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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 volatili