pricing services.
Advances
The fair values of advances are computed using standard option valuation models. The most significant inputs to the valuation model are (1) consolidated obligation debt curve (the “CO Curve”), published by the Office of Finance and available to the public, and (2) LIBOR swap curves and volatilities. The Bank considers both these inputs to be market 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”. 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. Discounted cash flow analysis is the primary methodology employed by the FHLBNY’s valuation models to measure and record the fair values of its interest rate swaps. The valuation technique is considered as an “Income approach”. Interest rate caps and floors are valued under the “Market approach”. Interest rate swaps and interest rate caps and floors are valued in an industry-standard option adjusted valuation models that utilize market inputs, which can be corroborated, from widely accepted third-party sources. The Bank’s valuation model utilizes a modified Black-Karasinski model that assumes that rates are distributed log normally. The log-normal model precludes interest rates turning negative in the model computations. Significant market based and observable inputs into the valuation model include volatilities and interest rates. These derivative positions are classified within Level 2 of the valuation hierarchy, and include interest rate swaps, swaptions, interest rate caps and floors, and mortgage delivery commitments.
The FHLBNY employs control processes to validate the fair value of its financial instruments, including those derived from valuation models. These control processes are designed to ensure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews of the pricing model’s theoretical soundness and appropriateness by specialists with relevant expertise who are independent from the trading desks or personnel who were involved in the design and selection of model inputs. Additionally, groups that are independent from the trading desk, or personnel involved in the design and selection of model inputs participate in the review and validation of the fair values generated from the valuation model. The FHLBNY maintains an ongoing review of its valuation models and has a formal model validation policy in addition to procedures for the approval and control of data inputs.
The valuation of derivative assets and liabilities reflect the value of the instrument including the values associated with counterparty risk and would also take into account the FHLBNY’s own credit standing and non-performance risk. The Bank has collateral agreements with all its derivative counterparties and enforces collateral exchanges at least weekly. The computed fair values of the FHLBNY’s derivatives took into consideration the effects of legally enforceable master netting agreements that allow the FHLBNY to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each derivative counterparty have bilateral collateral thresholds that take into account both the Bank’s and 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 Condition at September 30, 2010 and December 31, 2009.
Deposits
The FHLBNY determines estimated fair values of deposits by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the current cost of deposits with similar terms.
Consolidated obligations
The FHLBNY estimates fair values based on the cost of raising comparable term debt and prices its bonds and discount notes off of the current consolidated obligations market curve, which has a daily active market. The fair values of consolidated obligation debt (bonds and discount notes) are computed using a standard option valuation model using market based and observable inputs: (1) consolidated obligation debt curve (the “CO Curve”) that is available to the public and published by the Office of Finance, and (2) LIBOR curve and volatilities. Model adjustments that are not observable are not considered significant.
Mandatorily redeemable capital stock
The FHLBNY considers the fair value of capital subject to mandatory redemption, as the redemption value of the stock, which is generally par plus accrued estimated dividend. The FHLBNY has a cooperative structure. Stock can only be acquired by members at par value and redeemed at par value. Stock is not traded publicly and no market mechanism exists for the exchange of stock outside the cooperative structure.
Note 18. 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 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, 2010 and December 31, 2009. The par amount of the twelve FHLBanks’ outstanding consolidated obligations, including the FHLBNY’s, was approximately $0.8 trillion and $0.9 trillion at September 30, 2010 and December 31, 2009.
Standby letters of credit are executed for a fee on behalf of members to facilitate residential housing, community lending, and members’ asset/liability management or to provide liquidity. A standby letter of credit is a financing arrangement between the FHLBNY and its member. Members assume an unconditional obligation to reimburse the FHLBNY for value given by the FHLBNY to the beneficiary under the terms of the standby letter of credit. The FHLBNY may, in its discretion, permit the member to finance repayment of their obligation by receiving a collateralized advance. Outstanding standby letters of credit were approximately $1,865.4 million and $697.9 million as of September 30, 2010 and December 31, 2009, 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, 2010 and December 31, 2009. 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.

 

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Under the MPF program, the Bank was unconditionally obligated to purchase $20.7 million and $4.2 million of mortgage loans at September 30, 2010 and December 31, 2009. Commitments are generally for periods not to exceed 45 business days. Such commitments were recorded as derivatives at their fair value under the accounting standards for derivatives and hedging. In addition, the FHLBNY had entered into conditional agreements under “Master Commitments” with its members in the MPF program to purchase mortgage loans in aggregate of $605.9 million and $484.6 million as of September 30, 2010 and December 31, 2009.
The FHLBNY executes derivatives with major financial institutions and enters into bilateral collateral agreements. When counterparties are exposed, the Bank would typically pledge cash collateral to mitigate the counterparty’s credit exposure. To mitigate the counterparties’ exposures, the FHLBNY deposited $3.8 billion and $2.2 billion in cash with derivative counterparties as pledged collateral at September 30, 2010 and December 31, 2009, and these amounts were reported as a deduction to Derivative liabilities.
The FHLBNY was also exposed to credit risk associated with outstanding derivative transactions measured by the replacement cost of derivatives in net fair value gain positions of $32.4 million and $8.3 million at September 30, 2010 and December 31, 2009. At September 30, 2010, counterparties had deposited $53.8 million in cash as collateral to mitigate such an exposure. At December 31, 2009, the fair values of derivatives in a gain position were below the threshold and derivative counterparties pledged no cash to the FHLBNY.
The FHLBNY charged to operating expenses net rental costs of approximately $0.8 million for the three months ended September 30, 2010 and 2009. The net rental cost for the nine months ended September 30, 2010 and 2009 was $2.5 million. Lease agreements for FHLBNY premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBNY’s results of operations or financial condition.
The following table summarizes contractual obligations and contingencies as of September 30, 2010 (in thousands):
                                         
    September 30, 2010  
    Payments due or expiration terms by period  
    Less than     One year     Greater than three     Greater than        
    one year     to three years     years to five years     five years     Total  
Contractual Obligations
                                       
Consolidated obligations-bonds at par 1
  $ 38,972,100     $ 25,068,825     $ 6,634,375     $ 3,054,200     $ 73,729,500  
Mandatorily redeemable capital stock 1
    45,708       14,650       2,037       4,953       67,348  
Premises (lease obligations) 2
    3,060       6,284       4,748       4,674       18,766  
 
                             
 
                                       
Total contractual obligations
    39,020,868       25,089,759       6,641,160       3,063,827       73,815,614  
 
                             
 
                                       
Other commitments
                                       
Standby letters of credit
    1,824,089       20,012       17,472       3,861       1,865,434  
Consolidated obligations-bonds/ discount notes traded not settled
    774,322                         774,322  
Open delivery commitments (MPF)
    20,675                         20,675  
 
                             
 
                                       
Total other commitments
    2,619,086       20,012       17,472       3,861       2,660,431  
 
                             
 
                                       
Total obligations and commitments
  $ 41,639,954     $ 25,109,771     $ 6,658,632     $ 3,067,688     $ 76,476,045  
 
                             
     
1   Callable bonds contain exercise date or a series of exercise dates that may result in a shorter redemption period. Mandatorily redeemable capital stock is categorized by the dates at which the corresponding advances outstanding mature. Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock, under which stock may not be redeemed until the later of five years from the date the member becomes a nonmember or the related advance matures.
 
2   Immaterial amount of commitments for equipment leases are not included.
Impact of the bankruptcy of Lehman Brothers
As previously reported, on September 15, 2008, Lehman Brothers Holdings, Inc. (“LBHI”), the parent company of Lehman Brothers Special Financing Inc. (“LBSF”) and a guarantor of LBSF’s obligations, filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. LBSF filed for protection under Chapter 11 in the same court on October 3, 2008. LBSF was a counterparty to FHLBNY on multiple derivative transactions under an International Swap Dealers Association, Inc. master agreement with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF. The net amount that was due to the Bank after giving effect to obligations that were due

 

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LBSF was approximately $65 million. The FHLBNY timely filed proofs of claim in the amount of approximately $65 million as creditors of LBSF and LBHI in connection with the bankruptcy proceedings. The Bank fully reserved the LBSF receivables as the bankruptcies of LBHI and LBSF make the timing and the amount of any recovery uncertain.
As previously reported, the Bank received a Derivatives ADR Notice from LBSF dated July 23, 2010 making a Demand as of the date of the Notice of approximately $268 million owed to LBSF by the Bank. Subsequently, in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court dated September 17, 2009 (“Order”), the Bank responded to LBSF on August 23, 2010, denying LBSF’s Demand. LBSF served a reply on September 7, 2010, effectively reiterating its position. A mediation has been scheduled pursuant to the Order for December 8, 2010. While the Bank believes that LBSF’s position is without merit, the amount the Bank actually recovers or pays will ultimately be decided in the course of the bankruptcy proceedings.
The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses is required.
Note 19. 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 2010 third quarter, the bank assumed debt from another FHLBank totaling $193.9 million (par amounts). There was no transfer of consolidated obligation bonds to other FHLBanks or assumption of debt in the prior two quarters of 2010. Generally, when debt is transferred in exchange for a cash price that represents the fair market values of the debt. No debt was transferred to the FHLBNY or assumed from another FHLBank for the first three quarters of 2009.
When debt is transferred, at trade date, the transferring bank notifies the Office of Finance of a change in primary obligor for the transferred debt.
Advances sold or transferred
No advances were transferred/sold to the FHLBNY or from the FHLBNY to another FHLBank in the first three quarters of 2010 or in 2009.
MPF Program
In the MPF program, the FHLBNY may participate out certain portions of its purchases of mortgage loans from its members. Transactions are at market rates. The FHLBank of Chicago, the MPF provider’s cumulative share of interest in the FHLBNY’s MPF loans at September 30, 2010 and December 31, 2009 was $87.8 million and $101.2 million from inception of the program through mid-2004. Since 2004, the FHLBNY has not shared its purchases with the FHLBank of Chicago. Fees paid to the FHLBank of Chicago were $0.1 million in the third quarters of 2010 and 2009, and $0.4 million for the nine months end September 30, 2010 and 2009.
Mortgage-backed Securities
No mortgage-backed securities were acquired from other FHLBanks during the first three quarters of 2010 and 2009.
Intermediation
Notional amounts of $550.0 million and $320.0 million were outstanding at September 30, 2010 and December 31, 2009 in which the FHLBNY acted as an intermediary to sell derivatives to members. The amounts include offsetting identical transactions with unrelated derivatives counterparties. Net fair value exposures of these transactions at September 30, 2010 and December 31, 2009 were not material. The intermediated derivative transactions were fully collateralized.
Loans to and borrowings from other Federal Home Loan Banks
In the current year first three quarters, the FHLBNY extended one overnight loan for a total of $27.0 million to other FHLBanks and none in the same period of 2009. Generally, loans made to other FHLBanks are uncollateralized. There was no outstanding balance as of September 30, 2010 or December 31, 2009. Interest income from such loans were not significant in any period in this report.

 

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The following tables summarize outstanding balances with related parties at September 30, 2010 and December 31, 2009, and transactions for the three and nine months ended September 30, 2010 and 2009 (in thousands):
Related Party: Outstanding Assets, Liabilities and Capital
                                 
    September 30, 2010     December 31, 2009  
    Related     Unrelated     Related     Unrelated  
Assets
                               
Cash and due from banks
  $     $ 69,471     $     $ 2,189,252  
Federal funds sold
          4,095,000             3,450,000  
Available-for-sale securities
          3,373,781             2,253,153  
Held-to-maturity securities
                               
Long-term securities
          8,221,246             10,519,282  
Advances
    85,697,171             94,348,751        
Mortgage loans 1
          1,267,687             1,317,547  
Accrued interest receivable
    269,988       35,775       299,684       40,826  
Premises, software, and equipment
          14,550             14,792  
Derivative assets 2
          32,425             8,280  
Other assets 3
    208       16,236       179       19,160  
 
                       
 
                               
Total assets
  $ 85,967,367     $ 17,126,171     $ 94,648,614     $ 19,812,292  
 
                       
 
                               
Liabilities and capital
                               
Deposits
  $ 3,730,257     $     $ 2,630,511     $  
Consolidated obligations
          92,706,801             104,835,617  
Mandatorily redeemable capital stock
    67,348             126,294        
Accrued interest payable
    15       277,632       16       277,772  
Affordable Housing Program 4
    137,995             144,489        
Payable to REFCORP
          20,560             24,234  
Derivative liabilities 2
          784,498             746,176  
Other liabilities 5
    50,339       51,109       29,330       43,176  
 
                       
 
                               
Total liabilities
  $ 3,985,954     $ 93,840,600     $ 2,930,640     $ 105,926,975  
 
                       
 
                               
Capital
    5,266,984             5,603,291        
 
                       
 
                               
Total liabilities and capital
  $ 9,252,938     $ 93,840,600     $ 8,533,931     $ 105,926,975  
 
                       
     
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, 2010     September 30, 2009  
    Related     Unrelated     Related     Unrelated  
Interest income
                               
Advances
  $ 173,459     $     $ 240,573     $  
Interest-bearing deposits 1
          1,699             1,014  
Federal funds sold
          2,253             1,864  
Available-for-sale securities
          7,580             6,590  
Held-to-maturity securities
                               
Long-term securities
          84,242             111,232  
Certificates of deposit
                      851  
Mortgage loans 2
          16,333             17,405  
Loans to other FHLBanks and other
                1        
 
                       
 
                               
Total interest income
  $ 173,459     $ 112,107     $ 240,574     $ 138,956  
 
                       
 
                               
Interest expense
                               
Consolidated obligations
  $     $ 158,553     $     $ 223,355  
Deposits
    959             516        
Mandatorily redeemable capital stock
    879             1,807        
Cash collateral held and other borrowings
          14              
 
                       
 
                               
Total interest expense
  $ 1,838     $ 158,567     $ 2,323     $ 223,355  
 
                       
 
                               
Service fees
  $ 1,297     $     $ 1,101     $  
 
                       
     
1   Includes de minimis amounts of interest income from MPF service provider.
 
2   Includes de minimis amounts of mortgage interest income from loans purchased from members of another FHLBank.
                                 
    Nine months ended  
    September 30, 2010     September 30, 2009  
    Related     Unrelated     Related     Unrelated  
Interest income
                               
Advances
  $ 477,303     $     $ 1,094,089     $  
Interest-bearing deposits 1
          3,766             19,054  
Federal funds sold
          6,600             1,933  
Available-for-sale securities
          23,128             22,881  
Held-to-maturity securities
                               
Long-term securities
          274,686             355,916  
Certificates of deposit
                      1,392  
Mortgage loans 2
          49,689             54,679  
Loans to other FHLBanks and other
                1        
 
                       
 
                               
Total interest income
  $ 477,303     $ 357,869     $ 1,094,090     $ 455,855  
 
                       
 
                               
Interest expense
                               
Consolidated obligations
  $     $ 481,738     $     $ 956,923  
Deposits
    2,813             2,002        
Mandatorily redeemable capital stock
    3,051             5,478        
Cash collateral held and other borrowings
          14             49  
 
                       
 
                               
Total interest expense
  $ 5,864     $ 481,752     $ 7,480     $ 956,972  
 
                       
 
                               
Service fees
  $ 3,472     $     $ 3,181     $  
 
                       
     
1   Includes de minimis amounts of interest income from MPF service provider.
 
2   Includes de minimis amounts of mortgage interest income from loans purchased from members of another FHLBank.
Note 20. 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.

 

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The FHLBNY’s total assets and capital could significantly decrease if one or more large members were to withdraw from membership or decrease business with the Bank. Members might withdraw or reduce their business as a result of consolidating with an institution that was a member of another FHLBank, or for other reasons. The FHLBNY has considered the impact of losing one or more large members. In general, a withdrawing member would be required to repay all indebtedness prior to the redemption of its capital stock. Under current conditions, the FHLBNY does not expect the loss of a large member to impair its operations, since the FHLBank Act of 1999 does not allow the FHLBNY to redeem the capital of an existing member if the redemption would cause the FHLBNY to fall below its capital requirements. Consequently, the loss of a large member should not result in an inadequate capital position for the FHLBNY. However, such an event could reduce the amount of capital that the FHLBNY has available for continued growth. This could have various ramifications for the FHLBNY, including a possible reduction in net income and dividends, and a lower return on capital stock for remaining members.
The top ten advance holders at September 30, 2010, December 31, 2009 and September 30, 2009, and associated interest income for the periods then ended are summarized as follows (dollars in thousands):
                                         
    September 30, 2010  
                    Percentage of        
            Par     Total Par Value     Interest Income  
    City   State   Advances     of Advances     Three months     Nine months  
Hudson City Savings Bank, FSB*
  Paramus   NJ   $ 17,175,000       21.4 %   $ 178,029     $ 529,488  
Metropolitan Life Insurance Company
  New York   NY     13,230,000       16.5       75,674       222,705  
New York Community Bank*
  Westbury   NY     7,593,167       9.5       77,416       230,083  
MetLife Bank, N.A.
  Bridgewater   NJ     4,969,500       6.2       16,368       40,514  
Manufacturers and Traders Trust Company
  Buffalo   NY     3,709,163       4.6       11,607       34,369  
Astoria Federal Savings and Loan Assn.
  Lake Success   NY     2,735,000       3.4       27,463       83,763  
The Prudential Insurance Co. of America
  Newark   NJ     2,500,000       3.1       17,971       60,244  
Valley National Bank
  Wayne   NJ     2,361,500       2.9       24,677       73,885  
Doral Bank
  San Juan   PR     1,531,420       1.9       16,471       53,041  
New York Life Insurance Company
  New York   NY     1,500,000       1.9       4,274       11,166  
 
                               
Total
          $ 57,304,750       71.4 %   $ 449,950     $ 1,339,258  
 
                               
     
*   Officer of member bank also served on the Board of Directors of the FHLBNY.
                                 
    December 31, 2009  
                    Percentage of        
            Par     Total Par Value     12-months  
    City   State   Advances     of Advances     Interest Income  
Hudson City Savings Bank, FSB*
  Paramus   NJ   $ 17,275,000       19.0 %   $ 710,900  
Metropolitan Life Insurance Company
  New York   NY     13,680,000       15.1       356,120  
New York Community Bank*
  Westbury   NY     7,343,174       8.1       310,991  
Manufacturers and Traders Trust Company
  Buffalo   NY     5,005,641       5.5       97,628  
The Prudential Insurance Co. of America
  Newark   NJ     3,500,000       3.9       93,601  
Astoria Federal Savings and Loan Assn.
  Lake Success   NY     3,000,000       3.3       120,870  
Emigrant Bank
  New York   NY     2,475,000       2.7       64,131  
Doral Bank
  San Juan   PR     2,473,420       2.7       86,389  
MetLife Bank, N.A.
  Bridgewater   NJ     2,430,500       2.7       46,142  
Valley National Bank
  Wayne   NJ     2,322,500       2.6       103,707  
 
                         
Total
          $ 59,505,235       65.6 %   $ 1,990,479  
 
                         
     
*   At December 31, 2009, officer of member bank also served on the Board of Directors of the FHLBNY.
                                         
    September 30, 2009  
                    Percentage of        
            Par     Total Par Value     Interest Income  
    City   State   Advances     of Advances     Three months     Nine months  
Hudson City Savings Bank, FSB*
  Paramus   NJ   $ 17,325,000       18.9 %   $ 178,896     $ 532,100  
Metropolitan Life Insurance Company
  New York   NY     14,280,000       15.6       84,277       279,360  
New York Community Bank*
  Westbury   NY     8,148,476       8.9       78,413       233,129  
Manufacturers and Traders Trust Company
  Buffalo   NY     5,493,756       6.0       19,133       83,856  
The Prudential Insurance Co. of America
  Newark   NJ     3,500,000       3.8       22,448       71,473  
Astoria Federal Savings and Loan Assn.
  Lake Success   NY     2,960,000       3.2       29,824       91,226  
Emigrant Bank
  New York   NY     2,475,000       2.7       16,127       48,004  
Doral Bank
  San Juan   PR     2,473,420       2.7       21,513       65,825  
MetLife Bank, N.A.
  Bridgewater   NJ     2,382,000       2.6       12,854       34,658  
Valley National Bank
  Wayne   NJ     2,338,500       2.6       25,608       78,322  
 
                               
Total
          $ 61,376,152       67.0 %   $ 489,093     $ 1,517,953  
 
                               
     
*   At September 30, 2009, officer of member bank also served on the Board of Directors of the FHLBNY.

 

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The following table summarizes capital stock held by members who were beneficial owners of more than 5 percent of the FHLBNY’s outstanding capital stock as of September 30, 2010 and December 31, 2009 (shares in thousands):
                     
        Number     Percent  
    September 30, 2010   of shares     of total  
Name of beneficial owner   Principal Executive Office Address   owned     capital stock  
Hudson City Savings Bank, FSB*
  West 80 Century Road, Paramus, NJ 07652     8,787       18.57 %
Metropolitan Life Insurance Company
  200 Park Avenue, New York, NY 10166     7,339       15.51  
New York Community Bank*
  615 Merrick Avenue, Westbury, NY 11590     4,002       8.46  
Manufacturers and Traders Trust Company
  One M&T Plaza, Buffalo, NY 14203     2,415       5.10  
MetLife Bank N.A
  501 Route 22 Bridgewater, NJ 08807     2,398       5.07  
 
               
 
                   
 
        24,941       52.71 %
 
               
                     
        Number     Percent  
    December 31, 2009   of shares     of total  
Name of beneficial owner   Principal Executive Office Address   owned     capital stock  
Hudson City Savings Bank, FSB*
  West 80 Century Road, Paramus, NJ 07652     8,748       16.87 %
Metropolitan Life Insurance Company
  200 Park Avenue, New York, NY 10166     7,419       14.31  
New York Community Bank*
  615 Merrick Avenue, Westbury, NY 11590     3,777       7.28  
Manufacturers and Traders Trust Company
  One M&T Plaza, Buffalo, NY 14203     2,952       5.69  
 
               
 
 
 
        22,896       44.15 %
 
               
     
*   Officer of member bank also served on the Board of Directors of the FHLBNY.
Note 21. Subsequent events.
Under the final guidance issued by the FASB in February 2010, subsequent events for the FHLBNY are events or transactions that occur after the balance sheet date but before financial statements are issued. There are two types of subsequent events:
a. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
b. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).
The FHLBNY has evaluated subsequent events through the date of this report and no significant subsequent events were identified.

 

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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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Organization of Management’s Discussion and Analysis (“MD&A”).
The FHLBNY’s MD&A is designed to provide information that will assist the readers in better understanding the FHLBNY’s financial statements, the changes in key items in the Bank’s financial statements from period to period, the primary factors driving those changes as well as how accounting principles affect the FHLBNY’s financial statements. The MD&A is organized as follows:
         
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    60  
 
       
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    62  
 
       
    64  
 
       
    66  
 
       
    66  
 
       
    67  
 
       
    68  
 
       
    69  
 
       
    75  
 
       
    77  
 
       
    79  
 
       
    81  
 
       
    83  
 
       
    86  
 
       
    90  
 
       
    91  
 
       
    91  
 
       
    97  
 
       
    99  
 
       
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    115  
 
       
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MD&A TABLE REFERENCE
                 
Table   Description   Page  
     
Selected Financial Data
    64  
  1    
Interest Income – Principal Sources
    67  
  2    
Impact of Interest Rate Swaps on Interest Income Earned from Advances
    67  
  3    
Interest Expenses – Principal Categories
    68  
  4    
Impact of Interest Rate Swaps on Consolidated Obligation Interest Expense
    68  
  5    
Components of Net Interest Income
    69  
  6    
Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps
    71  
  7    
GAAP Versus Economic Basis – Contrasting Net Interest Income, Net Income Spread and Return on Earning Assets
    72  
  8    
Spread and Yield Analysis
    73  
  9    
Rate and Volume Analysis
    74  
  10    
Provision for Credit Losses on Mortgage Loans and Other Income
    75  
  11    
Net Gains (Losses) from Derivatives and Hedging Activities
    77  
  12    
Gain/(Losses) Reclassified from AOCI to Current Period Income from Cash Flow Hedges
    79  
  13    
Operating Expenses
    80  
  14    
Statements of Condition
    81  
  15    
Advances by Product Type
    83  
  16    
Investments by Categories
    86  
  17    
Mortgage-Backed Securities – Held-to-Maturity by Issuer
    87  
  18    
Available-for-Sale Securities – Composition
    87  
  19    
External Rating of the Held-to-Maturity Portfolio
    88  
  20    
External Rating of the Available-for-Sale Portfolio
    88  
  21    
Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities
    88  
  22    
Mortgage Loans by Loan Type
    91  
  23    
Consolidated Obligation Bonds by Type
    94  
  24    
Discount Notes Outstanding
    97  
  25    
Roll-Forward Mandatorily Redeemable Capital Stock
    98  
  26    
Derivative Hedging Strategies
    100  
  27    
Derivatives Financial Instruments by Hedge Designation
    101  
  28    
Derivative Financial Instruments by Product
    101  
  29    
Advances and Mortgage Loan Portfolios
    102  
  30    
Collateral Supporting Advances to Members
    103  
  31    
Collateral Supporting Member Obligations Other Than Advances
    104  
  32    
Location of Collateral Held
    104  
  33    
Concentration analysis – Top Ten Advance Holders
    105  
  34    
Period-Over-Period Change in Investments
    105  
  35    
NRSRO Held-to-Maturity Securities
    106  
  36    
NRSRO Available-for-Sale Securities
    106  
  37    
Carrying Value Basis of Held-to-Maturity Mortgage-Backed Securities by Issuer
    107  
  38    
Non-Agency Private Label Mortgage Securities
    107  
  39    
OTTI in 2010
    108  
  40    
Monoline Insurance of PLMBS
    108  
  41    
PLMBS by Year of Securitization and External Rating
    109  
  42    
Weighted-Average Market Price of MBS
    110  
  43    
Roll-Forward First Loss Account
    111  
  44    
Mortgage Loans – Past Due
    111  
  45    
Mortgage Loans – Interest Short-Fall
    112  
  46    
Mortgage Loans – Allowance for Credit Losses
    112  
  47    
Top Five Participating Financial Institutions – Concentration
    112  
  48    
Credit Exposure by Counterparty Credit Rating
    114  
  49    
Contractual Obligations and Other Commitments
    116  
  50    
Deposit Liquidity
    117  
  51    
Operational Liquidity
    117  
  52    
Contingency Liquidity
    118  
  53    
Consolidated Obligation – Original Maturities Less Than One Year
    119  
  54    
Unpledged Assets
    119  
  55    
FHFA MBS Limits
    119  
  56    
FHLBNY Ratings
    120  

 

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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 25, 2010.
Cooperative business model. As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission and its ability to provide adequate returns on the capital supplied by its members. The FHLBNY achieves this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and by paying a dividend on the members’ capital stock. Reflecting the FHLBNY’s cooperative nature, the FHLBNY’s financial strategies are designed to enable the FHLBNY to expand and contract in response to member credit needs. The FHLBNY invests its capital in high quality, short- and medium-term financial instruments. This strategy allows the FHLBNY to maintain sufficient liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. The dividends paid by FHLBNY are largely the result of the FHLBNY’s earnings on invested member capital, net earnings on advances to members, mortgage loans and investments, offset in part by the FHLBNY’s operating expenses and assessments. FHLBNY’s board of directors and management determine the pricing of member credit and dividend policies based on the needs of its members and the cooperative.
Historical Perspective. The fundamental business of the FHLBNY is to provide member institutions and housing associates with advances and other credit products in a wide range of maturities to meet their needs. Congress created the FHLBanks in 1932 to improve the availability of funds to support home ownership. Although the FHLBanks were initially capitalized with government funds, members have provided all of the FHLBanks’ capital for over 50 years.
To accomplish its public purpose, the FHLBanks, including the FHLBNY, offer a readily available, low-cost source of funds, called advances, to member institutions and certain housing associates. Congress originally granted access to advances only to those institutions with the potential to make and hold long-term, amortizing home mortgage loans. Such institutions were primarily federally and state chartered savings and loan associations, cooperative banks, and state-chartered savings banks (thrift institutions). FHLBanks and its member thrift institutions are an integral part of the home mortgage financing system in the United States.
However, a variety of factors, including a severe recession, record-high interest rates, and deregulation, resulted in significant financial losses for thrift institutions in the 1980s. In response to the significant cost borne by the American taxpayer to resolve the failed thrift institutions, Congress restructured the home mortgage financing system in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Through this legislation, Congress reaffirmed the housing finance mission of the FHLBanks and expanded membership eligibility in the FHLBanks to include commercial banks and credit unions with a commitment to housing finance.
Different FHLBank Business Strategies. Each FHLBank is operated as a separate entity with its own management, employees and board of directors. In addition, all FHLBanks operate under the Finance Agency’s supervisory and regulatory framework. However, each FHLBank’s management and board of directors determine the best approach for meeting its business objectives and serving its members. As such, the management and board of directors of each FHLBank have developed different business strategies and initiatives to fulfill that FHLBank’s mission, and they re-evaluate these strategies and initiatives from time to time.
Business segment. The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations and the principal factor that impacts its operating results. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to Resolution Funding Corporation (“REFCORP”), and set aside a percentage of its income towards an Affordable Housing Program (“AHP”). Together they are referred to as assessments.
Explanation of the use of certain non-GAAP measures of Interest Income and Expense, Net Interest income and margin. The FHLBNY has presented its results of operations in accordance with U.S. generally accepted accounting principles. The FHLBNY has also presented certain information regarding its Interest Income and Expense, Net Interest income and Net Interest spread that combines interest expense on debt with net interest paid on interest rate swaps associated with debt that were hedged on an economic basis. These are non-GAAP financial measures used by management that the FHLBNY believes are useful to investors and members of the FHLBNY in understanding the Bank’s operational performance and business and performance trends. Although the FHLBNY believes these non-GAAP financial measures enhance investor and members’ understanding of the Bank’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. When discussing non-GAAP measures, the Bank has provided GAAP measures in parallel.
Third Quarter 2010 Highlights
The FHLBNY reported Net income of $78.8 million, or $1.71 per share for the 2010 third quarter compared with Net income of $140.2 million or $2.70 per share for the same period in 2009. The return on average equity, which is Net income divided by average Capital stock, Retained earnings, and Accumulated other comprehensive income (loss) (“AOCI”), was 6.03% for the 2010 third quarter compared with 9.79% for the same period in 2009.

