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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 endedMarch 31, 2007
OR
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, New York | 10178 | |
(Address of principal executive offices) | (Zip Code) |
212-681-6000
(Registrant’s telephone number, including area code)
(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.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filero Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
At April 30, 2007 the Registrant had 35,986,138 shares of capital stock outstanding.
FEDERAL HOME LOAN BANK OF NEW YORK
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
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FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
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Exhibit 32.02 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Condition — Unaudited (in thousands, except par value)
As of March 31, 2007 and December 31, 2006
As of March 31, 2007 and December 31, 2006
March 31, 2007 | December 31, 2006 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 18,845 | $ | 38,850 | ||||
Interest-bearing deposits, includes $0 pledged at March 31, 2007 and December 31, 2006 | 6,367,102 | 5,591,077 | ||||||
Federal funds sold | 3,594,000 | 3,661,000 | ||||||
Held-to-maturity securities, includes $0 pledged at March 31, 2007 and December 31, 2006 (Note 2) | 10,806,981 | 11,251,098 | ||||||
Advances (Note 3) | 59,147,220 | 59,012,394 | ||||||
Mortgage loans held-for-portfolio, net of allowance for credit losses of $593 at March 31, 2007 and December 31, 2006 (Note 4) | 1,488,966 | 1,483,419 | ||||||
Accrued interest receivable | 396,430 | 406,123 | ||||||
Premises and equipment, net | 11,009 | 11,107 | ||||||
Derivative assets (Note 8) | 131,889 | 224,775 | ||||||
Other assets | 20,461 | 23,144 | ||||||
Total assets | $ | 81,982,903 | $ | 81,702,987 | ||||
Liabilities and capital | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Interest-bearing demand | $ | 2,181,158 | $ | 2,307,733 | ||||
Non-interest bearing demand | 2,039 | 1,795 | ||||||
Term | 26,900 | 80,000 | ||||||
Total deposits | 2,210,097 | 2,389,528 | ||||||
Consolidated obligations (Note 5) | ||||||||
Bonds | 60,780,476 | 62,042,675 | ||||||
Discount notes | 14,002,278 | 12,191,553 | ||||||
Total consolidated obligations | 74,782,754 | 74,234,228 | ||||||
Mandatorily redeemable capital stock (Note 6) | 111,782 | 109,950 | ||||||
Accrued interest payable | 636,999 | 735,215 | ||||||
Affordable Housing Program (Note 7) | 104,572 | 101,898 | ||||||
Payable to REFCORP | 17,818 | 17,475 | ||||||
Derivative liabilities (Note 8) | 123,681 | 107,615 | ||||||
Other liabilities | 82,670 | 102,685 | ||||||
Total liabilities | 78,070,373 | 77,798,594 | ||||||
Commitments and Contingencies(Notes 5, 6, 8 and 13) | ||||||||
Capital(Note 6) | ||||||||
Capital stock ($100 par value), putable, issued and outstanding shares: | ||||||||
35,483 at March 31, 2007, and 35,463 at December 31, 2006 | 3,548,288 | 3,546,253 | ||||||
Unrestricted retained earnings | 374,802 | 368,688 | ||||||
Accumulated other comprehensive income (loss) (Note 11) | ||||||||
Net unrealized loss on hedging activities | (4,775 | ) | (4,763 | ) | ||||
Employee supplemental retirement plans | (5,785 | ) | (5,785 | ) | ||||
Total capital | 3,912,530 | 3,904,393 | ||||||
Total liabilities and capital | $ | 81,982,903 | $ | 81,702,987 | ||||
The accompanying notes are an integral part of the unaudited financial statements.
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Statements of Income — Unaudited (in thousands, except per share data)
For the three months ended March 31, 2007 and 2006
For the three months ended March 31, 2007 and 2006
2007 | 2006 | |||||||
Interest income | ||||||||
Advances | $ | 777,494 | $ | 701,775 | ||||
Interest-bearing deposits | 80,699 | 76,492 | ||||||
Federal funds sold | 44,636 | 20,392 | ||||||
Held-to-maturity securities | 152,963 | 129,852 | ||||||
Mortgage loans held-for-portfolio | 19,518 | 18,858 | ||||||
Other | 1 | 5 | ||||||
Total interest income | 1,075,311 | 947,374 | ||||||
Interest expense | ||||||||
Consolidated obligations-bonds | 766,756 | 626,751 | ||||||
Consolidated obligations-discount notes | 171,280 | 202,827 | ||||||
Deposits | 21,010 | 14,072 | ||||||
Mandatorily redeemable stock (Note 6) | 2,149 | 320 | ||||||
Cash collateral held and other borrowings | 1,428 | 165 | ||||||
Total interest expense | 962,623 | 844,135 | ||||||
Net interest income before provision for credit losses | 112,688 | 103,239 | ||||||
Provision for credit losses on mortgage loans | — | — | ||||||
Net interest income after provision for credit losses | 112,688 | 103,239 | ||||||
Other income (loss) | ||||||||
Service fees | 827 | 807 | ||||||
Net realized and unrealized gain (loss) on derivatives and hedging activities (Note 8) | 3,523 | (1,936 | ) | |||||
Losses from extinguishment of debt and other | (2,356 | ) | 5 | |||||
Total other income (loss) | 1,994 | (1,124 | ) | |||||
Other expenses | ||||||||
Operating | 16,050 | 15,474 | ||||||
Finance Board and Office of Finance | 1,383 | 1,281 | ||||||
Total other expenses | 17,433 | 16,755 | ||||||
Income before assessments | 97,249 | 85,360 | ||||||
Affordable Housing Program (Note 7) | 8,158 | 7,001 | ||||||
REFCORP | 17,818 | 15,672 | ||||||
Total assessments | 25,976 | 22,673 | ||||||
Net income | $ | 71,273 | $ | 62,687 | ||||
Basic earnings per share (Note 14) | $ | 2.02 | $ | 1.73 | ||||
Cash dividends paid per share | $ | 1.76 | $ | 1.29 | ||||
The accompanying notes are an integral part of the unaudited financial statements.
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Statements of Capital — Unaudited (in thousands, except per share data)
For the three months ended March 31, 2007 and 2006
For the three months ended March 31, 2007 and 2006
Accumulated | ||||||||||||||||||||||||
Capital Stock* | Other | Total | ||||||||||||||||||||||
Class B | Retained | Comprehensive | Total | Comprehensive | ||||||||||||||||||||
Shares | Par Value | Earnings | Income (Loss) | Capital | Income (Loss) | |||||||||||||||||||
Balance, December 31, 2005 | 35,905 | $ | 3,590,454 | $ | 291,413 | $ | 3,513 | $ | 3,885,380 | |||||||||||||||
Proceeds from sale of capital stock | 8,052 | 805,251 | — | — | 805,251 | |||||||||||||||||||
Redemption of capital stock | (7,657 | ) | (765,714 | ) | — | — | (765,714 | ) | ||||||||||||||||
Mandatorily redeemable stock** | (93 | ) | (9,325 | ) | — | — | (9,325 | ) | ||||||||||||||||
Net Income | — | — | 62,687 | — | 62,687 | $ | 62,687 | |||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Net change in hedging activities | — | — | — | 3,428 | 3,428 | 3,428 | ||||||||||||||||||
Additional minimum liability on Benefit Equalization Plan | — | — | — | (762 | ) | (762 | ) | (762 | ) | |||||||||||||||
Cash dividends ($1.29 per share) on capital stock | — | — | (46,118 | ) | — | (46,118 | ) | — | ||||||||||||||||
Balance, March 31, 2006 | 36,207 | $ | 3,620,666 | $ | 307,982 | $ | 6,179 | $ | 3,934,827 | $ | 65,353 | |||||||||||||
Balance, December 31, 2006 | 35,463 | $ | 3,546,253 | $ | 368,688 | $ | (10,548 | ) | $ | 3,904,393 | ||||||||||||||
Proceeds from sale of capital stock | 5,421 | 542,056 | — | — | 542,056 | |||||||||||||||||||
Redemption of capital stock | (5,332 | ) | (533,156 | ) | — | — | (533,156 | ) | ||||||||||||||||
Mandatorily redeemable stock** | (69 | ) | (6,865 | ) | — | — | (6,865 | ) | ||||||||||||||||
Net Income | — | — | 71,273 | — | 71,273 | $ | 71,273 | |||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Net change in hedging activities | — | — | — | (12 | ) | (12 | ) | (12 | ) | |||||||||||||||
Cash dividends ($1.76 per share) on capital stock | — | — | (65,159 | ) | — | (65,159 | ) | — | ||||||||||||||||
Balance, March 31, 2007 | 35,483 | $ | 3,548,288 | $ | 374,802 | $ | (10,560 | ) | $ | 3,912,530 | $ | 71,261 | ||||||||||||
* | Putable stock | |
** | Shares reclassified to mandatorily redemable capital |
The accompanying notes are an integral part of the unaudited financial statements.
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Statements of Cash Flows — Unaudited (in thousands)
For the three months ended March 31, 2007 and 2006
For the three months ended March 31, 2007 and 2006
2007 | 2006 | |||||||
Operating Activities | ||||||||
Net Income | $ | 71,273 | $ | 62,687 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization: | ||||||||
Net premiums and discounts on consolidated obligations, investments, and mortgage loans | 18,899 | 17,582 | ||||||
Concessions on consolidated obligations | 3,294 | 3,159 | ||||||
Premises and equipment | 1,005 | 1,020 | ||||||
Change in net fair value adjustments on derivatives and hedging activities | (439 | ) | 3,497 | |||||
Net change in: | ||||||||
Accrued interest receivable | 9,693 | (23,298 | ) | |||||
Derivative assets due to accrued interest | 111,411 | (69,720 | ) | |||||
Derivative liabilities due to accrued interest | (46,844 | ) | 40,840 | |||||
Other assets | 1,398 | 129 | ||||||
Affordable Housing Program liability | 2,674 | 2,707 | ||||||
Accrued interest payable | (98,217 | ) | 42,420 | |||||
REFCORP liability | 343 | 1,610 | ||||||
Other liabilities | (21,009 | ) | (750 | ) | ||||
Total adjustments | (17,792 | ) | 19,196 | |||||
Net cash provided by operating activities | 53,481 | 81,883 | ||||||
Investing activities | ||||||||
Net change in: | ||||||||
Interest-bearing deposits | (776,000 | ) | 2,391,732 | |||||
Federal funds sold | 67,000 | (1,643,000 | ) | |||||
Deposits with other FHLBank’s mortgage programs | (25 | ) | 53 | |||||
Held-to-maturity securities: | ||||||||
Purchased | — | (1,100,118 | ) | |||||
Proceeds | 443,211 | 604,194 | ||||||
Advances: | ||||||||
Principal collected | 94,492,596 | 136,223,551 | ||||||
Made | (94,518,174 | ) | (137,066,527 | ) | ||||
Mortgage loans held-for-portfolio: | ||||||||
Principal collected | 37,619 | 38,988 | ||||||
Purchased and originated | (43,483 | ) | (28,930 | ) | ||||
Principal collected on other loans made | 70 | 64 | ||||||
Premises and equipment | (907 | ) | (1,361 | ) | ||||
Net cash used in investing activities | (298,093 | ) | (581,354 | ) | ||||
The accompanying notes are an integral part of the unaudited financial statements.
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Statements of Cash Flows — Unaudited (in thousands)
For the three months ended March 31, 2007 and 2006
For the three months ended March 31, 2007 and 2006
2007 | 2006 | |||||||
Financing activities | ||||||||
Net change in: | ||||||||
Deposits and other borrowings | $ | (178,438 | ) | $ | (269,244 | ) | ||
Short-term borrowings from other FHLBanks: | ||||||||
Proceeds from issuance | 20,000 | 85,000 | ||||||
Payments for maturing | (20,000 | ) | (85,000 | ) | ||||
Consolidated obligation bonds: | ||||||||
Proceeds from issuance | 9,741,160 | 11,058,168 | ||||||
Payments for maturing and early retirement | (10,781,670 | ) | (9,556,644 | ) | ||||
Payments for transfers to other FHLBanks | (285,350 | ) | — | |||||
Consolidated obligation discount notes: | ||||||||
Proceeds from issuance | 104,386,211 | 159,334,107 | ||||||
Payments for maturing | (102,596,015 | ) | (160,054,531 | ) | ||||
Capital stock: | ||||||||
Proceeds from issuance | 542,056 | 795,925 | ||||||
Payments for redemption | (533,156 | ) | (765,714 | ) | ||||
Mandatorily redeemable capital stock | (5,032 | ) | 9,396 | |||||
Cash dividends paid * | (65,159 | ) | (46,118 | ) | ||||
Net cash provided by financing activities | 224,607 | 505,345 | ||||||
Net (decrease) increase in cash and cash equivalents | (20,005 | ) | 5,874 | |||||
Cash and cash equivalents at beginning of the period | 38,850 | 22,114 | ||||||
Cash and cash equivalents at end of the period | $ | 18,845 | $ | 27,988 | ||||
Supplemental disclosures: | ||||||||
Interest paid | $ | 932,945 | $ | 546,983 | ||||
Affordable Housing Program payments ** | $ | 5,484 | $ | 4,294 | ||||
REFCORP payments | $ | 17,476 | $ | 14,062 |
* | Does not include payments to holders of mandatorily redeemable capital stock. | |
** | 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 the unaudited financial statements.
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Notes to Financial Statements — Unaudited
Background
The Federal Home Loan Bank of New York (“FHLBNY” or “the Bank”) is a federally chartered corporation, exempt from federal, state and local taxes except real property taxes. It is one of twelve district Federal Home Loan Banks (“FHLBanks”). The FHLBanks are U.S. government-sponsored enterprises (“GSEs”), organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”). Each FHLBank is a cooperative owned by member institutions located within a defined geographic district. The members purchase capital stock in the FHLBank and receive dividends on their capital stock investment. The FHLBNY’s defined geographic district includes 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.
Members of the cooperative must purchase FHLBNY stock according to regulatory requirements. The business of the cooperative is to provide liquidity for the members (primarily in the form of 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, 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. This means that the FHLBNY is managed to deliver balanced value to members, rather than to maximize profitability or advance volume through low pricing.
All federally insured depository institutions, insured credit unions and insurance companies engaged in residential housing finance can apply for membership in the FHLBank in their district. All members are required to purchase capital stock in the FHLBNY as a condition of membership. A member of another FHLBank or a financial institution that is not a member of any FHLBank may also hold FHLBNY stock as a result of having acquired an FHLBNY member. As a result of the membership requirements, 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.
The FHLBNY’s primary business is making collateralized loans, known as “advances” to members. This is the primary focus of the Bank’s operations and also the principal factor that impacts the financial condition of the FHLBNY.
The FHLBNY is supervised and regulated by the Federal Housing Finance Board (“Finance Board”), which is an independent agency in the executive branch of the U.S. government. The Finance Board ensures that the FHLBNY carries out its housing and community development mission, remains adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner. However, while the Finance Board establishes regulations governing the operations of the FHLBanks, the Bank functions as a separate entity with its own management, employees and board of directors.
The FHLBNY obtains its funds from several sources. A primary source is the sale of FHLBank debt instruments, called consolidated obligations, to the public. The issuance and servicing of consolidated obligations are performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Board. These debt instruments represent the joint and several obligations of all the FHLBanks. Additional sources of FHLBNY funding are member deposits, other borrowings, and the issuance of capital stock. Deposits may come from member financial institutions and federal instrumentalities.
The Code of Business Conduct and Ethics is posted on the Corporate Governance Section of the FHLBNY’s website atwww.fhlbny.com.
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Notes to Financial Statements — Unaudited
Tax Status
The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax.
Assessments
Assessments on net income —The Bank is required to make payments to the Resolution Funding Corporation based on percentage of its net income and to set aside funds from net income towards an “Affordable Housing Program.”
Resolution Funding Corporation (“REFCORP”) Assessments. Although the FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax, it is required to make payments to REFCORP.