 

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Net income contracted due to the significant decline in Net interest income. Net interest income was $125.2 million in the 2010 third quarter, down from $153.9 million, or a decline of 18.6% from the same period in 2009.
The primary cause of the lower Net interest income was the decline in business volume as measured by average member advances outstanding. Average outstanding advances in the 2010 third quarter was $84.2 billion down from $96.7 billion in the same period in 2009. This adverse change in volume caused Net interest income to decline by $29.9 million over the same period in 2009.
Net interest spread, which is the difference between yields on interest-earning assets and yields on interest-costing liabilities, contracted by 4 basis points in the 2010 third quarter over the same period in 2009. Net interest income and net interest spread contracted to levels more typical of the years before 2009, primarily because the Bank’s funding advantage weakened in 2010.
While FHLBank discount note yield volatility may have stabilized in the current quarter, discount note spreads to LIBOR have narrowed, adversely impacting FHLBNY’s interest margins. In a declining interest rate environment, the Federal Reserve Board’s bill issuance strategy has been to create a steady supply of bills that prevented yields from falling further, appears to have created a “floor” for further declines in Treasury bill yields. In turn, it has also stabilized the FHLBank discount note yields but that has not prevented discount note spreads from narrowing. As a result of the spread compression in the current quarter, discount note issuances were further reduced, and maturing notes were replaced by floating-rate debt and short lockout callable bonds with short maturities. In much of 2009, FHLBank discount notes were issued at wide advantageous spreads to LIBOR, and was one source of the funding advantage in 2009.
Earnings from investing members’ capital and net non-interest bearing liabilities in short-term interest-yielding assets were an important contributor to FHLBNY earnings. In the 2010 third quarter, $9.4 billion of deployed capital potentially could have earned a yield of 17-20 basis points, the weighted average yield on money market instruments in that period. In the same period in 2009, $8.8 billion in deployed capital could potentially have earned also about 17 basis points. Short-term rates were comparable in the current and prior year quarters. Relative contribution from deployed capital depends on (1) the absolute volume of deployed capital as measured by average capital stock, retained earnings, and net non-interest bearing liabilities, and, (2) the short-term investment yields.
In the 2010 third quarter, the FHLBNY increased the impairment of four private-label mortgage-backed securities. Cash flow assessments of the expected credit performance of the securities resulted in the recognition of $3.1 million as other-than-temporary impairment (“OTTI”) with a charge to earnings. All four securities had been previously determined to be OTTI, and the additional impairment in the 2010 third quarter was due to further deterioration in the performance parameters of the securities. Although all four securities are insured by bond insurers, Ambac and MBIA, the Bank’s analysis of the two bond insurers concluded that future credit losses due to projected collateral shortfalls of the insured securities would not be fully supported by the bond insurers. In the same period in 2009, OTTI of $3.7 million in credit impairment was charged to earnings. For more information about impairment methodology and bond insurer analysis, see Note 1 – Significant Accounting Policies and Estimates and Note 4 – Held-to-maturity securities.
In the 2010 third quarter, the FHLBNY recognized $8.4 million of net gains from derivative and hedging activities. In contrast, in the same period in 2009, net gains of $59.6 million were recognized. Net hedging gains were primarily unrealized market value adjustments that resulted from (1) hedge ineffectiveness — interest rate changes that affected the market values of interest rate swaps differently than the market values of the hedged risk, and (2) derivatives designated as economic hedges. When derivatives are designated as economic hedges, changes in the fair values of the derivatives are marked to fair value through earnings with no offsetting changes in fair values of the hedged financial instruments. This effect is sometimes referred to as “one-sided marks”. Hedging gains and losses included interest income or expense paid on swaps designated as economic hedges, in compliance with hedge accounting reporting guidance, which prescribes that such interest be included in the income statement as part of derivatives and hedging activities. Interest income or expense from swaps that qualify for hedge accounting are also included in the income statement but are reported as part of the income or expense of the hedged asset or liability as part of interest margin. See Note 16 to the unaudited financial statements and Table 11 in this MD&A for more information. In general, the FHLBNY holds derivatives and associated hedged instruments and consolidated obligation debt under the Fair Value Option accounting (“FVO”), to their maturity, call, or put dates. When such financial instruments are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are recorded as unrealized will generally reverse over time, and fair value changes will sum to zero over time. In limited instances, the FHLBNY may terminate these instruments prior to maturity or prior to call or put dates, which would result in a realized gain or loss.
Operating Expenses of the FHLBNY were $21.7 million for the 2010 third quarter, up from $17.8 million in the same period in 2009. The FHLBNY was also assessed for its share of the operating expenses for the Finance Agency and the Office of Finance, and those totaled $2.0 million for the 2010 third quarter, up slightly from $1.8 million in the same period in 2009. The 12 FHLBanks and two other GSEs share the administrative cost of the Finance Agency.
REFCORP assessment payments totaled $19.7 million in the 2010 third quarter, down from $35.1 million in the same period in 2009. Affordable Housing Program (“AHP”) assessment set aside from income totaled $8.9 million in the 2010 third quarter, down from $15.8 million in the same period in 2009. Assessments are calculated on Net income before assessments and the decreases were due to the significant decrease in the 2010 third quarter Net income as compared to the same period in 2009. For more information about REFCORP and AHP assessments see the section Assessments under Background in this Form 10-Q, and Note 12 to the unaudited financial statements.

 

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Cash dividend of $1.15 per share of capital stock (4.60% annualized return on capital stock) was paid to stockholders in the 2010 third quarter. In the 2009 third quarter, cash dividend of $1.40 per share (5.60% annualized return on capital stock) was paid.
The FHLBNY continued to experience balance sheet contraction as both its lending and funding steadily declined through the 2010 third quarter. Advances to member banks declined to $85.7 billion at September 30, 2010, a level more typical of that before the credit crisis, from a peak of approximately $109.2 billion in 2008 and $94.3 billion at December 31, 2009. The decline has occurred gradually as member banks have taken advantage of the improved availability of alternate funding sources such as deposits and senior unsecured borrowings in a more liquid market. Member demand for advances has also declined, as loan demand from their customers may have stayed lukewarm due to nationally weak economic conditions.
Aside from advances, the FHLBNY’s primary earning assets are its investment securities portfolios, comprising mainly of GSE and U.S. agency issued mortgage-backed securities (“MBS”), and state and local government housing agency bonds. Such investment securities, classified as long-term investment portfolios, totaled $11.6 billion, or 11.2% of Total assets at September 30, 2010, and included $10.0 billion of GSE and agency issued MBS. Only $0.9 billion of private-label MBS remained outstanding. Investment security values have continued to improve, and previously recorded unrealized fair value losses in AOCI on GSE issued MBS reversed, and fair values were in a net unrealized gain position, as liquidity has gradually returned to the market.
The FHLBNY’s capital remains strong. At September 30, 2010, actual risk based capital was $5.4 billion, compared to required risk based capital of $0.5 billion. To support $103.1 billion of Total assets at September 30, 2010, the required minimum regulatory capital was $4.1 billion, or 4.0% of assets. The FHLBNY’s actual regulatory capital was $5.4 billion, exceeding required capital by $1.3 billion at September 30, 2010. Aggregate capital ratio was at 5.27%, or 1.27% more than the 4.0% regulatory minimum. The FHLBNY has prudently retained capital through the period of credit turmoil. Retained earnings, excluding losses in AOCI, have grown to $701.2 million at September 30, 2010. AOCI losses declined to $97.8 million at September 30, 2010 from $144.5 million at December 31, 2009 primarily because of the improvement in the pricing of mortgage-backed securities designated as available-for-sale.
Shareholders’ equity, the sum of Capital stock, Retained earnings, and AOCI, was $5.3 billion at September 30, 2010, a decline of $336.3 million from December 31, 2009, primarily because of the decline in members’ Capital stock, which declined by $395.4 million. The decrease in Capital stock was consistent with the decrease in advances borrowed by members since members are required to purchase stock as a prerequisite to membership and to hold FHLBNY stock as a percentage of advances borrowed from the FHLBNY. The Bank’s current practice is to redeem stock in excess of the amount necessary to support advance activity on a daily basis. As a result, the amount of capital stock outstanding varies in line with members’ outstanding advance borrowings. For more information about changes in Capital, Retained earnings and AOCI, see Note 13 to the unaudited financial statements in this report.
Year-to-date 2010 Highlights
The FHLBNY reported year-to-date Net income of $189.1 million, or $3.98 per share, compared with $474.8 million, or $8.93 per share for the prior year period.
Net interest income was $347.6 million for the current year period, down $585.5 million from the prior year period. The primary causes were (1) decline in transaction volume in the current year period, (2) increases in debt costs relative to earnings from advances to members and investments, and (3) lower earnings from the deployment of members’ capital to fund interest earning-assets because of decline in member capital due to lower money-market investment yields.
Net realized and unrealized gain (loss) from derivatives and hedging activities was a loss of $3.3 million in the current year period. In contrast, the Bank recorded a gain of $124.6 million from derivatives and hedging activities in the prior year period.
Cash flow assessments of the expected credit performance of the securities resulted in the recognition of $7.7 million as OTTI charges to earnings. The non-credit component of OTTI recorded in AOCI through the third quarter was not significant. In the prior year period, credit related OTTI was $14.3 million. The non-credit component of OTTI recorded in AOCI through the prior year third quarter was $103.9 million.
Business Outlook
The following forward-looking statements are based upon the current beliefs and expectations of the FHLBNY’s management and are subject to risks and uncertainties which could cause the FHLBNY’s actual results to differ materially from those set forth in such forward-looking statements.
The FHLBNY expects its full year earnings to continue to decline to ultimately reach levels more typical of the years before 2009, primarily as a result of lower net interest margins on the Bank’s core assets, primarily advances and investments in mortgage-backed securities, as the Bank expects continued erosion of its funding advantages.
The Bank’s earnings will continue to be adversely impacted in 2011 in a low interest rate environment as opportunities to invest in high-quality assets and earn a reasonable spread will be limited.

 

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Advances - Management is unable to predict the timing and extent of the expected recovery in the U.S. economy, particularly the recovery in the housing market, or an expectation of continued stability in the financial markets. Against that backdrop, the management of the Bank believes it is also difficult to predict member demand for advances, which is the primary focus of the FHLBNY’s operations and the principal factor that impacts its operating results.
Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and long-term funding driven by economic factors such as availability to the Bank’s members of alternative funding sources that are more attractive, such as consumer deposits, the interest rate environment, and the outlook for the economy. Members may choose to prepay advances, which may require prepayment fees, based on their expectations of interest rate changes and demand for liquidity. Demand for advances may also be influenced by the dividend payout rate to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership stock and activity-based stock. Members are required to purchase activity stock in order to borrow advances. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or a non-member, they no longer qualify for membership in the FHLBNY, which cannot renew outstanding advances or provide new advances to non-members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight advance lending if the former member borrowed such advances.
Earnings – As existing high-yielding fixed-rate MBS and some intermediate-term advances continue to pay down or mature, it is unlikely they will be replaced by equivalent high yielding assets due to the low interest rate environment, and this will tend to lower the overall yield on total assets. The FHLBNY expects general advance demand from members to continue to decline, and specifically, the Bank expects limited demand for large intermediate-term advances because many members have adequate liquidity, and other members have significant amounts of intermediate-term advances that were borrowed from the FHLBNY several years ago. The FHLBNY anticipates that such members may be considering prepaying those borrowings, or to not replacing them at maturity. Members that have expressed interest in intermediate-term borrowing have not been significant borrowers in the past.
The FHLBNY earns income from investing its members’ capital and non-interest bearing liabilities, together referred to as deployed capital, to fund interest-earning assets. The two principal factors that impact earnings from deployed capital are the average amount of capital outstanding in a period and the interest rate environment in the period, which in turn impacts yields on earning assets. These factors determine the potential earnings from deployed capital, and both factors are subject to change. The Bank cannot predict with certainty the level of earnings from capital. In a lower interest rate environment, deployed capital, which consists of capital stock, retained earnings, and net non-interest bearing liabilities, will provide relatively lower income.
The Bank’s earnings will be adversely impacted in 2011 in the low interest rate environment as opportunities to invest in high-quality assets and to earn a reasonable spread may be limited.
Demand for FHLBank debt - The FHLBNY’s primary source of funds is the sale of consolidated obligations in the capital markets, and the FHLBNY’s ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, which are beyond the FHLBNY’s control. The FHLBNY may not be able to obtain funding on acceptable terms given the extraordinary market conditions and structural changes in the debt market. If the FHLBNY cannot access funding when needed on acceptable terms, its ability to support and continue operations could be adversely affected, which could negatively affect its financial condition and results of operations. The pricing of the FHLBanks’ longer-term debt remains at levels that are still higher than historical levels, relative to LIBOR. To the extent the FHLBanks receive sub-optimal funding, the Bank’s member institutions in turn may experience higher costs for advance borrowings. To the extent the FHLBanks may not be able to issue long-term debt at economical spreads relative to the 3-month LIBOR rate, the FHLBNY’s members borrowing choices may also be limited.
Credit Impairment of Mortgage-backed securities - OTTI charges of $7.7 million were recorded for the FHLBNY’s MBS portfolios through the current year quarter. However, without recovery in the near term such that liquidity returns to the mortgage-backed securities market, or if the credit losses of the underlying collateral within the mortgage-backed securities perform worse than expected, the FHLBNY could face additional credit losses. In addition, certain private-label MBS may be undergoing loan modification and forbearance proceedings at the loan level and such processes may have an adverse impact on the amounts and timing of expected cash flows.

 

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SELECTED FINANCIAL DATA (UNAUDITED)
                                         
Statements of Condition   September 30,     June 30,     March 31,     December 31,     September 30,  
(dollars in millions)   2010     2010     2010     2009     2009  
 
                                       
Investments (1)
  $ 15,690     $ 14,971     $ 15,561     $ 16,222     $ 18,741  
Interest bearing balance at FRB **
                             
Advances
    85,697       85,286       88,859       94,349       95,945  
Mortgage loans held-for-portfolio, net of allowance for credit losses (2)
    1,268       1,283       1,288       1,318       1,336  
Total assets
    103,094       105,183       107,239       114,461       117,604  
Deposits and borrowings
    3,730       4,795       7,977       2,631       2,276  
Consolidated obligations, net
                                       
Bonds
    74,919       66,247       72,408       74,008       69,671  
Discount notes
    17,788       27,481       19,816       30,828       38,385  
Total consolidated obligations
    92,707       93,728       92,224       104,836       108,056  
Mandatorily redeemable capital stock
    67       70       105       126       128  
AHP liability
    138       144       146       144       145  
REFCORP liability
    21       14       14       24       39  
Capital
                                       
Capital stock
    4,664       4,680       4,828       5,059       5,142  
Retained earnings
    701       676       672       689       666  
Accumulated other comprehensive income (loss)
    (98 )     (109 )     (124 )     (145 )     (147 )
Total capital
    5,267       5,247       5,376       5,603       5,661  
Equity to asset ratio (3)
    5.11 %     4.99 %     5.01 %     4.90 %     4.81 %
                                                         
    Three months ended     Nine months ended  
Statements of Condition   September 30,     June 30,     March 31,     December 31,     September 30,     September 30,     September 30,  
Averages(dollars in millions)   2010     2010     2010     2009     2009     2010     2009  
 
                                                       
Investments (1)
  $ 16,996     $ 18,757     $ 17,711     $ 18,650     $ 19,764     $ 17,811     $ 5,053  
Interest-bearing balance at FRB **
                                        8,062  
Advances
    84,164       85,609       91,415       94,193       96,704       87,036       100,574  
Mortgage loans
    1,274       1,281       1,299       1,333       1,357       1,285       1,403  
Total assets
    106,179       108,325       113,116       117,289       120,754       109,181       128,215  
Interest-bearing deposits and other borrowings
    5,062       5,212       5,050       2,361       2,083       5,108       2,006  
Consolidated obligations, net
                                                       
Bonds
    69,817       71,738       74,297       73,264       69,604       71,934       71,388  
Discount notes
    21,317       22,354       24,555       31,741       39,521       22,730       44,783  
Total consolidated obligations
    91,134       94,092       98,852       105,005       109,125       94,664       116,171  
Mandatorily redeemable capital stock
    68       96       108       143       128       91       135  
AHP liability
    141       144       144       144       139       143       132  
REFCORP liability
    10       7       9       15       23       9       23  
Capital
                                                       
Capital stock
    4,611       4,719       4,929       5,030       5,195       4,752       5,315  
Retained earnings
    679       661       658       666       611       666       522  
Accumulated other comprehensive income (loss)
    (106 )     (120 )     (141 )     (136 )     (125 )     (122 )     (95 )
Total capital
    5,184       5,260       5,446       5,560       5,681       5,296       5,742  

 

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Operating Results and other data            
(dollars in millions)   Three months ended     Nine months ended  
(except earnings, headcount,   September 30,     June 30,     March 31,     December 31,     September 30,     September 30,     September 30,  
and dividends per share)   2010     2010     2010     2009     2009     2010     2009  
 
                                                       
Net interest income (4)
  $ 125     $ 116     $ 106     $ 116     $ 154     $ 348     $ 585  
Net income
    79       57       54       97       140       189       475  
Dividends paid in cash (7)
    54       52       71       74       74       177       191  
AHP expense
    9       6       6       10       16       21       53  
REFCORP expense
    20       14       13       24       35       47       119  
Return on average equity* (5)
    6.03 %     4.32 %     3.99 %     6.85 %     9.79 %     4.77 %     11.06 %
Return on average assets*
    0.29 %     0.21 %     0.19 %     0.32 %     0.46 %     0.23 %     0.50 %
Net OTTI impairment losses
    (3 )   $ (1 )   $ (3 )   $ (7 )   $ (4 )     (8 )   $ (14 )
Other non-interest income (loss)
    9       (15 )     (8 )     48       61       (13 )     137  
Total other income (loss)
    6       (16 )     (11 )     41       57       (21 )     123  
Operating expenses
    22       20       19       22       18       61       54  
Finance Agency and Office of Finance
    2       2       3       2       2       6       6  
Total other expenses
    24       22       22       24       20       67       60  
Operating expenses ratio* (6)
    0.08 %     0.08 %     0.07 %     0.07 %     0.06 %     0.07 %     0.06 %
Earnings per share
  $ 1.71     $ 1.20     $ 1.09     $ 1.94     $ 2.70     $ 3.98     $ 8.93  
Dividend per share
  $ 1.15     $ 1.05     $ 1.41     $ 1.42     $ 1.40     $ 3.60     $ 3.54  
Headcount (Full/part time)
    269       270       266       264       259       269       259  
     
(1)   Investments include held-to-maturity securities, available for-sale securities, Federal funds, loans to other FHLBanks, and other interest bearing deposits.
 
(2)   Allowances for credit losses were $5.5 million, $5.4 million, $5.2 million, $4.5 million, and $3.4 million at the periods ended September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009 and September 30, 2009.
 
(3)   Equity to asset ratio is capital stock plus retained earnings and Accumulated other comprehensive income (loss) as a percentage of total assets.
 
(4)   Net interest income is net interest income before the provision for credit losses on mortgage loans.
 
(5)   Return on average equity is net income as a percentage of average capital stock plus average retained earnings and average Accumulated other comprehensive income (loss).
 
(6)   Operating expenses as a percentage of total average assets.
 
(7)   Excludes dividends accrued to non-members classified as interest expense under the accounting standards for certain financial instruments with characteristics of both liabilities and equity.
 
*   Annualized.
 
**   FRB program commenced in October 2008. On July 2, 2009, the Bank was no longer eligible to collect interest on excess balances.

 

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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 25, 2010.
The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations, and are the principal factor that impacts its operating results. Interest income from advances is the principal source of revenue. The primary expenses are interest paid on consolidated obligations debt, operating expenses, principally administrative and overhead expenses, and “assessments” on net income. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to REFCORP and set aside funds from its income towards an Affordable Housing Program (“AHP”), together referred to as assessments. Other significant factors affecting the Bank’s Net income include the volume and timing of investments in mortgage-backed securities, debt repurchases and associated losses, and earnings from shareholders’ capital.
Net Income
The FHLBNY reported current year third quarter Net income of $78.8 million, or $1.71 per share, compared to prior year period Net income of $140.2 million, or $2.70 per share. Current year-to-date Net income was $189.1 million, or $3.98 per share, compared to prior year period Net income of $474.8 million, or $8.93 per share.
Net interest income, a key metric for the FHLBNY and the primary contributor to Net income, was adversely affected in 2010. Net interest income in the current year quarter was $125.2 million, down by $28.7 million from the prior year period, and was the primary cause of the decline in Net income. Net interest income was $347.6 million for the current year-to-date period, down by $237.9 million from the prior year period. The Bank’s cost of debt has become more expensive in 2010 relative to prior year periods. Additionally, the volume of advance business has contracted. Another factor was the decline in member capital stock, which declined in line with advances borrowed by members. The FHLBNY typically invests member capital to fund short-term interest-earning investments and decline in capital stock reduced the potential for earning additional interest income. Hedging activities resulted in a small loss in 2010, in contrast to significant gains, mainly unrealized, that enhanced earnings in the prior year periods.
In the current year quarter, four held-to-maturity private-label MBS were credit impaired and to deemed to be OTTI and $3.1 million was recorded as a charge to Other income (loss), compared to $3.7 million in the prior year period. On a year-to-date basis, credit impairment charge of $7.7 million was recorded in the current year, compared to $14.3 million in the prior year.
Reported Net realized and unrealized loss from hedging activities was a gain of $8.4 million in the current year quarter compared to gain of $59.6 million in the prior year period. On a year-to-date basis, the Bank recorded a loss of $3.3 million in the current year period, in contrast to a gain of $124.6 million in the prior year period. In order to manage the FHLBNY’s interest rate risk profile, the FHLBNY routinely uses derivatives to manage the interest rate risk inherent in the Bank’s assets and liabilities. The hedging losses and gains were primarily due to (1) Fair value changes of interest rate swaps and options designated as economic hedges of debt issued by the FHLBNY, and (2) Reversal of fair value changes recorded in the prior year periods. Hedging losses are net of interest received or paid on swaps designated as economic hedges, in compliance with hedge accounting reporting guidance, which prescribes that such interest is included in the income statement as part of derivatives, and hedging activities. Interest income or expense from swaps that qualify under hedge accounting are also included in the income statement but are reported as part of the income or expense of the hedged asset or liability. See Note 16 to the unaudited financial statements and Table 11 in this MD&A for more information.
The Bank recorded fair value net losses of $12.6 million on consolidated obligation debt that were designated under the Fair Value Option (“FVO”) in the 2010 year-to-date period, compared to a gain of $8.7 million in the prior year period. The debt was economically hedged by interest rate swaps, and gains and losses were largely offset by recorded fair value changes on the swaps by $12.8 million in the 2010 year-to-date period, and $5.8 million in the prior year period. In the current and prior year third quarters, gains were de minimis.
In general, the FHLBNY holds derivatives and associated hedged instruments, and consolidated obligation debt at fair values under the FVO, to the maturity, call, or put dates. When such financial instruments are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are unrealized will generally reverse over time, and fair value changes will sum to zero. In limited instances, the FHLBNY may terminate these instruments prior to maturity or prior to call or put dates, which would result in a realized gain or loss.
Total Other expenses, comprised of Operating expenses and Assessments paid to the Finance Agency and the Office of finance, were $23.7 million for the current year quarter, up by $4.0 million from the prior year period. On a year-to-date basis, Other expenses were $67.7 million, up by $8.1 million from the prior year period.
REFCORP assessments were $19.7 million in current year quarter, down $15.4 million from the prior year period. AHP assessments were $21.4 million, down $32.0 million from the prior year period. On a year-to-date basis, the combined REFCORP and AHP assessment was $68.6 million in the current year period, down $103.4 million from the prior year period. Assessments are calculated on Net income before assessments and the decreases were due to lower Net income in current year periods compared to prior year periods.

 

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Interest Income
Interest income from advances and investments in mortgage-backed securities are the principal sources of income for the FHLBNY. Changes in both rate and intermediation volume (average interest-yielding assets) explain the change in the current year periods from the prior year periods. The principal categories of Interest Income are summarized below (dollars in thousands):
Table 1: Interest Income — Principal Sources
                                                 
    Three months ended September 30,     Nine months ended September 30,  
                    Percentage                     Percentage  
    2010     2009     Variance     2010     2009     Variance  
Interest Income
                                               
Advances
  $ 173,459     $ 240,573       (27.90 )%   $ 477,303     $ 1,094,089       (56.37 )%
Interest-bearing deposits
    1,699       1,014       67.55       3,766       19,054       (80.24 )
Federal funds sold
    2,253       1,864       20.87       6,600       1,933       NM  
Available-for-sale securities
    7,580       6,590       15.02       23,128       22,881       1.08  
Held-to-maturity securities
                                               
Long-term securities
    84,242       111,232       (24.26 )     274,686       355,916       (22.82 )
Certificates of deposit
          851       (100.00 )           1,392       (100.00 )
Mortgage loans held-for-portfolio
    16,333       17,405       (6.16 )     49,689       54,679       (9.13 )
Loans to other FHLBanks and other
          1       (100.00 )           1       (100.00 )
 
                                   
 
                                               
Total interest income
  $ 285,566     $ 379,530       (24.76 )%   $ 835,172     $ 1,549,945       (46.12 )%
 
                                   
Reported Interest income in the Statements of Income was adjusted for the cash flows associated with interest rate swaps (designated in accounting hedges) in which the Bank generally pays fixed-rate cash flows to derivative counterparties, which typically mirrors the fixed-rate coupons received from advances borrowed by members. In exchange, the Bank receives variable-rate LIBOR-indexed cash flows.
Impact of hedging advances - The FHLBNY executes interest rate swaps to modify the effective interest rate terms of many of its fixed-rate advance products and typically all of its putable advances. In these swaps, the FHLBNY effectively converts a fixed-rate stream of cash flows from its fixed-rate advances to a floating-rate stream of cash flows, typically indexed to LIBOR. These cash flow patterns from derivatives were in line with the Bank’s interest rate risk management practices and effectively converted fixed-rate cash flows of hedged advances to LIBOR indexed cash flows. Derivative strategies are used to manage the interest rate risk inherent in fixed-rate advances and are designed to protect future interest income.
The table below summarizes interest income earned from advances and the impact of interest rate derivatives (in thousands):
Table 2: Impact of Interest Rate Swaps on Interest Income Earned from Advances
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Advance Interest Income
                               
Advance interest income before adjustment for interest rate swaps
  $ 651,672     $ 743,687     $ 1,996,172     $ 2,345,699  
Net interest adjustment from interest rate swaps 1
    (478,213 )     (503,114 )     (1,518,869 )     (1,251,610 )
 
                       
 
                               
Total Advance interest income reported
  $ 173,459     $ 240,573     $ 477,303     $ 1,094,089  
 
                       
     
1   Interest portion only
In the current year periods, the FHLBNY paid swap counterparties fixed-rate cash flows, which typically mirrored the coupons on hedged advance. In return, the swap counterparties paid the FHLBNY a pre-determined spread plus the prevailing LIBOR, which resets generally every three months. In the table above, the unfavorable cash flow patterns of the interest rate swaps were indicative of the declining LIBOR rates (obligation of the swap counterparty) compared to fixed-rate obligation of the FHLBNY. The Bank is generally indifferent to changes in the cash flow patterns as it typically hedges its fixed-rate consolidated obligation debt, which is the Bank’s primary funding base, and achieves its overall net interest spread objective.
Under GAAP, net interest adjustments from derivatives (as described in Table 2 above) may be offset against the net interest accruals of the hedged financial instrument (e.g. advance) only if the derivative is in a hedge qualifying relationship. If the hedge does not qualify for hedge accounting, and the Bank designates the hedge as an economic hedge, the net interest adjustments from derivatives would not be recorded with the advance interest revenues. Instead, the net interest adjustments from swaps would be recorded in Other income (loss) as a Net realized and unrealized gain (loss) from derivatives and hedging activities. Thus, the accounting designation of a hedge may have a significant impact on reported Interest income from advances. There were no material amounts of net interest adjustments from interest rate swaps designated as economic hedges of advances that were reported in Other income in the current year or prior year periods related to swaps associated with advances.

 

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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 are 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 issued to fund advances and investments with shorter-interest rate reset characteristics.
The principal categories of Interest expense are summarized below. Changes in both rate and intermediation volume (average interest-costing liabilities), the mix of debt issuances between bonds and discount notes, and the impact of hedging strategies explain the changes in interest expense (dollars in thousands):
Table 3: Interest Expenses — Principal Categories
                                                 
    Three months ended September 30,     Nine months ended September 30,  
                    Percentage                     Percentage  
    2010     2009     Variance     2010     2009     Variance  
Interest Expense
                                               
Consolidated obligations-bonds
  $ 147,097     $ 191,708       (23.27 )%   $ 448,669     $ 783,695       (42.75 )%
Consolidated obligations-discount notes
    11,456       31,647       (63.80 )     33,069       173,228       (80.91 )
Deposits
    959       516       85.85       2,813       2,002       40.51  
Mandatorily redeemable capital stock
    879       1,807       (51.36 )     3,051       5,478       (44.30 )
Cash collateral held and other borrowings
    14           NM       14       49       (71.43 )
 
                                   
 
                                               
Total interest expense
  $ 160,405     $ 225,678       (28.92 )%   $ 487,616     $ 964,452       (49.44 )%
 
                                   
Reported 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 with swaps that generally qualify for hedge accounting. In the current year periods and the same periods in the prior year, the Bank economically hedged certain floating-rate bonds that were not indexed to 3-month LIBOR, and certain short-term fixed-rate debt and discount notes because it believed that the hedges would not be highly effective in offsetting changes in the fair values of the debt and the swap, and would not therefore qualify for hedge accounting.
Impact of hedging debt - The FHLBNY issues both fixed-rate callable and non-callable debt. Typically, the Bank issues callable debt with the simultaneous execution of cancellable interest rate swaps to modify the effective interest rate terms and the effective durations of its fixed-rate callable debt. A substantial percentage of non-callable fixed-rate debt is also swapped to “plain vanilla” LIBOR-indexed cash flows.
These hedging strategies benefit the Bank in two principal ways: (1) fixed-rate callable bond in conjunction with interest rate swap containing a call feature that mirrors the option embedded in the callable bond enables the FHLBNY to meet its funding needs at yields not otherwise directly attainable through the issuance of callable debt; and, (2) the issuance of fixed-rate debt and the simultaneous execution of an interest rate swap converts the debt to an adjustable-rate instrument tied to an index, typically 3-month LIBOR. Derivative strategies are used to manage the interest rate risk inherent in fixed-rate debt and certain floating-rate debt that are not indexed to 3-month LIBOR rates. The strategies are designed to protect future interest income. The economic hedge of debt tied to indices other than 3-month LIBOR (Prime, Federal funds, and 1-month LIBOR) is designed to effectively convert the cash flows of the debt to 3-month LIBOR.
The table below summarizes interest expense paid on consolidated obligation bonds and discount notes and the impact of interest rate swaps (in thousands):
Table 4: Impact of Interest Rate Swaps on Consolidated Obligation Interest Expense
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Consolidated bonds and discount notes-Interest expense
                               
Bonds-Interest expense before adjustment for swaps
  $ 285,874     $ 343,175     $ 933,744     $ 1,167,845  
Discount notes-Interest expense before adjustment for swaps
    11,456       31,647       33,069       173,702  
Net interest adjustment for interest rate swaps 1
    (138,777 )     (151,467 )     (485,075 )     (384,624 )
 
                       
 
                               
Total Consolidated bonds and discount notes-interest expense reported
  $ 158,553     $ 223,355     $ 481,738     $ 956,923  
 
                       
     
1   Interest portion only

 

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Net Interest Income
Net interest income is the principal source of revenue for the Bank, and represents the difference between interest income from interest-earning assets and interest expense paid on interest-costing liabilities. Net interest income is impacted by a variety of factors:
  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 deploys 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 contributor for the FHLBNY.
All of these factors may fluctuate based on changes in interest rates, demand by members for advances, investor demand for debt issued by the FHLBNY, the change in the spread between the yields on advances and investments, and the cost of financing these assets by the issuance of debt to investors.
The following table summarizes key changes in the components of Net interest income (dollars in thousands):
Table 5: Components of Net Interest Income
                         
    Three months ended September 30,  
                    Percentage  
    2010     2009     Variance  
Interest Income
                       
Advances
  $ 173,459     $ 240,573       (27.90 )%
Interest-bearing deposits
    1,699       1,014       67.55  
Federal funds sold
    2,253       1,864       20.87  
Available-for-sale securities
    7,580       6,590       15.02  
Held-to-maturity securities
                       
Long-term securities
    84,242       111,232       (24.26 )
Certificates of deposit
          851       (100.00 )
Mortgage loans held-for-portfolio
    16,333       17,405       (6.16 )
Loans to other FHLBanks and other
          1       (100.00 )
 
                 
 
                       
Total interest income
    285,566       379,530       (24.76 )
 
                 
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    147,097       191,708       (23.27 )
Consolidated obligations-discount notes
    11,456       31,647       (63.80 )
Deposits
    959       516       85.85  
Mandatorily redeemable capital stock
    879       1,807       (51.36 )
Cash collateral held and other borrowings
    14             N/A  
 
                 
 
                       
Total interest expense
    160,405       225,678       (28.92 )
 
                 
 
                       
Net interest income before provision for credit losses
  $ 125,161     $ 153,852       (18.65 )%
 
                 
                         
    Nine months ended September 30,  
                    Percentage  
    2010     2009     Variance  
Interest Income
                       
Advances
  $ 477,303     $ 1,094,089       (56.37 )%
Interest-bearing deposits
    3,766       19,054       (80.24 )
Federal funds sold
    6,600       1,933       241.44  
Available-for-sale securities
    23,128       22,881       1.08  
Held-to-maturity securities
                       
Long-term securities
    274,686       355,916       (22.82 )
Certificates of deposit
          1,392       (100.00 )
Mortgage loans held-for-portfolio
    49,689       54,679       (9.13 )
Loans to other FHLBanks and other
          1       (100.00 )
 
                 
 
                       
Total interest income
    835,172       1,549,945       (46.12 )
 
                 
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    448,669       783,695       (42.75 )
Consolidated obligations-discount notes
    33,069       173,228       (80.91 )
Deposits
    2,813       2,002       40.51  
Mandatorily redeemable capital stock
    3,051       5,478       (44.30 )
Cash collateral held and other borrowings
    14       49       (71.43 )
 
                 
 
                       
Total interest expense
    487,616       964,452       (49.44 )
 
                 
 
                       
Net interest income before provision for credit losses
  $ 347,556     $ 585,493       (40.64 )%
 
                 

 

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In the 2010 current quarter and year-to-date periods, Net interest income declined from the same periods in 2009. Net interest income is directly impacted by transaction volumes, as measured by average balances of interest earning assets, and by the prevailing balance sheet yields, as measured by coupons on earning assets minus yields paid on interest costing liabilities net of the cash flows paid or received on interest rate derivatives that qualified under hedge accounting rules.
Net interest income, a key metric for the FHLBNY and the primary contributor to Net income, was adversely affected in 2010, and contracted to levels more typical of the years before 2009, primarily because (1) business volume as measured by advances to members declined in the current year relative to 2009, and (2) the Bank’s funding advantages experienced in 2009 weakened in 2010.
Funding environment – Pricing of FHLBank issued discount notes has deteriorated in 2010, relative to 2009. In much of 2009, discount notes had been successfully utilized when such debt could be issued at wide advantageous spreads to LIBOR, and was one source of the funding advantage in 2009. With the easing of the credit crises and market normalization appearing to have set in, FHLBank discount note spread advantage to LIBOR seems to have returned to pre-crises ranges. At those levels, as a funding tool, discount notes were not as attractive as short-term callable bonds or floating rate debt and the FHLBNY reduced its reliance on discount notes in 2010. Discount note pricing has been relatively stable, driven by (1) increased investor demand (primarily from the money market funds) for the 60-day maturity discount notes. Demand for this particular maturity notes was due to the amendment to SEC’s Rule 2a-7 that impacted the money market industry, a major investor group for the FHLBank discount notes, and (2) Federal Reserve Board’s (“FRB”) action to support Treasury bills by issuing enough Treasury bills each week to replace maturing bills, and has tended to stabilize yield volatility, or yields to collapse to zero for bills, and has also reduced yield volatility for FHLB discount notes.
The 3-month LIBOR index is a vital indicator as the FHLBNY attempts to execute interest rate swaps to synthetically convert fixed-rate cash flows to sub-LIBOR cash flows, earning the FHLBNY a spread. The FHLBNY uses interest rate swaps to effectively change the repricing characteristics of a significant portion of its fixed-rate advances and consolidated obligation debt to match shorter-term LIBOR rates that reprice at intervals of three-months or less. When the Bank executes an interest rate swap to change the fixed payments on its debt to a LIBOR rate, the spread between the fixed payments and the LIBOR cash receipts results in the FHLBNY’s effective funding cost. Consequently, the current level of spread between the 3-month LIBOR rate and the swap rate for a fixed-rate FHLBank debt has an impact on the FHLBNY’s profitability. Also, the change in the absolute level of the index tends to impact the sub-LIBOR spread, which in turn, impacts interest margin and profitability.
Both the absolute level of the 3-month LIBOR index and the discount note spreads to swap rates have been uneven during 2010, and have caused the FHLBNY to shift its funding mix to accommodate changing circumstances. The 3-month LIBOR index declined to 29 basis points at September 30, 2010, down from 53 basis points at June 30, 2010, causing adverse spread compression in the 2010 third quarter. In response to changing interest rate market conditions, the FHLBNY made tactical changes to its funding mix by reducing issuances of discount notes in the 2010 third quarter. In mid-2010 second quarter, the increase in the 3-month LIBOR had benefited the pricing of short- and intermediate-term FHLBank bonds as well as discount notes. In the 2010 first quarter, the very low LIBOR level provided very little opportunity for FHLBank bonds and discount notes to yield their historic sub-LIBOR spreads.
Spreads on intermediate-term FHLBank issued bonds have improved in 2010 from the height of the credit crises and appear to have stabilized, although spreads have not returned to the pre-crises levels. Spreads on longer-term bonds have remained at disadvantageous levels well above the historic ranges.
Callable FHLBank issued bonds have declined to their all time lows as the low interest rate environment is fueling increased redemption, which has driven up investor liquidity in an environment in which there is already a shortage of high quality, high yielding assets. This has caused further tightening of spreads for the FHLBank callable debt. Short lockout callable bonds are an exception and have benefited from the relatively attractive funding afforded by inexpensive optionality.
Impact of business volume - Decline in member driven advance business volume, as measured by average advances outstanding, was the contributing factor to the decline of Net interest income in the 2010 third quarter and year-to-date periods. Average outstanding advances in the 2010 third quarter was $84.2 billion down from $96.7 billion in the same period in 2009. Balance sheet contraction caused Net interest income to decline by $29.9 million over the same period in 2009. The impact of balance sheet contraction was even more significant on a year-to-date basis, and caused Net interest income to compress by $101.0 million in 2010 relative to the same period in 2009. For more information, see Table 9, Rate & Volume Analysis.
Additionally, in 2010, certain higher-yielding intermediate-term advances matured, and were replaced by lower yielding advances, and that too has tended to lower Net interest income.
Impact of lower interest income from investing member capital — The FHLBNY earns significant interest income from investing its members’ capital to fund interest-earning assets. Such earnings are sensitive to the changes in short-term interest rates (Rate effects), as well as the average outstanding capital and non-interest bearing liabilities (Volume effects). In the 2010 year-to-date period, the FHLBNY earned less interest income from investing members’ capital and net non-interest assets compared to the same period in the prior year. The primary cause was the decline in stockholders capital stock which has declined in parallel with the lower volume of advances borrowed by members. As capital declines, the FHLBNY has lower amounts of deployed capital to invest and enhance interest income. For more information, see Table 8: Spread and Yield Analysis and Table 9: Rate and Volume Analysis.