REFCORP was established by Act of Congress in 1989 to help facilitate the U.S. government’s bailout of failed financial institutions. The REFCORP assessments are used by the 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.
Each FHLBank is required to pay 20 percent of income calculated in accordance with accounting principles generally accepted in the U.S. (“GAAP”) after the assessment for Affordable Housing Program, but before the assessment for the REFCORP. The Affordable Housing Program and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBNY accrues its REFCORP assessment on a monthly basis.
The Resolution Funding Corporation has been designated as the calculation agent for the Affordable Housing Program and REFCORP assessments. Each FHLBank provides the amount of quarterly net income before Affordable Housing Program and REFCORP 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 net income. Regulatory net income is defined as GAAP net income before interest expense related to mandatorily redeemable capital stock under Statement of Financial Accounting Standards 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, and the assessment for Affordable Housing Program, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Board. 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 report period. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ. The information contained in the financial statements is unaudited. In the opinion of management, normal recurring adjustments necessary for a fair statement of the interim period results have been made.
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Notes to Financial Statements — Unaudited
These unaudited financial statements should be read in conjunction with the FHLBNY’s audited financial statements for the year ended December 31, 2006, included in Form 10-K filed on March 29, 2007.
Note 1 to the Financial Statements of the Federal Home Loan Bank of New York filed with Form 10-K on March 29, 2007 contains a summary of our significant accounting policies.
Note 1. Accounting Developments
Recently Issued Accounting Standards and Interpretations
SFAS 155 — In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) SFAS 155“Accounting for Certain Hybrid Financial Instruments,”which amends SFAS 133 and 140 and permits fair value measurement of any structured note that contains an embedded derivative that would require bifurcation under SFAS 133. This fair value measurement is permitted on an instrument-by-instrument basis. The Bank applied the guidance under SFAS 155 at the beginning of the quarter ended March 31, 2007, and the implementation had no impact on its results of operations or financial condition.
SFAS 156 — In March 2006, the FASB issued SFAS 156,“Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”with respect to the accounting for separately-recognized servicing assets and liabilities. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value or a fair value measurement basis.
The new standard provides some relief for servicers that use derivatives to economically hedge fluctuations in the fair value of their servicing rights. In a rising interest rate environment, losses on derivatives used for hedging must be recognized. However, corresponding increases in the fair value of the related servicing rights previously could not be recognized since SFAS 140 mandated that servicing rights be carried at the lower of cost or market. This situation generated income volatility.
SFAS 156 also changes how gains and losses are computed in transfers or securitizations that qualify for “sale treatment” in which the transferor retains the right to service the transferred financial assets. Under SFAS 156, servicing assets must be initially recorded at fair value and treated as part of the proceeds received by the transferor, thus affecting the gain/loss calculations.
The Bank applied the provisions of SFAS 156 as of January 1, 2007. The adoption of SFAS 156 did not have an impact on its results of operations or financial condition.
SFAS 157 — In September 2005, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosure about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 nullifies the guidance in EITF 02-3, which precluded the recognition of a trading profit at the inception of a derivative contract, unless the fair value of such derivative is obtained from a quoted market price, or other valuation technique incorporating observable market data. SFAS 157 also precludes the use of a liquidity or block discount when measuring instruments traded in an active market at fair value. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value.
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Notes to Financial Statements — Unaudited
SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. SFAS 157 must be applied prospectively as of the beginning of the fiscal year in which it is initially adopted, except that the provisions related to block discounts and the guidance in EITF 02-3 are to be applied as a one time cumulative effect adjustment to opening retained earnings in the first interim period for the fiscal year in which SFAS 157 is initially applied. The Bank is evaluating the provisions of SFAS 157 and its potential effect on its financial statements.
SFAS 159 — On February 15, 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement 115(“SFAS 159”).SFAS 159 creates a fair value option allowing an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 also requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. Lastly, SFAS 159 requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Bank), with early adoption permitted. The Bank is continuing to evaluate SFAS 159 and to assess the impact on its financial condition, results of operations or cash flows, if a decision was made to adopt the standard.
Note 2. Held-to-maturity Securities
Held-to-maturity securities consisted of mortgage- and asset-backed securities (“MBS”), and state and local housing finance agency bonds. The amortized cost and the fair value of these securities were as follows (in thousands):
March 31, 2007 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
State and local housing agency obligations | $ | 616,378 | $ | 10,338 | $ | (362 | ) | $ | 626,354 | |||||||
Mortgage-backed securities | 10,190,603 | 56,956 | (114,850 | ) | 10,132,709 | |||||||||||
Total | $ | 10,806,981 | $ | 67,294 | $ | (115,212 | ) | $ | 10,759,063 | |||||||
December 31, 2006 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
State and local housing agency obligations | $ | 618,810 | $ | 11,141 | $ | (283 | ) | $ | 629,668 | |||||||
Mortgage-backed securities | 10,632,288 | 47,184 | (139,371 | ) | 10,540,101 | |||||||||||
Total | $ | 11,251,098 | $ | 58,325 | $ | (139,654 | ) | $ | 11,169,769 | |||||||
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Notes to Financial Statements — Unaudited
Temporary impairment. The following tables summarize held-to-maturity securities with fair values below their amortized cost, i.e., in an unrealized loss position at March 31, 2007 and December 31, 2006. The fair values and unrealized losses are aggregated by major security type and rating, and by the length of time individual securities have been in a continuous unrealized loss position. Securities, to which different rating levels have been assigned by different rating agencies, i.e., split ratings, are assigned to the lower rating category.
Temporary impairment at March 31, 2007 (in thousands):
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Estimated Fair | Unrealized | Estimated Fair | Unrealized | Estimated Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Mortgage-backed securities — fixed rate | ||||||||||||||||||||||||
AAA-rated | $ | 2,267,751 | $ | 28,789 | $ | 2,725,291 | $ | 86,055 | $ | 4,993,042 | $ | 114,844 | ||||||||||||
AA-rated | — | — | — | — | — | — | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
Mortgage-backed securities — variable rate | ||||||||||||||||||||||||
AAA-rated | 6,321 | 6 | — | — | 6,321 | 6 | ||||||||||||||||||
AA-rated | — | — | — | — | — | — | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
2,274,072 | 28,795 | 2,725,291 | 86,055 | 4,999,363 | 114,850 | |||||||||||||||||||
State and local housing finance agencies — fixed rate | ||||||||||||||||||||||||
AAA-rated | — | — | — | — | — | — | ||||||||||||||||||
AA-rated | — | — | 15,038 | 362 | 15,038 | 362 | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
State and local housing finance agencies — variable rate | ||||||||||||||||||||||||
AAA-rated | — | — | — | — | — | — | ||||||||||||||||||
AA-rated | — | — | — | — | — | — | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
— | — | 15,038 | 362 | 15,038 | 362 | |||||||||||||||||||
$ | 2,274,072 | $ | 28,795 | $ | 2,740,329 | $ | 86,417 | $ | 5,014,401 | $ | 115,212 | |||||||||||||
The FHLBNY has both the intent and financial ability to hold the temporarily impaired securities to anticipated recovery of their value. In addition, 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 represent temporary impairment at March 31, 2007.
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Notes to Financial Statements — Unaudited
Temporary impairment at December 31, 2006 (in thousands):
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Estimated Fair | Unrealized | Estimated Fair | Unrealized | Estimated Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Mortgage-backed securities — fixed rate | ||||||||||||||||||||||||
AAA-rated | $ | 1,434,317 | $ | 7,082 | $ | 4,528,193 | $ | 132,247 | $ | 5,962,510 | $ | 139,329 | ||||||||||||
AA-rated | — | — | — | — | — | — | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
Mortgage-backed securities — variable rate | ||||||||||||||||||||||||
AAA-rated | 134,958 | 42 | — | — | 134,958 | 42 | ||||||||||||||||||
AA-rated | — | — | — | — | — | — | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
1,569,275 | 7,124 | 4,528,193 | 132,247 | 6,097,468 | 139,371 | |||||||||||||||||||
State and local housing finance agencies — fixed rate | ||||||||||||||||||||||||
AAA-rated | — | — | — | — | — | — | ||||||||||||||||||
AA-rated | 15,117 | 283 | — | — | 15,117 | 283 | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
State and local housing finance agencies — variable rate | ||||||||||||||||||||||||
AAA-rated | — | — | — | — | — | — | ||||||||||||||||||
AA-rated | — | — | — | — | — | — | ||||||||||||||||||
Below AA | — | — | — | — | — | — | ||||||||||||||||||
15,117 | 283 | — | — | 15,117 | 283 | |||||||||||||||||||
$ | 1,584,392 | $ | 7,407 | $ | 4,528,193 | $ | 132,247 | $ | 6,112,585 | $ | 139,654 | |||||||||||||
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Notes to Financial Statements — Unaudited
Note 3. Advances
Advances outstanding are summarized below by contractual maturities (dollars in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
Weighted1 | Weighted1 | |||||||||||||||
Amount | Average Yield | Amount | Average Yield | |||||||||||||
Overdrawn demand deposit accounts | $ | 8 | 6.15 | % | $ | 498 | 6.05 | % | ||||||||
Due in one year or less | 14,388,523 | 4.96 | 12,273,636 | 4.91 | ||||||||||||
Due after one year through two years | 9,046,487 | 4.98 | 12,450,960 | 4.99 | ||||||||||||
Due after two years through three years | 4,058,679 | 5.11 | 4,108,983 | 5.05 | ||||||||||||
Due after three years through four years | 5,406,858 | 5.42 | 5,744,505 | 5.45 | ||||||||||||
Due after four years through five years | 2,819,861 | 4.89 | 2,591,828 | 4.86 | ||||||||||||
Due after five years through six years | 1,697,508 | 3.77 | 2,279,706 | 4.18 | ||||||||||||
Thereafter | 21,596,924 | 4.29 | 19,539,154 | 4.22 | ||||||||||||
Total par value | 59,014,848 | 4.73 | % | 58,989,270 | 4.73 | % | ||||||||||
Discount on AHP advances * | (493 | ) | (519 | ) | ||||||||||||
Net premium on advances * | 332 | 489 | ||||||||||||||
SFAS 133 hedging basis adjustments * | 132,533 | 23,154 | ||||||||||||||
Total | $ | 59,147,220 | $ | 59,012,394 | ||||||||||||
* | Premiums on advances and discounts on AHP advances are amortized to interest income using the level-yield method and were not significant for all periods reported. Amortization of fair value basis adjustments was a charge to interest income of $0.4 million and $0.6 million for the three months ended March 31, 2007 and 2006. | |
1 | The weighted average yield is the weighted average coupon rates for advances, unadjusted for swaps. |
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 (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Overdrawn demand deposit accounts | $ | 8 | $ | 498 | ||||
Due or putable in one year or less | 33,313,856 | 29,962,181 | ||||||
Due or putable after one year through two years | 14,864,387 | 16,745,798 | ||||||
Due or putable after two years through three years | 5,510,879 | 6,341,532 | ||||||
Due or putable after three years through four years | 1,933,608 | 2,504,205 | ||||||
Due or putable after four years through five years | 1,902,811 | 1,668,578 | ||||||
Due or putable after five years through six years | 194,008 | 442,706 | ||||||
Thereafter | 1,295,291 | 1,323,772 | ||||||
Total par value | 59,014,848 | 58,989,270 | ||||||
Discount on AHP advances | (493 | ) | (519 | ) | ||||
Net premium on advances | 332 | 489 | ||||||
SFAS 133 hedging basis adjustments | 132,533 | 23,154 | ||||||
Total | $ | 59,147,220 | $ | 59,012,394 | ||||
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Notes to Financial Statements — Unaudited
Note 4. Mortgage Loans
Mortgage loans are comprised primarily of Mortgage Partnership Finance® Program (“MPF”®) loans. The MPF program involves investment by the FHLBNY in mortgage loans that are purchased from its participating members. Included in the total are outstanding balances of $44.6 million and $45.7 million at March 31, 2007 and December 31, 2006, comprised of mortgage loans originated by the FHLBNY. In the MPF Program, the FHLBNY’s member institutions create, service, and credit-enhance the loans. No intermediary trusts are involved. Loans in the Community Mortgage Partnership Asset (“CMA”) program, which has been inactive since 2001, were $4.8 million and $4.9 million at March 31, 2007 and December 31, 2006.
The following summarizes investments in mortgage loans (dollars in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
2007 | Percentage | 2006 | Percentage | |||||||||||||
Real Estate: | ||||||||||||||||
Fixed medium-term single-family mortgages | $ | 564,702 | 38.1 | % | $ | 575,114 | 38.9 | % | ||||||||
Fixed long-term single-family mortgages | 913,620 | 61.6 | 897,153 | 60.7 | ||||||||||||
Multi-family mortgages | 4,822 | 0.3 | 4,940 | 0.4 | ||||||||||||
Total par value | 1,483,144 | 100.0 | % | 1,477,207 | 100.0 | % | ||||||||||
Unamortized premiums | 12,979 | 13,323 | ||||||||||||||
Unamortized discounts | (6,262 | ) | (6,288 | ) | ||||||||||||
Basis adjustment | (302 | ) | (230 | ) | ||||||||||||
Total mortgage loans held-for-portfolio | 1,489,559 | 1,484,012 | ||||||||||||||
Allowance for credit losses | (593 | ) | (593 | ) | ||||||||||||
Total mortgage loans held-for-portfolio after allowance for credit losses | $ | 1,488,966 | $ | 1,483,419 | ||||||||||||
The FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers. The first layer is typically 100 basis points but varies with the particular MPF program. The First Loss Account is not recorded or reported as a reserve for loan losses. The FHLBNY is responsible for absorbing losses in the first layer, as summarized below in the “memo” First Loss Account roll-forward analysis. 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 three months ended March 31, 2007 and 2006. Credit Enhancement fees are 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 a roll-forward analysis of the memo First Loss Account (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Beginning balance | $ | 12,162 | $ | 11,318 | ||||
Additions | 210 | 125 | ||||||
Charge-offs | — | — | ||||||
Recoveries | — | — | ||||||
Ending balance | $ | 12,372 | $ | 11,443 | ||||
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Notes to Financial Statements — Unaudited
Note 5. Consolidated Obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated bonds and discount notes.
The following summarizes consolidated obligations issued by the FHLBNY and outstanding (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Consolidated obligation bonds — amortized cost | $ | 60,869,773 | $ | 62,195,674 | ||||
FAS 133 Basis adjustments | (89,297 | ) | (152,999 | ) | ||||
Total Consolidated obligation — bonds | $ | 60,780,476 | $ | 62,042,675 | ||||
Discount notes — amortized cost | $ | 14,002,278 | $ | 12,191,553 | ||||
Total Consolidated obligation — discount notes | $ | 14,002,278 | $ | 12,191,553 | ||||
Note 6. Capital, Capital Ratios, and Mandatorily Redeemable Capital Stock
The FHLBanks, including 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 based on the amount of mortgage-related assets on the member’s balance sheet and its use of FHLBNY advances. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. The stock is not publicly traded.
The Gramm-Leach-Bliley Act (“GLB Act”) allows the FHLBanks to have two classes of stock, and each class may have sub-classes. Class A stock is conditionally redeemable on six months written notice from the member, and class B stock is conditionally redeemable on five years written notice from the member. Membership is voluntary for all members. Members that withdraw from an FHLBank may not reapply for membership of any FHLBank for five years from the date of withdrawal. The transfer of membership without interruption between two FHLBanks is not considered to be a termination of membership for this purpose.
The FHLBNY’s capital stock at March 31, 2007 is Class B stock which is sub-divided into membership stock and activity-based stock.
The FHLBNY is subject to risk-based capital rules. Specifically, the FHLBNY is subject to three capital requirements under the new capital structure plan. First, the FHLBNY must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with the FHLBNY policy and rules and regulations of the Finance Board. Only permanent capital, defined as Class B stock and retained earnings, satisfies this risk-based capital requirement. The Finance Board may require the FHLBNY to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements. In addition, the FHLBNY is required to maintain at least a 4% total capital-to-asset ratio and at least a 5% leverage ratio at all times. The leverage ratio is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 time divided by total assets. The FHLBNY was in compliance with the aforementioned capital rules and requirements.
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Notes to Financial Statements — Unaudited
Capital Ratios
The following table summarizes the Bank’s risk-based capital ratios (dollars in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
Required* | Actual | Required* | Actual | |||||||||||||
Regulatory capital requirements: | ||||||||||||||||
Risk-based capital1 | $ | 627,165 | $ | 4,034,872 | $ | 611,861 | $ | 4,024,891 | ||||||||
Total capital-to-asset ratio | 4.00 | % | 4.92 | % | 4.00 | % | 4.93 | % | ||||||||
Total capital2 | $ | 3,279,316 | $ | 4,035,465 | $ | 3,268,119 | $ | 4,025,483 | ||||||||
Leverage ratio | 5.00 | % | 7.38 | % | 5.00 | % | 7.39 | % | ||||||||
Leverage capital3 | $ | 4,099,145 | $ | 6,052,902 | $ | 4,085,149 | $ | 6,037,335 |
1 | Actual “Risk-based capital” is capital stock and retained earnings, plus mandatorily redeemable capital stock. Section 932.2 of the Finance Board’s regulations also refers to this amount as “Permanent Capital.” | |
2 | Actual “Total capital” is “Risk-based capital” plus allowance for credit losses. | |
3 | Actual “Leverage capital” is “Risk-based capital” times 1.5 plus allowance for loan losses. | |
* | Minimum required. |
Mandatorily Redeemable Capital Stock
The FHLBNY’s capital stock is redeemable at the option of either the member or the FHLBNY, subject to certain conditions. Dividends related to capital stock classified as mandatorily redeemable are accrued at an estimated dividend rate and reported as interest expense in the Statements of Income.
Mandatorily redeemable stock at March 31, 2007 and December 31, 2006 represented stock held by:
• | Former members who were no longer FHLBNY members by virtue of being acquired by members of another FHLBank; or | ||
• | Former members who were no longer FHLBNY members by virtue of being acquired by an institution that is not a member of any FHLBank. |
Such stock will be repurchased when it is no longer needed to meet stock ownership requirements for transactions outstanding with the Bank.
The FHLBNY repurchases excess activity-based capital stock daily. The three other triggering events that could cause the FHLBNY to repurchase capital stock are:
• | a member requests redemption of excess stock; | ||
• | a member delivers notice of its intent to withdraw from membership; | ||
• | a member attains non-member status (through merger into or acquisition by a non-member, or involuntary termination from membership). |
A member’s request to redeem excess Membership Stock will be considered to be revocable until the stock is repaid. Based on the fact that the member’s request to redeem excess Membership Stock can be withdrawn by the member without penalty, the FHLBNY considers the member’s intent regarding such request to not be substantive in nature and therefore no reclassification to a liability will be necessary at the time the request is delivered.
When a member delivers a notification of its intent to withdraw from membership, the reclassification from equity to a liability will become effective upon receipt of the notification. The FHLBNY considers the member’s intent regarding such notification to be substantive in nature and, therefore, reclassification to liability will be necessary at the time the notification of the intent to withdraw is delivered.
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Notes to Financial Statements — Unaudited
Anticipated redemptions of mandatorily redeemable capital stock were as follows (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Redemption less than one year | $ | 45,685 | $ | 43,184 | ||||
Redemption from one year to less than three years | 28,454 | 29,109 | ||||||
Redemption from three years to less than five years | 30,671 | 30,679 | ||||||
Redemption from five years or greater | 6,972 | 6,978 | ||||||
Total | $ | 111,782 | $ | 109,950 | ||||
Anticipated redemption assumes the Bank will follow its current practice of daily redemption of capital in excess of the amount required to support advances, and of redeeming excess membership stock annually.
Dividends related to capital stock classified as mandatorily redeemable were accrued at an estimated dividend rate and reported as interest expense in the statements of income. At March 31, 2007, the FHLBNY had estimated a 7.0% (annualized) dividend payout due to holders of mandatorily redeemable capital stock averaging $111.8 million during the first quarter of 2007, and a liability of $1.9 million representing accrued dividend was recognized as an interest expense. The actual rate of dividend that was paid on April 30, 2007 was 7.5% (annualized).
The following table provides roll-forward information with respect to changes in mandatorily redeemable capital stock liabilities (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Beginning balance | $ | 109,950 | $ | 18,087 | ||||
Capital stock subject to mandatory redemption reclassified from equity | 6,864 | 13,910 | ||||||
Redemption of mandatorily redeemable capital stock* | (5,032 | ) | (4,584 | ) | ||||
Ending balance | $ | 111,782 | $ | 27,413 | ||||
Accrued interest payable | $ | 1,930 | $ | 327 | ||||
* | Redemption includes repayment of excess stock. (Accrual is at a 7.00% annualized rate at March 31, 2007; 5.11% annualized at March 31, 2006) |
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Notes to Financial Statements — Unaudited
Note 7. Affordable Housing Program
The following table provides roll-forward information with respect to changes in Affordable Housing Program liabilities (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Beginning balance | $ | 101,898 | $ | 91,004 | ||||
Additions from current period’s assessments | 8,158 | 7,001 | ||||||
Net disbursements for grants and programs | (5,484 | ) | (4,294 | ) | ||||
Ending balance | $ | 104,572 | $ | 93,711 | ||||
Note 8. 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 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 counterparty defaults and the related collateral, if any, is of no value to the FHLBNY at March 31, 2007 and December 31, 2006.
The FHLBNY uses derivatives in three ways: by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset-liability management (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.
An economic hedge is defined as a derivative that hedges specific or non-specific underlying assets, liabilities or firm commitments, but does not qualify for hedge accounting under the rules of SFAS 133 while it is an acceptable hedging strategy under the FHLBNY’s risk management program. These strategies also comply with Finance Board’s regulatory requirements prohibiting speculative hedging transactions. An economic hedge, by definition, 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 does not take speculative positions with derivatives or any other financial instruments, and does not have any special purpose entities or any other types of off-balance sheet conduits.
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Notes to Financial Statements — Unaudited
The following table presents outstanding notional balances and estimated fair value gains and (losses) of derivatives by SFAS 133 hedge type (in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Notional | Fair Value | Notional | Fair Value | |||||||||||||
Interest rate swaps | ||||||||||||||||
Fair value | $ | 75,649,760 | $ | (227,721 | ) | $ | 76,125,220 | $ | (183,808 | ) | ||||||
Cash flow | 355,500 | 373 | — | — | ||||||||||||
Economic | 1,260,000 | (1,157 | ) | 175,000 | (253 | ) | ||||||||||
Interest rate caps/floors | ||||||||||||||||
Fair value-Economic | 1,192,694 | 2 | 1,237,694 | — | ||||||||||||
Mortgage delivery commitments | ||||||||||||||||
MPF Fair value-Economic | 2,954 | (2 | ) | 9,497 | (35 | ) | ||||||||||
Other | ||||||||||||||||
Intermediation * | 80,000 | 27 | 50,000 | 3 | ||||||||||||
Total | $ | 78,540,908 | $ | (228,478 | ) | $ | 77,597,411 | $ | (184,093 | ) | ||||||
Total derivatives, excluding accrued interest | $ | (228,478 | ) | $ | (184,093 | ) | ||||||||||
Accrued interest | 236,686 | 301,253 | ||||||||||||||
Net derivative balance | $ | 8,208 | $ | 117,160 | ||||||||||||
Net derivative asset balance | $ | 131,889 | $ | 224,775 | ||||||||||||
Net derivative liability balance | (123,681 | ) | (107,615 | ) | ||||||||||||
Net derivative balance | $ | 8,208 | $ | 117,160 | ||||||||||||
* | Classified as economic. |
The categories — “Fair value,” “Commitment,” and “Cash flow” hedges — represent derivative transactions accounted for as hedges. The category of “Economic” hedges represents derivative transactions under hedge strategies that did not qualify for hedge accounting treatment under SFAS 133.
Derivative Gains and Losses Reclassified from Accumulated other comprehensive income (loss) to Current Period Income
The following table summarizes changes in derivative gains and (losses) and reclassifications into earnings from Accumulated other comprehensive income (loss) in the statements of condition (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Accumulated (losses)/gains from cash flow hedges, beginning of year | $ | (4,763 | ) | $ | 5,352 | |||
Net hedging transactions | 139 | 3,970 | ||||||
Reclassified into earnings | (151 | ) | (542 | ) | ||||
Accumulated (losses)/gains from cash flow hedges, end of year | $ | (4,775 | ) | $ | 8,780 | |||
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Notes to Financial Statements — Unaudited
Earnings Impact of Hedging Activities
Net Realized and Unrealized Gain (Loss) on Derivatives and Hedging Activities
As a result of applying SFAS 133, the FHLBNY reported the following net gains (losses) on derivatives and hedging activities (in thousands):
As a result of applying SFAS 133, the FHLBNY reported the following net gains (losses) on derivatives and hedging activities (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Gains (losses) related to fair value changes — Interest rate swaps | $ | 3,239 | $ | (885 | ) | |||
(Losses) gains related to fair value changes — Options | (712 | ) | (2,231 | ) | ||||
Net interest accruals — Options | 1,003 | 1,200 | ||||||
Gains (losses) related to MPF — Economic hedges* | (70 | ) | 36 | |||||
Gains (losses) — Economic hedges* | (17 | ) | (57 | ) | ||||
Net interest accruals — Economic hedges* | 80 | 1 | ||||||
Net gains (losses) on derivatives and hedging activities | $ | 3,523 | $ | (1,936 | ) | |||
* | Economic hedges include intermediation and swaps not qualifying for hedge accounting under SFAS 133. |
Interest accruals associated with hedges are allocated by category in the table above to conform to current period classification to more precisely match gains and losses from hedging activities. This reclassification has no impact on the net gains (losses) on derivatives and hedging activities.
Cash Flow Hedges
There were no material amounts for the three months ended March 31, 2007 and 2006 that were reclassified from Accumulated other comprehensive income (loss) into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. Over the next twelve months, it is expected that $0.4 million of net gains recorded in Accumulated other comprehensive income at March 31, 2007, will be recognized in earnings.
Note 9. Employee Retirement Plans
The FHLBNY 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 substantially all employees of the FHLBNY. For accounting purposes, the DB Plan is a multi-employer plan and does not segregate its assets, liabilities, or costs by participating employer. As a result, disclosure of the accumulated benefit obligations, plan assets, and the components of annual pension expense attributable to the FHLBNY are not made.
The FHLBNY 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 FHLBNY 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 thrift component of the BEP plan is a supplemental defined contribution plan. The plan’s liability consists of the accumulated compensation deferrals and accrued interest on the deferrals.
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Notes to Financial Statements — Unaudited
The FHLBNY also offers a Postretirement Health Benefit Plan to retirees. There are no funded plan assets that have been designated to provide postretirement health benefits. The following table presents employee retirement plan expenses (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Defined Benefit Plan | $ | 1,456 | $ | 1,450 | ||||
Benefit Equalization Plan (Defined benefits) | 309 | 500 | ||||||
Defined Contribution Plan and BEP thrift | 380 | 282 | ||||||
Postretirement Health Benefit Plan | 481 | 363 | ||||||
Total retirement plan expenses | $ | 2,626 | $ | 2,595 | ||||
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 | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Service cost | $ | 103 | $ | 150 | ||||
Interest cost | 161 | 200 | ||||||
Amortization of unrecognized prior service cost | (25 | ) | (13 | ) | ||||
Amortization of unrecognized net loss | 70 | 163 | ||||||
Net periodic benefit cost | $ | 309 | $ | 500 | ||||
Key assumptions used in determining the supplemental retirement plan cost for the three months ended March 31, 2007 included a discount rate of 5.65%, salary increase of 5.5%, and an amortization period of 8 years. The measurement date used to determine the net periodic cost was December 31, 2006. The total amount of benefits paid and expected to be paid under this plan is not expected to be materially different from amounts disclosed in the Bank’s Form 10-K filed on March 29, 2007.
Components of the net periodic postretirement health benefit cost for the FHLBNY’s Postretirement Health Benefit Plan were as follows (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Service cost (benefits attributed to service during the period) | $ | 218 | $ | 135 | ||||
Interest cost on accumulated postretirement health benefit obligation | 203 | 148 | ||||||
Amortization of loss | 60 | 80 | ||||||
Net periodic postretirement health benefit cost | $ | 481 | $ | 363 | ||||
Key assumptions used in determining the Postretirement Health Benefit Plan for the three months ended March 31, 2007 included a discount rate of 5.65%, and health care cost trend rate of 4.5%. The measurement date used to determine the net periodic cost was December 31, 2006. The total amount of benefits paid and expected to be paid under this plan is not expected to be materially different from amounts disclosed in the Bank’s Form 10-K filed on March 29, 2007.
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Notes to Financial Statements — Unaudited
Note 10. Related Party Transactions
The FHLBNY is a cooperative and the members own almost all of the stock of the FHLBNY. Stock that is not owned by members is held by former members. The majority of the members of the Board of Directors of the FHLBNY are elected by and from the membership. The FHLBNY conducts its advances business almost exclusively with members. The FHLBNY considers its transactions with its members and non-member stockholders as related party transactions in addition to transactions with other FHLBanks, the Office of Finance, and the Finance Board.
All transactions with all members, including those whose officers may serve as directors of the FHLBNY, are at terms that are no more favorable than comparable transactions with other members.
The following tables summarize outstanding balances and transactions with related parties at March 31, 2007 and December 31, 2006.
Related Party: Outstanding Assets, Liabilities and Equity (in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
Related | Unrelated | Related | Unrelated | |||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | — | $ | 18,845 | $ | — | $ | 38,850 | ||||||||
Interest-bearing deposits | 102 | 6,367,000 | 77 | 5,591,000 | ||||||||||||
Federal funds sold | — | 3,594,000 | — | 3,661,000 | ||||||||||||
Held-to-maturity securities | — | 10,806,981 | — | 11,251,098 | ||||||||||||
Advances | 59,147,220 | — | 59,012,394 | — | ||||||||||||
Mortgage loans* | — | 1,488,966 | — | 1,483,419 | ||||||||||||
Accrued interest receivable | 306,801 | 89,629 | 319,687 | 86,436 | ||||||||||||
Premises and equipment, net | — | 11,009 | — | 11,107 | ||||||||||||
Derivative assets | — | 131,889 | — | 224,775 | ||||||||||||
Other assets** | — | 20,461 | — | 23,144 | ||||||||||||
Total assets | $ | 59,454,123 | $ | 22,528,780 | $ | 59,332,158 | $ | 22,370,829 | ||||||||
Liabilities and capital | ||||||||||||||||
Deposits | $ | 2,210,097 | $ | — | $ | 2,389,528 | $ | — | ||||||||
Consolidated obligations | — | 74,782,754 | — | 74,234,228 | ||||||||||||
Mandatorily redeemable capital stock | 111,782 | — | 109,950 | — | ||||||||||||
Accrued interest payable | — | 636,999 | — | 735,215 | ||||||||||||
Affordable Housing Program*** | 104,572 | — | 101,898 | — | ||||||||||||
Payable to REFCORP | — | 17,818 | — | 17,475 | ||||||||||||
Derivative liabilities | — | 123,681 | — | 107,615 | ||||||||||||
Other liabilities**** | 44,258 | 38,412 | 43,265 | 59,420 | ||||||||||||
Total liabilities | 2,470,709 | 75,599,664 | 2,644,641 | 75,153,953 | ||||||||||||
Capital | 3,912,530 | — | 3,904,393 | — | ||||||||||||
Total liabilities and capital | $ | 6,383,239 | $ | 75,599,664 | $ | 6,549,034 | $ | 75,153,953 | ||||||||
* | Includes insignificant amounts of mortgage loans purchased from members of another FHLBank. | |
** | Includes insignificant amounts of miscellaneous assets that are considered related party. | |
*** | Represents funds not yet disbursed to eligible programs. | |
**** | Related column includes member pass-through reserves at the Federal Reserve Bank. |
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Notes to Financial Statements — Unaudited
Related Party: Income and Expense transactions (in thousands):
Three months ended March 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Related | Unrelated | Related | Unrelated | |||||||||||||
Interest income | ||||||||||||||||
Advances | $ | 777,494 | $ | — | $ | 701,775 | $ | — | ||||||||
Interest-bearing deposits * | — | 80,699 | — | 76,492 | ||||||||||||
Federal funds sold | — | 44,636 | — | 20,392 | ||||||||||||
Held-to-maturity securities | — | 152,963 | — | 129,852 | ||||||||||||
Mortgage loans ** | — | 19,518 | — | 18,858 | ||||||||||||
Others | — | 1 | — | 5 | ||||||||||||
Total interest income | $ | 777,494 | $ | 297,817 | $ | 701,775 | $ | 245,599 | ||||||||
Interest expense | ||||||||||||||||
Consolidated obligations | $ | — | $ | 938,036 | $ | — | $ | 829,578 | ||||||||
Deposits | 21,010 | — | 14,072 | — | ||||||||||||
Mandatorily redeemable stock | 2,149 | — | 320 | — | ||||||||||||
Cash collateral held and other borrowings | 3 | 1,425 | — | 165 | ||||||||||||
Total interest expense | $ | 23,162 | $ | 939,461 | $ | 14,392 | $ | 829,743 | ||||||||
Service fees | $ | 827 | $ | — | $ | 807 | $ | — | ||||||||
* | Includes de minimis amounts of interest income from MPF service provider. | |
** | Includes de minimis amounts of mortgage interest income from loans purchased from members of other FHLBank. |
Debt extinguished- In the three months ended March 31, 2007, the FHLBNY retired $283.0 million of consolidated obligation debt, at a cost that exceeded book value by about $2.4 million. The debt was retired by transferring the debt obligation to another FHLBank at negotiated market prices.