 

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Impact of qualifying hedges on Net interest income - The Bank deploys hedging strategies to protect future net interest income that may reduce income in the short-term. On a GAAP basis, the impact of derivatives was to reduce Net interest income for the current quarter and year-to-date basis over the same periods in 2009. For more information, see Table 6, below:
The following table summarizes the impact of net interest adjustments from hedge qualifying interest-rate swaps (in thousands):
Table 6: Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps 1
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
 
                               
Interest Income
  $ 763,779     $ 882,644     $ 2,354,041     $ 2,801,555  
Net interest adjustment from interest rate swaps
    (478,213 )     (503,114 )     (1,518,869 )     (1,251,610 )
 
                       
Reported interest income
    285,566       379,530       835,172       1,549,945  
 
                       
 
                               
Interest Expense
    299,182       377,145       972,691       1,349,076  
Net interest adjustment from interest rate swaps
    (138,777 )     (151,467 )     (485,075 )     (384,624 )
 
                       
Reported interest expense
    160,405       225,678       487,616       964,452  
 
                       
 
                               
Net interest income (Margin)
  $ 125,161     $ 153,852     $ 347,556     $ 585,493  
 
                       
 
                               
Net interest adjustment — interest rate swaps
  $ (339,436 )   $ (351,647 )   $ (1,033,794 )   $ (866,986 )
 
                       
     
1   Net interest accruals of derivatives designated in a fair value or cash flow hedge qualifying under the derivatives and hedge accounting rules were recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities, and had a significant impact on Net interest income.
Impact of economic hedges on Net interest income — The FHLBNY executes certain transactions designated as economic hedges, primarily as hedges of FHLBNY debt. Under existing accounting rules, the interest income or expense generated from the derivatives designated as economic hedges are not reported as a component of Net interest income although they have an economic impact on Net interest income. Under GAAP, interest income or expense from such derivatives are recorded as derivative gains and losses in Other income (loss).
In the 2010 current quarter, on an economic basis, the economic impact of derivatives would have been to increase GAAP Net interest income by $7.9 million. In the same period in 2009, on an economic basis, the impact would have been to decrease GAAP Net interest expense by $19.1 million. On a year-to-date basis, 2010 GAAP Net interest income would have increased by $67.8 million. In contrast, 2009 GAAP Net interest income would have declined by $36.9 million. The reporting classification of interest income or expense associated with swaps designated as economic hedges has no impact on Net income as these adjustments are either reported as a component of Net interest income or as a component of Other income as gains or losses from hedging activities. See Table 7 for additional information.

 

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The following table contrasts Net interest income, Net income spread and Return on earning assets between GAAP and economic basis (dollar amounts in thousands):
Table 7: GAAP Versus Economic Basis — Contrasting Net Interest Income, Net Income Spread and Return on Earning Assets 2
                                                 
    Three months ended September 30, 2010     Three months ended September 30, 2009  
    Amount     ROA     Net Spread     Amount     ROA     Net Spread  
 
                                               
GAAP net interest income
  $ 125,161       0.47 %     0.41 %   $ 153,852       0.51 %     0.45 %
 
                                               
Interest income (expense)
                                               
Swaps not designated in a hedging relationship
    7,854       0.03       0.03       19,141       0.06       0.07  
 
                                   
 
                                               
Economic net interest income
  $ 133,015       0.50 %     0.44 %   $ 172,993       0.57 %     0.52 %
 
                                   
                                                 
    Nine months ended September 30, 2010     Nine months ended September 30, 2009  
    Amount     ROA     Net Spread     Amount     ROA     Net Spread  
 
                                               
GAAP net interest income
  $ 347,556       0.43 %     0.38 %   $ 585,493       0.61 %     0.53 %
 
                                               
Interest income (expense)
                                               
Swaps not designated in a hedging relationship
    67,822       0.08       0.09       (36,869 )     (0.03 )     (0.05 )
 
                                   
 
                                               
Economic net interest income
  $ 415,378       0.51 %     0.47 %   $ 548,624       0.58 %     0.48 %
 
                                   
Explanation of the use of certain non-GAAP measures of Interest Income and Expense, Net Interest income and margin. The FHLBNY has presented its results of operations in accordance with U.S. generally accepted accounting principles. The FHLBNY has also presented certain information regarding its Interest Income and Expense, Net Interest income and Net Interest spread that combines interest expense on debt with net interest paid on interest rate swaps associated with debt that were hedged on an economic basis. These are non-GAAP financial measures used by management that the FHLBNY believes are useful to investors and members of the FHLBNY in understanding the Bank’s operational performance as well as business and performance trends. Although the FHLBNY believes these non-GAAP financial measures enhance investor and members’ understanding of the Bank’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. When discussing non-GAAP measures, the Bank has provided GAAP measures in parallel.
     
2   In the 2010 quarters and in the same periods in 2009, significant amounts of swaps were designated as economic hedges of consolidated obligation debt in a hedging strategy that converted floating-rate debt indexed to 1-month LIBOR, the Prime rate, and the Federal Funds Effective rate to 3-month LIBOR cash flows. The Bank also economically hedged certain short-term fixed-rate debt and discount notes that it also believed would not be highly effective in offsetting changes in the fair values of the debt and the swap. Aggregate swap accruals for economic hedges represented cash in-flows and out-flows. In compliance with accounting standards for derivatives and hedging, interest income and expense from derivatives that did not qualify under hedge accounting were recorded as derivative gains and losses in Other income (loss) as a Net realized and unrealized gain (loss) from derivatives and hedging activities.

 

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Spread and Yield Analysis
Average balance sheet information is presented below as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average was calculated for the period. When daily weighted average balance information was not available, a simple monthly average balance was calculated. Average yields were derived by dividing income by the average balances of the related assets and average costs are derived by dividing expenses by the average balances of the related liabilities.
Table 8: Spread and Yield Analysis
                                                 
    Three months ended September 30,  
    2010     2009  
            Interest                     Interest        
    Average     Income/             Average     Income/        
(Dollars in thousands)   Balance     Expense     Rate 1     Balance     Expense     Rate 1  
Earning Assets:
                                               
Advances
  $ 84,163,767     $ 173,459       0.82 %   $ 96,703,710     $ 240,573       0.99 %
Certificates of deposit and other
    3,297,811       1,699       0.20       4,105,978       1,866       0.18  
Federal funds sold and other overnight funds
    5,339,728       2,253       0.17       5,105,043       1,864       0.14  
Investments
    11,633,953       91,822       3.13       12,907,450       117,822       3.62  
Mortgage and other loans
    1,273,893       16,333       5.09       1,360,907       17,405       5.07  
 
                                   
 
                                               
Total interest-earning assets
  $ 105,709,152     $ 285,566       1.07 %   $ 120,183,088     $ 379,530       1.25 %
 
                                   
 
                                               
Funded By:
                                               
Consolidated obligations-bonds
  $ 69,817,290     $ 147,097       0.84     $ 69,604,012     $ 191,708       1.09  
Consolidated obligations-discount notes
    21,316,412       11,456       0.21       39,520,933       31,647       0.32  
Interest-bearing deposits and other borrowings
    5,089,995       973       0.08       2,084,189       516       0.10  
Mandatorily redeemable capital stock
    68,498       879       5.09       127,964       1,807       5.60  
 
                                   
 
                                               
Total interest-bearing liabilities
    96,292,195       160,405       0.66 %     111,337,098       225,678       0.80 %
 
                                           
 
                                               
Capital and other non-interest- bearing funds
    9,416,957                     8,845,990                
 
                                       
 
                                               
Total Funding
  $ 105,709,152     $ 160,405             $ 120,183,088     $ 225,678          
 
                                       
 
                                               
Net Interest Income/Spread
          $ 125,161       0.41 %           $ 153,852       0.45 %
 
                                       
 
                                               
Net Interest Margin (Net interest income/Earning Assets)
                    0.47 %                     0.51 %
 
                                           
     
1   Reported yields with respect to advances and debt may not necessarily equal the coupons on the instruments as derivatives are extensively used to change the yield and optionality characteristics of the underlying hedged items. When fixed-rate debt is issued by the Bank and hedged with an interest rate derivative, it effectively converts the debt into a simple floating-rate bond. Similarly, the Bank makes fixed-rate advances to members and hedges the advance with a pay-fixed, receive-variable interest rate derivative that effectively converts the fixed-rate asset to one that floats with prevailing LIBOR rates. Average balance sheet information is presented as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average balance is calculated for the period. When daily weighted average balance information is not available, a simple monthly average balance is calculated. Average yields are derived by dividing income by the average balances of the related assets and average costs are derived by dividing expenses by the average balances of the related liabilities. Yields and rates are annualized.
                                                 
    Nine months ended September 30,  
    2010     2009  
            Interest                     Interest        
    Average     Income/             Average     Income/        
(Dollars in thousands)   Balance     Expense     Rate 1     Balance     Expense     Rate 1  
Earning Assets:
                                               
Advances
  $ 87,036,068     $ 477,303       0.73 %   $ 100,573,968     $ 1,094,089       1.45 %
Certificates of deposit and other
    2,619,259       3,766       0.19       3,244,842       20,447       0.84  
Federal funds sold and other overnight funds
    5,682,315       6,600       0.16       9,640,541       1,933       0.03  
Investments
    12,116,261       297,814       3.29       12,660,109       378,797       4.00  
Mortgage and other loans
    1,284,879       49,689       5.17       1,404,958       54,679       5.20  
 
                                   
 
                                               
Total interest-earning assets
  $ 108,738,782     $ 835,172       1.03 %   $ 127,524,418     $ 1,549,945       1.62 %
 
                                   
 
                                               
Funded By:
                                               
Consolidated obligations-bonds
  $ 71,934,296     $ 448,669       0.83     $ 71,387,598     $ 783,695       1.47  
Consolidated obligations-discount notes
    22,730,205       33,069       0.19       44,783,185       173,228       0.52  
Interest-bearing deposits and other borrowings
    5,119,117       2,827       0.07       2,040,807       2,051       0.13  
Mandatorily redeemable capital stock
    90,964       3,051       4.48       135,084       5,478       5.42  
 
                                   
 
                                               
Total interest-bearing liabilities
    99,874,582       487,616       0.65 %     118,346,674       964,452       1.09 %
 
                                           
 
                                               
Capital and other non-interest- bearing funds
    8,864,200                     9,177,744                
 
                                       
 
                                               
Total Funding
  $ 108,738,782     $ 487,616             $ 127,524,418     $ 964,452          
 
                                       
 
                                               
Net Interest Income/Spread
          $ 347,556       0.38 %           $ 585,493       0.53 %
 
                                       
 
                                               
Net Interest Margin (Net interest income/Earning Assets)
                    0.43 %                     0.61 %
 
                                           

 

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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 tables present the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected the FHLBNY’s interest income and interest expense (in thousands).
Table 9: Rate and Volume Analysis
                         
    For the three months ended  
    September 30, 2010 vs. September 30, 2009  
    Increase (decrease)  
    Volume     Rate     Total  
Interest Income
                       
Advances
  $ (28,893 )   $ (38,221 )   $ (67,114 )
Certificates of deposit and other
    (397 )     230       (167 )
Federal funds sold and other overnight funds
    89       300       389  
Investments
    (10,962 )     (15,038 )     (26,000 )
Mortgage loans and other loans
    (1,115 )     43       (1,072 )
 
                 
 
                       
Total interest income
    (41,278 )     (52,686 )     (93,964 )
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    586       (45,197 )     (44,611 )
Consolidated obligations-discount notes
    (11,780 )     (8,411 )     (20,191 )
Deposits and borrowings
    597       (140 )     457  
Mandatorily redeemable capital stock
    (777 )     (151 )     (928 )
 
                 
 
                       
Total interest expense
    (11,374 )     (53,899 )     (65,273 )
 
                 
 
                       
Changes in Net Interest Income
  $ (29,904 )   $ 1,213     $ (28,691 )
 
                 
                         
    For the nine months ended  
    September 30, 2010 vs. September 30, 2009  
    Increase (decrease)  
    Volume     Rate     Total  
Interest Income
                       
Advances
  $ (131,680 )   $ (485,106 )   $ (616,786 )
Certificates of deposit and other
    (3,334 )     (13,347 )     (16,681 )
Federal funds sold and other overnight funds
    (1,094 )     5,761       4,667  
Investments
    (15,709 )     (65,274 )     (80,983 )
Mortgage loans and other loans
    (4,645 )     (345 )     (4,990 )
 
                 
 
                       
Total interest income
    (156,462 )     (558,311 )     (714,773 )
 
                       
Interest Expense
                       
Consolidated obligations-bonds
    5,957       (340,983 )     (335,026 )
Consolidated obligations-discount notes
    (61,827 )     (78,332 )     (140,159 )
Deposits and borrowings
    2,019       (1,243 )     776  
Mandatorily redeemable capital stock
    (1,586 )     (841 )     (2,427 )
 
                 
 
                       
Total interest expense
    (55,437 )     (421,399 )     (476,836 )
 
                 
 
                       
Changes in Net Interest Income
  $ (101,025 )   $ (136,912 )   $ (237,937 )
 
                 

 

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Provision for Credit Losses and Analysis of Other Income (Loss)
The following table sets forth (1) changes in Provisions for credit losses, and (2) the main components of Other income (loss) (in thousands):
Table 10: Provision for Credit Losses on Mortgage Loans and Other Income
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Provision for credit losses on mortgage loans
  $ (231 )   $ (598 )   $ (1,137 )   $ (1,966 )
 
                       
 
                               
Other income (loss):
                               
Service fees
  $ 1,297     $ 1,101     $ 3,472     $ 3,181  
Instruments held at fair value-Unrealized (loss) gain
    55       426       (12,612 )     8,653  
 
                               
Total OTTI losses
    (498 )     (30,169 )     (4,573 )     (118,160 )
Net amount of impairment losses reclassified (from) to Accumulated other comprehensive loss
    (2,569 )     26,486       (3,164 )     103,884  
 
                       
Net impairment losses recognized in earnings
    (3,067 )     (3,683 )     (7,737 )     (14,276 )
 
                       
 
                               
Net realized and unrealized (loss) gain on derivatives and hedging activities
    8,444       59,639       (3,344 )     124,613  
Net realized gain from sale of available-for-sale securities
                708       721  
Other
    (624 )     (39 )     (1,493 )     59  
 
                       
Total other income (loss)
  $ 6,105     $ 57,444     $ (21,006 )   $ 122,951  
 
                       
Analysis of Allowances for Credit Losses, and Non-Interest Income (Loss)
The principal components are described below:
Allowance for Credit Losses
  Mortgage loans held-for-portfolio - The Bank recorded a provision of $0.2 million in the 2010 third quarter and $0.6 million in the same period in 2009 in the Statements of Income based on identification of inherent losses under a policy described more fully in Note – 1 Significant Accounting Policies and Estimates to the unaudited financial statements in this report. Charge offs were insignificant in all periods, and were substantially recovered through the credit enhancement provisions of MPF loans. Cumulatively, the allowance for credit losses recorded in the Statements of Condition have grown to $5.5 million at September 30, 2010, compared to $4.5 million at December 31, 2009. The FHLBNY believes the allowance for loan losses is adequate to cover the losses inherent in the FHLBNY’s mortgage loan portfolio at September 30, 2010 and December 31, 2009.
  Advances - The FHLBNY’s credit risk from advances at September 30, 2010 and December 31, 2009 were concentrated in commercial banks, savings institutions and insurance companies. All advances were fully collateralized during their entire term. In addition, borrowing members pledged their stock in the FHLBNY as additional collateral for advances. The FHLBNY has not experienced any losses on credit extended to any member since its inception. Based on the collateral held as security and prior repayment history, no allowance for losses is currently deemed necessary.
Service fees
Service fees are derived primarily from providing correspondent banking services to members and fees earned on standby letters of credit. The Bank does not consider income from such services as a significant element of its operations.
Redemption of financial instruments and extinguishment of debt
The Bank retires debt principally to reduce future debt costs when the associated asset is either prepaid or terminated early, and less frequently from prepayments of mortgage-backed securities. When assets are prepaid ahead of their expected or contractual maturities, the Bank also attempts to extinguish debt (consolidated obligation bonds) in order to realign asset and liability cash flow patterns. Bond retirement typically requires a payment of a premium resulting in a loss. The Bank typically receives prepayment fees when assets are prepaid, and the FHLBNY typically remains economically indifferent.
Net impairment losses recognized in earnings on held-to-maturity securities — Other-than-temporary impairment (“OTTI”)
In the 2010 third quarter, the FHLBNY identified credit re-impairment on four of its private-label mortgage-backed securities that had been previously impaired. Cash flow assessments of the expected credit performance of the securities resulted in the recognition of $3.1 million ($3.7 million in the prior year period) as credit OTTI which was a charge to earnings. The re-impairment in the 2010 third quarter was due to further deterioration in certain credit parameters of the securities. On a year-to-date basis, credit related OTTI of $7.7 million was charged to earnings, compared to $14.3 million in the prior year period.

 

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Net realized and unrealized gain (loss) on derivatives and hedging activities and Earnings impact of derivatives and hedging activities
The Bank may designate a derivative as either a hedge of (1) the fair value of a recognized fixed-rate asset or liability or an unrecognized firm commitment (fair value hedge); (2) a forecasted transaction; or (3) the variability of future cash flows of a floating-rate asset or liability (cash flow hedge). The Bank may also designate a derivative as an economic hedge, which does not qualify for hedge accounting under the accounting standards for derivatives and hedging.
Changes in the fair value of a derivative that qualifies as a fair value hedge under the accounting standards for derivatives and hedging and the offsetting gain or loss on the hedged asset or liability that is attributable to the hedged risk are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. To the extent that changes in the fair value of the derivative is not entirely offset by changes in the fair value of the hedged asset or liability, the net impact from hedging activities represents hedge ineffectiveness.
Net interest accruals of derivatives designated in qualifying fair value or cash flow hedges under the accounting standards for derivatives and hedging are recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities. Net interest accruals of derivatives that do not qualify for hedge accounting under the accounting standards for derivatives and hedging and interest received from “in-the-money” options are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The effective portion of changes in the fair value of a derivative that is designated and qualifies as a “cash flow” hedge under the accounting standards for derivatives and hedging are recorded in AOCI.
For all qualifying hedge relationships under the accounting standards for derivatives and hedging, hedge ineffectiveness resulting from differences between changes in fair values or cash flows of the hedged item and changes in fair value of the derivatives are recognized in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
Net realized and unrealized gains and losses from qualifying hedging activities under the accounting standards for derivatives and hedging are typically impacted by changes in the benchmark interest rate (designated as LIBOR by the FHLBNY) and the degree of ineffectiveness of hedging relationships between the change in the fair value of derivatives and the 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.
Earnings impact of Instruments held at fair value under the Fair Value Option
Under the accounting standards for the fair value option (“FVO”) for financial assets and liabilities, the FHLBNY elected to carry certain consolidated obligation bonds at fair value in the Statements of Condition. The Bank records changes in the unrealized fair value gains and losses on these liabilities in Other income. In general, transactions elected for the fair value option are in economic hedge relationships by the execution of interest rate swaps to offset the fair value volatility of consolidated obligation debt elected under the FVO.
The fair value adjustments on consolidated obligation debt carried at fair value in the 2010 third quarter and year-to-date period resulted in net unrealized fair value gains and losses as reported in Table 10 above. Such debt was primarily intermediate term bonds and discount notes. Gains are recorded when the debt’s market observable yields are higher then the contractual coupons or yields of the designated debt. Conversely, if market interest rates fall below the contractual coupons or yields, a fair value loss is recorded. Losses and gains would also result in the quarter when designated debt under the FVO matures and previously recorded unrealized gains and losses reverse in that period. When bonds and discount notes are recorded at fair value and are held to maturity, their cumulative fair value changes sum to zero at maturity.
The Bank hedges debt designated under the FVO on an economic basis by executing interest rate swaps with terms that match such debt. Unrealized gains and losses in the 2010 quarters and in the same periods in 2009 were almost entirely offset by fair value changes on derivatives that economically hedged the debt. For more information, see Table 11 below and Note 17 – Fair Values of financial instruments to the unaudited financial statements in this report.

 

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Earnings Impact of Derivatives and Hedging Activities
The FHLBNY reported the following net gains (losses) from derivatives and hedging activities (in thousands):
Table 11: Net Gains (Losses) from Derivatives and Hedging Activities
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    Gain (Loss)     Gain (Loss)     Gain (Loss)     Gain (Loss)  
Derivatives designated as hedging instruments
                               
Interest rate swaps
                               
Advances
  $ 1,215     $ 182     $ 439     $ (5,107 )
Consolidated obligations-bonds
    (1,507 )     167       2,308       18,187  
 
                       
Net gain (loss) related to fair value hedge ineffectiveness
    (292 )     349       2,747       13,080  
 
                       
Derivatives not designated as hedging instruments
                               
Economic hedges
                               
Interest rate swaps
                               
Advances
    (1,203 )     (1,475 )     (3,164 )     3,887  
Consolidated obligations-bonds
    6,753       28,420       (29,762 )     101,662  
Consolidated obligations-discount notes
    (231 )     (5,711 )     (4,331 )     409  
Member intermediation
    202       (16 )     357       (189 )
Balance sheet-macro hedges swaps
          210       173       2,617  
 
                       
Fair Values
    5,521       21,428       (36,727 )     108,386  
Accrued interest-swaps
    2,381       18,362       46,900       (37,772 )
Accrued interest-intermediation
    42       20       91       64  
 
                       
Interest accrual
    2,423       18,382       46,991       (37,708 )
 
                       
Total swaps
    7,944       39,810       10,264       70,678  
 
                       
Caps and floors
                               
Advances
    (19 )     (305 )     (418 )     (1,056 )
Balance sheet
    (14,618 )     19,196       (47,901 )     50,613  
 
                       
Fair Values
    (14,637 )     18,891       (48,319 )     49,557  
Accrued interest-options
          (1,786 )     (2,598 )     (3,731 )
 
                       
Total caps and floors
    (14,637 )     17,105       (50,917 )     45,826  
 
                       
Mortgage delivery commitments
    257       47       811       (49 )
 
                       
Swaps economically hedging instruments designated under FVO
                               
Consolidated obligations-bonds
    8,025       1,549       10,381       (5,825 )
Consolidated obligations-discount notes
    1,674             2,448        
 
                       
Fair values
    9,699       1,549       12,829       (5,825 )
Accrued interest on swaps
    5,473       779       20,922       903  
 
                       
Swaps hedging insturments designated under FVO
    15,172       2,328       33,751       (4,922 )
 
                       
Net gain (loss) related to derivatives not designated as hedging instruments
    8,736       59,290       (6,091 )     111,533  
 
                       
Net realized and unrealized (loss) gain on derivatives and hedging activities
  $ 8,444     $ 59,639     $ (3,344 )   $ 124,613  
 
                       
Key components of hedging gains and losses were primarily due to:
  Hedge ineffectiveness from fair value hedges of advances and consolidated obligation liabilities that qualified for hedge accounting treatment. Hedge ineffectiveness is typically the difference between changes in fair values of hedged consolidated obligation bonds and advances due to changes in the benchmark rate (adopted as the 3-month LIBOR rate) and changes in the fair value of the associated derivatives.
  Fair value changes of interest rate swaps designated in economic hedges of consolidated obligation debt, without the offsetting benefit of fair value changes of the hedged debt.
  Fair value changes of interest rate caps designated in economic hedges of GSE issued capped floating-rate MBS. Market pricing of the tenor and strikes of caps owned by the FHLBNY has fallen steeply since December 31, 2009 primarily because of lower volatilities for such caps. As a result, purchased caps are exhibiting fair value losses. The fair values of the caps, which stood at $23.6 million at September 30, 2010, will ultimately decline to zero if the caps are held to their contractual maturities.
  Swap income or expense, primarily swap interest accruals, associated with swaps designated as economic hedges.
Qualifying hedges under the accounting standards for derivatives and hedging - Hedge ineffectiveness occurs when changes in the fair value of the derivative and the associated hedged financial instrument, generally debt or an advance, do not perfectly offset each other. Hedge ineffectiveness is associated with changes in the benchmark interest rate and volatility, and the extent of the mismatch of the structures of the derivative and the hedged financial instrument.

 

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Relatively stable interest rates and volatilities in the 2010 third quarter and in the same period in 2009 kept hedge ineffectiveness to insignificant levels. On a year-to-date basis, in 2010 net ineffectiveness from qualifying hedges resulted in a gain of $2.7 million. In the same period in 2009, fair value ineffectiveness resulted in significant net gains of $13.1 million, in part due to the reversal of fair value losses of debt hedges that had matured in the prior year first two quarters (or were effectively matured when call options were exercised), and in part as a result of market volatility of interest rates causing fair values of hedged bonds to diverge from the swap fair values. Typically, the FHLBNY hedges its advances and bonds with structures that are almost identical, and gains and losses represented hedge ineffectiveness caused by the asymmetrical impact of interest rate volatility on hedged debt and advances and associated swaps.
Economic hedges – An economic hedge represents derivative transactions that are an approved risk management hedge but may not qualify for hedge accounting treatment under the accounting standards for derivatives and hedging. When derivatives are designated as economic hedges, the fair value changes due to changes in the interest rate and volatility of rates are recorded through earnings without the offsetting change in the fair values of the hedged advances and debt as would be afforded under the derivatives and hedge accounting rules. In general, the FHLBNY’s derivatives are held to maturity or to their call or put dates. At inception, the fair value is “at market” and is generally zero. Until the derivative matures or is called or put on pre-determined dates, fair values will fluctuate with changes in the interest rate environment and volatility observed in the swap market. At maturity or scheduled call or put dates, the fair value will generally reverse to zero as the Bank’s derivatives settle at par. Therefore, nearly all of the cumulative net gains and losses that are unrealized at a point in time will reverse over the remaining contractual terms so that the cumulative gains or losses will sum to zero over the contractual maturity, scheduled call, or put dates.
However, interest income and expense have economic consequences since they are the result of exchanges of cash payments or receipts. Additionally, if a derivative 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. On the other hand, when swaps qualify for hedge accounting treatment, interest income and interest expense from interest rate swaps are reported as a component of Net interest income together with interest on the instrument being hedged.
Economic hedges
Interest rate swaps Fair value changes – The principal components of changes in the fair values of interest rate swaps in economic hedges, often referred to as “one-sided marks” were:
  Consolidated bond economic hedges – Unrealized gains and losses were generated primarily by: (1) Basis swaps that synthetically converted floating-rate debt (based on non- 3-month LIBOR: Prime rate, Federal funds rate, and 1-month LIBOR rate) to 3-month LIBOR cash flows, and (2) Short-term callable debt swapped by mirror image interest rate swaps. The “pay-leg” of the basis swaps floats with changes to the 3-month LIBOR index. The “receive-leg” floats with changes to indices other than 3-month LIBOR. In 2010, a significant percentage of basis swaps matured, or the swaps were nearing maturity and unrealized gains at December 31, 2009 reversed. When swaps mature, all previously recorded fair value gains and losses reverse. In the 2010 third quarter, recorded gains were reversal of previously recorded net unrealized losses, primarily due to maturing short-term cancellable swaps in economic hedges of callable bonds.
  Consolidated discount note economic hedges – The FHLBNY hedges the principal amounts of certain term discount notes to convert fixed cash flows to LIBOR indexed cash flows. Fair value losses are all unrealized and will reverse over time. In a declining interest rate environment, the pay-fixed, receive floating swaps are exhibiting fair value losses.
Interest rate swaps — Cash flows (Net interest accruals) – Swap interest accruals are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities if the swap is designated as an economic hedge. If the swap qualifies for hedge accounting treatment, cash flows are recorded as a component of Net interest income. The classification of swap accruals, either as a component of Net interest income or derivatives and hedging activities, has no impact on Net income.
In the 2010 third quarter and year-to-date period, net interest accrual income represented the net cash in-flows primarily from basis swaps hedging the basis risk of changes in floating-rate debt that were indexed to rates other than 3-month LIBOR. Under the contractual terms of the basis swaps the FHLBNY is receiving cash flows indexed to an agreed upon spread to the daily Federal funds effective rate, the 1-month LIBOR rate, and the Prime rate, and in return paying cash flows indexed to an agreed upon spread to the 3-month LIBOR rate.
Interest rate caps – Unfavorable fair values changes of purchased caps resulted in net unrealized fair value losses in 2010. In a declining interest rate environment at September 30, 2010, relative to December 31, 2009 and June 30, 2010, fair values of purchased caps are exhibiting fair value losses. Fair values of interest rate caps were $23.6 million, down from $38.2 million at June 30, 2010, and $71.0 million at December 31, 2009. The fair values of the caps will decline to zero over the contractual life of the caps if held to maturity.
Swaps economically hedging instruments designated under the FVO – In a declining interest rate environment, the receive fixed, pay float (indexed to LIBOR) were in an unrealized fair value gain position. Such gains will also decline to zero if held to maturity or to their call dates.

 

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Derivative gains and losses reclassified from Accumulated other comprehensive income (loss) to current period income — The following table summarizes changes in derivative gains and (losses) and reclassifications into earnings from AOCI in the Statements of Condition (in thousands):
Table 12: Gains/(Losses) Reclassified from AOCI to Current Period Income from Cash Flow Hedges
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
Accumulated other comprehensive income/(loss) from cash flow hedges   2010     2009     2010     2009  
 
                               
Beginning of period
  $ (19,614 )   $ (26,402 )   $ (22,683 )   $ (30,191 )
Net hedging transactions
                (472 )      
Reclassified into earnings
    1,882       1,898       5,423       5,687  
 
                       
 
                               
End of period
  $ (17,732 )   $ (24,504 )   $ (17,732 )   $ (24,504 )
 
                       
Cash Flow Hedges
In the 2010 current quarter and year-to-date period, fair value basis were reclassified from AOCI as interest expense in parallel with the recognition of interest expense of the debt that had been hedged by “cash flow hedges” in prior years. Fair value basis from settled hedges in the 2010 current quarter and year-to-date periods were not material.
In 2010 and 2009 no material amounts were reclassified from AOCI into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. Ineffectiveness from hedges designated as cash flow hedges was not material in any periods reported in this Form 10-Q. Over the next twelve months, it is expected that $5.3 million of net losses recorded in AOCI will be recognized as an interest expense.
There were no open anticipatory cash flow hedges at the current quarter end.
Debt extinguishment and sales of available-for-sale securities
In the second quarter of 2010, the Bank retired $250.0 million of consolidated obligation bond at an insignificant gain. No debt was retired in the first quarter or the third quarter of 2010. In the first quarter of 2010, the Bank sold mortgage-backed securities from its AFS portfolio at a gain of $0.7 million. No securities were sold in the 2010 second and third quarters.
Non-Interest Expense
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.

 

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Operating Expenses
The following table sets forth the major categories of operating expenses (dollars in thousands):
Table 13: Operating Expenses
                                 
    Three months ended September 30,  
            Percentage of             Percentage of  
    2010     total     2009     total  
 
                               
Salaries and employee benefits
  $ 15,648       72.25 %   $ 12,075       67.80 %
Temporary workers
    30       0.14       3       0.02  
Occupancy
    1,131       5.22       1,128       6.33  
Depreciation and leasehold amortization
    1,444       6.67       1,369       7.69  
Computer service agreements and contractual services
    1,666       7.69       1,395       7.83  
Professional and legal fees
    385       1.78       356       2.00  
Other *
    1,353       6.25       1,484       8.33  
 
                       
 
                               
Total operating expenses
  $ 21,657       100.00 %   $ 17,810       100.00 %
 
                       
 
                               
Finance Agency and Office of Finance
  $ 2,036             $ 1,834          
 
                           
                                 
    Nine months ended September 30,  
            Percentage of             Percentage of  
    2010     total     2009     total  
 
                               
Salaries and employee benefits
  $ 41,458       67.69 %   $ 36,036       66.77 %
Temporary workers
    86       0.14       128       0.24  
Occupancy
    3,270       5.34       3,273       6.06  
Depreciation and leasehold amortization
    4,201       6.86       4,020       7.45  
Computer service agreements and contractual services
    6,018       9.83       4,670       8.65  
Professional and legal fees
    1,983       3.24       1,144       2.12  
Other *
    4,229       6.90       4,699       8.71  
 
                       
 
                               
Total operating expenses
  $ 61,245       100.00 %   $ 53,970       100.00 %
 
                       
 
                               
Finance Agency and Office of Finance
  $ 6,447             $ 5,663          
 
                           
     
*   Other primarily represents audit fees, director fees and expenses, insurance and telecommunications.
Staff increases and additional payments towards the Bank’s Defined Benefit Pension plan caused increases in operating expenses in 2010.

 

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Financial Condition: Assets, Liabilities, Capital, Commitments and Contingencies:
Table 14: Statements of Condition
                                 
                    Net change in     Net change in  
(Dollars in thousands)   September 30, 2010     December 31, 2009     dollar amount     percentage  
Assets
                               
Cash and due from banks
  $ 69,471     $ 2,189,252     $ (2,119,781 )     (96.83) %
Federal funds sold
    4,095,000       3,450,000       645,000       18.70  
Available-for-sale securities
    3,373,781       2,253,153       1,120,628       49.74  
Held-to-maturity securities
Long-term securities
    8,221,246       10,519,282       (2,298,036 )     (21.85 )
Advances
    85,697,171       94,348,751       (8,651,580 )     (9.17 )
Mortgage loans held-for-portfolio
    1,267,687       1,317,547       (49,860 )     (3.78 )
Accrued interest receivable
    305,763       340,510       (34,747 )     (10.20 )
Premises, software, and equipment
    14,550       14,792       (242 )     (1.64 )
Derivative assets
    32,425       8,280       24,145     NM  
Other assets
    16,444       19,339       (2,895 )     (14.97 )
 
                       
 
                               
Total assets
  $ 103,093,538     $ 114,460,906     $ (11,367,368 )     (9.93) %
 
                       
 
                               
Liabilities
                               
Deposits
                               
Interest-bearing demand
  $ 3,660,132     $ 2,616,812     $ 1,043,320       39.87 %
Non-interest bearing demand
    9,725       6,499       3,226       49.64  
Term
    60,400       7,200       53,200     NM  
 
                       
 
                               
Total deposits
    3,730,257       2,630,511       1,099,746       41.81  
 
                       
 
                               
Consolidated obligations
                               
Bonds
    74,918,893       74,007,978       910,915       1.23  
Discount notes
    17,787,908       30,827,639       (13,039,731 )     (42.30 )
 
                       
Total consolidated obligations
    92,706,801       104,835,617       (12,128,816 )     (11.57 )
 
                       
 
                               
Mandatorily redeemable capital stock
    67,348       126,294       (58,946 )     (46.67 )
 
                               
Accrued interest payable
    277,647       277,788       (141 )     (0.05 )
Affordable Housing Program
    137,995       144,489       (6,494 )     (4.49 )
Payable to REFCORP
    20,560       24,234       (3,674 )     (15.16 )
Derivative liabilities
    784,498       746,176       38,322       5.14  
Other liabilities
    101,448       72,506       28,942       39.92  
 
                       
 
                               
Total liabilities
    97,826,554       108,857,615       (11,031,061 )     (10.13 )
 
                       
 
                               
Capital
    5,266,984       5,603,291       (336,307 )     (6.00 )
 
                       
 
                               
Total liabilities and capital
  $ 103,093,538     $ 114,460,906     $ (11,367,368 )     (9.93) %
 
                       
Balance sheet overview
The FHLBNY continued to experience balance sheet contraction in the 2010 third quarter. Advances to member banks have remained steady at September 30, 2010, after two quarters of decline. Reported Advances stood at $85.7 billion at September 30, 2010, compared to $85.3 billion at June 30, 2010, and $94.3 billion at December 31, 2009, from a peak of approximately $109.1 billion in 2008. Reported balances include fair value basis of hedged advances. The decline from the balances at December 31, 2009 has occurred as member banks have taken advantage of improved availability of alternate funding sources such as deposits and senior unsecured borrowings in a more liquid market. Member demand for borrowed advances have also declined as loan demand from members’ customers may have stayed lukewarm due to nationally weak economic conditions.

 

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Advances - At September 30, 2010, the FHLBNY’s Total assets were $103.1 billion, a decrease of 9.9%, or $11.4 billion from December 31, 2009. The Bank’s balance sheet management strategy has been to keep balance sheet growth or decline in line with the changes in member demand for advances, which declined 9.2%.
(BAR GRAPH)
Investments - The FHLBNY’s investment strategies continue to be restrained, and were limited to investments in mortgage-backed securities (“MBS”) issued by GSEs and U.S. government agencies. Acquisitions even in such securities have been made when they justified the Bank’s risk-reward preferences. No MBS acquisitions were made in the held-to-maturity (“HTM”) securities portfolio in the 2010-second and third quarters. In the 2010 first quarter, the Bank added $174.0 million of GSE issued fixed-rate MBS.
Floating-rate GSE and U.S. government issued MBS were acquired for the Bank’s available-for-sale (“AFS”) portfolio in 2010 that kept acquisitions ahead of paydowns. Market pricing of GSE issued MBS improved at September 30, 2010 as liquidity appeared to return to the market place, and substantially all of MBS in the AFS portfolio were in net unrealized fair value gain positions. Fair values of the Bank’s private-label securities continue to be depressed, as market conditions for such securities remained uncertain. For more information about fair values of AFS and HTM securities, see Note 17 to the unaudited financial statements in this report.
Leverage - At September 30, 2010, balance sheet leverage was 19.6 times shareholders’ equity, compared to 20.4 times capital at December 31, 2009. The Bank’s balance sheet management strategy is to keep the balance sheet change in line with the changes in member demand for advances, although from time-to-time the Bank may maintain excess liquid investments to meet unexpected member demand for funds. Increases or decreases in investments have a direct impact on leverage, but generally, growth in or shrinkage of advances does not significantly impact balance sheet leverage under existing capital stock management practices. This is because changes in shareholders’ capital are in line with changes in advances, and the ratio of assets to capital generally remains unchanged. Under existing capital management practices, members are required to purchase capital stock to support their borrowings from the Bank, and when capital stock is in excess of the amount that is required to support advance borrowings, the Bank redeems the excess capital stock immediately. Therefore, stockholders’ capital increases and decreases with members’ advance borrowings, and the capital to asset ratios remains relatively unchanged. As capital increases or declines in line with higher or lower volumes of advances, the Bank may also adjust its assets by increasing or decreasing holdings of short-term investments in certificates of deposit, and, to some extent, its positions in Federal funds sold, which it inventories to accommodate unexpected member needs for liquidity.
Debt - In the 2010 third quarter and in the same period in 2009, the primary source of funds for the FHLBNY continued to be from issuance of consolidated obligation bonds and discount notes. Discount notes are consolidated obligations with maturities up to one year, and consolidated bonds have maturities of one year or longer. The mix between the use of discount notes and bonds has fluctuated during the 2010 first three quarters and through 2009, partly because of fluctuations in the market pricing of discount notes relative to the pricing of fixed-rate bonds with similar maturities, and partly because of the price attractiveness of short-term callable and non-callable bonds that could be swapped back to 3-month LIBOR rates, as an alternative to discount notes. In the 2010 first quarter, the Bank decreased its issuances of discount notes mainly because of unfavorable pricing relative to alternative funding, primarily short-term callable bonds. On an option adjusted basis, the effective duration of such callable bonds was shorter than its contractual maturities and achieved the Bank’s asset/liability management profile. In the second quarter, discount note pricing became favorable with the rise in the 3-month LIBOR index, and the Bank increased its usage of discount notes, which replaced maturing/called bonds. In the 2010 third quarter, the 3-month LIBOR index declined, spreads narrowed, and the FHLBNY reduced issuances of discount notes.

 

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Advances
The FHLBNY’s primary business is making collateralized loans, known as “advances”, to members.
Par amounts of advances outstanding had been steadily declining through the four quarters in 2009 and through to the 2010 second quarter. That trend was halted in the 2010 third quarter as borrowed advances held steady, with new borrowings that replaced maturing advances, and outstanding member advances at September 30, 2010 remained almost unchanged from the balance at June 30, 2010.
Reported book value of advances was $85.7 billion at September 30, 2010, slightly up from $85.3 billion at June 30, 2010, compared to $94.3 billion at December 31, 2009. Advance book value included fair value basis adjustments of $5.6 billion at September 30, 2010, compared to $4.7 billion at June 30, 2010 and $3.6 billion at December 31, 2009. Fair value basis adjustments of hedged advances are recorded under the hedge accounting provisions. When medium- and long-term interest rates rise or fall, the fair values of fixed-rate advances move in the opposite direction.
Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and term funding driven by economic factors, such as availability to the Bank’s members of alternative funding sources that are more attractive, or by the interest rate environment, and the outlook for the economy. Members may choose to prepay advances (which may generate prepayment penalty fees) based on their expectations of interest rate changes and demand for liquidity. Demand may also be influenced by the dividend payout to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership and activity stock. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or a non-member, the former members no longer qualify for membership and the FHLBNY may not offer renewals or additional advances to the former members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight lending if the former member borrowed short-term and overnight advances.
Advances — Product Types
The following table summarizes par values of advances by product type (dollars in thousands):
Table 15: Advances by Product Type
                                 
    September 30, 2010     December 31, 2009  
            Percentage             Percentage  
    Amounts     of total     Amounts     of total  
 
                               
Adjustable Rate Credit — ARCs
  $ 9,190,500       11.47 %   $ 14,100,850       15.54 %
Fixed Rate Advances
    67,148,859       83.83       71,943,468       79.29  
Short-Term Advances
    1,343,150       1.68       2,173,321       2.39  
Mortgage Matched Advances
    539,479       0.67       606,883       0.67  
Overnight & Line of Credit (OLOC) Advances
    905,786       1.13       926,517       1.02  
All other categories
    975,037       1.22       986,661       1.09  
 
                       
 
                               
Total par value
    80,102,811       100.00 %     90,737,700       100.00 %
 
                           
 
                               
Discount on AHP Advances
    (50 )             (260 )        
Hedging adjustments
    5,594,410               3,611,311          
 
                           
 
                               
Total
  $ 85,697,171             $ 94,348,751          
 
                           
Member demand for advance products
Fixed-rate advances and Adjustable-rate advances (“ARCs”) have been the more significant products that have declined in 2010 relative to the balances at December 31, 2009.
Adjustable Rate Advances (“ARC Advances”) - ARC advances declined steadily in 2009 and that trend has continued through the 2010 third quarter, as demand has remained weak. Generally, the FHLBNY’s larger members have been the more significant borrowers of ARCs.
ARC advances are medium- and long-term loans that can be linked to a variety of indices, such as 1-month LIBOR, 3-month LIBOR, the Federal funds rate, or Prime. Members use ARC advances to manage interest rate and basis risks by efficiently matching the interest rate index and repricing characteristics of floating-rate assets. The interest rate is set and reset (depending upon the maturity of the advance and the type of index) at a spread to that designated index. Principal is due at maturity and interest payments are due at each reset date, including the final payment date.

 

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Fixed-rate Advances - Fixed-rate advances, comprising putable and non-putable advances, remain the largest category of advances.
Member demand for fixed-rate advances has remained steady thus far in 2010. On aggregate, maturing advances have been replaced by new borrowings. Demand has been concentrated around medium-term advances, as members remain uncertain about locking into long-term advances perhaps because of unfavorable pricing of longer-term advances, or an uncertain outlook over the direction and timing of interest rate changes, or lukewarm demand from members’ customer base for longer-term fixed-rate loans.
A significant component of Fixed-rate advances is putable advances. 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. With a putable advance, the FHLBNY has the right to exercise the put option and terminate the advance at predetermined exercise date (s), which the FHLBNY normally would exercise when interest rates rise, and the borrower may then apply for a new advance at the then prevailing coupon and terms. In the present interest rate environment, the price advantage has not been significant because of constraints in offering longer-term-advances. The price advantage of a putable advance increases with the numbers of puts sold and the length of the term of a putable advance.
Fixed-rate advances are flexible funding tools that can be used by members to meet short- to long-term liquidity needs. Terms vary from two days to 30 years.
Member demand for the competitively priced putable advances had remained steady through the third quarter in 2009, contracted somewhat in the fourth quarter of 2009, and declined steadily through the 2010 second quarter as maturing putable advances were either not replaced, or replaced by bullet advance (without the put feature). Putable advances stood at $36.7 billion at September 30, 2010, slightly below $37.4 billion at June 30, 2010 and $38.6 billion at March 31, 2010. The amount outstanding at December 31, 2009 was $41.4 billion.
Short-term Advances - Demand for Short-term fixed-rate advances has remained very weak in the 2010 three quarters, a continuing trend from 2009. Borrowed amounts stood at $1.3 billion, slightly up from $1.0 billion at June 30, 2010, but down from $2.2 billion at December 31, 2009. By way of contrast, the outstanding balance was $7.8 billion at December 31, 2008.
Overnight advances - Overnight borrowings also remained lackluster in 2010, a continuation of the trend seen in 2009. Member demand for the overnight Advances may also reflect the seasonal needs of certain member banks for their short-term liquidity requirements. Some large members also use overnight advances to adjust their balance sheet in line with their own leverage targets.
The overnight advances program gives members a short-term, flexible, readily accessible revolving line of credit for immediate liquidity needs. Overnight Advances mature on the next business day, at which time the advance is repaid.
Merger Activity
Merger activity is an important factor and, if significant, would contribute to an uneven pattern in advance balances. Merger activity may result in the loss of new business if 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 thus far in 2010. The former member is not considered to have a significant borrowing potential.
Early 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 in the 2010 third quarter was $0.5 billion (par amount of advances). In the prior year third quarter, prepayments were only $92.0 million. On a year-to-date basis, prepayments totaled $3.0 billion in 2010, compared to $3.2 billion in the same period in 2009.
Prepayment fees recorded to Interest income were $3.7 million in the 2010 third quarter, compared to $0.2 million in the same period in 2009. On a year-to-date basis, prepayment fees were $9.7 million in 2010, compared to $21.2 million in the same period in 2009.
For advances that are prepaid and hedged under hedge accounting rules, the FHLBNY generally terminates the hedging relationship upon prepayment and adjusts the prepayment fees received for the associated fair value basis of the hedged prepaid advance.
Impact of Derivatives and hedging activities to the balance sheet carrying values of 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. Fair value changes of qualifying hedged advances under the derivatives and hedge accounting rules are recorded in the Statements of Income as a Net realized and unrealized gain (loss) on derivative and hedging activities, a component of Other income (loss). An offset is recorded as a fair value basis adjustment to the carrying amount of the advances in the Statements of Condition.

 

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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 and non-putable (“bullet”), to better match the FHLBNY’s cash flows, to enhance yields, and to manage risk from a changing interest rate environment.
  Converts at the time of issuance, certain simple fixed-rate bullet and putable fixed-rate advances into synthetic floating-rate advances by the simultaneous execution of interest rate swaps that convert the cash flows of the fixed-rate advances to conventional adjustable rate instruments tied to an index, typically 3-month LIBOR.
  Uses derivatives to manage the risks arising from changing market prices and volatility of a fixed coupon advance by matching the cash flows of the advance to the cash flows of the derivative, and making the FHLBNY indifferent to changes in market conditions. Putable advances are typically hedged by an offsetting derivative with a mirror-image call option with identical terms.
  Adjusts the reported carrying value of hedged fixed-rate advances for changes in their fair value (“fair value basis” or “fair value”) that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for advances in the Statements of Condition include fair value hedge basis adjustments.
The most significant element that impacts balance sheet reporting of advances is the recording of fair value basis adjustments to the carrying value of advances in the Statements of Condition. In addition, when putable advances are hedged by cancellable swaps, the possibility of exercise of the call shortens the expected maturity of the advance. The impact of derivatives to the Bank’s income is discussed in this MD&A under “Results of Operations”. Fair value basis adjustments as measured under the hedging rules are impacted by hedge volume, the interest rate environment, and the volatility of the interest rates.
Hedge volume - The Bank primarily hedges putable advances and certain “bullet” fixed-rate advances that qualify under the hedging provisions of the accounting standards for derivatives and hedging, and as economic hedges when the hedge accounting provisions are operationally difficult to establish, or a high degree of hedge effectiveness cannot be asserted.
At September 30, 2010, $61.6 billion of interest rate swaps hedged fixed-rate advances, compared to $66.0 billion at December 31, 2009 (See Table 28: Derivative Financial Instruments by Product). Except for an insignificant notional amount of derivatives that were designated as economic hedges of advances, the swaps were in a qualifying hedging relationship under the accounting standards for derivatives and hedging. Decline in the use of derivatives was consistent with the contraction of fixed-rate advances, which the FHLBNY typically hedges to convert fixed-rate cash flows to LIBOR-indexed cash flows through the use of interest rate swaps.
The largest component of interest rate swaps hedging advances at September 30, 2010 and December 31, 2009 was comprised of cancellable swaps that hedged a significant percentage of the $36.7 billion and $41.4 billion of putable advances at those dates (See Table 26: Derivative Hedging Strategies). Typically, 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 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. Notional amounts of non-cancellable swaps were $27.1 billion at September 30, 2010, compared to $26.0 billion at December 31, 2009.
Fair value basis adjustments - The Bank uses interest rate derivatives to hedge the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR, and is also the discounting basis for computing changes in fair values of hedged advances. Recorded fair value basis adjustments in the Statements of Condition were associated with hedging activities under the hedge accounting provisions. Advances designated at inception as economic hedges do not have any basis adjustments, and were insignificant. The reported carrying values of advances at September 30, 2010 included net unrealized fair value basis gains of $5.6 billion up from $3.6 billion at December 31, 2009 associated with hedged advances that qualified under hedge accounting rules at those dates. Fair value gains were consistent with the downward sloping forward yield curve at September 30, 2010 and December 31, 2009 that were projecting forward rates below the contractual coupons of hedged fixed-rate advances. Hedged-fixed rate advances had been issued in prior periods at the then prevailing higher interest-rate environment, and since hedged advances are typically fixed-rate, in a lower interest rate environment relative to the coupons of the advances, fixed-rate advances will exhibit net unrealized fair value basis gains.
The increase in net fair value basis adjustments of hedged Advances was primarily caused by the flattening of forward interest rates at September 30, 2010, relative to December 31, 2009, with the forward rates well below the same yields projected at December 31, 2009. At September 30, 2010, the yield curve was forecasting 0.64%, 1.29%, and 1.92% on the 3-year, 5-year and 7-year swap curves, compared to 1.67%, 2.68% and 3.38% at December 31, 2009. Fair values of hedged fixed-rate advances typically gain value when interest rates decline.

 

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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.
Investments
The FHLBNY maintains investments for liquidity purposes, to manage capital stock repurchases and redemptions, to provide additional earnings, and to ensure the availability of funds to meet the credit needs of its members. The FHLBNY also maintains longer-term investment portfolios, which are principally mortgage-backed securities issued by government-sponsored mortgage agencies, a smaller portfolio of MBS issued by private enterprises, and securities issued by state or local housing finance agencies. Finance Agency regulations prohibit the FHLBanks, including the FHLBNY, from investing in certain types of securities and limit the investment in mortgage- and asset-backed securities.
Investments -Policies 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. Mortgage- and asset-backed securities acquired must carry the highest ratings from Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Rating Services (“S&P”) at the time of purchase. Finance Agency regulations further limit the mortgage- and asset-backed investments of each FHLBank to 300 percent of that FHLBank’s capital. The FHLBNY was within the 300 percent limit for all periods reported. The FHLBNY’s investment in mortgage-backed securities during all periods reported complied with FHLBNY’s Board-approved policy of acquiring mortgage-backed securities issued or guaranteed by the government-sponsored housing enterprises, or prime residential mortgages rated triple-A by both Moody’s and Standard & Poor’s rating services at acquisition.
The FHLBNY’s practice is not to lend unsecured funds to members, including overnight Federal funds and certificates of deposit. The FHLBNY does not preclude or specifically seek out investments any differently than it would in the normal course of acquiring securities for investments, unless it is prohibited by existing regulations. Unsecured lending to members is not prohibited by Finance Agency regulations or Board of Directors’ policy. The FHLBNY is prohibited from purchasing a consolidated obligation issued directly by another FHLBank, but may acquire consolidated obligations for investment in the secondary market after the bond settles. There were no investments in consolidated obligations by the FHLBNY at September 30, 2010 or December 31, 2009. On March 24, 2008, the Board of Directors of the Federal Housing Finance Board, predecessor to the Finance Agency adopted Resolution 2008-08, which temporarily expanded the authority of a FHLBank to purchase mortgage-backed securities (“MBS”) under certain conditions. The resolution allowed a FHLBank to increase its 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 investments to be as much as 600 percent of the FHLBNY’s capital. The FHLBNY did not exercise the expanded authority provided under the temporary regulations to purchase MBS issued by Fannie Mae and Freddie Mac. The expanded authority expired in March 2010.
The following table summarizes changes in investments by categories (including held-to-maturity securities, available-for-sale securities, and money market investments). Amounts are after writing down (at the time of credit related OTTI) held-to-maturity impaired securities to fair values. No securities classified as available-for-sale were OTTI (dollars in thousands):
Table 16: Investments by Categories
                                 
    September 30,     December 31,     Dollar     Percentage  
    2010     2009     Variance     Variance  
 
                               
State and local housing finance agency obligations 1
  $ 740,256     $ 751,751     $ (11,495 )     (1.53) %
Mortgage-backed securities
                               
Available-for-sale securities, at fair value
    3,360,959       2,240,564       1,120,395       50.01  
Held-to-maturity securities, at carrying value
    7,480,990       9,767,531       (2,286,541 )     (23.41 )
 
                       
Total securities
    11,582,205       12,759,846       (1,177,641 )     (9.23 )
 
                               
Grantor trusts 2
    12,822       12,589       233       1.85  
Federal funds sold
    4,095,000       3,450,000       645,000       18.70  
 
                       
 
                               
Total investments
  $ 15,690,027     $ 16,222,435     $ (532,408 )     (3.28) %
 
                       
     
1   Classified as held-to-maturity securities, at carrying value.
 
2   Classified as available-for-sale securities, at fair value and represents investments in registered mutual funds and other fixed-income securities maintained under the grantor trusts.

 

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Long-term investments
Investments with original long-term contractual maturities were comprised of mortgage- and asset-backed securities, and investment in securities issued by state and local housing agencies. These investments were classified either as “Held-to-maturity” or as “Available-for-sale” securities in accordance with accounting standard on investments in debt and equity securities as amended by the guidance on recognition and presentation of other-than-temporary impairments. 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.
Mortgage-backed securities — By issuer
Issuer composition of held-to-maturity mortgage-backed securities was as follows (carrying values; dollars in thousands):
Table 17: Mortgage-Backed Securities — Held-to-Maturity by Issuer
                                 
    September 30,     Percentage     December 31,     Percentage  
    2010     of total     2009     of total  
 
 
U.S. government sponsored enterprise residential mortgage-backed securities
  $ 6,248,361       83.52 %   $ 8,482,139       86.84 %
U.S. agency residential mortgage-backed securities
    127,168       1.70       171,531       1.76  
U.S. government sponsored enterprise commercial mortgage-backed securities
    173,969       2.33              
U.S. agency commercial mortgage-backed securities
    48,953       0.65       49,526       0.51  
Private-label issued securities backed by home equity loans
    362,847       4.85       417,151       4.27  
Private-label issued residential mortgage-backed securities
    336,981       4.51       444,906       4.55  
Private-label issued securities backed by manufactured housing loans
    182,711       2.44       202,278       2.07  
 
                       
 
                               
Total Held-to-maturity securities-mortgage-backed securities
  $ 7,480,990       100.00 %   $ 9,767,531       100.00 %
 
                       
Held-to-maturity mortgage- and asset-backed securities (“MBS”) - The Bank’s conservative purchasing practice over the years is evidenced by the high concentration of MBS issued by the GSEs. Privately issued mortgage-backed securities made up the remaining 11.8% and 10.9% at September 30, 2010 and December 31, 2009.
Local and housing finance agency bonds - The FHLBNY had investments in primary public and private placements of taxable obligations of state and local housing finance authorities (“HFA”) classified as held-to-maturity. Investments in state and local housing finance bonds help to fund mortgages that finance low- and moderate-income housing. No additions were made in the 2010 three quarters.
Available-for-sale securities - The FHLBNY classifies investments that it may sell before maturity as available-for-sale (“AFS”) and carries them at fair value. Fair value changes are recorded in AOCI until the security is sold or is anticipated to be sold. Composition of FHLBNY’s available-for-sale securities was as follows (dollars in thousands):
Table 18: Available-for-Sale Securities — Composition
                                 
    September 30,     Percentage     December 31,     Percentage  
    2010     of total     2009     of total  
 
                               
Fannie Mae
  $ 2,275,326       67.70 %   $ 1,544,500       68.93 %
Freddie Mac
    1,085,633       32.30       696,064       31.07  
 
                       
Total AFS mortgage-backed securities
    3,360,959       100.00 %     2,240,564       100.00 %
 
                           
Grantor Trusts — Mutual funds
    12,822               12,589          
 
                           
Total Available-for-sale portfolio
  $ 3,373,781             $ 2,253,153          
 
                           
One hundred percent of AFS portfolio of mortgage-backed securities was comprised of securities issued by Fannie Mae and Freddie Mac. The Bank acquired $2.0 billion of GSE issued, triple-A rated MBS in the 2010 first three quarters. The Bank also has grantor trusts designed to fund current and potential future payments to retirees for supplemental pension plan obligations. The trusts are invested in money market funds, fixed-income and equity funds, and are designated as available-for-sale.
For more information and analysis with respect to investment securities, see Investment Quality in the section captioned Asset Quality and Concentration — Advances, Investment securities, Mortgage loans, and Counterparty risks in this MD&A. Also, see Notes 4 and 5 to the unaudited financial statements in this report.