22
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Notes to Financial Statements — Unaudited
Note 11. Total Comprehensive Income
Total comprehensive income was comprised of Net Income and Accumulated other comprehensive income (loss), which included cash flow hedging activities, and additional liability for employee supplemental retirement plans. Changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2007 and 2006 were as follows (in thousands):
Accumulated | ||||||||||||||||||||||||
Cash | Benefit | Postretirement | Other | Total | ||||||||||||||||||||
Flow | Equalization | Health Benefit | Comprehensive | Net | Comprehensive | |||||||||||||||||||
Hedges | Plan | Plan | Income (Loss) | Income | Income | |||||||||||||||||||
Balance, December 31, 2005 | $ | 5,352 | $ | (1,839 | ) | $ | — | $ | 3,513 | |||||||||||||||
Net change | 3,428 | (762 | ) | — | 2,666 | $ | 62,687 | $ | 65,353 | |||||||||||||||
Balance, March 31, 2006 | 8,780 | (2,601 | ) | — | 6,179 | |||||||||||||||||||
Net change | (13,543 | ) | 2,957 | — | (10,586 | ) | $ | 222,508 | $ | 211,922 | ||||||||||||||
Incremental impact of adopting SFAS 158 | (2,321 | ) | (3,820 | ) | (6,141 | ) | ||||||||||||||||||
Balance, December 31, 2006 | (4,763 | ) | (1,965 | ) | (3,820 | ) | (10,548 | ) | ||||||||||||||||
Net change | (12 | ) | — | — | (12 | ) | $ | 71,273 | $ | 71,261 | ||||||||||||||
Balance, March 31, 2007 | $ | (4,775 | ) | $ | (1,965 | ) | $ | (3,820 | ) | $ | (10,560 | ) | ||||||||||||
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Notes to Financial Statements — Unaudited
Note 12. Estimated Fair Values
The carrying value and estimated fair values of the FHLBNY’s financial instruments as of March 31, 2007 were as follows (in thousands):
March 31, 2007 | ||||||||||||
Carrying | Net Unrealized | Estimated | ||||||||||
Financial Instruments | Value | Gains/Losses | FairValue | |||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 18,845 | $ | — | $ | 18,845 | ||||||
Interest-bearing deposits | 6,367,102 | 94 | 6,367,196 | |||||||||
Federal funds sold | 3,594,000 | — | 3,594,000 | |||||||||
Held-to-maturity securities | 10,806,981 | (47,918 | ) | 10,759,063 | ||||||||
Advances | 59,147,220 | (44,124 | ) | 59,103,096 | ||||||||
Mortgage loans | 1,488,966 | (19,644 | ) | 1,469,322 | ||||||||
Accrued interest receivable | 396,430 | — | 396,430 | |||||||||
Derivative assets | 131,889 | — | 131,889 | |||||||||
Other financial assets | 2,624 | — | 2,624 | |||||||||
Liabilities | ||||||||||||
Deposits | 2,210,097 | 3 | 2,210,100 | |||||||||
Consolidated obligations: | ||||||||||||
Bonds | 60,780,476 | (130,475 | ) | 60,650,001 | ||||||||
Discount notes | 14,002,278 | (878 | ) | 14,001,400 | ||||||||
Mandatorily redeemable capital stock | 111,782 | — | 111,782 | |||||||||
Accrued interest payable | 636,999 | — | 636,999 | |||||||||
Derivative liabilities | 123,681 | — | 123,681 | |||||||||
Other financial liabilities | 50,016 | — | 50,016 |
The carrying value and estimated fair values of the FHLBNY’s financial instruments as of December 31, 2006 were as follows (in thousands):
December 31, 2006 | ||||||||||||
Carrying | Net Unrealized | Estimated | ||||||||||
Financial Instruments | Value | Gains/Losses | Fair Value | |||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 38,850 | $ | — | $ | 38,850 | ||||||
Interest-bearing deposits | 5,591,077 | 62 | 5,591,139 | |||||||||
Federal funds sold | 3,661,000 | 17 | 3,661,017 | |||||||||
Held-to-maturity securities | 11,251,098 | (81,329 | ) | 11,169,769 | ||||||||
Advances | 59,012,394 | (55,450 | ) | 58,956,944 | ||||||||
Mortgage loans | 1,483,419 | (24,284 | ) | 1,459,135 | ||||||||
Accrued interest receivable | 406,123 | — | 406,123 | |||||||||
Derivative assets | 224,775 | — | 224,775 | |||||||||
Other financial assets | 2,105 | 6 | 2,111 | |||||||||
Liabilities | ||||||||||||
Deposits | 2,389,528 | 1 | 2,389,529 | |||||||||
Consolidated obligations: | ||||||||||||
Bonds | 62,042,675 | (184,723 | ) | 61,857,952 | ||||||||
Discount notes | 12,191,553 | (1,229 | ) | 12,190,324 | ||||||||
Mandatorily redeemable capital stock | 109,950 | — | 109,950 | |||||||||
Accrued interest payable | 735,215 | — | 735,215 | |||||||||
Derivative liabilities | 107,615 | — | 107,615 | |||||||||
Other financial liabilities | 52,506 | — | 52,506 |
24
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Notes to Financial Statements — Unaudited
Note 13. Commitments and Contingencies
The primary duty of the Finance Board is to ensure that the FHLBanks operate in a financially safe and sound manner. The Finance Board has the power to supervise the FHLBanks and to promulgate and enforce such regulations and orders as are necessary from time to time to carry out the provision of the Federal Home Loan Bank Act. FHLBanks have joint and several liability for all the consolidated obligations issued on their behalf. Accordingly, should one or more of the FHLBanks be unable to repay their participation in the consolidated obligations, each of the other FHLBanks could be called upon to repay all or part of such obligations, as determined or approved by the Finance Board. Neither the FHLBNY nor any other FHLBank has had to assume or pay the consolidated obligation of another FHLBank. The FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future. Under FASB interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others”(“FIN 45”), FHLBNY would have been required to recognize the fair value of the FHLBNY’s joint and several liability for all the consolidated obligations, as discussed above. However, the FHLBNY considers the joint and several liability as similar to a related party guarantee, which meets the scope exception in FIN 45. Accordingly, the FHLBNY has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at March 31, 2007 or December 31, 2006. The par amounts of the twelve FHLBanks’ outstanding consolidated obligations, including the FHLBNY’s, were approximately $951.5 billion and $951.9 billion at March 31, 2007 and December 31, 2006, respectively.
Commitments for additional advances totaled approximately $21.1 billion and $21.2 billion as of March 31, 2007 and December 31, 2006. Commitments are conditional, and generally were for periods of up to twelve months. Extension of credit under these commitments is subject to certain collateral requirements and other financial criteria at the time the commitment is drawn upon. Standby letters of credit are issued on behalf of members for a fee to facilitate residential housing, community lending, and members’ asset/liability management or to provide liquidity. Members assume an unconditional obligation to reimburse the FHLBNY for value given by the FHLBNY to the beneficiary under the standby letter of credit. The FHLBNY may, in its discretion, permit the member to finance repayment of this obligation by receiving a collateralized advance. Outstanding standby letters of credit were approximately $369.1 million and $331.1 million as of March 31, 2007 and December 31, 2006, respectively, and had original terms of up to fifteen years, with a final expiration in 2019. Unearned fees on standby letters of credit are recorded in other liabilities and were not significant as of March 31, 2007 and December 31, 2006. Based on management’s credit analyses and collateral requirements, the FHLBNY does not deem it necessary to have any provision for credit losses on these commitments and letters of credit. Standby letters of credit are fully collateralized at the time of issuance.
The FHLBNY was unconditionally obligated to purchase $3.0 million and $9.5 million in mortgage loans at March 31, 2007 and December 31, 2006, respectively under the MPF Program. Commitments are generally for periods not to exceed 45 days. In accordance with SFAS 149, “Amendment of Statement 133 on Derivatives Instruments and Hedging Activities,”such commitments entered into after June 30, 2003 were recorded as derivatives at their fair value. In addition, the FHLBNY had entered into conditional agreements under “Master Commitments” with its members in the MPF program to purchase mortgage loans in aggregate amount of $241.6 million and $223.9 million as of March 31, 2007 and December 31, 2006.
The FHLBNY executes derivatives with major banks and broker-dealers (“derivative counterparties”), and generally enters into bilateral collateral agreements. When derivative counterparties are exposed, the Bank would typically pledge cash collateral to mitigate the counterparty’s credit exposure. Such market value exposure was below the threshold agreements with counterparties at March 31, 2007 and December 31, 2006. As a result, it did not become necessary for the FHLBNY to pledge collateral at either date to mitigate the derivative counterparties’ credit exposure related to derivative contracts with the FHLBNY.
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Notes to Financial Statements — Unaudited
The FHLBNY was also exposed to credit risk associated with derivative contracts, which is measured as the replacement cost of derivatives in a gain position. The FHLBNY’s credit exposure was mitigated by cash collateral of $32.0 million and $124.0 million delivered by derivative counterparties and held by the FHLBNY at March 31, 2007 and December 31, 2006.
The FHLBNY charged to operating expense rental costs of approximately $0.8 million for the three months ended March 31, 2007 and 2006. Lease agreements for FHLBNY premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBNY.
The following table summarizes commitments and contingencies as of March 31, 2007 (in thousands):
Payments due or expiration terms by period | ||||||||||||||||||||
Less than | One year | Four years | Greater than | |||||||||||||||||
One year | to three years | to five years | Five years | Total | ||||||||||||||||
Contractual Obligations | ||||||||||||||||||||
Consolidated obligations-bonds at par | $ | 27,897,215 | $ | 24,017,530 | $ | 4,656,950 | $ | 4,310,350 | $ | 60,882,045 | ||||||||||
Mandatorily redeemable capital stock | 45,685 | 28,454 | 30,671 | 6,972 | 111,782 | |||||||||||||||
Premises and equipment (rental and lease obligations) | 2,954 | 4,796 | 4,347 | 12,590 | 24,687 | |||||||||||||||
Total contractual obligations | 27,945,854 | 24,050,780 | 4,691,968 | 4,329,912 | 61,018,514 | |||||||||||||||
Other commitments | ||||||||||||||||||||
Standby letters of credit | 309,117 | 30,629 | 19,643 | 9,728 | 369,117 | |||||||||||||||
Unused lines of credit and other conditional commitments | 21,113,550 | — | — | — | 21,113,550 | |||||||||||||||
Consolidated obligation bonds/discount notes traded not settled | 378,555 | — | — | — | 378,555 | |||||||||||||||
Commitment to purchase investment security | 100,000 | — | — | — | 100,000 | |||||||||||||||
Open delivery commitments (MPF) | 2,954 | — | — | — | 2,954 | |||||||||||||||
Total other commitments | 21,904,176 | 30,629 | 19,643 | 9,728 | 21,964,176 | |||||||||||||||
Total contractual obligations and commitments | $ | 49,850,030 | $ | 24,081,409 | $ | 4,711,611 | $ | 4,339,640 | $ | 82,982,690 | ||||||||||
The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses on such commitments is required.
The FHLBNY is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, the FHLBNY does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the FHLBNY’s financial condition or results of operations.
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Notes to Financial Statements — Unaudited
Note 14. Earnings per Share of Capital
The following table sets forth the computation of earnings per share of capital (in thousands except per share amounts):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Net income | $ | 71,273 | $ | 62,687 | ||||
Net income available to stockholders | $ | 71,273 | $ | 62,687 | ||||
Weighted average shares of capital | 36,381 | 36,413 | ||||||
Less: Mandatorily redeemable capital | (1,118 | ) | (260 | ) | ||||
Average number of shares of capital used to calculate earnings per share | 35,263 | 36,153 | ||||||
Earnings per share of capital | $ | 2.02 | $ | 1.73 | ||||
Net earnings per share of capital | $ | 2.02 | $ | 1.73 | ||||
Basic and diluted earnings per share of capital are the same. The FHLBNY has no dilutive potential common shares or other common stock equivalents.
27
Table of Contents
Notes to Financial Statements — Unaudited
Note 15. Segment Information
The FHLBNY manages its operations as a single business segment. Management and the FHLBNY’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. Advances to large members constitute a significant percentage of FHLBNY’s advance portfolio and its source of revenues.
The following table summarizes advances to the top 5 members at March 31, 2007 and interest income earned for the three months ended March 31, 2007 (dollars in thousands):
March 31, 2007 | ||||||||||||||||
Par | Percent of | Interest | ||||||||||||||
City | State | Advances | Total * | Income | ||||||||||||
Hudson City Savings Bank | Paramus | NJ | $ | 10,416,000 | 17.6 | % | $ | 101,937 | ||||||||
New York Community Bank | Westbury | NY | 7,588,175 | 12.9 | 83,662 | |||||||||||
HSBC Bank USA, National Association | New York | NY | 5,008,976 | 8.5 | 67,298 | |||||||||||
Manufacturers and Traders Trust Company | Buffalo | NY | 3,596,154 | �� | 6.1 | 46,344 | ||||||||||
Astoria Federal Savings and Loan Assn | Long Island City | NY | 2,340,000 | 4.0 | 29,353 | |||||||||||
Total | $ | 28,949,305 | 49.1 | % | $ | 328,594 | ||||||||||
* | Percentage calculated on par value of advances. |
The following table summarizes advances to the top 5 members at March 31, 2006 and interest income earned for the three months ended March 31, 2006 (dollars in thousands):
March 31, 2006 | ||||||||||||||||
Par | Percent of | Interest | ||||||||||||||
City | State | Advances | Total* | Income | ||||||||||||
New York Community Bank | Westbury | NY | $ | 7,304,398 | 11.7 | % | $ | 79,404 | ||||||||
Hudson City Savings Bank | Paramus | NJ | 5,350,000 | 8.6 | 49,285 | |||||||||||
HSBC Bank USA, National Association | New York | NY | 5,009,924 | 8.0 | 56,801 | |||||||||||
Manufacturers and Traders Trust Company | Buffalo | NY | 3,803,457 | 6.1 | 45,292 | |||||||||||
North Fork Bank | Mattituck | NY | 3,625,015 | 5.8 | 49,890 | |||||||||||
$ | 25,092,794 | 40.2 | % | $ | 280,672 | |||||||||||
* | Percentage calculated on par value of advances. |
The following table summarizes advances to the top 5 members at December 31, 2006, and interest income earned for the twelve months ended December 31, 2006 (dollars in thousands):
December 31, 2006 | ||||||||||||||||
Par | Percent of | Interest | ||||||||||||||
City | State | Advances | Total * | Income | ||||||||||||
Hudson City Savings Bank | Paramus | NJ | $ | 8,873,000 | 15.0 | % | $ | 289,348 | ||||||||
New York Community Bank | Westbury | NY | 7,878,877 | 13.4 | 315,626 | |||||||||||
HSBC Bank USA, National Association | New York | NY | 5,009,503 | 8.5 | 260,749 | |||||||||||
Manufacturers and Traders Trust Company | Buffalo | NY | 3,423,231 | 5.8 | 188,514 | |||||||||||
Astoria Federal Savings and Loan Assn | Long Island City | NY | 2,480,000 | 4.2 | 114,426 | |||||||||||
Total | $ | 27,664,611 | 46.9 | % | $ | 1,168,663 | ||||||||||
* | Percentage calculated on par value of advances. |
28
Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Statements contained in this report, including statements describing the objectives, projections, estimates, or predictions of the Federal Home Loan Bank of New York (“FHLBNY” or “Bank”), may be “forward-looking statements.” All statements other than statements of historical fact are statements that could potentially be forward-looking statements. These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or other variations on these terms or their negatives. These statements may involve matters pertaining to, but not limited to, projections regarding revenue, income, earnings, capital expenditures, dividends, the capital structure and other financial items; statements of plans or objectives for future operations; expectations of future economic performance; and statements of assumptions underlying certain of the foregoing types of statements.
The Bank cautions that, by their nature, forward-looking statements involve risks or uncertainties, and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, readers are cautioned not to place undue reliance on such statements, which are current only as of the date thereof. The Bank will not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Bank.
These forward-looking statements may not be realized due to a variety of risks and uncertainties including, but not limited, to risks and uncertainties relating to economic, competitive, governmental, technological and marketing factors, as well as other factors identified in the Bank’s filings with the Securities and Exchange Commission.
29
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Business Overview
Financial Performance. As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission and its ability to provide adequate returns on the capital supplied by its members. The FHLBNY achieves this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and by paying a dividend. Reflecting the FHLBNY’s cooperative nature, the FHLBNY’s financial strategies are designed to enable the FHLBNY to expand and contract in response to member credit needs. The FHLBNY invests its capital in high quality, short- and intermediate-term financial instruments. This strategy allows the FHLBNY to maintain liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. The dividends paid by FHLBNY are largely the result of the FHLBNY’s earnings on invested member capital, net earnings on member credit, mortgage loans and investments, offset in part by the FHLBNY’s operating expenses and assessments. FHLBNY’s board of directors and management determine the pricing of member credit and dividend policies based on the needs of its members.
Historical Perspective. The fundamental business of the FHLBNY is to provide member institutions and housing associates with advances and other credit products in a wide range of maturities to meet their needs. Congress created the FHLBanks in 1932 to improve the availability of funds to support home ownership. Although the FHLBanks were initially capitalized with government funds, members have provided all of the FHLBanks’ capital for over 50 years.
Financial Highlights
The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations, and is the principal factor that impacts its operating results. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to Resolution Funding Corporation (“REFCORP”), and set aside a percentage of its income towards an Affordable Housing Program (“AHP”). Together they are referred to as assessments.
Net Income —Net Income for the three months ended March 31, 2007, increased by $8.6 million to $71.3 million, up from $62.7 million for the comparable period in 2006. Net earnings per share of capital for the three months ended March 31, 2007 was $2.02, up from $1.73 for the same period in 2006. Return on average stockholders’ equity, defined as net income as an annualized percentage of average capital stock and retained earnings, increased to 7.35% for the three months ended March 31, 2007, up from 6.55% in the comparable period in 2006. Improved return on equity was directly attributable to the increase in net income in the first quarter of 2007 compared to the same quarter in 2006.
Net Interest Income —Net interest income after the provision for credit losses, a key metric for the FHLBNY, was $112.7 million for the three months ended March 31, 2007, up from $103.2 million in the same period in 2006. Net interest income represents the difference between income from interest-earning assets and interest expenses paid on interest-bearing liabilities. Net interest spread, was 31.3 basis points in the three months ended March 31, 2007, compared to 26.9 basis points in the same period in 2006. Net interest spread is defined as the difference between yields on interest-earning assets and yields on interest-bearing liabilities. Net interest margin, defined as annualized net interest income as a percentage of average earning assets increased to 56.7 basis points for the three months ended March 31, 2007, up from 50.9 basis points for the comparable period in 2006. A cash dividend of $1.76 per share of capital stock (7.00% annualized return on capital stock) was paid in January 2007 for the fourth quarter of 2006, up from $1.29 paid in January 2006 for the fourth quarter 2005. A cash dividend of $1.85 per share of capital stock (7.50% annualized return on capital stock) was paid in April 2007 for the first quarter of 2007.
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Other Income —Other income for the three months ended March 31, 2007 was $2.0 million compared to a loss of $1.1 million for the comparable period in 2006. Other income comprised of service fee income from providing correspondent banking services to members, realized and unrealized gains and losses from hedging activities, and losses from extinguishment of debt. Service fee income remained substantially unchanged for the three months ended March 31, 2007 and 2006. Net realized and unrealized gain from hedging activities was a gain of $3.5 million for the three months ended March 31, 2007 compared to a loss of $1.9 million for the same period in 2006. Debt retirement in the three months ended March 31, 2007 resulted in a loss of $2.4 million. No debt was retired in the same period in 2006. Other expense, comprising principally of operating expenses, was $17.4 million for the three months ended March 31, 2007, up from $16.8 million in same period in 2006.
Assessments —REFCORP assessments on net income was $17.8 million in the three months ended March 31, 2007 compared to $15.7 million in the same period in 2006. Assessments set aside on net income for the Affordable Housing Program (AHP) was $8.2 million in the three months ended March 31, 2007 compared to $7.0 million in the same period in 2006. Both REFCORP and AHP assessments are based on income and the increase reflected the increase in pre-assessment income for the three months ended March 31, 2007 over the comparable period in 2006.
Advances —Total assets at March 31, 2007 was $82.0 billion compared to $81.7 billion at December 31, 2006. Reported Advances to members was $59.2 billion at March 31, 2007, almost unchanged from $59.0 billion at December 31, 2006. One member was acquired by a non-member in the first quarter of 2007, and about $100.0 million in advances outstanding to the former member was prepaid. About another $100.0 million was prepaid by members in the three months ended March 31, 2007.
Investments —Held-to-maturity securities consisting mainly of mortgage-backed securities “MBS” stood at $10.8 billion at March 31, 2007, down from $11.3 billion at December 31, 2006. MBS spreads remained “tight” inhibiting opportunities for MBS acquisition. Purchases of new MBS investments have remained opportunistic. Only when pricing met the Bank’s risk-reward preferences, the Bank considered an acquisition. At March 31, 2007, the Bank committed to purchase $100.0 million in a triple-A, agency issued MBS security that settled in April 2007. Proceeds from scheduled and unscheduled paydowns were $443.2 million, and no purchases were made that settled in the three months ended March 31, 2007. The Bank increased its inventory of short-term certificates of deposits issued by highly-rated financial institutions to $6.4 billion at March 31, 2007, up from $5.6 billion at December 31, 2006. The yield curve was still somewhat inverted and the Bank benefited from the relatively high yields from short-term investments.
Consolidated obligation debt —The Bank refined its funding practices to make greater use of term and overnight discount notes to provide greater flexibility in adjusting its balance sheet leverage. As a result, discount notes outstanding at March 31, 2007 increased to $14.0 billion from $12.2 billion at December 31, 2006. As the Bank’s total assets were virtually unchanged at March 31, 2007 compared to December 31, 2006, the Bank compensated for the increased issuance of discounts notes by a decrease in issuances of bonds. As a result, consolidated obligations bonds declined by $1.3 billion in par amounts to $60.9 billion at March 31, 2007 from $62.2 billion of par amount of bonds at December 31, 2006.
Stockholders’ Equity —Stockholders’ equity comprising of capital stock, retained earnings and accumulated comprehensive income, increased very slightly as the Bank paid out $65.2 million in dividends in the first quarter of 2007 on a net income of $71.3 million. Capital stock, a component of equity, remained unchanged at $3.5 billion at March 31, 2007, compared to December 31, 2006. The Bank has continued its program to redeem stock in excess of the amount necessary to support advance activity. Members are required to purchase stock as a prerequisite to membership, and the amount is also determined by a percentage of advances borrowed from the FHLBNY. Under the FHLBNY’s present practice of repurchasing excess stock, the amount of capital stock outstanding varies in line with members’ outstanding borrowings.
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Selected financial data are presented below (Unaudited)
Statements of Condition | March 31, | Year ended December 31, | ||||||||||||||||||||||
(dollars in millions) | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||
Investments (1) | $ | 20,768 | $ | 20,503 | $ | 21,190 | $ | 18,363 | $ | 14,217 | $ | 23,598 | ||||||||||||
Advances | 59,147 | 59,012 | 61,902 | 68,507 | 63,923 | 68,926 | ||||||||||||||||||
Mortgage loans | 1,489 | 1,483 | 1,467 | 1,178 | 672 | 435 | ||||||||||||||||||
Total assets | 81,983 | 81,703 | 85,014 | 88,439 | 79,230 | 93,606 | ||||||||||||||||||
Deposits and borrowings | 2,210 | 2,390 | 2,658 | 2,297 | 2,100 | 2,743 | ||||||||||||||||||
Consolidated obligations | 74,783 | 74,234 | 77,279 | 80,157 | 70,857 | 83,512 | ||||||||||||||||||
Mandatorily redeemable stock | 112 | 110 | 18 | 127 | — | — | ||||||||||||||||||
AHP liability | 105 | 102 | 91 | 82 | 93 | 110 | ||||||||||||||||||
REFCORP liability | 18 | 17 | 14 | 10 | — | 14 | ||||||||||||||||||
Capital stock | 3,548 | 3,546 | 3,590 | 3,655 | 3,639 | 4,051 | ||||||||||||||||||
Retained earnings | 375 | 369 | 291 | 223 | 127 | 244 | ||||||||||||||||||
Equity to asset ratio (2) | 4.79 | % | 4.79 | % | 4.57 | % | 4.38 | % | 4.75 | % | 4.59 | % |
Three months ended | ||||||||||||||||||||||||||||
Statements of Condition | March 31, | Year ended December 31, | ||||||||||||||||||||||||||
Averages(in millions) | 2007 | 2006 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||
Investments (1) | $ | 20,516 | $ | 18,478 | $ | 19,490 | $ | 19,944 | $ | 17,642 | $ | 19,833 | $ | 20,677 | ||||||||||||||
Advances | 58,585 | 62,516 | 64,658 | 63,446 | 65,289 | 70,943 | 64,210 | |||||||||||||||||||||
Mortgage loans | 1,488 | 1,464 | 1,471 | 1,360 | 928 | 527 | 400 | |||||||||||||||||||||
Total assets | 81,362 | 83,052 | 86,319 | 85,254 | 84,344 | 92,747 | 86,682 | |||||||||||||||||||||
Deposits and borrowings | 1,907 | 1,381 | 1,773 | 2,112 | 1,968 | 2,952 | 2,908 | |||||||||||||||||||||
Consolidated obligations | 74,550 | 76,558 | 79,314 | 77,629 | 76,105 | 81,818 | 76,907 | |||||||||||||||||||||
Mandatorily redeemable capital | 112 | 26 | 51 | 56 | 238 | — | — | |||||||||||||||||||||
AHP liability | 102 | 91 | 95 | 84 | 83 | 105 | 107 | |||||||||||||||||||||
REFCORP liability | 9 | 8 | 9 | 7 | 4 | 2 | 8 | |||||||||||||||||||||
Capital stock | 3,526 | 3,615 | 3,737 | 3,604 | 3,554 | 4,082 | 3,768 | |||||||||||||||||||||
Retained earnings | 338 | 286 | 314 | 251 | 159 | 193 | 204 |
Operating Results | Three months ended | |||||||||||||||||||||||||||
(dollars in millions, except | March 31, | Years ended December 31, | ||||||||||||||||||||||||||
earnings and dividends per share) | 2007 | 2006 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||
Net interest income (3) | $ | 113 | $ | 103 | $ | 470 | $ | 395 | $ | 268 | $ | 299 | $ | 389 | ||||||||||||||
Net income | 71 | 63 | 285 | 230 | 161 | 46 | 234 | |||||||||||||||||||||
Dividends paid in cash | 65 | 46 | 208 | 162 | 66 | 164 | 167 | |||||||||||||||||||||
AHP expense | 8 | 7 | 32 | 26 | 19 | 5 | 26 | |||||||||||||||||||||
REFCORP expense | 18 | 16 | 71 | 58 | 40 | 11 | 59 | |||||||||||||||||||||
Return on average equity* | 7.35 | % | 6.55 | % | 7.04 | % | 5.97 | % | 4.34 | % | 1.08 | % | 5.89 | % | ||||||||||||||
Return on average assets* | 0.35 | % | 0.31 | % | 0.33 | % | 0.27 | % | 0.19 | % | 0.05 | % | 0.27 | % | ||||||||||||||
Operating expenses | $ | 16 | $ | 15 | $ | 63 | $ | 59 | $ | 51 | $ | 48 | $ | 39 | ||||||||||||||
Operating expense ratio* (4) | 0.08 | % | 0.07 | % | 0.07 | % | 0.07 | % | 0.06 | % | 0.05 | % | 0.04 | % | ||||||||||||||
Earnings per share | $ | 2.02 | $ | 1.73 | $ | 7.63 | $ | 6.36 | $ | 4.55 | $ | 1.12 | $ | 6.21 | ||||||||||||||
Dividend per share | $ | 1.76 | $ | 1.29 | $ | 5.59 | $ | 4.50 | $ | 1.83 | $ | 3.97 | $ | 4.51 | ||||||||||||||
Headcount (Full time and part time) | 239 | 222 | 232 | 221 | 210 | 206 | 200 |
(1) | Investments include held-to-maturity securities, available-for-sale securities, interest-bearing deposits, Federal funds, and loans to other FHLBanks. | |
(2) | Equity to asset ratio is capital stock plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets. | |
(3) | Net interest income is net interest income before the provision for credit losses on mortgage loans. | |
(4) | Operating expenses as a percentage of average assets. ` | |
* | Annualized. |
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Critical Accounting Policies and Estimates
The FHLBNY has identified certain accounting policies that it believes are critical 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 using different assumptions. These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios; estimating the liabilities for unfunded pension liabilities; and estimating fair values on certain assets and liabilities. The FHLBNY accounts for derivatives in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and specifically identifies the hedged assets or liabilities and the associated hedging strategy.
For additional information, refer to Note 1 to the Financial Statements in the FHLBNY’s Form 10-K filed on March 29, 2007.
Recently Issued Accounting Standards and Interpretations
SFAS 155 — In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) SFAS 155“Accounting for Certain Hybrid Financial Instruments,”which amends SFAS 133 and 140 and permits fair value measurement of any structured note that contains an embedded derivative that would require bifurcation under SFAS 133. This fair value measurement is permitted on an instrument-by-instrument basis. The Bank applied the guidance under SFAS 155 at the beginning of the quarter ended March 31, 2007, and the implementation had no impact on its results of operations or financial condition.