 

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External rating information of the held-to-maturity portfolio was as follows. (Carrying values; in thousands):
Table 19: External Rating of the Held-to-Maturity Portfolio
                                                 
    September 30, 2010  
                                    Below        
                                    Investment        
    AAA-rated     AA-rated     A-rated     BBB-rated     Grade     Total  
Long-term securities
                                               
Mortgage-backed securities
  $ 6,977,063     $ 275,025     $ 44,215     $ 18,129     $ 166,557     $ 7,480,990  
State and local housing finance agency obligations
    71,596       592,594       19,845       56,221             740,256  
 
                                   
 
                                               
Total Long-term securities
    7,048,660       867,619       64,060       74,350       166,557       8,221,246  
 
                                   
 
                                               
Total
  $ 7,048,660     $ 867,619     $ 64,060     $ 74,350     $ 166,557     $ 8,221,246  
 
                                   
                                                 
    December 31, 2009  
                                    Below        
                                    Investment        
    AAA-rated     AA-rated     A-rated     BBB-rated     Grade     Total  
Long-term securities
                                               
Mortgage-backed securities
  $ 9,205,018     $ 299,314     $ 65,921     $ 31,261     $ 166,017     $ 9,767,531  
State and local housing finance agency obligations
    72,992       601,109       21,430       56,220             751,751  
 
                                   
 
                                               
Total Long-term securities
    9,278,010       900,423       87,351       87,481       166,017       10,519,282  
 
                                   
 
                                               
Total
  $ 9,278,010     $ 900,423     $ 87,351     $ 87,481     $ 166,017     $ 10,519,282  
 
                                   
External rating information of the available-for-sale portfolio was as follows (Carrying values of AFS investments are at fair values; in thousands):
Table 20: External Rating of the Available-for-Sale Portfolio
                                                 
    September 30, 2010  
    AAA-rated     AA-rated     A-rated     BBB-rated     Unrated     Total  
Available-for-sale securities
                                               
Mortgage-backed securities
  $ 3,360,959     $     $     $     $     $ 3,360,959  
Other — Grantor trusts
                            12,822       12,822  
 
                                   
 
                                               
Total
  $ 3,360,959     $     $     $     $ 12,822     $ 3,373,781  
 
                                   
                                                 
    December 31, 2009  
    AAA-rated     AA-rated     A-rated     BBB-rated     Unrated     Total  
Available-for-sale securities
                                               
Mortgage-backed securities
  $ 2,240,564     $     $     $     $     $ 2,240,564  
Other — Grantor trusts
                            12,589       12,589  
 
                                   
 
                                               
Total
  $ 2,240,564     $     $     $     $ 12,589     $ 2,253,153  
 
                                   
Weighted average rates — Mortgage-backed securities
The following table summarizes weighted average rates and amounts by contractual maturities. A significant portion of the MBS portfolio consisted of floating-rate securities and the weighted average rates will change with changes in the indexed LIBOR rate (dollars in thousands):
Table 21: Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities
                                 
    September 30, 2010     December 31, 2009  
    Amortized     Weighted     Amortized     Weighted  
    Cost     Average rate     Cost     Average rate  
Mortgage-backed securities
                               
Due in one year or less
  $       %           %
Due after one year through five years
    1,927       6.25       2,663       6.25  
Due after five years through ten years
    1,096,896       4.69       1,140,153       4.78  
Due after ten years
    9,814,713       2.79       10,977,950       3.21  
 
                       
 
                               
Total mortgage-backed securities
  $ 10,913,536       2.98 %   $ 12,120,766       3.36 %
 
                       

 

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Credit Impairment analysis (Other-than-temporary Impairment — OTTI)
Management evaluates its investments for OTTI on a quarterly basis, under amended OTTI guidance issued in the prior year first quarter by the Financial Accounting Standards Board (“FASB”). This amended OTTI guidance, which the FHLBNY early adopted in the 2009 first quarter, results in only the credit portion of OTTI securities being recognized in earnings. The non-credit portion of OTTI, which represent fair value losses of OTTI securities, is recognized in AOCI. Prior to the adoption of the amended guidance, if an impairment was determined to be other-than-temporary, the impairment loss recognized in earnings was equal to the entire difference between the security’s amortized cost basis and its fair value. The FHLBNY had not determined any security as impaired prior to 2009. Beginning with the quarter ended September 30, 2009, at each subsequent quarter, the FHLBNY performed its OTTI analysis by cash flow testing 100 percent of it private-label MBS. At December 31, 2008, and at the two interim quarters ended June 30, 2009, the FHLBNY’s methodology was to analyze all of its private-label MBS to isolate securities that were considered to be at risk of OTTI and to perform cash flow analysis on securities at risk of OTTI.
2010 vs. 2009 current quarter - In 2010, the FHLBNY identified credit re-impairment on four HTM private-label MBS. Cash flow assessments of the expected credit performance of the four securities resulted in the recognition of $3.1 million as credit related OTTI and was a charge to earnings. All four securities had been previously determined to be OTTI, and the additional impairment (re-impairment) was due to further deterioration in the credit performance measures of the impaired securities. The non-credit portion of OTTI recorded in AOCI was not significant. In the prior year current quarter, the Bank’s cash flow impairment analysis resulted in credit related OTTI of $3.7 million, and the non-credit portion of OTTI recorded in AOCI was $26.5 million.
2010 vs. 2009 year-to-date - In 2010, cumulative credit impairment charged to income was $7.7 million. Non-credit OTTI was not significant. In the same period in the prior year, cumulative credit impairment was $14.3 million and non-credit OTTI was a loss of $103.9 million.
Bond insurers Ambac and MBIA insure the four MBS credit securities impaired in the 2010 current quarter. The Bank’s analysis of Ambac concluded that the bond insurer could not be relied upon to pay future credit losses due to projected collateral shortfalls of the impaired securities. Analysis of MBIA concluded that insurance support could be relied upon for shortfalls up until June 30, 2011, beyond which date MBIA’s financial resources would be such that insurance protection could not be relied upon.
Based on detailed cash flow credit analysis on a security level at the current quarter-end, the Bank has concluded the gross unrealized losses for the remainder of the Bank’s investment securities (other than the four securities credit impaired) 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.
Fair values of investment securities
In an effort to achieve consistency among all of the FHLBanks on the pricing of investments in mortgage-backed securities, in the third quarter of 2009 the FHLBanks formed the MBS Pricing Governance Committee, which was responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. Consistent with the guidance from the Governance Committee, the FHLBNY changed the methodology used to estimate the fair value of mortgage-backed securities starting as of September 30, 2009. Under the approved methodology, the Bank requests prices for all mortgage-backed securities from four specified third-party vendors, and, depending on the number of prices received for each security, selected a median or average price as defined by the methodology. If four prices are received by the FHLBNY from the pricing vendors, the average of the middle two prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used subject to additional validation. The computed prices are tested for reasonableness using tolerance thresholds. Prices within the established thresholds are generally accepted unless strong evidence suggests that using the median pricing methodology as described above would not be appropriate. Preliminary estimated fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis of all relevant facts and circumstances that a market participant would consider.
To compute fair values at September 30, 2010, four vendor prices were received for substantially all of the FHLBNY’s MBS holdings and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supported the FHLBNY’s conclusion that the final computed prices were reasonable estimates of fair value. While the FHLBNY adopted this common methodology, the fair values of mortgage-backed investment securities are estimated by FHLBNY’s management which remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used.
The four specialized pricing services use pricing models or quoted prices of securities with similar characteristics. The valuation techniques used by pricing services employ cash flow generators and option-adjusted spread models. Pricing spreads used as inputs in the models are based on new issue and secondary market transactions if the securities are traded in sufficient volumes in the secondary market.
These pricing vendors typically employ valuation techniques that incorporate benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing, as may be deemed appropriate for the security. Such inputs into the pricing models employed by pricing services for most of the Bank’s investments are market based and observable and are considered Level 2 of the fair value hierarchy.

 

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The valuation of the FHLBNY’s private-label mortgage-backed securities, all designated as held-to-maturity, may require pricing services to use significant inputs that are subjective and may be considered to be Level 3 of the fair value hierarchy because of the current lack of significant market activity so that the inputs may not be market based and observable. All private-label mortgage-backed securities were classified as held-to-maturity and were recorded in the balance sheet at their carrying values. Carrying value of a security is the same as its amortized cost, unless the security is determined to be OTTI. In the period the security is determined to be OTTI, its carrying value is generally adjusted down to its fair value.
Prior to the adoption of the new pricing methodology in the prior year third quarter, the Bank used a similar process that utilized three third-party vendors and similar variance thresholds. This change in pricing methodology did not have a significant impact on the Bank’s estimated fair values of its mortgage-backed securities.
For a comparison of carrying values and fair values of mortgage-backed securities, see Notes 4 and 5 to the unaudited financial statements in this report.
In the Statement of Conditions in this Form 10Q, the carrying values of certain HTM securities determined to be OTTI were written down to $8.1 million, their fair values, which were classified as Level 3 financial instruments within the fair value hierarchy. This determination was made based on management’s view that the private-label instruments may not have an active market because of the specific vintage of the impaired securities as well as inherent conditions surrounding the trading of private-label mortgage-backed securities.
For more information about the corroboration and other analytical procedures performed by the FHLBNY, see Note 1 — Significant Accounting Policies and Estimates, and Note 17 — Fair values of financial instruments to the financial statements accompanying this report. 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.
Short-term investments
The FHLBNY typically maintains substantial investments in high quality, short- and intermediate-term financial instruments, such as certificates of deposit as well as overnight and term Federal funds sold to highly rated financial institutions. These investments provide the liquidity necessary to meet members’ credit needs. Short-term investments also provide a flexible means of implementing the asset/liability management decisions to increase liquidity. The Bank invests in certificates of deposit with maturities not exceeding 270 days and issued by major financial institutions. Certificates of deposit are recorded at amortized cost basis and designated as held-to maturity investment. No certificates of deposit were outstanding at the current quarter-end or at December 31, 2009.
Federal funds sold - Historically, the FHLBNY has been a provider of Federal funds to its members, allowing the FHLBNY to warehouse and provide balance sheet liquidity to meet unexpected member borrowing demands. See Table 16, Investment by Categories, for more details.
Cash collateral pledged - Cash deposited by the FHLBNY as pledged collateral to derivative counterparties is reported as a deduction to Derivative liabilities in the Statements of Condition. The FHLBNY generally executes derivatives with major financial institutions and typically enters into bilateral collateral agreements. When the FHLBNY’s derivatives are in a net unrealized loss position, as a liability from the FHLBNY’s perspective, counterparties are exposed and the FHLBNY would be called upon to pledge cash collateral to mitigate the counterparties’ credit exposure. Collateral agreements include certain thresholds and pledge requirements that are generally triggered if exposures exceed the agreed upon thresholds. At the current quarter-end and at December 31, 2009, the Bank had deposited $3.8 billion and $2.2 billion in interest-earning cash as pledged collateral to derivative counterparties. Typically, such cash deposit pledges earn interest at the overnight Federal funds rate. For more information, see Table 27: Derivative Financial Instruments by Hedge Designation.
Mortgage Loans Held-for-Portfolio
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 recent Form 10-K filed on March 25, 2010. In the CMA program, the FHLBNY holds participation interests in residential and community development mortgage loans. Acquisition of participations under the CMA program was suspended indefinitely in November 2001 and the loans are being paid down under their contractual terms.
MPF Program - Paydowns slightly outpaced acquisitions in 2010. The FHLBNY does not expect the MPF loans to increase substantially, and the Bank provides this product to its members as another alternative for them to sell their mortgage production.
CMA Program - The amortized cost basis of loans in the CMA program, which has not been active since 2001, has been declining steadily over time, and was not material.

 

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Mortgage loans by loan type
The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):
Table 22: Mortgage Loans by Loan Type
                                 
    September 30, 2010     December 31, 2009  
            Percentage             Percentage  
    Amount     of Total     Amount     of Total  
Real Estate:
                               
Fixed medium-term single-family mortgages
  $ 344,781       27.20 %   $ 388,072       29.43 %
Fixed long-term single-family mortgages
    918,967       72.50       926,856       70.27  
Multi-family mortgages
    3,827       0.30       3,908       0.30  
 
                       
 
                               
Total par value
    1,267,575       100.00 %     1,318,836       100.00 %
 
                           
 
                               
Unamortized premiums
    10,027               9,095          
Unamortized discounts
    (4,700 )             (5,425 )        
Basis adjustment 1
    322               (461 )        
 
                           
 
                               
Total mortgage loans held-for-portfolio
    1,273,224               1,322,045          
Allowance for credit losses
    (5,537 )             (4,498 )        
 
                           
Total mortgage loans held-for-portfolio after allowance for credit losses
  $ 1,267,687             $ 1,317,547          
 
                           
     
1   Represents fair value basis of open and closed delivery commitments.
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. Deposits at current quarter-end stood at $3.7 billion, an increase of $1.0 billion from the balance at December 31, 2009, primarily due to deposits placed by a U.S. government agency. The Bank may accept deposits from governmental and semi-governmental institutions in addition to member deposit. Fluctuations in member deposits have little impact on the Bank and are not a significant source of liquidity for the Bank.
Borrowings from other FHLBanks — The Bank borrows from other FHLBanks, generally for a period of one day and at market terms. There were no borrowings in the 2010 three quarters.
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 of up to 365 days, and consolidated bonds have maturities of one year or longer. Member deposits, capital, and to a lesser extent borrowings from other FHLBanks, are also funding sources.
Consolidated Obligation Liabilities
The issuance and servicing of consolidated obligations debt are performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Agency. Each FHLBank independently determines its participation in each issuance of consolidated obligations based on, among other factors, its own funding and operating requirements, maturities, interest rates, and other terms available for consolidated obligations in the market place. Although the FHLBNY is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. The FHLBanks, including the FHLBNY, have emphasized diversification of funding sources and channels as the need for funding from the capital markets has grown.
The two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP issue programs as described below. The FHLBNY participates in both programs.
The Global Debt Program provides the FHLBanks with the ability to distribute debt into multiple primary markets across the globe. The FHLBank global debt issuance facility has been in place since July 1994. FHLBank global bonds are known for their variety and flexibility; all can be customized to meet changing market demand with different structures, terms and currencies. Global Debt Program bonds are available in maturities ranging from one year to 30 years with the majority of global issues between one and five years. The most common Global Debt Program structures are bullets, floaters and fixed-rate callable bonds with maturities of one through ten years. Issue sizes are typically from $500 million to $5 billion and individual bonds can be reopened to meet additional demand. Bullets are the most common global bonds, particularly in sizes of $3 billion or larger.

 

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In mid-1999, the Office of Finance implemented the TAP issue program on behalf of the FHLBanks. This program consolidates domestic bullet bond issuance through daily auctions of common maturities by reopening previously issued bonds. Effectively, the program has reduced the number of separate FHLBanks bullet issues and individual issues have grown as large as $1.0 billion. The increased issue sizes have a number of market benefits for investors, dealers and the 12 FHLBanks. TAP issues have improved market awareness, expanded secondary market trading opportunities, improved liquidity and stimulated greater demand from investors and dealers seeking high-quality Government Sponsored Enterprises securities with U.S. Treasury-like characteristics. The TAP issues follow the same 3-month quarterly cycles used for the issuance of “on-the-run” Treasury securities and also have semi-annual coupon payment dates (March, June, September and December). The coupons for new issues are determined by the timing of the first auction during a given quarter.
The FHLBanks also issue global consolidated obligations-bonds. Effective in January 2009, a debt issuance process was implemented by the FHLBanks and the Office of Finance to provide a scheduled monthly issuance of global bullet consolidated obligation bonds. As part of this process, management from each of the FHLBanks will determine and communicate a firm commitment to the Office of Finance for an amount of scheduled global debt to be issued on its behalf. If the FHLBanks’ orders do not meet the minimum debt issue size, the proceeds are allocated to all FHLBanks based on the larger of the FHLBank’s commitment or allocated proceeds based on the individual FHLBank’s capital to total system capital. If the FHLBanks’ commitments exceed the minimum debt issue size, the proceeds are allocated based on relative capital of the FHLBanks’ with the allocation limited to the lesser of the allocation amount or actual commitment amount. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. The FHLBanks can, however, pass on any scheduled calendar slot and not issue any global bullet consolidated obligation bonds upon agreement of eight of the 12 FHLBanks.
The FHLBanks, including the FHLBNY, continue to issue debt that is both competitive and attractive in the marketplace. In addition, the FHLBanks continuously monitor and evaluate their debt issuance practices to ensure that consolidated obligations are efficiently and competitively priced.
Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices 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 FHLBNY’s consolidated obligations outstanding has contracted at current quarter-end from December 31, 2009 in part due to the contraction of the Bank’s advance business, and in part due to reduction in overall funding requirements, as the Bank has also been cautious about increasing its investment portfolios. However, the primary source of funds for the FHLBNY continued to be through issuance of consolidated bonds and discount notes. Reported amounts of consolidated obligations outstanding, comprising of bonds and discount notes, at September 30, 2010 and December 31, 2009, were $92.7 billion and $104.8 billion, and funded 89.9% and 91.6% of Total assets at those dates. These financing ratios have remained substantially unchanged over the years at around 90 percent, indicative of the stable funding strategy pursued by the FHLBNY. Fixed-rate non-callable debt remains the largest component of consolidated obligation debt. Earlier in the 2010 first quarter, in response to market conditions for FHLBank debt, the FHLBNY shifted its funding strategy, reducing its issuance of discount notes while increasing the utilization of callable debt. In the second quarter, as market pricing of discount notes became relatively more attractive, the FHLBNY increased issuance of discount notes to replace callable bonds that had been called or had naturally matured. In the third quarter, as discount note pricing and spreads became less attractive, issuances of discount notes declined.
Market trends for FHLBank bonds and discount notes and tactical changes in funding mix
While in 2009, key investors from Asia had reduced acquisitions of FHLBank debt and limited their participation in debt issuances, in 2010, there is now encouraging signs of the return of central banks from Asia to FHLBank debt issuances and increased participation in the debt offerings. In 2010, central banks in the Americas have also been strong buyers of “Global” FHLBank bonds in the 2010 second quarter. The most active issues were the 3-year and 2-year new issue Global bullets. The cost of long-term debt issuance has continued to be under pressure through the 2010 third quarter.
FHLBank consolidated obligation bonds
2010 first quarter - Several government support programs, including the Federal Reserve’s Agency debt program, expired during the 2010 first quarter. With the absence of Fed purchasing GSE debt, spreads deteriorated, with March 2010 witnessing the lowest weighted-average monthly bond pricing spreads since February 2009. At the same time, compression of swapped funding levels of FHLBank consolidated bonds to LIBOR had effectively driven up the cost of funding for the FHLBank debt, as much of FHLBank fixed-rate debt is swapped back to LIBOR.

 

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2010 second quarter - Several factors helped improve the pricing of the FHLBank debt. First, the 3-month LIBOR index had risen to 53 basis points, from around 25 basis points at March 31, 2010. That brought some relief to the FHLBank debt spreads (to LIBOR). Second, a decline in the availability of competing GSE issued debt in the 2010 second quarter also helped to improve funding costs of FHLBank debt. Lastly, the credit concerns in Europe heightened credit risk about sovereign debt and inter-bank lending, resulting in a flight to quality to FHLBank short-term debt. By the close of the 2010 second quarter, debt costs had improved for almost all short-term FHLBank debt. Cost of bullet bonds (non-callable, non-amortizing) was more favorable for all maturities with the exception of longer-term maturities. Investor demand had been particularly strong for bullets with maturities of less than 15 months. Cost of callable bonds improved on a swapped out basis to 3-month LIBOR in parallel with the 3-month LIBOR rising to 53 basis points. Cost of callable step-up bonds also improved and investor interest warmed as the structure can be used as an effective hedge by investors in a rising rate environment. Some investors also saw opportunities in investing in step-up bonds on the assumption that the step-up callable bond would be called on the first call date and the investor would benefit from the higher yield on the step-up bond relative to alternative short-term investment. Investor demand for floating-rate FHLBank bonds was weak and volume was down.
2010 third quarter - Shrinking FHLBanks’ balance sheets and the resulting lower issuances have adversely compressed spreads. Evidence of a slowing economy has caused yields to fall for potential investors, who are, for the most part, cash rich. At the same time, callable bond redemptions are on the rise in a low interest rate environment, and this too has added to investor’s liquidity. All of these factors have driven investors to seek out ways to reinvest, driving intermediate-term callable bond spreads tighter. As a result of these factors, investor demand has shifted towards the shorter lockout (3-months or shorter) short-maturity callable bonds, also on the assumption that the callable bonds would be called on the first call date and investor would benefit from higher yield on the callable bond. Bullet bond issuances have declined for the same reason — investor perception of relatively low yields.
The outlook for the issuances of longer-term debt is still uncertain. It remains uneconomical for the FHLBanks to issue longer-term debt. Yields demanded by investors for longer-term FHLBank debt and spreads between 3-month LIBOR and FHLBank long-term debt yield have 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.
FHLBank consolidated obligation discount notes
2010 first quarter - In the prior year, the U.S. money market funds had become key drivers of the increased demand for FHLBank discount notes. That changed in the 2010 first quarter as money market funds experienced a steady outflow of funds, limiting additional demand for discount notes longer than 2-months. With credit markets returning to normalcy in early 2010, money market fund balances declined, demand for discount notes declined, resulting in lower volumes of issuances of discount notes in the 2010 first quarter.
2010 second quarter - However, relief was in sight for the FHLBank discount notes with the amendments to SEC’s Rule 2a-7, effective May 28, 2010, that tightened the credit restrictions on money market funds, who are now required to purchase a greater percentage of “first tier” securities. This benefited FHLBank issued discount notes due to the triple A rating ascribed to the debt. The FHLBank discount notes also benefited as money market funds actively purchased discount notes out to 60 days, since these maturities are categorized as weekly liquid assets under the revised Rule 2a-7. The combination of the liquidity and maturity requirements coupled with limits on second tier securities had a favorable impact on pricing levels in the short end of the FHLBank discount note curve. Pricing along the longer end of the discount note curve had also improved. Investors sought out the high credit quality of FHLBank discount notes because of heightened inter-bank counterparty credit risk in light of European sovereign concerns. The cost of discount notes in June 2010 was lower for the length of the discount note curve, relative to equivalent term LIBOR, a key benchmark for the FHLBanks.
2010 third quarter - The 3-month LIBOR declined to levels in the first quarter. Since the FHLBank discount note is offered at yields below the equivalent LIBOR, declining rates tend to compress the spread to LIBOR and typically results in adverse pricing for the FHLBank debt. Further declines in short-term yields would have created further erosion of discount note spreads to LIBOR, but it appears that yield volatility may have been stabilized by the FRB’s action to ensure support for Treasury bills by weekly auction of bills, just sufficient to meet maturing bills. That action will stabilize Treasury bill supply, stabilize Repo yields, and should prevent further discount note spread erosion.

 

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Consolidated obligation bonds
The following summarizes types of bonds issued and outstanding (dollars in thousands):
Table 23: Consolidated Obligation Bonds by Type
                                 
    September 30, 2010     December 31, 2009  
            Percentage             Percentage  
    Amount     of Total     Amount     of Total  
 
                               
Fixed-rate, non-callable
  $ 46,800,200       63.48 %   $ 48,647,625       66.31 %
Fixed-rate, callable
    6,321,300       8.57       8,374,800       11.42  
Step Up, non-callable
                53,000       0.07  
Step Up, callable
    2,180,000       2.96       3,305,000       4.51  
Single-index floating rate
    18,428,000       24.99       12,977,500       17.69  
 
                       
 
                               
Total par value
    73,729,500       100.00 %     73,357,925       100.00 %
 
                           
 
                               
Bond premiums
    145,239               112,866          
Bond discounts
    (27,718 )             (33,852 )        
Fair value basis adjustments
    1,060,537               572,537          
Fair value basis adjustments on terminated hedges
    1,099               2,761          
Fair value option valuation adjustments and accrued interest
    10,236               (4,259 )        
 
                           
 
                               
Total bonds
  $ 74,918,893             $ 74,007,978          
 
                           
Tactical changes in the funding mix
In 2010, the FHLBNY issued fixed-rate and floating-rate bonds, and discount notes in a mix of issuances to achieve its asset/liability management goals and be responsive to the changing market dynamics. The issuance of bonds has been the primary financing vehicle for the Bank, although the use of term and overnight discount notes remains vital sources of funding because of the ease of issuance of discount notes as a flexible funding tool for day-to-day operations.
2010 first quarter - As investor demand in the 2010 first quarter shifted away from discount notes to callable debt, the FHLBNY was also opportunistic in pursuing the debt structure most in demand at a reasonable price consistent with the Bank’s asset/liability match. The Bank shifted its funding mix between bonds and discount notes, reducing its issuance of discount notes. The money-market sector, which had become a significant investor segment for FHLBank discount notes during much of the credit crisis, was seeking short-term investments that offered a higher rate of return. As a result, discount note pricing was adversely impacted, spreads to LIBOR narrowed, and as a funding tool, discount notes were no longer as attractive as they had been in the prior year.
In the 2010 first quarter, spread deterioration was not just isolated to FHLBank discounts notes but across to short-callable bonds as well, although not as significantly. Since December 31, 2009, the weighted-average bond funding costs deteriorated relative 3-month LIBOR and resulted in increased funding costs on debt swapped to 3-month LIBOR. While short-term callable bond spreads to LIBOR also worsened, the spread compression had been relatively small compared to other FHLBank debt structures. Callable bonds became an attractive funding alternative in the 2010 first quarter. Investor demand for short and medium-term callable bonds with call lock-outs of 1-year or less was encouraging and the FHLBNY increased issuance of callable bonds. These structures tended to fill in as a substitute for discount notes. Swapped short-lockout callable bonds offered effective durations that could be as short as a term discount note. In the falling interest rate environment, the swap counterparty is likely to exercise its rights to terminate the swap at the first exercise opportunity, and the FHLBNY would also exercise its right and terminate the debt.
2010 Second quarter - Discount notes made a comeback with increased investor demand for the 60-day maturity notes as a result of the amendment to SEC’s Rule 2a-7 that impacted the money market industry, and resulted in improved pricing for FHLBank discount notes. Cost of funding on the long-end of the discount note curve also improved as investors shifted from bank certificates of deposit and other form of debt to higher quality FHLBank debt because of sovereign and increased counterparty risk concerns in Europe. In response, the FHLBNY increased issuance of discount notes in June 2010, replacing significant amounts of called and maturing bonds with new issuances of discount notes.
2010 Third quarter - As interest rates declined further in the current quarter, the 3-month LIBOR, an important benchmark for the FHLBNY’s funding strategy declined and resulted in adverse spread compression. In response, the FHLBNY reduced issuance of discount notes, instead relying on floating-rate notes and bullet bonds to replace maturing discount notes.
The principal tactical funding strategy changes employed in executing issuances of FHLBank bonds are outlined below:
  Floating rate bonds - Floating-rate bonds had declined steadily through the four quarters in 2009 and in the 2010 first two quarter. In those periods, maturing floating-rate bonds in general were not replaced because of marketplace perception of a pricing advantage of comparable GSE issued LIBOR-indexed floaters. In the 2010 third quarter, the Bank added (net of maturities) $7.6 billion of floating-rate debt. As a result, floating-rate bonds outstanding at September 30, 2010 increased to $18.4 billion, up from $10.8 billion at June 30, 2010 and $13.0 billion at December 31, 2009. The outstanding debt at September 30, 2010 consisted of $12.8 billion indexed to the 1-month LIBOR, the Prime rate and the Federal funds effective rates. By executing interest rate swaps concurrently with the issuances of the floating-rate bonds and swapping the non 3-month LIBOR indices for 3-month LIBOR, the Bank effectively created variable funding that was indexed to 3-month LIBOR, at spreads more favorable than it could have achieved by issuing a simple 3-month LIBOR floating-rate bond.

 

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  Non-callable bonds - Non-callable bond remains the primary funding vehicle for the FHLBNY. Issuances of non-callable debt are predicated partly on pricing of such debt and investor demand, and partly on the need to achieve asset/liability management goals. The Bank has made a strong effort to issue fixed-rate longer-term debt and lock-in the relative low rates in the current interest-rate environment. This has been a challenge as investor appetite for term debt has continued to be lukewarm, given investor preference for discount notes, short-term bullets and short lock-out callable debt.
  Callable-bonds - In 2010, investors were receptive to the FHLBank short lockout callable bonds with short maturities as an alternative to comparable debt available in the capital markets, and execution pricing fared relatively better even under deteriorating pricing conditions for other types of bond structures. Fixed-rate callable bonds with maturities up to 15 months and a short lockout call option have been the more popular FHLBank bond structure. Responding to investor preference, the FHLBNY issued short lockout callables, with call dates as short as 3 months from issue date. Such debt structures offer an alternative at an attractive pricing to similar maturity discount notes. FHLBank longer-term fixed-rate callable-bonds have not been an attractive investment asset for investors over the last several years, and have continued to be under price pressure.
With a callable bond, the Bank purchases a call option from the investor and the option allows the Bank to terminate the bond at predetermined call dates at par. When the Bank purchases the call option from investors, it typically lowers the cost to the investor, who has traditionally been receptive to callable-bond yields offered by the FHLBNY.
Debt extinguishment - In 2010, the FHLBNY extinguished $250.0 million consolidated obligation bond at an insignificant gain.
Impact of hedging fixed-rates consolidated obligation bonds
The Bank hedges certain fixed-rate debt by the use of both cancellable and non-cancellable interest rate swaps in fair value hedges under the accounting standards for derivatives and hedging. The Bank may also hedge the anticipatory issuance of bonds under the provisions of “cash flow” hedging rules as provided in the accounting standards for derivatives and hedging.
Net interest accruals from qualifying interest rate swaps under the derivatives and hedge accounting rules are recorded together with interest expense of consolidated obligation bonds in the Statements of Income. Fair value changes of debt in a qualifying fair value hedge are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivative and hedging activities. An offset is recorded as a fair value basis adjustment to the carrying amount of the debt in the balance sheet. Net interest accruals associated with derivatives not qualifying under derivatives and hedge accounting rules are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
Derivatives are employed to hedge consolidated bonds in the following manner to achieve the indicated principal objectives:
The FHLBNY:
  Makes extensive use of the derivatives to restructure interest rates on consolidated obligation bonds, both callable and non-callable, to better meet its members’ funding needs, to reduce funding costs, and to manage risk in a changing market environment.
  Converts, at the time of issuance, certain simple fixed-rate bullet and callable bonds into synthetic floating-rate bonds by the simultaneous execution of interest rate swaps that convert the cash flows of the fixed-rate bonds to conventional adjustable rate instruments tied to an index, typically 3-month LIBOR.
  Uses derivatives to manage the risk arising from changing market prices and volatility of a fixed coupon bond by matching the cash flows of the bond to the cash flows of the derivative and making the FHLBNY indifferent to changes in market conditions. Except when issued to fund MBS and MPF loans, callable bonds are typically hedged by an offsetting derivative with a mirror-image call option and identical terms.
  Adjusts the reported carrying value of hedged consolidated bonds for changes in their fair value (“fair value basis adjustments” or “fair value”) that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for consolidated obligation bonds in the Statements of Condition include fair value basis adjustments.
  Lowers its funding cost by the issuance of a callable bond and the execution of an associated interest rate swap with mirrored call options, which results in funding at a lower cost than the FHLBNY would otherwise have achieved. The issuance of callable bonds and the simultaneous swapping with a derivative instrument depends on the price relationships in both the bond and the derivatives markets.

 

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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 bonds. The Bank recorded net unrealized fair value basis losses of $1.1 billion and $0.6 billion as part of the carrying values of consolidated obligation bonds in the Statements of Condition at September 30, 2010 and December 31, 2009. Carrying values of bonds designated under the FVO are also adjusted for valuation adjustments to recognize changes in the full fair value of the bonds elected under the FVO. At September 30, 2010, the fair value basis recorded was in an unrealized loss position of $10.2 million. At December 31, 2009, the fair value basis was in an unrealized gain position of $4.3 million.
Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, the value and implied volatility of call options of callable bonds, and from the growth or decline in hedge volume.
Hedge volume - As of September 30, 2010 and December 31, 2009, the Bank had hedged $32.3 billion and $32.9 billion of fixed-rate consolidated bonds with interest rate swaps. The swaps hedged the fair value risk from changes in the benchmark rate, and were in hedge relationships that qualified under derivatives and hedge accounting rules. These hedges effectively 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. Generally, the call option terms mirror the call option terms embedded in a cancellable swap. Under the terms of the call option, the Bank has the right to terminate the bond at agreed upon dates, and the swap counterparty has the right to cancel the swap.
At September 30, 2010 and December 31, 2009, outstanding par value of consolidated obligation bonds elected under the FVO was $10.8 billion and $6.0 billion. These bonds were also hedged by interest rate swaps designated as economic hedges, as discussed below.
Economic hedges - 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 (hedged item), and the FHLBNY accounted for the derivatives as freestanding (economic hedge). Unless designated under the FVO, economic hedges of debt do not generate basis adjustments for the hedged instruments since their carrying values are not adjusted for fair value changes. The carrying values of debt designated under the FVO are adjusted for changes in the full fair values of the debt, not just for changes in the benchmark rate.
Principal economic hedges are summarized below:
Floating-rate debt - At September 30, 2010 and at December 31, 2009, the FHLBNY had hedged $13.4 billion and $8.0 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.
Fixed-rate debt - At September 30, 2010 and December 31, 2009, the FHLBNY had hedged $1.5 billion and $13.1 billion of short-term fixed-rate debt.
FVO economic hedge - At September 30, 2010 and December 31, 2009, the FHLBNY had hedged $10.8 billion and $6.0 billion of short-term bonds designated under the FVO.
Impact of changes in interest rate to the balance sheet carrying values of hedged bonds - The carrying amounts of consolidated obligation bonds included fair value basis losses of $1.1 billion at September 30, 2010 and $0.6 billion at December 31, 2009. Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the two measurement dates, and the value and implied volatility of call options of callable bonds.
Unrealized fair value basis losses were consistent with the forward yield curves at those dates that were projecting forward rates below the fixed-rate coupons of hedge qualifying bonds and bonds designated under the FVO. The flattening of the yield curve at September 30, 2010, with the forward rates well below the same yields projected at December 31, 2009, caused bond fair values to be in a loss position. At September 30, 2010, the yield curve was forecasting 0.64%, 1.29%, and 1.92% on the 3-year, 5-year and 7-year swap curves, compared to 1.67%, 2.68% and 3.38% at December 31, 2009.
Most of the hedged bonds had been issued in prior years at the then prevailing higher interest-rate environment. Since such bonds were typically fixed-rate, in a declining interest rate environment fixed-rate bonds exhibited unrealized fair value basis losses, which were recorded as part of the balance sheet carrying values of the hedged debt. In the Statements of Income, such unrealized losses from fair value basis adjustments on hedged bonds were almost entirely offset by net fair value unrealized gains from derivatives associated with the hedged bonds, thereby achieving the Bank’s hedging objectives of mitigating fair value basis risk.