SFAS 156 — In March 2006, the FASB issued SFAS 156,“Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”with respect to the accounting for separately-recognized servicing assets and liabilities. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value or a fair value measurement basis. The new standard provides some relief for servicers that use derivatives to economically hedge fluctuations in the fair value of their servicing rights. In a rising interest rate environment, losses on derivatives used for hedging must be recognized. However, corresponding increases in the fair value of the related servicing rights previously could not be recognized since SFAS 140 mandated that servicing rights be carried at the lower of cost or market. This situation generated income volatility. SFAS 156 also changes how gains and losses are computed in transfers or securitizations that qualify for “sale treatment” in which the transferor retains the right to service the transferred financial assets. Under SFAS 156, servicing assets must be initially recorded at fair value and treated as part of the proceeds received by the transferor, thus affecting the gain/loss calculations.
The Bank applied the provisions of SFAS 156 as of January 1, 2007. The adoption of SFAS 156 did not have an impact on its results of operations or financial condition.
SFAS 157 — In September 2005, the FASB issued SFAS 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosure about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 nullifies the guidance in EITF 02-3, which precluded the recognition of a trading profit at the inception of a derivative contract, unless the fair value of such derivative is obtained from a quoted market price, or other valuation technique incorporating observable market data. SFAS 157 also precludes the use of a liquidity or block discount when measuring instruments traded in an active market at fair value. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value.
SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosure about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 nullifies the guidance in EITF 02-3, which precluded the recognition of a trading profit at the inception of a derivative contract, unless the fair value of such derivative is obtained from a quoted market price, or other valuation technique incorporating observable market data. SFAS 157 also precludes the use of a liquidity or block discount when measuring instruments traded in an active market at fair value. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value.
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SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. SFAS 157 must be applied prospectively as of the beginning of the fiscal year in which it is initially adopted, except that the provisions related to block discounts and the guidance in EITF 02-3 are to be applied as a one time cumulative effect adjustment to opening retained earnings in the first interim period for the fiscal year in which SFAS 157 is initially applied. The Bank is evaluating the provisions of SFAS 157 and its potential effect on its financial statements.
SFAS 159 — On February 15, 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement 115(“SFAS 159”).SFAS 159 creates a fair value option allowing an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 also requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. Lastly, SFAS 159 requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Bank), with early adoption permitted. The Bank is continuing to evaluate SFAS 159 and to assess the impact on financial condition, results of operations or cash flows, if a decision was made to adopt the standard.
Results of Operations
Net Income- Net income for the first quarter 2007 was $71.3 million, compared with $62.7 million for the comparable quarter in 2006. Net income is after the deduction of AHP and REFCORP assessments, which are a fixed percentage of the FHLBNY’s pre-assessment income. Increase in net income is attributed to an increase in net interest income, which grew to $112.7 million for the first quarter of 2007, up from $103.2 million in the comparable quarter in 2006. Net interest income represents the difference between income from interest-earnings assets and interest expense paid on interest-bearing liabilities.
Net Interest Income- Net interest income is the principal source of revenue for the FHLBNY and the primary factors that impact it are yields from advances and investment minus the cost of consolidated obligation debt. The execution of interest rate swaps in the derivative market at a constant spread to LIBOR, in effect converting fixed-rate assets and debt to conventional adjustable-rate instruments tied to LIBOR, is also a factor. Income earned from assets funded by member capital and retained earnings, which are non-interest bearing, is another important consideration for the FHLBNY.
Reported net interest income after provisions for credit losses was $112.7 million for the first quarter of 2007, up 9.2% compared to $103.2 million for the comparable quarter in 2006. The FHLBNY also continued to earn significant income from investing its members’ capital to fund interest earning assets. In a rising interest rate environment, deployment of capital, retained earnings and net non-interest bearing liabilities, defined as deployed capital, provided the FHLBNY with significant income. As an illustration, an average of $4.0 billion in deployed capital earned an estimated yield of 5.41%, the reported annualized yield on aggregate interest-earning assets for the three months ended March 31, 2007, in contrast to a similar yield of 4.66% on a higher average deployed capital of $4.5 billion for the comparable period in 2006. As a result, deployed capital made a stronger contribution to net interest income in the three months ended Ma rch 31, 2007 compared to the same period in 2006.
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The following tables summarize key changes in the components of net interest income (dollar amounts in thousands):
Three months ended | ||||||||||||||||
March 31, | Dollar | Percentage | ||||||||||||||
2007 | 2006 | Variance | Variance | |||||||||||||
Interest Income | ||||||||||||||||
Advances | $ | 777,494 | $ | 701,775 | $ | 75,719 | 10.79 | % | ||||||||
Interest-bearing deposits | 80,699 | 76,492 | 4,207 | 5.50 | ||||||||||||
Federal funds sold | 44,636 | 20,392 | 24,244 | 118.89 | ||||||||||||
Held-to-maturity securities | 152,963 | 129,852 | 23,111 | 17.80 | ||||||||||||
Mortgage loans held-for-portfolio | 19,518 | 18,858 | 660 | 3.50 | ||||||||||||
Other | 1 | 5 | (4 | ) | (80.00 | ) | ||||||||||
Total interest income | 1,075,311 | 947,374 | 127,937 | 13.50 | ||||||||||||
Interest Expense | ||||||||||||||||
Consolidated obligations | 938,036 | 829,578 | 108,458 | 13.07 | ||||||||||||
Other | 24,587 | 14,557 | 10,030 | 68.90 | ||||||||||||
Total interest expense | 962,623 | 844,135 | 118,488 | 14.04 | ||||||||||||
Net interest income before mortgage loan loss provision | $ | 112,688 | $ | 103,239 | $ | 9,449 | 9.15 | % | ||||||||
Interest Income- Interest income grew to $1.1 billion in the three months ended March 31, 2007, up from $947.4 million in the same period in 2006. Growth in interest income was principally attributable to new advances with higher coupons replacing maturing advances in a rising interest rate environment. Advance volume, as represented by average earning advances in the three months ended March 31, 2007, was down from the comparable period in 2006. Investment volume in held-to-maturity securities and Federal funds sold were up and was partially offset by declining volume in interest-bearing deposits, principally short-term certificates of deposits. Interest income from all investments benefited from higher coupons in a rising rate environment. Prepayment fees associated with advances reported in interest income was $1.9 million and $0.5 million for the three months ended March 31, 2007 and 2006.
Cash flow from interest rate swaps was also a critical component of interest income earned from advances. The FHLBNY executes interest rate swaps to modify the effective interest rate terms of many of its fixed-rate advance products, and typically all of its convertible or putable advances. In these swaps, the FHLBNY effectively converts a fixed-rate stream of cash flows from the advance to a floating-rate advance, indexed to LIBOR. The impact of swapping fixed- for floating-interest rate in which the FHLBNY pays out fixed-rate and receives LIBOR-indexed cash flows in an interest rate swap agreement made a positive cash in-flow of $84.4 million in the three months ended March 31, 2007, compared to $12.2 million in the same period in 2006.
The table below summarizes interest earned from advances and the impact of interest rate derivatives (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Advance Interest Income | ||||||||
Gross interest income before adjustment for interest rate swaps | $ | 693,066 | $ | 689,557 | ||||
Net interest adjustment for interest rate swaps | 84,428 | 12,218 | ||||||
Total Advance interest income reported | $ | 777,494 | $ | 701,775 | ||||
Interest Expense –The FHLBNY has continued to fund its assets with consolidated obligation bonds and discount notes in the three months ended March 31, 2007. Interest expense on consolidated obligations increased by 13.1% to $938.0 million in the three months ended March 31, 2007, up from $829.6 million in the same period in 2006. Increases were rate-related as new debt was issued at higher coupons in a rising rate environment to replace maturing debt. Rate-related increases were partly offset by decline in debt volume, defined as average debt outstanding in the period, principally because of decline in average total earning assets by about $1.9 billion and associated decline in funding needs in the three months ended March 31, 2007 compared to the same period in 2006.
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Cash flow from interest rate swaps was also a critical component of interest expense on debt. The FHLBNY issues fixed-rate callable debt with the simultaneous execution of callable interest rate swaps to modify the effective interest rate terms and effective durations of its fixed-rate debt. The net impact of accruals of receive-fixed interest-rate swaps and pay-LIBOR indexed cash flows associated with qualifying debt hedges increased debt expense by $52.8 million and $52.5 million for the three months ended March 31, 2007 and 2006.
The table below summarizes interest expense paid on consolidated obligation bonds and the impact of interest rate swaps (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Consolidated bonds — Interest expense | ||||||||
Gross interest expense before adjustment for interest rate swaps | $ | (713,958 | ) | $ | (574,300 | ) | ||
Net interest adjustment for interest rate swaps | (52,798 | ) | (52,451 | ) | ||||
Total Consolidated bonds — interest expense reported | $ | (766,756 | ) | $ | (626,751 | ) | ||
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Spread/Yield Analysis:
The following table summarizes the Bank’s net interest income and net interest yield and provides an attribution of changes in rates and volumes of the FHLBNY’s interest-earning assets and interest bearing liabilities.
Three months ended March 31, | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Average | Income/ | |||||||||||||||||||||
(dollars in thousands) | Balance | Expense | Rate1 | Balance | Expense | Rate1 | ||||||||||||||||||
Earning Assets: | ||||||||||||||||||||||||
Advances | $ | 58,585,142 | $ | 777,494 | 5.38 | % | $ | 62,516,101 | $ | 701,775 | 4.55 | % | ||||||||||||
Interest-earning deposits | 6,101,374 | 80,699 | 5.36 | 6,937,144 | 76,492 | 4.47 | ||||||||||||||||||
Federal funds sold | 3,397,411 | 44,636 | 5.33 | 1,823,822 | 20,392 | 4.53 | ||||||||||||||||||
Investments | 11,016,798 | 152,963 | 5.63 | 9,716,787 | 129,852 | 5.42 | ||||||||||||||||||
Mortgage loans and other loans | 1,487,535 | 19,519 | 5.32 | 1,463,638 | 18,863 | 5.23 | ||||||||||||||||||
Total interest-earning assets | $ | 80,588,260 | $ | 1,075,311 | 5.41 | % | $ | 82,457,492 | $ | 947,374 | 4.66 | % | ||||||||||||
Funded By: | ||||||||||||||||||||||||
Consolidated obligations | $ | 74,549,738 | $ | 938,036 | 5.10 | % | $ | 76,558,451 | $ | 829,578 | 4.39 | % | ||||||||||||
Interest-bearing deposits and other borrowings | 2,019,218 | 24,587 | 4.94 | 1,407,438 | 14,557 | 4.15 | ||||||||||||||||||
Total interest-bearing liabilities | 76,568,956 | 962,623 | 5.10 | % | 77,965,889 | 844,135 | 4.39 | % | ||||||||||||||||
Capital and other non-interest- bearing funds | 4,019,304 | — | 4,491,603 | — | ||||||||||||||||||||
Total Funding | $ | 80,588,260 | $ | 962,623 | $ | 82,457,492 | $ | 844,135 | ||||||||||||||||
Net Interest Spread | $ | 112,688 | 0.3128 | % | $ | 103,239 | 0.2686 | % | ||||||||||||||||
Net Interest Margin (Net interest income/Earning Assets) | 0.567 | % | 0.509 | % | ||||||||||||||||||||
Note1: Reported yields with respect to advances and debt may not necessarily equal the coupons on the instruments as derivatives are extensively used to change the yield and optionality characteristics of the underlying hedged items. When fixed-rate debt is issued by the Bank and hedged with an interest rate derivative, it effectively converts the debt into a simple floating-rate bond, typically resulting in funding at an advantageous price. Similarly, the Bank makes fixed-rate advances to members and hedges the advance with a pay-fixed, receive-variable interest rate derivative that effectively converts the fixed-rate asset to one that floats with prevailing LIBOR rates. Average balance sheet information is presented as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average balance is calculated for the period. When daily weighted average balance information is not available, a simple monthly average balance is calculated. Average yields are derived by dividing income by the average balances of the related assets and average costs are derived by dividing expenses by the average balances of the related liabilities. |
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Rate and Volume Analysis
The Rate and Volume Analysis presents changes in interest income, interest expense, and net interest income that are due to changes in volumes and rates. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected the FHLBNY’s interest income and interest expense (in thousands):
Three months ended | ||||||||||||
March 31, 2007 vs. March 31, 2006 | ||||||||||||
Increase (decrease) | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest Income | ||||||||||||
Advances | $ | (44,127 | ) | $ | 119,846 | $ | 75,719 | |||||
Interest-earning deposits | (9,215 | ) | 13,422 | 4,207 | ||||||||
Federal funds sold | 17,594 | 6,650 | 24,244 | |||||||||
Investments | 17,373 | 5,738 | 23,111 | |||||||||
Mortgage loans | 308 | 348 | 656 | |||||||||
Total interest income | (18,067 | ) | 146,004 | 127,937 | ||||||||
Interest Expense | ||||||||||||
Consolidated obligations | (21,766 | ) | 130,224 | 108,458 | ||||||||
Deposits and borrowings | 6,328 | 3,702 | 10,030 | |||||||||
Total interest expense | (15,438 | ) | 133,926 | 118,488 | ||||||||
Changes in Net Interest Income | $ | (2,629 | ) | $ | 12,078 | $ | 9,449 | |||||
Non-Interest Income
The following table summarizes non-interest income (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Other income (loss): | ||||||||
Service fees | $ | 827 | $ | 807 | ||||
Net realized and unrealized gain (loss) on derivatives and hedging activities | 3,523 | (1,936 | ) | |||||
Losses from extinguishment of debt and other | (2,356 | ) | 5 | |||||
Total other income (loss) | $ | 1,994 | $ | (1,124 | ) | |||
Service fees– Service fees were derived primarily from providing correspondent banking services to members, and fees earned on standby letters of credit.
Net realized and unrealized gain (loss) on derivatives and hedging activities- The Bank records all derivatives as either assets or liabilities in the statements of condition at their estimated fair value and recognizes changes in fair value in the statements of income. Changes in the fair value of the Bank’s derivatives, including a small amount of mortgage commitments, resulted in gains of $3.5 million in the three months ended March 31, 2007 and a loss of $1.9 million in the same period in 2006. These gains and losses were included in other income (loss) as “Net realized and unrealized gain (loss) on derivatives and hedging activities.” In addition, the net contractual interest accruals on interest rate swaps considered as non-qualifying for hedge accounting and interest received from “in-the-money” options were also included in “Net realized and unrealized gain (loss) on derivatives and hedging activities.”
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Net realized and unrealized gains and losses from hedging activities are typically determined by changes in the benchmark interest rate (designated as LIBOR by the FHLBNY) and the degree of ineffectiveness of hedging relationships between the change in the fair value of derivatives and change in the fair value of the hedged assets and liabilities attributable to changes in benchmark interest rates.
The primary components of reported gains and losses from hedging activities for the three months ended March 31, 2007 and 2006 were:
• | Changes in the benchmark interest rate and implied volatilities of interest rates (i.e., market’s expectation of potential changes in future interest rates) of fair value hedges using receive-fixed, pay-variable swaps of : (1) SFAS 133 qualifying fair value hedges of the Bank’s debt resulted in net unrealized and realized gains of $1.8 million on notional hedged amounts of $38.6 billion of such hedges; and (2) SFAS 133 non-qualifying fair value hedges resulted in net unrealized losses of $0.3 million on a notional amount of $1.3 billion. For the comparable period in 2006, qualifying hedges reported unrealized and realized net losses of $1.5 million; non-qualifying hedges were de minimis. |
• | Changes in the benchmark interest rate and implied volatilities of interest rates of fair value hedges using pay-fixed, receive-variable swaps associated with SFAS 133 qualifying hedges of the Bank’s advances for the three months ended March 31, 2007 resulted in reported ineffectiveness, including amortization of basis adjustments, of $1.4 million on notional amounts of $37.1 billion of such hedges. For the comparable period in 2006, reported net unrealized and realized gains were $0.6 million. |
• | Changes in the fair value basis of options for the three months ended March 31, 2007 resulted in reported realized losses of $0.7 million, principally from market-amortization of the time value of purchased options approaching expiration. Net interest income accruals from in-the-money option contracts associated with variable-rate advances contributed $1.0 million in realized gains in 2006. Purchased options, indexed to LIBOR, became “in-the-money” during 2006 as short-term interest rates rose past the contractual “strike-prices” of option contracts, and the Bank accrued to income the difference between the option strike price and prevailing LIBOR rates. Under hedge accounting rules, such periodic contractual interest income is also considered as cash flows from economic hedges and is reported in “Net realized and unrealized gain (loss) on derivatives and hedging activities.” For the comparable period in 2006, change in fair value basis of options net of interest income from in-the-money options was a loss of $1.0 million. |
Debt Extinguishment- Losses from extinguishment of debt consisted principally of the recorded loss from retirement of consolidated obligation bonds. In the three months ended March 31, 2007, the FHLBNY retired $283.0 million of consolidated obligation debt, at a cost that exceeded book value by about $2.4 million. The debt was retired by transferring the debt obligation to another FHLBank at negotiated market prices. Debt extinguished were fixed-rate and non-callable. The bonds retired were associated with advances and commercial mortgage-backed securities (“CMBS”) that had been prepaid. When assets are prepaid in advance of their expected or contractual maturities, the Bank attempts to also extinguish the associated debt in order to re-align asset and liability cash flow patterns. When CMBS and longer-term advances are prepaid, the Bank receives an early termination prepayment fee. Historically, the Bank has generally repurchased its debt when the coupons were higher than the current prevailing market rates.
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Non-Interest Expense
Operating expenses include the administrative and overhead costs of operating the Bank and operating costs of providing advances, managing the investment portfolios, and providing correspondent services. The FHLBanks fund the costs of the Office of Finance, a joint office of the FHLBanks that facilitates issuing and servicing the consolidated obligations of the FHLBanks, preparation of the combined quarterly and annual financial reports, and certain other functions. The FHLBanks are also assessed the operating expenses of the Finance Board, the regulator of the FHLBanks.
The following table sets forth the principal components of other expenses (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Other expenses: | ||||||||
Operating | $ | 16,050 | $ | 15,474 | ||||
Finance Board and Office of Finance | 1,383 | 1,281 | ||||||
Total other expenses | $ | 17,433 | $ | 16,755 | ||||
The following table summarizes the major categories of operating expenses (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Salaries and employee benefits | $ | 10,757 | $ | 10,035 | ||||
Temporary Workers | 81 | — | ||||||
Occupancy | 967 | 888 | ||||||
Depreciation and leasehold amortization | 1,005 | 1,020 | ||||||
Computer service agreements and contractual services | 1,334 | 1,615 | ||||||
Professional fees | 455 | 196 | ||||||
Legal | 219 | 214 | ||||||
Other | 1,232 | 1,506 | ||||||
Total operating expenses | $ | 16,050 | $ | 15,474 | ||||
The delayed impact of staff additions in mid-2006 was the primary cause of the increases in salaries and employee benefits expenses in the three months ended March 31, 2007.
Assessments
Each FHLBank is required to set aside a portion of earnings to fund its Affordable Housing Program and to satisfy its Resolution Funding Corporation assessment. These are more fully described under the section “Assessments” in notes to unaudited financial statements.
REFCORP assessment on net income was $17.8 million in the three months ended March 31, 2007 compared to $15.7 million in the same period in 2006. Assessments set aside on net income for the Affordable Housing Program (AHP) was $8.2 million in the three months ended March 31, 2007 compared to $7.0 million in the same period in 2006. Both REFCORP and AHP assessments are based on income and the increase reflected the increase in pre-assessment income for the three months ended March 31, 2007 over the comparable period in 2006.
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Financial Position — Assets, Liabilities and Shareholders’ Capital
Total assets at March 31, 2007 stood at $82.0 billion, slightly higher than $81.7 billion at December 31, 2006, and were in line with the Bank’s decision to maintain balance sheet leverage at 20.9 times equity, unchanged from December 31, 2006. The small increase in total assets was principally as a result of additional investment in interest-bearing deposits. The leverage ratio is a multiple of stockholders’ capital, which increases and decreases with members’ advance borrowings. As capital increases or declines in line with higher or lower volumes of advances, the Bank adjusts its balance sheet assets to achieve desired leverage by increasing or decreasing holdings of short-term investments in certificates of deposits, and to some extent its inventory of Federal funds sold, which it inventories to accommodate unexpected member needs for liquidity.
Summary
Investments-Investments in held-to-maturity securities consisting mainly of mortgage-backed securities “MBS” stood at $10.8 billion at March 31, 2007, down from $11.3 billion at December 31, 2006, as pay-downs were allowed to outpace acquisitions. MBS spreads remained “tight” inhibiting opportunities for MBS acquisitions and prevailing spreads were unable to meet the Bank’s risk-reward preferences. As investments in MBS declined, the Bank maintained its leverage targets by increasing its inventory of short-term certificates of deposits issued by highly-rated financial institutions to $6.4 billion at March 31, 2007, up from $5.6 billion at December 31, 2006.
Advances-Reported book value of advances was $59.2 billion at March 31, 2007, up slightly from $59.0 billion at December 31, 2006. Reported book value at March 31, 2007 included fair value hedge basis adjustments of $132.5 million, principally representing unrealized fair value gains, compared to $23.2 million at December 31, 2006. Fair value basis of previously recorded realized gains and losses from discontinued hedges, net of amortization, was not material. Unrealized gains and losses represent changes in the fair values of hedged advances under the provisions of hedge accounting rules. Par amount of advances, an economic measure of member demand for advances, was $59.0 billion at March 31, 2007, almost unchanged from $59.0 billion at December 31, 2006.
Debt- The primary source of funds for the FHLBNY continued to be through issuance of consolidated obligation bonds and discount notes. Discount notes are consolidated obligations with maturities up to 365 days, and consolidated bonds have maturities of one year or longer. Reported consolidated obligations bonds and discount notes, outstanding at March 31, 2007 stood at $60.8 billion and $14.0 billion, representing 74.1% and 17.1% of assets at March 31, 2007. By way of comparison, the percentages were 75.9% and 14.9% at December 31, 2006. Issuances of consolidated obligation discount notes, the principal short-term funding source for the FHLBNY, increased in the three months ended March 31, 2007, and outstanding balances were up to $14.0 billion, compared to $12.2 billion at December 31, 2006. The Bank refined its funding practices to make greater use of term and overnight discount notes to provide greater flexibility in adjusting its balance sheet leverage. The Bank hedges the risk of changes in the benchmark interest rate (adopted by the Bank as the LIBOR rate) of designated fixed-rate debt and almost all callable fixed-rate debt. The reported carrying value of hedged consolidated bonds was adjusted for changes in their fair value basis adjustments that were attributable to the risk being hedged in accordance with hedge accounting rules. Fair value basis adjustments resulting from changes in the benchmark rate have remained in unrealized gain positions were $87.9 million and $151.2 million at March 31, 2007 and December 31, 2006. Fair value basis of previously recorded realized gains and losses from discontinued hedges, net of amortization, was not material. Fair value gains at March 31, 2007 were associated with $38.6 billion notional amount of interest rate swaps. The comparable notional amount of interest rate swaps at December 31, 2006 was $40.5 billion.
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Member Deposits- Member deposits totaled $2.2 billion at March 31, 2007, compared to $2.4 billion at December 31, 2006. Changes in deposit balances reflect member preference for liquidity and availability of alternative investment vehicles. The FHLBNY does not rely on member deposits to meet its funding needs.
Advances
The FHLBNY’s primary business is making collateralized loans, known as “advances”, to members.
The growth or decline in advances reflects demand by members for both short-term liquidity and term funding driven by economic factors, such as availability to the Bank’s members of alternative funding sources that is more attractive, or by the interest rate environment and the outlook for the economy. Members may choose to prepay advances, which may incur prepayment penalty fees, based on their expectations of interest rate changes and economic demand for liquidity.
Demand may also be influenced by the FHLBNY’s dividend payout rate to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership stock and activity stock. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or another non-member, they no longer qualify for membership in the FHLBNY, and the FHLBNY may not offer advances to non-members. Consequently upon merger, maturing advances may not be replaced, and has an immediate impact on short-term and overnight lending.
Advances – By type
The following table summarizes advances by product types (dollars in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
Percentage | Percentage | |||||||||||||||
Amounts | of total | Amounts | of total | |||||||||||||
Adjustable Rate Credit — ARCs | $ | 13,259,794 | 22.47 | % | $ | 13,251,464 | 22.47 | % | ||||||||
Fixed Rate Advances | 31,464,343 | 53.32 | 29,873,543 | 50.64 | ||||||||||||
Repurchase (Repo) Agreement | 11,671,091 | 19.78 | 11,969,036 | 20.29 | ||||||||||||
Short-Term Advances | 750,716 | 1.27 | 1,824,705 | 3.09 | ||||||||||||
Mortgage Matched Advances | 725,233 | 1.23 | 757,050 | 1.28 | ||||||||||||
Overnight Line of Credit (OLOC) Advances | 979,806 | 1.66 | 1,187,685 | 2.02 | ||||||||||||
All other categories | 163,865 | 0.27 | 125,787 | 0.21 | ||||||||||||
Total par value of advances | 59,014,848 | 100.00 | % | 58,989,270 | 100.00 | % | ||||||||||
Discount on AHP Advances | (493 | ) | (519 | ) | ||||||||||||
Net premium on advances | 332 | 489 | ||||||||||||||
SFAS 133 hedging adjustments | 132,533 | 23,154 | ||||||||||||||
Total | $ | 59,147,220 | $ | 59,012,394 | ||||||||||||
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Member demand for advances- Advances measured in par amounts outstanding were flat at $59.0 billion at March 31, 2007, compared to December 31, 2006. One large member’s increased borrowings of convertible fixed-rate advances accounted for increase in the Fixed-Rate Advances.
Fixed-rate advances are flexible funding tools that can be used by members to meet short- to long-term liquidity needs. Terms vary from 2 days to 30 years. Fixed-rate advances were the largest category of advances.
Fixed-rate, putable advances are competitively priced where the FHLBNY has purchased the option from the member to put the advance back to borrowers (members) at predetermined exercise dates. This feature lowers the member’s cost of the advance. These advances are known as “convertible” or “putable” advances. On the date of the put, the existing advance is matured. The member may request an advance of any type or term within the available suite of advance products that is offered to all members on that day. In order to qualify for an advance, regardless of whether or not the advance is replacement funding, a member must meet the Bank’s credit and collateral criteria.
Member prepayment activity–Member prepayment activity during the three months ended March 31, 2007 was modest at $200.0 million, and included a prepayment of $100.0 million borrowed by a member that was acquired by a non-member.
Merger activity–One member was acquired by a non-member during the three months ended March 31, 2007.
Impact of hedging-The Bank hedges certain advances under the provisions of SFAS 133 by the use of both callable and non-callable interest rate swaps in fair value hedges. Certain LIBOR-indexed advances have “capped” coupons. These caps were offset by purchased options (caps) with mirror-image terms. Fair value changes of caps due to changes in the benchmark rate were recorded through “Net realized and unrealized gains losses on derivative and hedging activities” in other income.
The most significant elements that impacted balance sheet reporting included the recording of fair value basis adjustments. Also, when advances were hedged by callable swaps, the possibility of exercise of the swaps and the associated advances shortened the effective maturities of the advances. The impact on the Bank’s income from hedging advances is discussed in “Results of Operations” elsewhere in the MD&A. Its impact as a risk management tool is discussed in Item 7A “Quantitative and Qualitative Disclosures about Market Risk.”
The Bank hedged $37.1 billion of par amounts of advances outstanding at March 31, 2007, compared to $35.6 billion at December 31, 2006 The Bank hedged the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR and is also the discounting basis for computing changes in fair values of hedged advances. Recorded fair value basis adjustments in the statements of condition were associated with hedging activities under the provisions of SFAS 133. At March 31, 2007, the basis adjustment was $132.5 million, up from $23.2 million at December 31, 2006. Fair value changes are typically from changes in the term structure of medium- and short-term rates, from changes in volatilities of such rates, and from the growth or decline in hedge volume. The short-end of the yield curve has declined at March 31, 2007 from December 31, 2006, and many of the Bank’s hedged fixed-rate, non-putable advances with maturities in the short- and medium-term are exhibiting greater fair value gains at March 31, 2007, compared to year-end 2006. Changes due to amortization of previously recorded realized gains and losses were not material. Unrealized gains and losses represented by the fair value basis adjustments were almost entirely offset by fair value unrealized losses and gains of the derivatives associated with the fair value hedges.
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Investments
The FHLBNY acquires investments authorized by Finance Board policies and regulations, and it maintains substantial investments in high-quality, short- and intermediate-term financial instruments. At March 31, 2007 and December 31, 2006, the FHLBNY’s investments consisted of investment securities classified as held-to-maturity, interest-bearing deposits, bank certificates of deposits, and Federal funds sold. The FHLBNY does not trade in investment securities.
The following table summarizes changes in investment by category (including held-to-maturity securities) (dollars in thousands):
March 31, | December 31, | Dollar | Percentage | |||||||||||||
2007 | 2006 | Variance | Variance | |||||||||||||
State and local housing agency obligations | $ | 616,378 | $ | 618,810 | $ | (2,432 | ) | (0.39 | )% | |||||||
Mortgage-backed securities | 10,190,603 | 10,632,288 | (441,685 | ) | (4.15 | ) | ||||||||||
Total investment securities | 10,806,981 | 11,251,098 | (444,117 | ) | (3.95 | ) | ||||||||||
Interest-bearing deposits* | 6,367,000 | 5,591,000 | 776,000 | 13.88 | ||||||||||||
Federal funds sold | 3,594,000 | 3,661,000 | (67,000 | ) | (1.83 | ) | ||||||||||
Total investments | $ | 20,767,981 | $ | 20,503,098 | $ | 264,883 | 1.29 | % | ||||||||
* | Excludes bank deposits at another FHLBank. |
Held-to-maturity Securities
At March 31, 2007 and December 31, 2006, held-to-maturity securities included privately issued mortgage- and asset-backed securities, collectively referred to as “MBS” that were rated “Aaa” by Moody’s or “AAA” by S&P, and mortgage-pass-throughs and Real Estate Mortgage Investment Conduit bonds issued by government sponsored mortgage agencies. In addition, the FHLBNY had investments in primary public and private placements of taxable obligations of state and local housing finance authorities that were rated at least “Aa” by Moody’s or “AA” by S&P. Investment in mortgage-backed securities provides a reliable income stream.
Limits for adding to the MBS portfolio are defined by Finance Board regulations, which limits holding of MBS to 300% of capital. At March 31, 2007 and December 31, 2006, the Bank was within these limits.
MBS spreads remained “tight” inhibiting opportunities for MBS acquisitions. Purchases of new MBS investments have remained opportunistic. Only when pricing met the Bank’s risk-reward preferences would the Bank consider an acquisition. At March 31, 2007, the Bank committed to purchase $100.0 million in a triple-A, agency issued MBS security that settled in April 2007. Aside from that commitment, the Bank did not acquire MBS or housing-finance agency bonds for settlement in the three months ended March 31, 2007, as security pricing and risk-profiles did not meet the Bank’s risk-reward preferences. Pay-downs and prepayments in the first quarter were $443.2 million.
The FHLBNY conducts a review and evaluation of the securities portfolio to determine if the decline, if any, in the fair value of a security below its carrying value is other than temporary. The FHLBNY generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with the FHLBNY’s experience. The FHLBNY has both the intent and financial ability to hold the temporarily impaired securities until recovery of their value.