 

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Discount Notes
Consolidated obligation discount notes provide the FHLBNY with short-term and overnight funds. Discount notes have maturities of up to one year and are offered daily through a dealer-selling group; the notes are sold at a discount from their face amount and mature at par. Through a sixteen-member selling group, the Office of Finance, acting on behalf of the twelve Federal Home Loan Banks, offers discount notes. In addition, the Office of Finance offers discount notes in four standard maturities in two auctions each week.
The FHLBNY typically uses discount notes to fund short-term advances, longer-term advances with short repricing intervals, putable advances and money market investments.
The following summarizes discount notes issued and outstanding (dollars in thousands):
Table 24: Discount Notes Outstanding
                 
    September 30, 2010     December 31, 2009  
 
               
Par value
  $ 17,791,522     $ 30,838,104  
 
           
 
               
Amortized cost
  $ 17,784,192     $ 30,827,639  
Fair value option valuation adjustments
    3,716        
 
           
 
               
Total
  $ 17,787,908     $ 30,827,639  
 
           
 
               
Weighted average interest rate
    0.19 %     0.15 %
 
           
Discount notes remain a popular funding vehicle for the FHLBNY. The efficiency of issuing discount notes is an important element in its use to alter funding tactics relatively rapidly, as discount notes can be issued any time and in a variety of amounts and maturities in contrast to other short-term funding sources, such as the issuance of callable debt with an associated interest rate derivative with matching terms.
During the three quarters of 2010, the Bank has shifted its funding mix between bonds and discount notes, reducing or increasing issuance of discount notes depending on changes in pricing and spreads of discount notes. In 2010, investor demand for discount notes has declined relative to 2009. The money-market sector, which had become a significant investor segment for FHLBank discount notes during much of the credit crisis, is now seeking short-term investments that offer a higher rate of return. The prevailing low interest rate environment in 2010 has also adversely impacted discount note spreads to LIBOR, and as a funding tool, discount notes are no longer as attractive as they had been in 2009. In large part, the FHLBNY has stopped the issuance of overnight discount notes, in part because of shortage of a ready source of a risk-free overnight asset to fund profitably, in part as a result of worsening pricing of overnight discount note, and in part because the FHLBNY has determined that term discount notes would better match its regulatory liquidity profile.
Discount notes outstanding at September 30, 2010 declined to $17.8 billion when spreads narrowed adversely to levels observed in the 2010 first quarter. In the 2010 second quarter, spreads to LIBOR had widened making the funding more attractive, discount notes outstanding rose to $27.5 billion from $19.8 billion at March 31, 2010.
Economic hedges of discount notes - As of September 30, 2010 and December 31, 2009, no discount notes were hedged under the accounting standards for derivatives and hedging. The Bank generally hedges discount notes in economic hedges to convert the fixed-rate exposure of the discount notes to a variable-rate exposure, generally indexed to LIBOR. At September 30, 2010, the discount notes outstanding as designated under the FVO was $1.8 billion in principal amounts and were economically hedged by interest rate swaps to mitigate fair value risk due to changes in fair values of the notes. There were no discount notes designated under the FVO at December 31, 2010.
Stockholders’ Capital and Mandatorily Redeemable Capital Stock
Capital Resources — Stockholders’ Capital
The FHLBanks, including FHLBNY, have a unique cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. The member’s stock requirement is based on the amount of mortgage-related assets on the member’s balance sheet and its use of FHLBNY advances, as prescribed by the FHLBank Act, which reflects the value of having ready access to FHLBNY as a reliable source of low-cost funds. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. The shares are not publicly traded. See Note 11 for more information about Capital and Capital ratios.
At September 30, 2010, total capital stock $100 par value, putable and issued and held by members was 46,636,000 shares compared to 50,590,000 shares at December 31, 2009. Members are required to purchase FHLBNY stock in proportion to the volume of advances borrowed. Decrease in capital stock is in line with the decrease in advances borrowed by members.
Stockholders’ Capital - Stockholders’ Capital comprised of capital stock, retained earnings and Accumulated other comprehensive income (loss) (“AOCI”) decreased by $336.3 million at September 30, 2010 from December 31, 2009 primarily because of decrease in capital stock. Retained earnings, after payment of dividends, grew by $12.3 million to $701.2 million at September 30, 2010. For more information about the Bank’s retained earnings policy, refer to the section Retained Earnings and Dividend in the Bank’s Form 10-K filed on March 25, 2010. The loss in AOCI declined by $46.7 million from December 31, 2009. The principal components of AOCI are summarized in Note 13 to the unaudited financial statements accompanying this report.

 

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Capital stock- Capital stock, par value $100, was $4.7 billion at September 30, 2010, a decline of $395.4 million from December 31, 2009. The decline in capital stock was consistent with decreases in advances borrowed by members. Since members are required to purchase stock as a percentage of advances borrowed from the FHLBNY, a decline in advances will typically result in a decline in capital stock. In addition, under the Bank’s 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.
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. Such capital is considered to be mandatorily redeemable and a liability under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. Dividends related to capital stock classified as mandatorily redeemable are accrued at an estimated dividend rate and reported as interest expense in the Statements of Income. Mandatorily redeemable capital stock at September 30, 2010 and December 31, 2009 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 repurchased when the stock is no longer required to support outstanding transactions with the FHLBNY.
The FHLBNY reclassifies the stock subject to redemption from equity to liability once a member: irrevocably exercises a written redemption right; gives notice of intent to withdraw from membership; or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership.
One member was acquired by a non-member financial institution thus far in 2010. Reduction in mandatorily redeemable stock reflects the fact that the FHLBNY redeemed stock held by former members when advances to the former members matured or were prepaid. Under existing practice, capital stock held by non-members is repurchased at maturity of the advances borrowed by former members. In accordance with Finance Agency regulations, former members and non-members cannot renew their advance borrowings at maturity. Such capital is considered to be a liability and mandatorily redeemable and subject to the provisions under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity.
The following table provides roll-forward information with respect to changes in mandatorily redeemable capital stock liabilities (in thousands):
Table 25: Roll-Forward Mandatorily Redeemable Capital Stock
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
Beginning balance
  $ 69,569     $ 128,254     $ 126,294     $ 143,121  
Capital stock subject to mandatory redemption reclassified from equity
    42       434       30,308       434  
Redemption of mandatorily redeemable capital stock 1
    (2,263 )     (806 )     (89,254 )     (15,673 )
 
                       
 
                               
Ending balance
  $ 67,348     $ 127,882     $ 67,348     $ 127,882  
 
                       
 
                               
Accrued interest payable
  $ 794     $ 1,807     $ 794     $ 1,807  
 
                       
     
1   Redemption includes repayment of excess stock.
     
  (The annualized accrual rates were 4.60% for September 30, 2010 and 5.60% for September 30, 2009.)

 

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Derivative Instruments and Hedging Activities
Interest rate swaps, swaptions, and cap and floor agreements (collectively, derivatives) enable the FHLBNY to manage its exposure to changes in interest rates by adjusting the effective maturity, repricing frequency, or option characteristics of financial instruments. The FHLBNY, to a limited extent, also uses interest rate swaps to hedge changes in interest rates prior to debt issuance and essentially lock in the FHLBNY’s funding cost.
Finance Agency regulations prohibit the speculative use of derivatives. The FHLBNY does not take speculative positions with derivatives or any other financial instruments, or trade derivatives for short-term profits. The FHLBNY does not have any special purpose entities or any other types of off-balance sheet conduits.
The notional amounts of derivatives are not recorded as assets or liabilities in the Statements of Condition, rather the fair values of all derivatives are recorded as either a derivative asset or a derivative liability. Although notional principal is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since the notional amount does not change hands (other than in the case of currency swaps, of which the FHLBNY has none).
All derivatives are recorded on the Statements of Condition at their estimated fair values and designated as either fair value or cash flow hedges for qualifying hedges, or as non-qualifying hedges (economic hedges or customer intermediations) under the accounting standards for derivatives and hedging. In an economic hedge, the Bank retains or executes derivative contracts, which are economically effective in reducing risk. Such derivatives are designated as economic hedges either because a qualifying hedge is not available, the difficulty to demonstrate that the hedge would be effective on an ongoing basis as a qualifying hedge, or the cost of a qualifying hedge is not economical. Changes in the fair value of a derivative are recorded in current period earnings for a fair value hedge, or in AOCI for the effective portion of fair value changes of a cash flow hedge.
Interest income and interest expense from interest rate swaps used for hedging are reported together with interest on the instrument being hedged if the swap qualifies for hedge accounting. If the swap is designated as an economic hedge, interest accruals are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
The FHLBNY uses derivatives in three ways: (1) as a fair value or cash flow hedge of an underlying financial instrument or as a cash flow hedge of a forecasted transaction; (2) as intermediation hedges to offset derivative positions (e.g., caps) sold to members; and (3) as an economic hedge, defined as a non-qualifying hedge of an asset or liability and used as an asset/liability management tool.
The FHLBNY uses derivatives to adjust the interest rate sensitivity of consolidated obligations to more closely approximate the sensitivity of assets or to adjust the interest rate sensitivity of advances to more closely approximate the sensitivity of liabilities. In addition, the FHLBNY uses derivatives to (1) offset embedded options in assets and liabilities; (2) hedge the market value of existing assets, liabilities and anticipated transactions; and (3) reduce funding costs. For additional information, see Note 16 – Derivatives and hedging activities to the financial statements accompanying this report.

 

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The following table summarizes the principal derivatives hedging strategies:
Table 26: Derivative Hedging Strategies
                         
            September 30, 2010     December 31, 2009  
            Notional Amount     Notional Amount  
Derivatives/Terms   Hedging Strategy   Accounting Designation   (in millions)     (in millions)  
Pay fixed, receive floating interest rate swap
  To convert fixed rate on a fixed rate advance to a LIBOR floating rate   Economic Hedge of Fair Value Risk     $ 115     $ 123  
Pay fixed, receive floating interest rate swap cancelable by FHLBNY
  To convert fixed rate on a fixed rate advance to a LIBOR floating rate callable advance   Fair Value Hedge     $ 150     $  
Pay fixed, receive floating interest rate swap cancelable by counterparty
  To convert fixed rate on a fixed rate advance to a LIBOR floating rate putable advance   Fair Value Hedge     $ 34,231     $ 40,252  
Pay fixed, receive floating interest rate swap no longer cancelable by counterparty
  To convert fixed rate on a fixed rate advance to a LIBOR floating rate no-longer putable advance   Fair Value Hedge     $ 4,064     $ 2,283  
Pay fixed, receive floating interest rate swap non-cancelable
  To convert fixed rate on a fixed rate advance to a LIBOR floating rate non-putable advance   Fair Value Hedge     $ 23,109     $ 23,367  
Purchased interest rate cap  
  To offset the cap embedded in the variable rate advance   Economic Hedge of Fair Value Risk   $ 8     $ 390  
Receive fixed, pay floating interest rate swap
  To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate   Economic Hedge of Fair Value Risk     $ 5,300     $ 13,113  
Receive fixed, pay floating interest rate swap cancelable by counterparty
  To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate callable bond   Fair Value Hedge     $ 4,970     $ 6,785  
Receive fixed, pay floating interest rate swap no longer cancelable
  To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate no-longer callable   Fair Value Hedge     $ 440     $ 108  
Receive fixed, pay floating interest rate swap non-cancelable
  To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate non-callable   Fair Value Hedge     $ 26,908     $ 25,982  
Receive fixed, pay floating interest rate swap (non-callable)
  To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate non-callable   Economic Hedge of Fair Value Risk     $ 87     $ 3,784  
Basis swap  
  To convert non-LIBOR index to LIBOR to reduce interest rate sensitivity and repricing gaps   Economic Hedge of Cash Flows     $ 8,128     $ 6,035  
Basis swap  
  To convert 1M LIBOR index to 3M LIBOR to reduce interest rate sensitivity and repricing gaps   Economic Hedge of Cash Flows     $ 1,450     $ 1,950  
Receive fixed, pay floating interest rate swap cancelable by counterparty  
  Fixed rate callable bond converted to a LIBOR floating rate; matched to callable bond accounted for under fair value option   Fair Value Option       $ 3,101     $ 5,690  
Receive fixed, pay floating interest rate swap non-cancelable  
  Fixed rate non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under fair value option   Fair Value Option       $ 7,650     $ 350  
Receive fixed, pay floating interest rate swap non-cancelable  
  Fixed rate consolidated obligation discount note converted to a LIBOR floating rate; matched to discount note accounted for under fair value option   Fair Value Option       $ 1,752     $  
Pay fixed, receive floating interest rate swap
  Economic hedge on the Balance Sheet     Economic Hedge     $     $ 1,050  
Receive fixed, pay floating interest rate swap
  Economic hedge on the Balance Sheet     Economic Hedge     $     $ 1,050  
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       $ 550     $ 320  
The accounting designation “economic” hedges represented derivative transactions under hedge strategies that do not qualify for hedge accounting but are an approved risk management hedge.

 

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Derivatives Financial Instruments by hedge designation
The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by hedge designation. The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands):
Table 27: Derivatives Financial Instruments by Hedge Designation
                                 
    September 30, 2010     December 31, 2009  
            Estimated             Estimated  
    Notional     Fair Value     Notional     Fair Value  
Interest rate swaps
                               
Derivatives in fair value hedging relationships
  $ 93,872,212     $ (4,556,517 )   $ 98,776,447     $ (3,056,718 )
Derivatives not designated as hedging instruments
    15,079,729       117       27,104,963       31,723  
Derivatives matching designated under FVO
    12,503,185       10,198       6,040,000       (2,632 )
Interest rate caps/floors
                               
Economic-fair value changes
    1,900,000       23,593       2,282,000       71,494  
Mortgage delivery commitments (MPF)
                               
Economic-fair value changes
    20,675       4       4,210       (39 )
Other
                               
Intermediation
    550,000       709       320,000       352  
 
                       
Total
  $ 123,925,801     $ (4,521,896 )   $ 134,527,620     $ (2,955,820 )
 
                       
Total derivatives, excluding accrued interest
          $ (4,521,896 )           $ (2,955,820 )
Cash collateral pledged to counterparties
            3,844,058               2,237,028  
Cash collateral received from counterparties
            (53,796 )              
Accrued interest
            (20,439 )             (19,104 )
 
                           
Net derivative balance
          $ (752,073 )           $ (737,896 )
 
                           
 
                               
Net derivative asset balance
          $ 32,425             $ 8,280  
Net derivative liability balance
            (784,498 )             (746,176 )
 
                           
 
                               
Net derivative balance
          $ (752,073 )           $ (737,896 )
 
                           
Derivative Financial Instruments by Product
The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by product and type of accounting treatment. The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands):
Table 28: Derivative Financial Instruments by Product
                                 
    September 30, 2010     December 31, 2009  
            Total estimated             Total estimated  
            fair value             fair value  
            (excluding             (excluding  
    Total notional     accrued     Total notional     accrued  
    amount     interest)     amount     interest)  
Derivatives designated as hedging instruments
                               
Advances-fair value hedges
  $ 61,554,507     $ (5,604,763 )   $ 65,901,667     $ (3,622,141 )
Consolidated obligations-fair value hedges
    32,317,705       1,048,246       32,874,780       565,423  
Derivatives not designated as hedging instruments
                               
Advances-economic hedges
    122,659       (3,861 )     513,089       (196 )
Consolidated obligations-economic hedges
    14,965,070       3,978       24,881,874       36,954  
MPF loan-commitments
    20,675       4       4,210       (39 )
Balance sheet
    1,892,000       23,593       1,892,000       71,494  
Intermediary positions-economic hedges
    550,000       709       320,000       352  
Balance sheet-macro hedges swaps
                2,100,000       (5,035 )
Derivatives matching COs designated under FVO
                               
Interest rate swaps-consolidated obligations-bonds
    10,751,000       7,750       6,040,000       (2,632 )
Interest rate swaps-consolidated obligations-discount notes
    1,752,185       2,448              
 
                       
 
                               
Total notional and fair value
  $ 123,925,801     $ (4,521,896 )   $ 134,527,620     $ (2,955,820 )
 
                       
 
                               
Total derivatives, excluding accrued interest
          $ (4,521,896 )           $ (2,955,820 )
Cash collateral pledged to counterparties
            3,844,058               2,237,028  
Cash collateral received from counterparties
            (53,796 )              
Accrued interest
            (20,439 )             (19,104 )
 
                           
 
                               
Net derivative balance
          $ (752,073 )           $ (737,896 )
 
                           
 
                               
Net derivative asset balance
          $ 32,425             $ 8,280  
Net derivative liability balance
            (784,498 )             (746,176 )
 
                           
 
                               
Net derivative balance
          $ (752,073 )           $ (737,896 )
 
                           
The categories of “Fair value” “Commitment” 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 but were an approved risk management strategy. No cash flow hedges were outstanding at September 30, 2010 or December 31, 2009.

 

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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 following table sets forth five-year history of the FHLBNY’s advances and mortgage loan portfolios (in thousands):
Table 29: Advances and Mortgage Loan Portfolios
                                                 
    September 30,     December 31,  
    2010     2009     2008     2007     2006     2005  
 
                                               
Advances
  $ 85,697,171     $ 94,348,751     $ 109,152,876     $ 82,089,667     $ 59,012,394     $ 61,901,534  
 
                                   
Mortgage loans before allowance for credit losses
  $ 1,273,224     $ 1,322,045     $ 1,459,291     $ 1,492,261     $ 1,484,012     $ 1,467,525  
 
                                   
Advances
The FHLBNY closely monitors the creditworthiness of the institutions to which it lends. The FHLBNY also closely monitors the quality and value of the assets that are pledged as collateral by its members. The FHLBNY periodically assesses the mortgage underwriting and documentation standards of its borrowing members. In addition, the FHLBNY has collateral policies and restricted lending procedures in place to manage its exposure to those members experiencing difficulty in meeting their capital requirements or other standards of creditworthiness.
The FHLBNY has not experienced any losses on advances extended to any member since its inception. The FHLBank Act affords any security interest granted to the FHLBNY by a member, or any affiliate of such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party) having the rights of a lien creditor. However, the FHLBNY’s security interest is not entitled to priority over claims and rights that (1) would be entitled to priority under applicable law, or (2) are held by a bona fide purchaser for value or by parties that are secured by actual perfected security interests.
The FHLBNY’s members are required to pledge collateral to secure advances. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. The FHLBNY has the right to take such steps, as it deems necessary, to protect its secured position on outstanding advances, including requiring additional collateral (whether or not such additional collateral would otherwise be eligible to secure a loan). The FHLBNY also has a statutory lien under the FHLBank Act on the capital stock of its members, which serves as further collateral for members’ indebtedness to the FHLBNY.
The FHLBNY has established asset classification and reserve policies. All adversely classified assets of the FHLBNY will have a reserve established for probable losses. Based upon the collateral held as security and prior repayment histories, no allowance for losses on advances is currently deemed necessary by management.
The FHLBNY uses methodologies to identify and measure credit risk from creditworthiness risk arising from members, counterparties, and other entities; collateral risk arising from type, quality, and lien status; and concentration risk arising from borrower, portfolio, geographic area, industry, or product type.
Creditworthiness Risk — Advances
The FHLBNY’s potential exposure to creditworthiness risk arises from the deterioration of the financial health of FHLBNY members. The FHLBNY manages its exposure to the creditworthiness of members by monitoring their collateral and advance levels daily and by analyzing their financial health each quarter.
Collateral Risk — Advances
The FHLBNY is exposed to collateral risk if it is unable to perfect its interest in pledged collateral, or when the liquidation value of pledged collateral does not fully cover the FHLBNY’s exposure. The FHLBNY manages this risk by pricing collateral on a weekly basis, performing on-site reviews of pledged mortgage collateral from time to time, and reviewing pledged portfolio concentrations on a quarterly basis. The FHLBNY requires that members pledge a specific amount of excess collateral above the par amount of their outstanding obligations. Members provide the FHLBNY with reports of pledged collateral and the FHLBNY evaluates the eligibility and value of the pledged collateral.
The FHLBNY’s loan and collateral agreements give the FHLBNY a security interest in assets held by borrowers that is sufficient to cover their obligations to the FHLBNY. The FHLBNY may supplement this security interest by imposing additional reporting, segregation or delivery requirements on the borrower. The FHLBNY assigns specific collateral requirements to a borrower, based on a number of factors. These include, but are not limited to: (1) the borrower’s overall financial condition; (2) the degree of complexity involved in the pledging, verifying, and reporting of collateral between the borrower and the FHLBNY, especially when third-party pledges, custodians, outside service providers and pledges to other entities are involved; and (3) the type of collateral pledged. The FHLBNY has also established collateral maintenance levels for borrower collateral that are intended to help ensure that the FHLBNY has sufficient collateral to cover credit extensions and reasonable expenses arising from potential collateral liquidation and other unknown factors. Collateral maintenance levels are designated by collateral type and are periodically adjusted to reflect current market and business conditions. Maintenance levels for individual borrowers may also be adjusted, based on the overall financial condition of the borrower or another, third-party entity involved in the collateral relationship with the FHLBNY. Borrowers are required to maintain an amount of eligible collateral with a liquidation value at least equal to the borrower’s current collateral maintenance level. All borrowers that pledge mortgage loans as collateral are also required to provide, on a monthly or quarterly basis, a detailed listing of mortgage loans pledged. The FHLBNY uses this detailed reporting to monitor and track payment performance of the collateral and to assess the risk profile of the pledged collateral based on mortgage characteristics, geographic concentrations and other pertinent risk factors.

 

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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 reviews of borrowers in connection with the evaluation of the borrowers’ pledged mortgage collateral. This review involves a qualitative assessment of risk factors that includes an examination of legal documentation, credit underwriting, and loan-servicing practices on mortgage collateral. The FHLBNY has developed the on-site review process to more accurately value each borrower’s pledged mortgage portfolio based on current secondary-market standards. The results of the review may lead to adjustments in the estimated liquidation value of pledged collateral. The FHLBNY may also make additional market value adjustments to a borrower’s pledged mortgage collateral based on the quality and accuracy of the automated data provided to the FHLBNY. See Tables 30-32 for more information.
Credit Risk and Concentration Risk — Advances
While the FHLBNY has never experienced a credit loss on an advance, the expanded eligible collateral for Community Financial Institutions and non-member housing associates permitted, but not required, by the Finance Agency provides the potential for additional credit risk for the FHLBNY. It is the FHLBNY’s current policy not to accept “expanded” eligible collateral from Community Financial Institutions. The management of the FHLBNY has the policies and procedures in place to appropriately manage credit risk associated with the advance business. In extending credit to a member, the FHLBNY adheres to specific credit policy limits approved by its Board of Directors. The FHLBNY has not established limits for the concentrations of specific types of advances, but management reports the activity in advances to the Board each month. Each quarter, management reports the concentrations of putable advances made to individual members. There were no past due advances and all advances were current at any periods in this report. Management does not anticipate any credit losses, and accordingly, the FHLBNY has not provided an allowance for credit losses on advances. The FHLBNY’s potential credit risk from advances is concentrated in commercial banks, savings institutions and insurance companies. At September 30, 2010, the top ten member institutions had borrowed advances aggregating $57.3 billion or 71.4% of total advances outstanding (par). The comparable amount at December 31, 2009 was $59.5 billion, or 65.6% of total advance outstanding. Sufficient collateral was held to cover the advances to these institutions. See Table 33 below for more information.
Collateral Coverage of Advances
The FHLBNY lends to financial institutions involved in housing finance within its district. In addition, the FHLBNY is permitted, but not required, to accept collateral in the form of small business or agricultural loans (“expanded collateral”) from Community Financial Institutions (“CFIs”). Borrowing members pledge their capital stock of the FHLBNY as additional collateral for advances. All member obligations with the FHLBNY must be fully collateralized throughout their entire term.
As of September 30, 2010 and December 31, 2009, the FHLBNY had rights to collateral with an estimated value greater than outstanding advances. Based upon the financial condition of the member, the FHLBNY:
    Allows a member to retain possession of the collateral assigned to the FHLBNY, if the member executes a written security agreement and agrees to hold such collateral for the benefit of the FHLBNY; or
    Requires the member specifically to assign or place physical possession of such collateral with the FHLBNY or its safekeeping agent.
The following table summarizes pledged collateral in support of advances (in thousands):
Table 30: Collateral Supporting Advances to Members
                                 
            Underlying Collateral for Advances  
            Mortgage     Securities and        
    Advances1     Loans2     Deposits2     Total2  
September 30, 2010
  $ 80,102,811     $ 102,314,450     $ 44,596,206     $ 146,910,656  
 
                               
December 31, 2009
  $ 90,737,700     $ 111,346,235     $ 49,564,456     $ 160,910,691  
     
Note1   Par value
 
Note2   Estimated market value

 

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The level of over-collateralization is on an aggregate basis and may not necessarily be indicative of a similar level of over-collateralization on an individual transaction basis. At a minimum, each member pledged sufficient collateral to adequately secure the member’s outstanding obligation with the FHLBNY. In addition, most members maintain an excess amount of pledged collateral with the FHLBNY to secure future liquidity needs.
The following table summarizes pledged collateral in support of other member obligations (other than advances) (in thousands):
Table 31: Collateral Supporting Member Obligations Other Than Advances
                                 
            Underlying Collateral for Other Obligations  
    Other             Securities and        
    Obligations1     Mortgage Loans2     Deposits2     Total 2  
September 30, 2010
  $ 1,899,440     $ 4,686,068     $ 323,262     $ 5,009,330  
 
 
December 31, 2009
  $ 720,622     $ 2,257,204     $ 126,970     $ 2,384,174  
     
Note1   Standby financial letters of credit, derivatives and members’ credit enhancement guarantee amount. (“MPFCE”)
 
Note2   Estimated market value
The outstanding member obligations consisted principally of standby letters of credit, and a small amount of collateralized value of outstanding derivatives, and members’ credit enhancement guarantee amount (“MPFCE”) on loans sold to the FHLBNY through the Mortgage Partnership Finance program. The FHLBNY’s underwriting and collateral requirements for securing Letters of Credit are the same as its requirements for securing advances.
The following table shows the breakdown of collateral pledged by members between those that were specifically listed and those in the physical possession or that of its safekeeping agent (in thousands):
Table 32: Location of Collateral Held
                                 
    Estimated Market Values  
    Collateral in     Collateral     Collateral     Total  
    Physical     Specifically     Pledged for     Collateral  
    Possession     Listed     AHP     Received  
September 30, 2010
  $ 51,752,820     $ 100,449,622     $ (282,455 )   $ 151,919,987  
 
                               
December 31, 2009
  $ 57,660,864     $ 105,714,763     $ (80,762 )   $ 163,294,865  
The total of collateral pledged to the FHLBNY includes excess collateral pledged above the FHLBNY’s maximum Lendable value. These Lendable value requirements range from 60% to 97% of the collateral pledged, based on the collateral type. It is common for members to maintain excess collateral positions with the FHLBNY for future liquidity needs. Based on several factors (e.g. advance type, collateral type or member financial condition) members are required to comply with specified collateral requirements, including but not limited to, a detailed listing of pledged mortgage collateral and/or delivery of pledged collateral to FHLBNY or its designated collateral custodian(s). For example, all pledged securities collateral must be delivered to the FHLBNY’s nominee name at Citibank, N.A., the FHLBNY’s securities safekeeping custodian. Mortgage collateral that is required to be in the FHLBNY’s possession is typically delivered to the FHLBNY’s Jersey City, N.J. facility. However, in certain instances, delivery to an FHLBNY approved custodian may be allowed.

 

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Table 33: Concentration analysis — Top Ten Advance Holders
The following tables provide summary data for the top ten advance holders (dollars in thousands):
                                         
    September 30, 2010  
                    Percentage of        
            Par     Total Par Value     Interest Income  
    City   State   Advances     of Advances     Three months     Nine months  
Hudson City Savings Bank, FSB*
  Paramus   NJ   $ 17,175,000       21.4 %   $ 178,029     $ 529,488  
Metropolitan Life Insurance Company
  New York   NY     13,230,000       16.5       75,674       222,705  
New York Community Bank*
  Westbury   NY     7,593,167       9.5       77,416       230,083  
MetLife Bank, N.A.
  Bridgewater   NJ     4,969,500       6.2       16,368       40,514  
Manufacturers and Traders Trust Company
  Buffalo   NY     3,709,163       4.6       11,607       34,369  
Astoria Federal Savings and Loan Assn.
  Lake Success   NY     2,735,000       3.4       27,463       83,763  
The Prudential Insurance Co. of America
  Newark   NJ     2,500,000       3.1       17,971       60,244  
Valley National Bank
  Wayne   NJ     2,361,500       2.9       24,677       73,885  
Doral Bank
  San Juan   PR     1,531,420       1.9       16,471       53,041  
New York Life Insurance Company
  New York   NY     1,500,000       1.9       4,274       11,166  
 
                               
Total
          $ 57,304,750       71.4 %   $ 449,950     $ 1,339,258  
 
                               
     
*   Officer of member bank also served on the Board of Directors of the FHLBNY.
                                 
    December 31, 2009  
                    Percentage of        
            Par     Total Par Value     12-months  
    City   State   Advances     of Advances     Interest Income  
Hudson City Savings Bank, FSB*
  Paramus   NJ   $ 17,275,000       19.0 %   $ 710,900  
Metropolitan Life Insurance Company
  New York   NY     13,680,000       15.1       356,120  
New York Community Bank*
  Westbury   NY     7,343,174       8.1       310,991  
Manufacturers and Traders Trust Company
  Buffalo   NY     5,005,641       5.5       97,628  
The Prudential Insurance Co. of America
  Newark   NJ     3,500,000       3.9       93,601  
Astoria Federal Savings and Loan Assn.
  Lake Success   NY     3,000,000       3.3       120,870  
Emigrant Bank
  New York   NY     2,475,000       2.7       64,131  
Doral Bank
  San Juan   PR     2,473,420       2.7       86,389  
MetLife Bank, N.A.
  Bridgewater   NJ     2,430,500       2.7       46,142  
Valley National Bank
  Wayne   NJ     2,322,500       2.6       103,707  
 
                         
Total
          $ 59,505,235       65.6 %   $ 1,990,479  
 
                         
     
*   At December 31, 2009, officer of member bank also served on the Board of Directors of the FHLBNY.
                                         
    September 30, 2009  
                    Percentage of        
            Par     Total Par Value     Interest Income  
    City   State   Advances     of Advances     Three months     Nine months  
Hudson City Savings Bank, FSB*
  Paramus   NJ   $ 17,325,000       18.9 %   $ 178,896     $ 532,100  
Metropolitan Life Insurance Company
  New York   NY     14,280,000       15.6       84,277       279,360  
New York Community Bank*
  Westbury   NY     8,148,476       8.9       78,413       233,129  
Manufacturers and Traders Trust Company
  Buffalo   NY     5,493,756       6.0       19,133       83,856  
The Prudential Insurance Co. of America
  Newark   NJ     3,500,000       3.8       22,448       71,473  
Astoria Federal Savings and Loan Assn.
  Lake Success   NY     2,960,000       3.2       29,824       91,226  
Emigrant Bank
  New York   NY     2,475,000       2.7       16,127       48,004  
Doral Bank
  San Juan   PR     2,473,420       2.7       21,513       65,825  
MetLife Bank, N.A.
  Bridgewater   NJ     2,382,000       2.6       12,854       34,658  
Valley National Bank
  Wayne   NJ     2,338,500       2.6       25,608       78,322  
 
                               
Total
          $ 61,376,152       67.0 %   $ 489,093     $ 1,517,953  
 
                               
     
*   At September 30, 2009, officer of member bank also served on the Board of Directors of the FHLBNY.
Investment quality
The FHLBNY’s investments are summarized below (dollars in thousands):
Table 34: Period-Over-Period Change in Investments
                                 
    September 30,     December 31,     Dollar     Percentage  
    2010     2009     Variance     Variance  
 
                               
State and local housing finance agency obligations 1
  $ 740,256     $ 751,751     $ (11,495 )     (1.53 )%
Mortgage-backed securities
                               
Available-for-sale securities, at fair value
    3,360,959       2,240,564       1,120,395       50.01  
Held-to-maturity securities, at carrying value
    7,480,990       9,767,531       (2,286,541 )     (23.41 )
 
                       
Total securities
    11,582,205       12,759,846       (1,177,641 )     (9.23 )
 
                               
Grantor trusts 2
    12,822       12,589       233       1.85  
Federal funds sold
    4,095,000       3,450,000       645,000       18.70  
 
                       
 
                               
Total investments
  $ 15,690,027     $ 16,222,435     $ (532,408 )     (3.28 )%
 
                       
     
1   Classified as held-to-maturity securities, at carrying value.
 
2   Classified as available-for-sale securities, at fair value and represents investments in registered mutual funds and other fixed-income securities maintained under the grantor trusts.
Long-term investments were principally comprised of (1) Mortgage-backed securities classified as held-to-maturity at a carrying value of $7.5 billion, of which 88.2% comprised of securities issued by government sponsored enterprises and a U.S. government agency, (2) Mortgage-backed securities classified as available-for-sale securities at recorded fair values of $3.4 billion, 100 percent of which was comprised of GSE issued mortgage-backed securities. In addition, the FHLBNY had investments of $740.3 million in primary public and private placements of taxable obligations of state and local housing finance authorities classified as held-to-maturity. Short-term investments consisted of Federal funds sold.

 

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Investment rating
External ratings and the changes in a security’s external rating are factors in the FHLBNY’s assessment of impairment; a rating or a rating change alone is not necessarily indicative of impairment or absence of impairment.
The following tables contain information about credit ratings of the Bank’s investments in Held-to-maturity and Available-for-sale securities (in thousands). Also see, Table 20 rating information:
Table 35: NRSRO Held-to-Maturity Securities
External ratings — Held-to-maturity securities — September 30, 2010:
                                                 
                                               
                                            Below  
    Carrying     NRSRO Ratings - September 30, 2010     Investment  
Issued, guaranteed or insured:   Value     AAA     AA     A     BBB     Grade  
Pools of Mortgages
                                               
Fannie Mae
  $ 939,288     $ 939,288     $     $     $     $  
Freddie Mac
    269,515       269,515                          
 
                                   
Total pools of mortgages
    1,208,803       1,208,803                          
 
                                   
Collateralized Mortgage Obligations/Real
                                               
Estate Mortgage Investment Conduits
                                               
Fannie Mae
    1,854,692       1,854,692                          
Freddie Mac
    3,184,866       3,184,866                          
Ginnie Mae
    127,168       127,168                          
 
                                   
Total CMOs/REMICs
    5,166,726       5,166,726                          
 
                                   
Commercial Mortgage-Backed Securities
                                               
Freddie Mac
    173,969       173,969                          
Ginnie Mae
    48,954       48,954                          
 
                                   
Total commercial mortgage-backed securities
    222,923       222,923                          
 
                                   
Non-GSE MBS
                                               
CMOs/REMICs
    336,980       218,579       9,688       20,989             87,724  
Asset-Backed Securities
                                               
Manufactured housing loans (insured)
    182,711             182,711                    
Home equity loans (insured)
    196,641       9,710       70,835       23,226       14,037       78,833  
Home equity loans (uninsured)
    166,206       150,323       11,791             4,092        
 
                                   
Total asset-backed securities
    545,558       160,033       265,337       23,226       18,129       78,833  
 
                                   
Total HTM mortgage-backed securities
  $ 7,480,990     $ 6,977,064     $ 275,025     $ 44,215     $ 18,129     $ 166,557  
 
                                   
 
                                               
Other
                                               
State and local housing finance agency obligations
  $ 740,256     $ 71,597     $ 592,594     $ 19,845     $ 56,220     $  
 
                                   
Total other
  $ 740,256     $ 71,597     $ 592,594     $ 19,845     $ 56,220     $  
 
                                   
Total Held-to-maturity securities
  $ 8,221,246     $ 7,048,661     $ 867,619     $ 64,060     $ 74,349     $ 166,557  
 
                                   
Table 36: NRSRO Available-for-Sale Securities
External ratings — Available-for-sale securities — September 30, 2010:
                                 
            NRSRO Ratings - September 30, 2010  
Issued, guaranteed or insured:   Fair Value     AAA     AA     A  
Pools of Mortgages
                               
Fannie Mae
  $     $     $     $  
Freddie Mac
                       
 
                       
Total pools of mortgages
                       
 
                       
Collateralized Mortgage Obligations/Real
                               
Estate Mortgage Investment Conduits
                               
Fannie Mae
    2,275,326       2,275,326              
Freddie Mac
    1,085,633       1,085,633              
Ginnie Mae
                       
 
                       
Total CMOs/REMICs
    3,360,959       3,360,959              
 
                       
Non-GSE MBS
                               
CMOs/REMICs
                       
Commercial mortgage-backed securities
                       
 
                       
Total non-federal-agency MBS
                       
 
                       
Asset-Backed Securities
                               
Manufactured housing loans (insured)
                       
Home equity loans (insured)
                       
Home equity loans (uninsured)
                       
 
                       
Total asset-backed securities
                       
 
                       
Total AFS mortgage-backed securities
  $ 3,360,959     $ 3,360,959     $     $  
 
                       
 
                               
Other
                               
Fixed income funds, equity funds and cash equivalents *
  $ 12,822                          
 
                             
Total Available-for-sale securities
  $ 3,373,781                          
 
                             
     
*   Unrated

 

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Fannie Mae and Freddie Mac Securities
The FHLBNY’s mortgage-backed securities were predominantly issued by Fannie Mae and Freddie Mac.
The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are in conservatorship, with the Finance Agency named as conservator, who will manage Fannie Mae and Freddie Mac in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market.
Available-for-sale securities – 100 percent of MBS outstanding and classified as AFS were issued by Fannie Mae and Freddie Mac.
Held-to-maturity securities – Comprised of 88.2% and 89.1% of MBS also issued by Fannie Mae, Freddie Mac and a U.S. government agency at September 30, 2010 and December 31, 2009.
The following table summarizes the carrying value basis of held-to-maturity mortgage-backed securities by issuer (dollars in thousands):
Table 37: Carrying Value Basis of Held-to-Maturity Mortgage-Backed Securities by Issuer
                                 
    September 30,     Percentage     December 31,     Percentage  
    2010     of total     2009     of total  
 
                               
U.S. government sponsored enterprise residential mortgage-backed securities
                               
Fannie Mae
  $ 2,793,981       37.35 %   $ 3,746,768       38.36 %
Freddie Mac
    3,454,380       46.17       4,735,371       48.48  
U.S. agency residential mortgage-backed securities
    127,168       1.70       171,531       1.76  
U.S. government sponsored enterprise commercial mortgage-backed securities
    173,969       2.33              
U.S. agency commercial mortgage-backed securities
    48,953       0.65       49,526       0.51  
Private-label issued securities
    882,539       11.80       1,064,335       10.89  
 
                       
Total Held-to-maturity securities-mortgage-backed securities
  $ 7,480,990       100.00 %   $ 9,767,531       100.00 %
 
                       
Non-Agency Private label mortgage — and asset-backed securities
The Bank also held MBS that were privately issued, and were classified as held-to-maturity. The following table summarizes private-label mortgage- and asset-backed securities by fixed- or variable-rate coupon types (Unpaid principal balance; in thousands):
Table 38: Non-Agency Private Label Mortgage Securities
                                                 
    September 30, 2010     December 31, 2009  
Private-label MBS   Fixed Rate     Variable Rate     Total     Fixed Rate     Variable Rate     Total  
Private-label RMBS
                                               
Prime
  $ 328,579     $ 4,068     $ 332,647     $ 435,913     $ 4,359     $ 440,272  
Alt-A
    6,123       3,338       9,461       7,229       3,713       10,942  
 
                                   
Total PL RMBS
    334,702       7,406       342,108       443,142       8,072       451,214  
 
                                   
Home Equity Loans
                                               
Subprime
    399,922       85,256       485,178       437,042       108,801       545,843  
 
                                   
Total Home Equity Loans
    399,922       85,256       485,178       437,042       108,801       545,843  
 
                                   
Manufactured Housing Loans
                                               
Subprime
    182,731             182,731       202,299             202,299  
 
                                   
Total Manufactured Housing Loans
    182,731             182,731       202,299             202,299  
 
                                   
Total UPB of private-label MBS
  $ 917,355     $ 92,662     $ 1,010,017     $ 1,082,483     $ 116,873     $ 1,199,356  
 
                                   
Unpaid principal balance (UPB) is also known as the current face or par amount of a mortgage-backed security.
Other-Than-Temporarily Impaired Securities
OTTI at 2010 third quarter — To assess whether the entire amortized cost basis of the Bank’s private-label MBS will be recovered, the Bank performed cash flow analysis on 100 percent of the its private-label MBS outstanding at September 30, 2010. Cash flow assessments identified credit impairment on four HTM private-label mortgage-backed securities, and $3.1 million as other-than-temporary impairment (“OTTI”) was recorded as a charge to earnings. All four securities had been previously determined to be OTTI, and the additional impairment (or re-impairment) in the 2010 third quarter was due to further deterioration in the credit performance metrics of the securities. The non-credit portion of OTTI recorded in AOCI was not significant. Year-to-date credit OTTI was $7.7 million.

 

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The tables below provide the key characteristics of the securities1 that were deemed OTTI in the 2010 (dollars in thousands):
Table 39: OTTI in 2010
                                                                 
                                    Quarter Ended     Nine Months Ended  
    Quarter ended September 30, 2010     September 30, 2010     September 30, 2010  
    Insurer MBIA     Insurer Ambac     OTTI     OTTI  
Security           Fair             Fair     Credit     Non-credit2     Credit     Non-credit2  
Classification   UPB     Value     UPB     Value     Loss     Loss     Loss     Loss  
 
                                                               
HEL Subprime*
  $ 31,876     $ 15,050     $ 16,341     $ 8,233     $ (3,067 )   $ (2,569 )   $ (7,737 )   $ (3,164 )
 
                                               
Total
  $ 31,876     $ 15,050     $ 16,341     $ 8,233     $ (3,067 )   $ (2,569 )   $ (7,737 )   $ (3,164 )
 
                                               
     
*   HEL Subprime — MBS supported by home equity loans.
                                                 
    Quarter ended June 30, 2010  
    Insurer MBIA     Insurer Ambac     OTTI  
Security           Fair             Fair     Credit     Non-credit2  
Classification   UPB     Value     UPB     Value     Loss     Loss  
 
                                               
HEL Subprime*
  $ 20,976     $ 9,044     $ 37,456     $ 22,564     $ (1,270 )   $ (1,068 )
 
                                   
Total
  $ 20,976     $ 9,044     $ 37,456     $ 22,564     $ (1,270 )   $ (1,068 )
 
                                   
     
*   HEL Subprime — MBS supported by home equity loans.
                                                 
    Quarter ended March 31, 2010  
    Insurer MBIA     Insurer Ambac     OTTI  
Security           Fair             Fair     Credit     Non-credit2  
Classification   UPB     Value     UPB     Value     Loss     Loss  
 
                                               
HEL Subprime*
  $ 21,637     $ 9,730     $ 45,476     $ 26,015     $ (3,400 )   $ 473  
 
                                   
Total
  $ 21,637     $ 9,730     $ 45,476     $ 26,015     $ (3,400 )   $ 473  
 
                                   
     
*   HEL Subprime — MBS supported by home equity loans.
 
1   At September 30, 2010, the total carrying value of the securities prior to OTTI was $22.7 million. The carrying values and fair values of OTTI securities in a loss position prior to OTTI were $8.6 million and $8.1 million also at September 30, 2010.
 
2   Represents net amount of impairment losses reclassified (from) to AOCI to earnings as a result of additional credit losses on securities that had been previously determined to be OTTI.
All four credit impaired securities at September 30, 2010 are insured by bond insurers Ambac and MBIA. The Bank’s analysis of Ambac concluded that the bond insurer could not be relied upon to make whole credit losses. Analysis of MBIA concluded that insurance support could be relied upon for shortfalls up until June 30, 2011, beyond which date, MBIA’s financial resources would be such that insurance protection could not be relied upon.
The following table summarizes the key characteristics of securities insured by MBIA, Ambac, and Assured Guaranty Municipal Trust (formerly FSA) (in thousands):
Table 40: Monoline Insurance of PLMBS
                                                 
    September 30, 2010  
    AMBAC     MBIA     AGM *  
            Unrealized             Unrealized             Unrealized  
Private-label MBS   UPB     Losses     UPB     Losses     UPB     Losses  
HEL
                                               
Subprime
                                               
2004 and earlier
  $ 179,287     $ (31,202 )   $ 34,450     $ (8,414 )   $ 77,981     $ (2,577 )
Manufactured Housing Loans
                                               
Subprime
                                               
2004 and earlier
                            182,731       (22,141 )
 
                                   
Total of all Private-label MBS
  $ 179,287     $ (31,202 )   $ 34,450     $ (8,414 )   $ 260,712     $ (24,718 )
 
                                   
     
*   Assured Guaranty Municipal Trust (formerly FSA)

 

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The following tables present additional information of the fair values and gross unrealized losses of PLMBS by year of securitization and external rating (in thousands):
Table 41: PLMBS by Year of Securitization and External Rating
                                                                                 
    September 30, 2010                              
    Unpaid Principal Balance                              
                                            Below             Gross                
    Ratings                                     Investment     Amortized     Unrealized             Total OTTI  
Private-label MBS   Subtotal     Triple-A     Double-A     Single-A     Triple-B     Grade     Cost     (Losses)     Fair Value     Losses  
RMBS
                                                                               
Prime
                                                                               
2006
  $ 46,480     $     $     $     $     $ 46,480     $ 46,029     $ (407 )   $ 45,710     $  
2005
    66,409                   21,223             45,186       64,699       (716 )     64,575        
2004 and earlier
    219,758       209,866       9,892                         218,805       (443 )     223,795        
 
                                                           
Total RMBS Prime
    332,647       209,866       9,892       21,223             91,666       329,533       (1,566 )     334,080        
 
                                                           
Alt-A
                                                                               
2004 and earlier
    9,461       9,461                               9,462       (768 )     8,746        
 
                                                           
Total RMBS
    342,108       219,327       9,892       21,223             91,666       338,995       (2,334 )     342,826        
 
                                                           
HEL
                                                                               
Subprime
                                                                               
2004 and earlier
    485,178       180,811       89,111       42,759       28,932       143,565       456,876       (76,438 )     381,214       (4,573 )
 
                                                           
Manufactured
                                                                               
Housing Loans
                                                                               
Subprime
                                                                               
2004 and earlier
    182,731             182,731                         182,712       (22,141 )     160,571        
 
                                                           
Total PLMBS
  $ 1,010,017     $ 400,138     $ 281,734     $ 63,982     $ 28,932     $ 235,231     $ 978,583     $ (100,913 )   $ 884,611     $ (4,573 )
 
                                                           
                                                                                 
    December 31, 2009                              
    Unpaid Principal Balance                              
                                            Below             Gross                
    Ratings                                     Investment             Unrealized             Total OTTI  
Private-label MBS   Subtotal     Triple-A     Double-A     Single-A     Triple-B     Grade     Amortized Cost     (Losses)     Fair Value     Losses  
RMBS
                                                                               
Prime
                                                                               
2006
  $ 63,276     $     $     $ 38,689     $     $ 24,587     $ 62,654     $ (2,396 )   $ 60,258     $  
2005
    82,982       28,687                         54,295       80,996       (1,708 )     79,288       (3,204 )
2004 and earlier
    294,014       281,240       12,774                         292,773       (3,696 )     289,958        
 
                                                           
Total RMBS Prime
    440,272       309,927       12,774       38,689             78,882       436,423       (7,800 )     429,504       (3,204 )
 
                                                           
Alt-A
                                                                               
2004 and earlier
    10,942       10,942                               10,944       (938 )     10,006        
 
                                                           
Total RMBS
    451,214       320,869       12,774       38,689             78,882       447,367       (8,738 )     439,510       (3,204 )
 
                                                           
HEL
                                                                               
Subprime
                                                                               
2004 and earlier
    545,843       205,480       91,782       48,838       43,035       156,708       525,260       (151,818 )     373,442       (137,708 )
 
                                                           
Manufactured
                                                                               
Housing Loans
                                                                               
Subprime
                                                                               
2004 and earlier
    202,299             202,299                         202,278       (37,101 )     165,177        
 
                                                           
Total PLMBS
  $ 1,199,356     $ 526,349     $ 306,855     $ 87,527     $ 43,035     $ 235,590     $ 1,174,905     $ (197,657 )   $ 978,129     $ (140,912 )
 
                                                           

 

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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.
Table 42: Weighted-Average Market Price of MBS
                         
    September 30, 2010  
    Original              
    Weighted-     Weighted-     Weighted-Average  
    Average Credit     Average Credit     Collateral  
Private-label MBS   Support %     Support %     Delinquency %  
RMBS
                       
Prime
                       
2006
    3.73 %     5.29 %     6.30 %
2005
    2.59       4.13       2.56  
2004 and earlier
    1.58       3.21       0.65  
 
                 
Total RMBS Prime
    2.08       3.69       1.82  
Alt-A
                       
2004 and earlier
    10.97       33.36       10.89  
 
                 
Total RMBS
    2.32       4.51       2.07  
 
                 
HEL
                       
Subprime
                       
2004 and earlier
    57.14       64.72       17.24  
 
                 
Manufactured Housing Loans
                       
Subprime
                       
2004 and earlier
    100.00       100.00       3.14  
 
                 
Total Private-label MBS
    46.33 %     50.71 %     9.55 %
 
                 
                         
    December 31, 2009  
    Original              
    Weighted-     Weighted-     Weighted-Average  
    Average Credit     Average Credit     Collateral  
Private-label MBS   Support %     Support %     Delinquency %  
RMBS
                       
Prime
                       
2006
    3.74 %     5.16 %     5.47 %
2005
    2.67       3.82       2.32  
2004 and earlier
    1.58       2.82       0.79  
 
                 
Total RMBS Prime
    2.10       3.35       1.75  
Alt-A
                       
2004 and earlier
    10.73       32.35       11.22  
 
                 
Total RMBS
    2.30       4.05       1.98  
 
                 
HEL
                       
Subprime
                       
2004 and earlier
    57.86       65.34       17.40  
 
                 
Manufactured Housing Loans
                       
Subprime
                       
2004 and earlier
    57.78       55.56       3.64  
 
                 
Total Private-label MBS
    36.95 %     40.63 %     9.28 %
 
                 
Definitions:
Original Weighted-Average Credit Support 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.
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.

 

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Mortgage Loans — Held-for-portfolio
Through the Mortgage Partnership Finance Program or MPF program, the FHLBNY invests in home mortgage loans originated by or through members or approved state and local housing finance agencies (“housing associates”). The FHLBNY purchases these mortgages loans under the Finance Agency’s Acquired Member Assets (“AMA”) regulation. These assets may include whole loans eligible to secure advances (excluding mortgages above the conforming-loan limit); whole loans secured by manufactured housing; or bonds issued by housing associates.
Underwriting standards - Summarized below are the principal underwriting criteria for the Bank’s MPF Program through which the Bank acquires mortgage loans for its own portfolio. For a fuller description of the MPF loan mortgage loan standards, refer to pages 8 through 19 of the Bank’s most recent Form 10-K filed on March 25, 2010.
Mortgage loans delivered under the MPF Program must meet certain underwriting and eligibility requirements. Loans must be qualifying 5- to 30-year conforming conventional or Government fixed-rate, fully amortizing mortgage loans, secured by first liens on owner-occupied one-to-four family residential properties and single unit second homes. Not eligible for delivery under the MPF Program are mortgage loans that are not ratable by S&P, or loans that are classified as high cost, high rate, or high risk. Satisfaction Collectability of mortgage loans is supported by liens on real estate securing the loan. For conventional loans, defined as mortgage loans other than VA and FHA insured loans, additional loss protection is provided by private mortgage insurance required for MPF loans with a loan-to-value ratio of more than 80 percent at origination, which is paid for by the borrower. The FHLBNY is responsible for losses up to the “first loss level”. Losses beyond this layer are absorbed through credit enhancement provided by the member participating in the Mortgage Partnership Program. All residual credit exposure is FHLBNY’s responsibility. The amount of credit enhancement is computed with the use of a Standard & Poor’s model to bring a pool of uninsured loans to “AA” credit risk. The credit enhancement is an obligation of the member.
The following table provides roll-forward information with respect to the First Loss Account (in thousands):
Table 43: Roll-Forward First Loss Account
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Beginning balance
  $ 11,513     $ 13,948     $ 13,934     $ 13,765  
Additions
    187       19       340       216  
Resets*
                (2,540 )      
Charge-offs
    (97 )           (131 )     (14 )
Recoveries
                       
 
                       
Ending balance
  $ 11,603     $ 13,967     $ 11,603     $ 13,967  
 
                       
     
*   For the Original MPF, MPF 100, MPF 125 and MPF Plus products, the Credit Enhancement is periodically recalculated. If the recalculated Credit Enhancement would result in a PFI Credit Enhancement obligation lower than the remaining obligation, the PFI’s Credit Enhancement obligation will be reset to the new, lower level.
The aggregate amount of the First Loss Account is memorialized and tracked but is neither recorded nor reported as a credit loss reserve in the FHLBNY’s financial statements. If “second losses” beyond this layer are incurred, they are absorbed through a credit enhancement provided by the Participating Financial Institutions. The credit enhancement held by PFIs ensures that the lender retains a credit stake in the loans it originates. For managing this risk, PFIs receive monthly “credit enhancement fees” from the FHLBNY.
Mortgage loans — Past due
In the FHLBNY’s outstanding mortgage loans held-for-portfolio, non-performing loans and loans 90 days or more past due and accruing interest were as follows (in thousands):
Table 44: Mortgage Loans — Past Due
                 
    September 30, 2010     December 31, 2009  
 
               
Secured by 1-4 family
  $ 668     $ 570  
 
           
The past due loans still accruing were VA and FHA insured loans.
Non-performing mortgage loans were conventional mortgage loans that were placed on non-accrual/non-performing status when the collection of the contractual principal or interest from the borrower was 90 days or more past due. FHLBNY considers conventional loans that are 90 days or more past due as non-accrual loans. Conventional loans exclude Federal Housing Administration (“FHA”) and Veteran Administration (“VA”) insured loans. FHA and VA insured loans that were past due 90 days or more were not significant at any period reported, and interest was still being accrued because of VA and FHA insurance (See Table 45: Mortgage Loans — Interest Short-fall). No loans were impaired for any periods covered in this report, other than the non-accrual loans.

 

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Mortgage loans — Interest on Non-performing loans
The FHLBNY’s interest contractually due and actually received for non-performing loans were as follows (in thousands):
Table 45: Mortgage Loans — Interest Short-Fall
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Interest contractually due 1
  $ 373     $ 200     $ 973     $ 505  
Interest actually received
    344       179       898       452  
 
                       
 
                               
Shortfall
  $ 29     $ 21     $ 75     $ 53  
 
                       
     
1   The Bank does not recognize interest received as income from uninsured loans past due 90-days or greater.
Table 46: Mortgage Loans — Allowance for Credit Losses
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Beginning balance
  $ 5,392     $ 2,760     $ 4,498     $ 1,406  
Charge-offs
    (97 )           (131 )     (14 )
Recoveries
    11             33        
Provision for credit losses on mortgage loans
    231       598       1,137       1,966  
 
                       
 
 
Ending balance
  $ 5,537     $ 3,358     $ 5,537     $ 3,358  
 
                       
Participating Financial Institution Risk
The members or housing associates that are approved as Participating Financial Institutions continue to bear a significant portion of the credit risk through credit enhancements that they provide to the FHLBNY. The Acquired Member Assets regulation requires that these credit enhancements be sufficient to protect the FHLBNY from excess credit risk exposure. Specifically, the FHLBNY exposure must be no greater than it would be with an asset rated in the fourth-highest credit rating category by a Nationally Recognized Statistical Rating Organization (“NRSRO”), or such higher rating category as the FHLBNY may require. The MPF program is constructed to provide the Bank with assets that are credit-enhanced to the second-highest credit rating category (double-A).
The top five Participating Financial Institutions (PFI) and the outstanding MPF loan balances are listed below (dollars in thousands):
Table 47: Top Five Participating Financial Institutions — Concentration
                 
    September 30, 2010  
    Mortgage     Percent of Total  
    Loans     Mortgage Loans  
 
               
Manufacturers and Traders Trust Company
  $ 533,689       42.23 %
Astoria Federal Savings and Loan Association
    210,404       16.65  
Community Bank fka Elmira Svgs & Ln Assn
    51,694       4.09  
OceanFirst Bank
    50,658       4.01  
CFCU Community Credit Union
    40,802       3.23  
All Others
    376,501       29.79  
 
           
 
               
Total 1
  $ 1,263,748       100.00 %
 
           
                 
    December 31, 2009  
    Mortgage     Percent of Total  
    Loans     Mortgage Loans  
 
               
Manufacturers and Traders Trust Company
  $ 607,072       46.17 %
Astoria Federal Savings and Loan Association
    220,268       16.75  
Elmira Savings and Loan F.A.
    61,663       4.69  
Ocean First Bank
    51,277       3.90  
CFCU Community Credit Union
    42,344       3.22  
All Others
    332,304       25.27  
 
           
 
               
Total 1
  $ 1,314,928       100.00 %
 
           
     
Note1   Totals do not include CMA loans.

 

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Credit Risk Exposure on MPF Loans — Mortgage insurer default risk
Credit risk on MPF loans is the potential for financial loss due to borrower default or depreciation in the value of the real estate collateral securing the MPF Loan, offset by the PFI’s credit enhancement protection, which may take the form of a contingent performance based credit enhancement fees as well as the credit enhancement amount. The credit enhancement amount is a direct liability of the PFI to pay credit losses; the PFI may also arrange with an insurer for a SMI policy insuring a portion of the credit losses. To the extent credit losses are not recoverable from PMI, the FHLBNY has potential credit exposure should the loan default and the PFI directly or indirectly is unable to recover credit losses.
The MPF Program uses certain mortgage insurance companies to provide both primary mortgage insurance (“PMI”) and supplemental mortgage insurance (“SMI”) for MPF loans. The FHLBNY is exposed to the performance of mortgage insurers to the extent PFI’s rely on insurer credit protection. Credit exposure is defined as the total of PMI and SMI coverage written by a mortgage insurer on MPF loans held by FHLBNY that are delinquent.
All mortgage insurance providers have had their external ratings for insurer financial strength downgraded below AA- by one or more NRSROs since December 31, 2008. If a mortgage insurer fails to fulfill its obligations, the FHLBNY may bear any remaining loss of the borrowers’ default on the related mortgage loans not covered by the PFI.
The FHLBNY has stopped accepting new loans under master commitments with SMI from mortgage insurers that no longer meet MPF insurer requirements. If an SMI provider is downgraded below an “AA-” rating under the MPF Plus product, the PFI has six months to either replace the SMI policy or provide its own undertaking; or it may forfeit its performance based CE Fees. If a PMI provider is downgraded, the FHLBNY may request the servicer to obtain replacement PMI coverage with a different provider. However, it is possible that replacement coverage may be unavailable or result in additional cost to the FHLBNY.
Derivative Counterparty Ratings
The FHLBNY is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The FHLBNY transacts most of its derivatives with major financial institutions. Some of these institutions or their affiliates buy, sell, and distribute consolidated obligations. The FHLBNY is also subject to operational risks in the execution and servicing of derivative transactions. The degree of counterparty 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.

 

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The following table summarizes the FHLBNY’s credit exposure by counterparty credit rating (in thousands, except number of counterparties).
Table 48: Credit Exposure by Counterparty Credit Rating
                                 
    September 30, 2010  
                    Total Net        
    Number of     Notional     Exposure at     Net Exposure after  
Credit Rating   Counterparties     Balance     Fair Value     Cash Collateral3  
 
                               
AAA
        $     $     $  
AA
    8       45,406,173       40,342       18,346  
A
    8       78,223,953       35,340       3,540  
Members (Note1 and Note2)
    2       275,000       10,535       10,535  
Delivery Commitments
          20,675       4       4  
 
                       
 
                               
Total
    18     $ 123,925,801     $ 86,221     $ 32,425  
 
                       
                                 
    December 31, 2009  
                    Total Net        
    Number of     Notional     Exposure at     Net Exposure after  
Credit Rating   Counterparties     Balance     Fair Value     Cash Collateral3  
 
                               
AAA
        $     $     $  
AA
    7       45,652,167       684       684  
A
    8       88,711,243              
Members (Note1 and Note2)
    2       160,000       7,596       7,596  
Delivery Commitments
          4,210              
 
                       
 
                               
Total
    17     $ 134,527,620     $ 8,280     $ 8,280  
 
                       
     
Note1:   Fair values of $10.5 million and $7.6 million comprising of intermediated transactions with members and interest-rate caps sold to members (with capped floating-rate advances) were collateralized at September 30, 2010 and December 31, 2009.
 
Note2:   Members are required to pledge collateral to secure derivatives purchased by the FHLBNY as an intermediary on behalf of its members. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. As a result of the collateral agreements with its members, the FHLBNY believes that its maximum credit exposure due to the intermediated transactions was $0 at September 30, 2010 and December 31, 2009.
 
Note3:   As reported in the Statements of Condition.
Risk measurement - Although notional amount is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since derivative counterparties do not exchange the notional amount (except in the case of foreign currency swaps of which the FHLBNY has none). Counterparties use the notional amounts of derivative instruments to calculate contractual cash flows to be exchanged. The fair value of a derivative in a gain position is a more meaningful measure of the FHLBNY’s current market exposure on derivatives. The FHLBNY estimates exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a gain position, net of collateral pledged by the counterparty to mitigate the FHLBNY’s exposure. All derivative contracts with non-members are also subject to master netting agreements or other right of offset arrangements.
Exposure - In determining credit risk, the FHLBNY considers accrued interest receivable and payable, and the legal right to offset assets and liabilities by counterparty. The FHLBNY attempts to mitigate its exposure by requiring derivative counterparties to pledge cash collateral, if the amount of exposure is above the collateral threshold agreements. At September 30, 2010, counterparties had deposited $53.8 million in cash as collateral to mitigate such an exposure. At December 31, 2009, the fair values of derivatives in a gain position were below the threshold and derivative counterparties pledged no cash to the FHLBNY.
At September 30, 2010 and December 31, 2009, the FHLBNY had posted $3.8 billion and $2.2 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 pay the posted cash collateral to the FHLBNY under unforeseen circumstances, such as bankruptcy; in such an event the FHLBNY would then exercise its rights under the “International Swaps and Derivatives Association agreement” (“ISDA”). To the extent, the FHLBNY may not receive cash equal to the amount posted, the FHLBNY could face losses.
Derivative counterparty ratings - The Bank’s credit exposures (derivatives in a net gain position) at September 30, 2010 were to counterparties rated Single A or better and to member institutions on whose behalf the FHLBNY had acted as an intermediary or had sold interest rate caps, at the request of members, to create capped floating rate advance borrowings. The exposures were collateralized under standard collateral agreements with the FHLBNY’s member. Acting as an intermediary, the Bank had also purchased equivalent notional amounts of derivatives from unrelated derivative counterparties. See Table 48: Credit Exposure by Counterparty Credit Rating.
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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Commitments, Contingencies and Off-Balance Sheet Arrangements
Consolidated obligations — Joint and several liability
Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been transferred/assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks.
The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make a payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate among the other FHLBanks the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the 12 FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation (the Bank did not hold any consolidated obligations of other FHLBanks as investments at September 30, 2010 and December 31, 2009). If principal or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.
Although the FHLBNY is primarily liable for those consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock from, any member or non-member stockholder until the Finance Agency approves the FHLBNY’s consolidated obligation payment plan or another remedy, and until the FHLBNY pays all the interest and principal currently due under all its consolidated obligations. The par amounts of the outstanding consolidated obligations of all 12 FHLBanks were $0.8 trillion and $0.9 trillion at September 30, 2010 and December 31, 2009.
The FHLBNY does not believe that the identification of particular banks as the primary obligors on these consolidated obligations is relevant because all FHLBanks are jointly and severally obligated to pay all consolidated obligations. The identity of the primary obligor does not affect the FHLBNY’s investment decisions. The FHLBNY’s ownership of consolidated obligations in which other FHLBanks are primary obligors does not affect the FHLBNY’s “guarantee” on consolidated obligations as there is no automatic legal right of offset. Even if the FHLBNY were to claim an “offset,” the FHLBNY would still be jointly and severally obligated for any debt service shortfall caused by the FHLBanks’ failure to pay.
Off-balance sheet arrangements with respect to derivatives are discussed in detail in Note 16 to the unaudited financial statements in this report. Also, see Item 1 Legal Proceedings.

 

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The following table summarizes contractual obligations and other commitments as of September 30, 2010 (in thousands):
Table 49: Contractual Obligations and Other Commitments
(For more information, see Note 18 to the unaudited financial statements in this report.)
                                         
    September 30, 2010  
    Payments due or expiration terms by period  
    Less than     One year     Greater than three     Greater than        
    one year     to three years     years to five years     five years     Total  
Contractual Obligations
                                       
Consolidated obligations-bonds at par 1
  $ 38,972,100     $ 25,068,825     $ 6,634,375     $ 3,054,200     $ 73,729,500  
Mandatorily redeemable capital stock 1
    45,708       14,650       2,037       4,953       67,348  
Premises (lease obligations) 2
    3,060       6,284       4,748       4,674       18,766  
 
                             
 
                                       
Total contractual obligations
    39,020,868       25,089,759       6,641,160       3,063,827       73,815,614  
 
                             
 
                                       
Other commitments
                                       
Standby letters of credit
    1,824,089       20,012       17,472       3,861       1,865,434  
Consolidated obligations-bonds/ discount notes traded not settled
    774,322                         774,322  
Open delivery commitments (MPF)
    20,675                         20,675  
 
                             
 
                                       
Total other commitments
    2,619,086       20,012       17,472       3,861       2,660,431  
 
                             
 
                                       
Total obligations and commitments
  $ 41,639,954     $ 25,109,771     $ 6,658,632     $ 3,067,688     $ 76,476,045  
 
                             
     
1   Callable bonds contain exercise date or a series of exercise dates that may result in a shorter redemption period. Mandatorily redeemable capital stock is categorized by the dates at which the corresponding advances outstanding mature. Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock, under which stock may not be redeemed until the later of five years from the date the member becomes a nonmember or the related advance matures.
 
2   Immaterial amount of commitments for equipment leases are not included.
Liquidity, Short-Term Borrowings and Short-Term Debt
The FHLBNY’s primary source of liquidity is the issuance of consolidated obligation bonds and discount notes. To refinance maturing consolidated obligations, the Bank relies on the willingness of the investors to purchase new issuances. The FHLBNY has access to the discount note market and the efficiency of issuing discount notes is an important factor as a source of liquidity since discount notes can be issued any time and in a variety of amounts and maturities. Member deposits and capital stock purchased by members are another source of funds. Short-term unsecured borrowings from other FHLBanks and in the Federal funds market provide additional sources of liquidity. 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 expired December 31, 2009 and supplemented the existing limit of $4 billion. See Note 18 to the unaudited financial statements for more information.
The FHLBNY’s liquidity position remains in compliance with all regulatory requirements and management does not foresee any changes to that position.
Finance Agency Regulations — Liquidity
Beginning December 1, 2005, with the implementation of the Capital Plan, the Financial Management Policy rules of the Finance Agency with respect to liquidity were superseded by regulatory requirements that are specified in Parts 917, 932 and 965 of Finance Agency regulations and are summarized below. Each FHLBank shall at all times have at least an amount of liquidity equal to the current deposits received from its members that may be invested in:
  Obligations of the United States;
 
  Deposits in banks or trust companies; or
 
  Advances with a maturity not to exceed five years.
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 result in non-compliance penalties under discretionary powers given to the Finance Agency under applicable regulations, which include other corrective actions.
Liquidity Management
The FHLBNY actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member demand, and the maturity profile of the FHLBNY’s assets and liabilities. The FHLBNY recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the FHLBNY is required to maintain certain liquidity measures in accordance with the FHLBank Act and policies developed by the FHLBNY management and approved by the FHLBNY’s Board of Directors. The specific liquidity requirements applicable to the FHLBNY are described in the next four sections:

 

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Deposit Liquidity. The FHLBNY is required to invest an aggregate amount at least equal to the amount of current deposits received from the FHLBNY’s members in: (1) obligations of the U.S. government; (2) deposits in banks or trust companies; or (3) advances to members with maturities not exceeding five years. In addition to accepting deposits from its members, the FHLBNY may accept deposits from other FHLBank or from any other governmental instrumentality.
Deposit liquidity is calculated daily. Quarterly average reserve requirements and actual reserves are summarized below (in millions). The FHLBNY met its requirements at all times.
Table 50: Deposit Liquidity
                         
    Average Deposit     Average Actual        
For the quarters ended   Reserve Required     Deposit Liquidity     Excess  
September 30, 2010
  $ 5,055     $ 46,304     $ 41,249  
June 30, 2010
    5,227       48,055       42,828  
March 31, 2010
    5,032       51,987       46,955  
December 31, 2009
    2,364       53,089       50,725  
Operational Liquidity. The FHLBNY must be able to fund its activities as its balance sheet changes from day to day. The FHLBNY maintains the capacity to fund balance sheet growth through its regular money market and capital market funding activities. Management monitors the Bank’s operational liquidity needs by regularly comparing the Bank’s demonstrated funding capacity with its potential balance sheet growth. Management then takes such actions as may be necessary to maintain adequate sources of funding for such growth.
Operational liquidity is measured daily. The FHLBNY met the requirements at all times. The following table summarizes excess operational liquidity (in millions):
Table 51: Operational Liquidity
                         
    Average Balance Sheet     Average Actual        
For the quarters ended   Liquidity Requirement     Operational Liquidity     Excess  
September 30, 2010
  $ 3,915     $ 15,127     $ 11,212  
June 30, 2010
    2,665       16,051       13,386  
March 31, 2010
    2,283       15,796       13,513  
December 31, 2009
    6,710       16,388       9,678  
Contingency Liquidity. The FHLBNY is required by Finance Agency regulations to hold “contingency liquidity” in an amount sufficient to meet its liquidity needs if it is unable, by virtue of a disaster, to access the consolidated obligation debt markets for at least five business days. Contingency liquidity includes (1) marketable assets with a maturity of one year or less; (2) self-liquidating assets with a maturity of one year or less; (3) assets that are generally acceptable as collateral in the repurchase market; and (4) irrevocable lines of credit from financial institutions receiving not less than the second-highest credit rating from a nationally recognized statistical rating organization. The FHLBNY consistently exceeded the regulatory minimum requirements for contingency liquidity.

 

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Contingency liquidity is reported daily. The FHLBNY met the requirements at all times. The following table summarizes excess contingency liquidity (in millions):
Table 52: Contingency Liquidity
                         
    Average Five Day     Average Actual        
For the quarters ended   Requirement     Contingency Liquidity     Excess  
September 30, 2010
  $ 1,967     $ 14,859     $ 12,892  
June 30, 2010
    2,047       15,821       13,774  
March 31, 2010
    2,424       15,463       13,039  
December 31, 2009
    2,188       15,309       13,121  
The FHLBNY sets standards in its risk management policy that address its day-to-day operational and contingency liquidity needs. These standards enumerate the specific types of investments to be held by the FHLBNY to satisfy such liquidity needs and are outlined above. These standards also establish the methodology to be used by the FHLBNY in determining the FHLBNY’s operational and contingency needs. Management continually monitors and projects the FHLBNY’s cash needs, daily debt issuance capacity, and the amount and value of investments available for use in the market for repurchase agreements. Management uses this information to determine the FHLBNY’s liquidity needs and to develop appropriate liquidity plans.
Advance “Roll-Off” and “Roll-Over” Liquidity guidelines. In September 2009, the Finance Agency finalized its Minimum Liquidity Requirement Guidelines. The guidelines expanded the existing liquidity requirements under Parts 917, 932 and 965 of the Finance Agency regulations to include additional cash flow requirements under two scenarios — Advance “Roll-Over” and Roll-Off” scenarios. Each FHLBank, including the FHLBNY must have positive cash balances to be able to maintain positive cash flows for 15 days under the Roll-Off scenario, and for five days under the Roll-Over scenario. The Roll-Off scenario assumes that advances maturing under their contractual terms would mature, and in that scenario the FHLBNY would maintain positive cash flows for a minimum of 5 days on a daily basis. The Roll-Over scenario assumes that the FHLBNY’s maturing advances would be rolled over, and in that scenario the FHLBNY would maintain positive cash flows for a minimum of 15 days on a daily basis. The FHLBNY calculates the amount of cash flows under each scenario on a daily basis and has been in compliance with the guidelines.
Other Liquidity Contingencies. As discussed more fully under the section Debt Financing - Consolidated Obligations, the FHLBNY is primarily liable for consolidated obligations issued on its behalf. The FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the following rules apply: the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock of any member or non-member stockholder until the Finance Agency approves the FHLBNY’s consolidated obligation payment plan or other remedy and until the FHLBNY pays all the interest or principal currently due on all its consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $0.8 trillion at September 30, 2010. The FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future.
Finance Agency regulations also state that the FHLBanks must maintain, free from any lien or pledge, the following types of assets in an amount at least equal to the amount of consolidated obligations outstanding:
Cash;
Obligations of, or fully guaranteed by, the United States;
Secured advances;
Mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States;
Investments described in section 16(a) of the FHLBank Act, including securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and
Other securities that are rated Aaa by Moody’s or AAA by Standard & Poor’s.
Short-term Borrowings and Short-term Debt. The primary source of fund, as discussed under the section Debt Financing Activity and Consolidation Obligation bonds and discount notes, in this MD&A is the issuance of FHLBank debt to the public.
Consolidated obligation discount notes are issued with maturities up to one year and provide the FHLBNY with short-term funds and are principally used in funding short-term advances, some long-term advances, as well as money market instruments. The FHLBNY also issues short-term consolidated obligation bonds as part of its asset-liability management strategy.
The FHLBNY may also borrow from another FHLBanks, generally for a period of one day. Such borrowings have been insignificant historically.

 

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The following table summarizes short-term debt and their key characteristics (in thousands)
Table 53: Consolidated Obligations — Original Maturities Less Than One Year
                                 
                    Consolidated Obligations-Bonds With  
    Consolidated Obligations-Discount Notes     Original Maturities of One Year or Less  
    September 30, 2010     December 31, 2009     September 30, 2010     December 31, 2009  
 
                               
Outstanding at end of the period1
  $ 17,784,192     $ 30,827,639     $ 13,054,985     $ 17,987,974  
Weighted-average coupon rate at end of the period
    0.19 %     0.15 %     0.31 %     0.56 %
Monthly-average outstanding for the period2
  $ 22,729,663     $ 41,495,856     $ 11,885,428     $ 15,626,249  
Highest outstanding at any month-end2
  $ 27,479,446     $ 52,040,302     $ 17,537,976     $ 17,987,974  
     
1   Outstanding balances represents the amortized cost of short-term debt (less than 1-year) issued and outstanding at the reported dates.
 
2   Monthly average outstanding and highest outstanding represent amounts during the 9-months ended September 30, 2010, and 12-months ended December 31, 2009.
Leverage Limits and Unpledged Asset Requirements
The FHLBNY met the Finance Agency’s requirement that unpledged assets, as defined under regulations, exceed the total of consolidated obligations as follows (in thousands):
Table 54: Unpledged Assets
                 
    September 30, 2010     December 31, 2009  
Consolidated Obligations:
               
Bonds
  $ 74,918,893     $ 74,007,978  
Discount Notes
    17,787,908       30,827,639  
 
           
 
               
Total consolidated obligations
    92,706,801       104,835,617  
 
           
 
               
Unpledged assets
               
Cash
    69,471       2,189,252  
Less: Member pass-through reserves at the FRB
    (50,339 )     (29,331 )
Secured Advances 2
    85,697,171       94,348,751  
Investments 1
    15,690,234       16,222,615  
Mortgage loans
    1,267,687       1,317,547  
Accrued interest receivable on advances and investments
    305,763       340,510  
Less: Pledged Assets
    (2,981 )     (2,045 )
 
           
 
               
 
    102,977,006       114,387,299  
 
           
Excess unpledged assets
  $ 10,270,205     $ 9,551,682  
 
           
     
1   The Bank pledged $3.0 million and $2.0 million at September 30, 2010 and December 31, 2009 to the FDIC. See Note 4 — Held-to-maturity securities.
 
2   The Bank also provided to the U.S. Treasury a listing of $0.0 and $10.3 billion in advances with respect to a lending agreement at September 30, 2010 and December 31, 2009.
Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and such securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located.
Purchases of MBS. Finance Agency investment regulations limit the purchase of mortgage-backed securities to 300 percent of capital. The FHLBNY was in compliance with the regulation at all times.
Table 55: FHFA MBS Limits
                                 
    September 30, 2010     December 31, 2009  
    Actual     Limits     Actual     Limits  
 
                               
Mortgage securities investment authority
    209 %     300 %     213 %     300 %
 
                       
On March 24, 2008, the Board of Directors of the Federal Housing Finance Board (“Finance Board”), predecessor to the Finance Agency, adopted Resolution 2008-08, which temporarily expanded the authority of a FHLBank to purchase mortgage-backed securities (“MBS”) under certain conditions. The resolution had allowed an FHLBank to increase its investments in MBS issued by Fannie Mae and Freddie Mac by an amount equal to three times its capital, which is to be calculated in addition to the existing regulatory limit. The expanded authority permitted MBS to be as much as 600 percent of the FHLBNY’s capital.
All mortgage loans underlying any securities purchased under this expanded authority must have been originated after January 1, 2008. The Finance Board believed that such loans are generally of higher credit quality than loans originated at an earlier time, particularly in 2005 and 2006. The loans underlying any Fannie Mae and Freddie Mac issued MBS acquired pursuant to the new authority must have been underwritten to conform to standards imposed by the federal banking agencies in the "Interagency Guidance on Nontraditional Mortgage Product Risks” dated October 4, 2006 and the "Statement on Subprime Mortgage Lending” dated July 10, 2007.

 

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The Bank has not notified or exercised Resolution 2008-08, therefore no separate calculation was required. The expanded authority expired in March 2010.
Rating Actions With Respect to the FHLBNY are outlined below:
Table 56: FHLBNY Ratings
Short-Term Ratings:
                     
    Moody’s Investors Service   S & P
Year   Outlook   Rating   Short-Term Outlook   Rating
2010
  June 17, 2010 - Affirmed   P-1   July 21, 2010   Short-Term rating affirmed   A-1+
 
                   
2009
  June 19, 2009 - Affirmed   P-1   July 13, 2009   Short-Term rating affirmed   A-1+
 
  February 2, 2009 - Affirmed   P-1            
 
                   
2008
  October 29, 2008 - Affirmed   P-1   June 16, 2008   Short-Term rating affirmed   A-1+
 
  April 17, 2008 - Affirmed   P-1            
Long-Term Ratings:
                         
    Moody’s Investors Service   S & P
Year   Outlook   Rating   Long-Term Outlook   Rating
2010
  June 17, 2010 - Affirmed   Aaa/Stable   July 21, 2010   Long-Term rating affirmed   outlook stable   AAA/Stable
 
                       
2009
  June 19, 2009 - Affirmed   Aaa/Stable   July 13, 2009   Long-Term rating affirmed   outlook stable   AAA/Stable
 
  February 2, 2009 - Affirmed   Aaa/Stable                
 
                       
2008
  October 29, 2008 - Affirmed   Aaa/Stable   June 16, 2008   Long-Term rating affirmed   outlook stable   AAA/Stable
 
  April 17, 2008 - Affirmed   Aaa/Stable                

Legislative and Regulatory Developments

The most important legislative development during the period covered by this report was the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on July 21, 2010, which is discussed in greater detail below together with a presentation of certain regulatory actions resulting from the Dodd-Frank Act that may have an important impact on the Bank. Other important developments during the period covered by this report include certain Finance Agency regulatory actions, certain proposed legislation that would permit the Bank to continue to issue certain tax exempt letters of credit past December 31, 2010, and Basel Committee activity that may ultimately impact member demand for advances and investor demand for COs, each discussed in greater detail below.

Dodd-Frank Act

The Dodd-Frank Act, among other things: (1) creates an interagency oversight council (the “Oversight Council”) that is charged with identifying and regulating systemically important financial institutions; (2) regulates the over-the-counter derivatives market; (3) imposes new executive compensation proxy and disclosure requirements; (4) establishes new requirements for MBS, including a risk-retention requirement; (5) reforms the credit rating agencies; (6) makes a number of changes to the federal deposit insurance system; and (7) creates a consumer financial protection bureau. Although the FHLBanks were exempted from several notable provisions of the Dodd-Frank Act, the FHLBanks’ business operations, funding costs, rights, obligations, and the environment in which FHLBanks carry out their housing-finance mission are likely to be impacted by the Dodd-Frank Act. Certain regulatory actions resulting from the Dodd-Frank Act that may have an important impact on the Bank are summarized below, although the full impact of the Dodd-Frank Act will become known only after the required regulations, studies and reports are issued and finalized.

Regulatory Activity Pursuant to the Dodd-Frank Act

Proposed Commodities Futures Trading Commission (“CFTC”) — Securities and Exchange Commission (“SEC “) Rule—Certain Key Definitions for Derivatives. On August 20, 2010, the CFTC and the SEC jointly issued a proposed rule which requested comments on certain key terms necessary to regulate the use and clearing of derivatives as required by the Dodd-Frank Act by September 20, 2010. The definitions of those terms may adversely impact the Bank. For example, in addition to the clearing and exchange trading requirements for certain standardized derivatives transactions, if the Bank is determined to be a “major swap participant,” the Bank will also have to register with the CFTC and will be subject to new standards of conduct and additional reporting and swap-based capital and margin requirements. In addition, derivatives transactions not subject to exchange trading or centralized clearing will also be subject to additional margin requirements, and all derivatives transactions could be subject to new reporting requirements. Such additional requirements would likely increase the cost of the Bank’s hedging activities and may adversely affect the Bank’s ability to hedge its interest rate risk exposure, to achieve its risk management objectives, and to act as an intermediary between its members and counterparties.

Proposed CFTC Rule on Eligible Investments for Derivatives Clearing Organizations. On November 3, 2010, the CFTC issued a proposed rule with a comment deadline of December 3, 2010, which, among other changes, would eliminate the ability of futures commissions’ merchants and derivatives clearing organizations to invest customer funds in GSE securities that are not explicitly guaranteed by the U.S. government. Currently, GSE securities are eligible investments under CFTC regulations. If this change is adopted as proposed, then the demand for FHLBank debt may be adversely impacted.

Oversight Council Proposed Rule Regarding Authority to Supervise and Regulate Certain Nonbank Financial Companies. On October 6, 2010, the Oversight Council created by the Dodd-Frank Act issued a proposed rule with a comment deadline of November 5, 2010 that, if implemented, will give the Oversight Council the authority to require a ‘nonbank financial company’ (a term to be defined by the Oversight Council) to be supervised by the Board of Governors of the Federal Reserve System and subject to certain prudential standards. The Oversight Council shall make this determination based on whether material financial distress at a given firm, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the firm, could pose a threat to the financial stability of the United States. If the FHLBanks are determined to be nonbank financial companies subject to the Oversight Council’s regulatory requirements, then the FHLBanks’ operations and business are likely to be impacted.

 

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Oversight Council Request for Information on Implementing the ‘Volcker Rule’. On October 6, 2010, the Oversight Council issued a public request for information in connection with the Oversight Council’s study on implementing certain prohibitions on proprietary trading, which prohibitions are commonly referred to as the ‘Volcker Rule’. Institutions covered by the Volcker Rule may be subject to higher capital requirements and quantitative limits with regard to their proprietary trading. If the Volcker Rule is implemented in a way that subjects FHLBanks to it, then the Bank may be subject to additional limitations on the composition of its investment portfolio, beyond those to which it is already subject under existing Finance Agency regulations, which in turn could potentially result in less profitable investment alternatives.

Federal Deposit Insurance Corporation (“FDIC”) Proposed Rule on Unlimited Deposit Insurance for Non-interest Bearing Transaction Accounts. The Dodd-Frank Act requires the FDIC and the National Credit Union Administration to provide unlimited deposit insurance for non-interest bearing transaction accounts. This requirement is in effect for FDIC-insured institutions from December 31, 2010 until January 1, 2013 and for insured credit unions from the effective date of the Dodd-Frank Act until January 1, 2013. On September 27, 2010, the FDIC issued a proposed rule to implement this provision of the Dodd-Frank Act. Deposits are a source of liquidity for our members, and a rise in deposits, which may occur due to the FDIC’s unlimited support of non-interest bearing transaction accounts if the proposed rule is adopted, would tend to weaken member demand for Bank advances.

FDIC Proposed Rule on Dodd-Frank Resolution Authority. On October 12, 2010, the FDIC issued a proposed rule with a comment deadline of November 18, 2010 on how the FDIC would treat certain creditor claims under the new orderly liquidation authority established by the Dodd-Frank Act. The Dodd-Frank Act provides for the appointment of the FDIC as receiver for a financial company in instances where the failure of the company and its liquidation under other insolvency procedures (such as bankruptcy) would pose a significant risk to the financial stability of the United States. The proposed rule provides, among other things, that:

  all creditors must expect to absorb losses in any liquidation and that secured creditors will only be protected to the extent of the fair value of their collateral;

  to the extent that any portion of a secured creditor’s claim is unsecured, it will absorb losses along with other unsecured creditors; and

  secured obligations collateralized with US government obligations will be valued at par.

Finance Agency Regulatory Actions

Proposed Finance Agency Regulation on Conservatorship and Receivership. On July 9, 2010, the Finance Agency issued a proposed regulation on the conservatorship and receivership of Fannie Mae, Freddie Mac and the FHLBanks that would set forth the basic authorities of the Finance Agency as conservator or receiver, including the enforcement and repudiation of contracts; establishment of procedures for conservators and receivers and priorities of claims for contract parties and other claimants; and address whether and to what extent claims by current and former holders of equity interests in the regulated entities will be paid.

Proposed Finance Agency Regulation on Rules of Practice and Procedure for Enforcement Proceedings. On August 12, 2010, the Finance Agency issued a proposed regulation with a comment deadline of October 12, 2010 that would, if adopted, amend existing regulations implementing stronger Finance Agency enforcement powers and procedures.

Additional Developments

Tax-Exempt Bonds Supported by FHLBank Letters of Credit. Legislation has been introduced that would allow an FHLBank, on behalf of one or more members, to issue letters of credit to support non-housing related tax-exempt state and local bond issuances issued after December 31, 2010. If enacted, this would be an extension of the Bank’s authority to issue such letters of credit that was first granted to the FHLBanks by the Housing and Economic Recovery Act of 2008, which authority is otherwise set to expire on December 31, 2010.

Basel Committee on Banking Supervision Capital Framework. The Basel Committee on Banking Supervision (the “Basel Committee”) has developed a new capital regime for internationally-active banks. Banks subject to the new regime will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses. While it is uncertain how the new capital regime or other standards being developed by the Basel Committee, such as liquidity standards, will be implemented by the U.S. regulatory authorities, the new regime could require some of our members to divest assets in order to comply with the more stringent capital requirements, thereby decreasing their need for advances. Likewise, any new liquidity requirements may also adversely impact member demand for advances and/or investor demand for COs.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management. Market or interest rate risk (“IRR”) is the risk of loss of 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 potentially significant declines in market value and future income if the interest rate environment turned against the FHLBNY’s expectations. The FHLBNY has opted to retain a modest level of IRR which allows it to preserve its capital value while generating steady and predictable income. In keeping with that philosophy, the FHLBNY’s balance sheet consists of predominantly short-term and LIBOR-based assets and liabilities. More than 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 which periodically reset to a LIBOR index. Similarly, a majority of the long-term consolidated obligations are swapped to 3- or 1-month LIBOR. These features create a relatively steady income that changes in concert with prevailing interest rate changes to maintain a spread to short-term rates.
Despite its conservative philosophy, IRR does arise from a number of aspects of the FHLBNY’s portfolio. These include the embedded prepayment rights, refunding needs, rate resets between the FHLBNY’s short-term assets and liabilities, and basis risks arising from differences between the yield curves associated with the FHLBNY’s assets and its liabilities. To address these risks, the FHLBNY uses certain key IRR measures including re-pricing gaps, duration of equity (“DOE”), value at risk (“VaR”), net interest income (“NII”) at risk, key rate durations (“KRD”), and forecasted dividend rates.
Risk Measurements. The FHLBNY’s Risk Management Policy sets up a series of risk limits that the FHLBNY calculates on a regular basis. The risk limits are as follows:
    The option-adjusted DOE is limited to a range of +/- four 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 through the third quarter of 2010, rates were too low for a meaningful parallel down-shock measurement.
 
    The one-year cumulative re-pricing gap is limited to 10 percent of total assets.
 
    The sensitivity of expected net interest income over a one-year period is limited to a -15 percent change under both the +/-200bps shocks compared to the rates unchanged case.
 
    The potential decline in the market value of equity is limited to a 10 percent change under the +/-200bps shocks.
 
    KRD exposure at any of nine term points (3-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 15-year, and 30-year) is limited to between +/-12 months.
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:
                         
    Base Case DOE     -200bps DOE*     +200bps DOE  
September 30, 2010
    -2.13       N/A       1.46  
June 30, 2010
    -1.20       N/A       2.80  
March 31, 2010
    -0.51       N/A       3.81  
December 31, 2009
    0.42       N/A       3.68  
September 30, 2009
    -0.39       N/A       3.88  
     
*   Due to the on-going low interest rate environment, there were no down-shock measurements performed between the third quarter of 2009 and the third quarter of 2010.
The DOE has remained within its limits. Duration indicates any cumulative re-pricing/maturity imbalance in the FHLBNY’s financial assets and liabilities. A positive DOE indicates that, on average, the liabilities will re-price or mature sooner than the assets while a negative DOE indicates that, on average, the assets will re-price or mature earlier than the liabilities. The FHLBNY measures its DOE using software that incorporates any optionality within the FHLBNY’s portfolio using well-known and tested financial pricing theoretical models.
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, 2010
  $ 6.888  Billion
June 30, 2010
  $ 4.939  Billion
March 31, 2010
  $ 4.753  Billion
December 31, 2009
  $ 4.626  Billion
September 30, 2009
  $ 5.480  Billion

 

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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:
                 
    Sensitivity in     Sensitivity in  
    the -200bps     the +200bps  
    Shock *     Shock  
September 30, 2010
    N/A       12.96 %
June 30, 2010
    N/A       12.20 %
March 31, 2010
    N/A       3.13 %
December 31, 2009
    N/A       4.53 %
September 30, 2009
    N/A       9.23 %
     
*   Due to the on-going low interest rate environment, there were no down-shock measurements performed between the third quarter of 2009 and the third quarter of 2010.
Aside from net interest income, the other significant impact on changes in the interest rate environment is the potential impact on the value of the portfolio. These calculated and quoted market values are estimated based upon their financial attributes including optionality and then re-estimated under the assumption that interest rates suddenly rise or fall by 200bps. The worst effect, whether it is the up or the down shock, is compared to the internal limit of 10 percent. The quarterly potential maximum decline in the market value of equity under these 200bps shocks is provided below:
                 
    Down-shock     +200bps Change in  
    Change in MVE *     MVE  
September 30, 2010
    N/A       1.63 %
June 30, 2010
    N/A       -1.62 %
March 31, 2010
    N/A       -4.53 %
December 31, 2009
    N/A       -5.08 %
September 30, 2009
    N/A       -4.68 %
     
*   Due to the on-going low interest rate environment, there were no down-shock measurements performed between the third quarter of 2009 and the third quarter of 2010.
As noted, the potential declines under these shocks are within the FHLBNY’s limits of a maximum 10 percent.

 

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The following table displays the FHLBNY’s maturity/re-pricing gaps as of September 30, 2010 (in millions):
                                         
    Interest Rate Sensitivity  
    September 30, 2010  
            More than     More than     More than        
    Six months     six months to     one year to     three years to     More than  
    or less     one year     three years     five years     five years  
 
                                       
Interest-earning assets:
                                       
Non-MBS Investments
  $ 8,899     $ 315     $ 417     $ 184     $ 186  
MBS Investments
    7,636       1,548       1,035       241       481  
Adjustable-rate loans and advances
    9,191                          
 
                             
Net unswapped
    25,726       1,863       1,452       425       667  
 
                                       
Fixed-rate loans and advances
    14,117       4,201       13,883       7,780       30,932  
Swaps hedging advances
    55,269       (3,905 )     (12,857 )     (7,590 )     (30,917 )
 
                             
Net fixed-rate loans and advances
    69,386       296       1,026       190       15  
Loans to other FHLBanks
                             
 
                             
 
                                       
Total interest-earning assets
  $ 95,112     $ 2,159     $ 2,478     $ 615     $ 682  
 
                             
 
                                       
Interest-bearing liabilities:
                                       
Deposits
  $ 3,773     $ 1     $     $     $  
 
                                       
Discount notes
    17,156       630                    
Swapped discount notes
    629       (629 )                  
 
                             
Net discount notes
    17,785       1                    
 
                             
 
                                       
Consolidated Obligation Bonds
                                       
FHLB bonds
    28,034       14,522       21,510       6,741       3,040  
Swaps hedging bonds
    39,771       (13,505 )     (19,119 )     (5,097 )     (2,050 )
 
                             
Net FHLB bonds
    67,805       1,017       2,391       1,644       990  
 
                                       
Total interest-bearing liabilities
  $ 89,363     $ 1,019     $ 2,391     $ 1,644     $ 990  
 
                             
Post hedge gaps1:
                                       
Periodic gap
  $ 5,749     $ 1,140     $ 87     $ (1,029 )   $ (308 )
Cumulative gaps
  $ 5,749     $ 6,889     $ 6,976     $ 5,947     $ 5,639  
     
1   Re-pricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the re-pricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity.

 

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The following tables display the FHLBNY’s maturity/re-pricing gaps as of December 31, 2009 (in millions):
                                         
    Interest Rate Sensitivity  
    December 31, 2009  
            More than     More than     More than        
    Six months     six months to     one year to     three years to     More than  
    or less     one year     three years     five years     five years  
 
                                       
Interest-earning assets:
                                       
Non-MBS Investments
  $ 8,621     $ 124     $ 371     $ 249     $ 587  
MBS Investments
    6,773       903       2,420       1,167       879  
Adjustable-rate loans and advances
    14,101                          
 
                             
Net unswapped
    29,495       1,027       2,791       1,416       1,466  
 
                                       
Fixed-rate loans and advances
    9,588       7,853       16,124       8,254       34,814  
Swaps hedging advances
    63,852       (6,722 )     (14,389 )     (7,950 )     (34,791 )
 
                             
Net fixed-rate loans and advances
    73,440       1,131       1,735       304       23  
Loans to other FHLBanks
                             
 
                             
 
                                       
Total interest-earning assets
  $ 102,935     $ 2,158     $ 4,526     $ 1,720     $ 1,489  
 
                             
 
                                       
Interest-bearing liabilities:
                                       
Deposits
  $ 2,590     $     $     $     $  
 
                                       
Discount notes
    28,770       2,057                    
Swapped discount notes
    1,422       (1,422 )                  
 
                             
Net discount notes
    30,192       635                    
 
                             
 
                                       
Consolidated Obligation Bonds
                                       
FHLB bonds
    25,717       16,014       22,829       6,033       2,844  
Swaps hedging bonds
    39,617       (14,298 )     (19,513 )     (4,501 )     (1,305 )
 
                             
Net FHLB bonds
    65,334       1,716       3,316       1,532       1,539  
 
                                       
Total interest-bearing liabilities
  $ 98,116     $ 2,351     $ 3,316     $ 1,532     $ 1,539  
 
                             
Post hedge gaps1:
                                       
Periodic gap
  $ 4,819     $ (193 )   $ 1,210     $ 188     $ (50 )
Cumulative gaps
  $ 4,819     $ 4,626     $ 5,836     $ 6,024     $ 5,974  
     
1   Re-pricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the re-pricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity.

 

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Operational Risk Management. Operational risk is the risk of loss resulting from the failures or inadequacies of internal processes, people, and systems, or resulting from external events. Operational risks include those arising from fraud, human error, computer system failures and a wide range of external events — from adverse weather to terrorist attacks. The management of these risks is the responsibility of the senior managers at the operating level. To assist them in discharging this responsibility and to ensure that operational risk is managed consistently throughout the organization, the FHLBNY has developed an operational risk management framework, which evolves as warranted by circumstances and changing conditions. The FHLBNY’s Operational Risk Management framework defines the core governing principles for operational risk management and provides the framework to identify, control, monitor, measure, and report operational risks in a consistent manner across the FHLBNY.
Risk and Control Self-Assessment. FHLBNY’s Risk and Control Self-Assessment incorporates standards for risk and control self-assessment which apply to all businesses and establish Risk and Control Self-Assessment as the process for identifying the risks inherent in a business’ activities and for evaluating and monitoring the effectiveness of the controls over those risks. It is the policy of the FHLBNY to require businesses and staff functions to perform a Risk and Control Self-Assessment on a periodic basis. The Risk and Control Self-Assessment must include documentation of the control environment as well as policies for assessing risks and controls, testing commensurate with risk level and tracking corrective action for control breakdowns or deficiencies. The Risk and Control Self-Assessment also must require periodic reporting to senior management and to the Board’s Audit Committee.

 

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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, 2010. Based on this evaluation, they concluded that as of September 30, 2010, 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
As previously reported, on September 15, 2008, Lehman Brothers Holdings, Inc. (“LBHI”), the parent company of Lehman Brothers Special Financing Inc. (“LBSF”) and a guarantor of LBSF’s obligations, filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. LBSF filed for protection under Chapter 11 in the same court on October 3, 2008. LBSF was a counterparty to FHLBNY on multiple derivative transactions under an International Swap Dealers Association, Inc. master agreement with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF. The net amount that was due to the Bank after giving effect to obligations that were due LBSF was approximately $65 million. The FHLBNY timely filed proofs of claim in the amount of approximately $65 million as creditors of LBSF and LBHI in connection with the bankruptcy proceedings. The Bank fully reserved the LBSF receivables as the bankruptcies of LBHI and LBSF make the timing and the amount of any recovery uncertain.
As previously reported, the Bank received a Derivatives ADR Notice from LBSF dated July 23, 2010 making a Demand as of the date of the Notice of approximately $268 million owed to LBSF by the Bank. Subsequently, in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court dated September 17, 2009 (“Order”), the Bank responded to LBSF on August 23, 2010, denying LBSF’s Demand. LBSF served a reply on September 7, 2010, effectively reiterating its position. A mediation has been scheduled pursuant to the Order for December 8, 2010.
While the Bank believes that LBSF’s position is without merit, the amount the Bank actually recovers or pays will ultimately be decided in the course of the bankruptcy proceedings.
Item 1A. RISK FACTORS
There have been no material changes from risk factors included in the FHLBNY’s Form 10-K for the fiscal year ended December 31, 2009.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. (REMOVED AND RESERVED)
Item 5. OTHER INFORMATION
None.

 

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Item 6. EXHIBITS
         
Exhibit No.   Identification of Exhibit
       
 
  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 Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  Federal Home Loan Bank of New York
(Registrant)
 
 
  /s/ Patrick A. Morgan    
  Patrick A. Morgan   
  Senior Vice President and Chief Financial Officer
Federal Home Loan Bank of New York (on behalf of the
registrant and as the Principal Financial Officer)
 
 
Date: November 12, 2010

 

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