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Short-term investments
High-quality, short-term investments such as Federal funds and certificates of deposits were held at March 31, 2007 and December 31, 2006, and provided the liquidity necessary to meet member credit needs and a reasonable return on members’ short-term deposits. Both short- and long-term investments were used by the FHLBNY to employ excess capital and generated additional returns for its members. Short-term investments were higher at March 31, 2007, compared to December 31, 2006, principally to offset decline in its MBS inventory and still maintain its balance sheet leverage, and defined here as total assets as a ratio of total stockholders’ equity.
Federal funds sold- Inventory of Federal funds sold was $3.6 billion slightly down from $3.7 billion at December 31, 2006. Historically, the FHLBNY has been a provider of Federal funds, allowing the FHLBNY to warehouse and provide balance sheet liquidity to meet unexpected member borrowing demands.
Certificates of deposits- At March 31, 2007, certificates of deposits, all maturing within 12 months or less, were $6.4 billion, up from $5.6 billion at December 31, 2006, and comprised of short-term investments in securities issued by major financial institutions.
Cash collateral pledged deposits- The FHLBNY generally executes derivatives with major banks and broker-dealers and typically enters into bilateral collateral agreements. When counterparties are exposed, the Bank’s derivatives are in a net unrealized loss position, and the Bank would be called upon to pledge cash collateral to mitigate the counterparties’ credit exposure. Collateral agreements in place include certain thresholds and pledge requirements are generally triggered if exposures exceed the agreed upon thresholds. As of March 31, 2007 and December 31, 2006, no cash had been required to be pledged by the Bank.
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Mortgage Loans Held-for-Portfolio
The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
2007 | Percentage | 2006 | Percentage | |||||||||||||
Real Estate: | ||||||||||||||||
Fixed medium-term single-family mortgages | $ | 564,702 | 38.1 | % | $ | 575,114 | 38.9 | % | ||||||||
Fixed long-term single-family mortgages | 913,620 | 61.6 | 897,153 | 60.7 | ||||||||||||
Multi-family mortgages | 4,822 | 0.3 | 4,940 | 0.4 | ||||||||||||
Total par value | 1,483,144 | 100.0 | % | 1,477,207 | 100.0 | % | ||||||||||
Unamortized premiums | 12,979 | 13,323 | ||||||||||||||
Unamortized discounts | (6,262 | ) | (6,288 | ) | ||||||||||||
Basis adjustment | (302 | ) | (230 | ) | ||||||||||||
Total mortgage loans held-for-portfolio | 1,489,559 | 1,484,012 | ||||||||||||||
Allowance for credit losses | (593 | ) | (593 | ) | ||||||||||||
Total mortgage loans held-for-portfolio after allowance for credit losses | $ | 1,488,966 | $ | 1,483,419 | ||||||||||||
The total portfolio of mortgage loans was comprised principally of investments in Mortgage Partnership Finance loans (“MPF”). Community Mortgage Asset loans (“CMA”), which has not been active since 2001 and has declined steadily over time, were $4.8 million and $4.9 million at March 31, 2007 and December 31, 2006, respectively. During the three months ended March 31, 2007, the FHLBNY added $43.5 million in new MPF loans, and run-offs were about $37.5 million. The FHLBNY does not expect the MPF loans to increase substantially, and provides this product to its members as another alternative for members to sell their mortgage production.
Deposit Liabilities
Member deposits- The FHLBNY operates deposit programs for the benefit of its members. Deposits are primarily short-term in nature, with the majority maintained in demand accounts that reprice daily based upon rates prevailing in the overnight Federal funds market. Members’ liquidity preferences are the primary determinant of the level of deposits. Total deposits at March 31, 2007, including demand and term aggregated $2.2 billion, slightly down from $2.4 billion at December 31, 2006. Member deposit balances are typically higher at quarter-end dates. The average demand deposit balances for the first quarter in 2007 was $1.8 billion.
Cash collateral held- Cash collateral pledged to the FHLBNY by derivative counterparties at March 31, 2007 was $32.0 million compared to $124.0 million at December 31, 2006. These deposits were interest-bearing demand deposits that repriced daily based principally upon rates prevailing in the overnight Federal funds market. Derivative counterparties are required by agreement to pledge to the FHLBNY collateral to cover the Bank’s credit exposure in the event of counterparty default. At March 31, 2007 and December 31, 2006, the FHLBNY’s exposure was represented by derivatives in an unrealized gain position, after giving effect to threshold triggers under collateral agreements with derivative counterparties.
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Consolidated Obligations and Debt Financing Activity
The primary source of funds for the FHLBNY continued to be through issuance of consolidated obligation bonds and discount notes, together referred to as consolidated obligations.
Reported amounts of consolidated obligations, bonds and discount notes, outstanding at March 31, 2007 and December 31, 2006 were $74.8 billion and $74.2 billion, and funded 91.2% and 90.8% total assets at those dates. These ratios have remained substantially unchanged over the years, indicative of the stable funding strategy pursued by the FHLBNY.
The following summarizes types of bonds issued and outstanding (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Fixed-rate, non-callable | $ | 35,518,045 | $ | 37,328,640 | ||||
Fixed-rate, callable | 17,731,000 | 17,039,000 | ||||||
Step Up, non-callable | — | 50,000 | ||||||
Step Up, callable | 3,033,000 | 3,688,000 | ||||||
Single-index floating rate | 4,600,000 | 4,100,000 | ||||||
Total par value | 60,882,045 | 62,205,640 | ||||||
Bond premiums | 21,051 | 23,334 | ||||||
Bond discounts | (33,323 | ) | (33,300 | ) | ||||
SFAS 133 fair value basis adjustments | (87,889 | ) | (151,222 | ) | ||||
Deferred net gains on terminated hedges | (1,408 | ) | (1,777 | ) | ||||
Total carrying value | $ | 60,780,476 | $ | 62,042,675 | ||||
The Bank increased its use of discount notes for funding its assets with an offsetting decline in the use of fixed-rate, non-callable and step-up, callable bonds. The Bank’s decision to increase the outstanding balances of discount notes, which have maturities ranging from overnight to 365 days, was aimed at providing a flexible means of decreasing leverage should the need arise.
The following summarizes discount notes issued and outstanding (dollars in thousands):
Weighted | ||||||||||||
Book | Par | Average | ||||||||||
Value | Value | Interest Rate | ||||||||||
March 31, 2007 | $ | 14,002,278 | $ | 14,058,059 | 5.12 | % | ||||||
December 31, 2006 | $ | 12,191,553 | $ | 12,255,625 | 5.10 | % | ||||||
Fair value basis adjustments- The reported carrying value of hedged consolidated bonds were adjusted for changes in their fair value basis adjustments that were attributable to the risk being hedged in accordance with hedge accounting rules. The Bank hedged the risk of changes in the benchmark interest rate, which the Bank has designated as LIBOR.
The most significant elements that impacted balance sheet reporting included the recording of fair value basis adjustments. Also, when callable bonds were hedged by callable swaps, the possibility of exercise of the call shortened the expected maturity of the bond. The impact to the Bank’s income is discussed in this MD&A under “Results of Operations.” Its impact as a risk management tool is discussed under Item 7A “Quantitative and Qualitative Disclosures about Market Risk.”
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Of the par amounts of $60.9 billion outstanding at March 31, 2007, the Bank had hedged $39.8 billion, representing 65.4% of total par. Of the $62.2 billion of par amounts of bonds outstanding at December 31, 2006, the notional amount of swapped out debt stood at $40.7 billion, representing 65.4% of total par amount of consolidated obligation bonds.
The reported carrying value of hedged consolidated bonds is adjusted for changes in their fair value basis adjustments that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for consolidated obligation debt in the statements of condition included hedging fair value basis adjustments of $87.9 million in unrealized gains at March 31, 2007, a decline of $63.3 million compared to $151.2 million at December 31, 2006. Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, the value and implied volatility of call options of callable bonds, and from the growth or decline in hedge volume. Hedge volume, defined as the notional amount of hedged debt outstanding, declined to $38.6 billion at March 31, 2007, down from $40.5 billion at December 31, 2006. Decline in hedge volume was a factor in explaining the decrease in unrealized gains as represented in the fair value basis of hedged debt at March 31, 2007, compared to December 31, 2006. Additionally, the term structure of interest rates in the 1-3 year sector declined at March 31, 2007, compared to December 31, 2006. The Bank’s bond maturity concentration was significant in those maturity categories at March 31, 2007. Unrealized fair value gains of liabilities typically decline when interest rates decline. Changes due to amortization of previously recorded realized gains and losses were not material. Unrealized gains associated with hedged debt were almost entirely offset by unrealized losses associated with the interest rate swaps that hedged the consolidated obligation bonds at March 31, 2007 and December 31, 2006.
In the three months ended March 31, 2007, the FHLBNY repurchased par amount of $283.0 million at a loss of $2.4 million; no repurchases were made in the comparable period in 2006. Bonds repurchased were primarily associated with the financing of advances and MBS that had been prepaid. Bonds retired were acquired by another FHLBank at a negotiated price that was representative of prevailing market prices.
Consolidated Obligation bonds by maturity or next call date.
The following is a summary of consolidated bonds outstanding by year of maturity (dollars in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Maturity | Amount | Rate | Amount | Rate | ||||||||||||
1 year or less | $ | 27,897,215 | 4.53 | % | $ | 25,888,510 | 4.35 | % | ||||||||
over 1 year through 2 years | 16,889,880 | 4.69 | 20,458,280 | 4.69 | ||||||||||||
over 2 years through 3 years | 7,127,650 | 4.87 | 6,007,350 | 4.80 | ||||||||||||
over 3 years through 4 years | 2,142,500 | 4.89 | 3,275,700 | 4.62 | ||||||||||||
over 4 years through 5 years | 2,514,450 | 5.10 | 2,077,900 | 5.00 | ||||||||||||
over 5 years through 6 years | 364,550 | 4.69 | 529,800 | 4.71 | ||||||||||||
Thereafter | 3,945,800 | 5.30 | 3,968,100 | 5.29 | ||||||||||||
Total par value | 60,882,045 | 4.70 | % | 62,205,640 | 4.60 | % | ||||||||||
Bond premiums | 21,051 | 23,334 | ||||||||||||||
Bond discounts | (33,323 | ) | (33,300 | ) | ||||||||||||
SFAS 133 fair value basis adjustments | (87,889 | ) | (151,222 | ) | ||||||||||||
Deferred net gains on terminated hedges | (1,408 | ) | (1,777 | ) | ||||||||||||
Total carrying value | $ | 60,780,476 | $ | 62,042,675 | ||||||||||||
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The following table summarizes the consolidated bonds outstanding by years to maturity or next call date (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Year of Maturity or next call date | ||||||||
Due or callable in one year or less | $ | 41,967,915 | $ | 40,152,210 | ||||
Due or callable after one year through two years | 11,389,180 | 14,786,280 | ||||||
Due or callable after two years through three years | 2,763,650 | 1,959,650 | ||||||
Due or callable after three years through four years | 1,087,800 | 1,608,000 | ||||||
Due or callable after four years through five years | 945,450 | 928,900 | ||||||
Due or callable after five years through six years | 239,550 | 284,800 | ||||||
Thereafter | 2,488,500 | 2,485,800 | ||||||
Total par value | 60,882,045 | 62,205,640 | ||||||
Bond premiums | 21,051 | 23,334 | ||||||
Bond discounts | (33,323 | ) | (33,300 | ) | ||||
SFAS 133 fair value adjustments | (87,889 | ) | (151,222 | ) | ||||
Deferred net gains on terminated hedges | (1,408 | ) | (1,777 | ) | ||||
Total carrying value | $ | 60,780,476 | $ | 62,042,675 | ||||
The issuance of a callable bond with associated callable swap significantly alters the contractual maturity characteristics of the original bond, and introduces the possibility of an exercise call date that is significantly shorter than the contractual maturity.
Mandatorily Redeemable Stock
The FHLBNY’s capital stock is redeemable at the option of both the member and the FHLBNY subject to certain conditions. Dividends related to capital stock classified as mandatorily redeemable are accrued at an estimated dividend rate and reported as interest expense in the statements of income. Redeemable capital stock is generally accounted for under the provisions of SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,”(“SFAS 150”) Mandatorily redeemable stock at March 31, 2007 and December 31, 2006 represented stocks held by former members who were no longer members by virtue of being acquired by members of another FHLBank. Such stock will be repaid when the stock is no longer required to support outstanding transactions with the FHLBNY.
No member had notified the FHLBNY at March 31, 2007 or at December 31, 2006 of their intention to voluntarily withdraw from membership. The Bank reclassifies stock of members to a liability on the day the member’s charter is dissolved upon acquisition by a non-member.
At March 31, 2007 and December 31, 2006, the amount of mandatorily redeemable stock classified as a liability was $111.8 million and $109.9 million. In the three months ended March 31, 2007, one member was acquired by a non-member and $6.9 million of Class B stock was reclassified from capital to liability. In the same period, $5.0 million of stock in excess of collateral requirements was repaid to non-members during the period for maturing advances held by former members. In accordance with Finance Board regulations, non-members cannot renew their advance borrowings at maturity.
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Derivative Instruments
Interest rate swaps, swaptions, and cap and floor agreements (collectively, derivatives) enable the FHLBNY to manage its exposure to changes in interest rates by adjusting the effective maturity, repricing frequency, or option characteristics of financial instruments. The FHLBNY, to a limited extent, also uses interest rate swaps to hedge changes in interest rates prior to debt issuance, and essentially lock in the FHLBNY’s funding cost.
Section 956.6(a) of the Finance Board regulations prohibits the speculative use of derivatives, and the FHLBNY does not take speculative positions with derivatives or any other financial instruments, or trade derivatives for short-term profits. The FHLBNY does not have any special purpose entities or any other types of off-balance sheet conduits.
All derivatives are recorded on the statements of condition at their fair value and designated as either fair value or cash flow hedges for SFAS 133-qualifying hedges or as non-SFAS 133-qualifying hedges (economic hedges, or customer intermediations). In an economic hedge, the Bank retains or executes derivative contracts, which are economically effective in reducing risk, either because a SFAS 133-qualifying hedge was not available or because the cost of a qualifying hedge was not economical. Interest income and interest expense from interest rate swaps used for hedging are recorded with interest on the instrument being hedged. Any changes in the fair value of a derivative are recorded in current period earnings or other comprehensive income, depending on the type of hedge designation.
The FHLBNY uses derivatives in three ways: (1) as fair value or cash flow hedges of an underlying financial instrument or as a cash flow hedge of a forecasted transaction; (2) as intermediation hedges to offset derivative positions (e.g., caps) sold to members; and (3) as economic hedges, defined as a non-qualifying hedge of an asset or liability and used as an asset/liability management tool. The FHLBNY uses derivatives to adjust the interest rate sensitivity of consolidated obligations and advances to more closely approximate the sensitivity of assets or to adjust the interest rate sensitivity of advances to more closely approximate the sensitivity of liabilities. In addition, the FHLBNY uses derivatives to offset embedded options in assets and liabilities, to hedge the market value of existing assets and liabilities and anticipated transactions and to reduce funding costs.
At March 31, 2007, the notional amount of derivatives outstanding was $78.5 billion, up from $77.6 billion at December 31, 2006, and was primarily attributable to increased members’ use of putable advances. Greater volume of putable advances required increased executions of interest rate derivatives to hedge associated interest rate risk.
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Derivative Financial Instruments by Product-The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by product and type of accounting treatment. The table also reconciles fair value basis gains and (losses) of derivatives to the statements of condition (in thousands):
March 31, 2007 | December 31, 2006 | |||||||||||||||
Total estimated | Total estimated | |||||||||||||||
fair value | fair value | |||||||||||||||
(excluding | (excluding | |||||||||||||||
Total notional | accrued | Total notional | accrued | |||||||||||||
amount | interest) | amount | interest) | |||||||||||||
Advances — fair value hedges | $ | 37,066,025 | $ | (133,416 | ) | $ | 35,615,115 | $ | (23,889 | ) | ||||||
Advances (Caps) — economic hedges | 1,192,694 | 2 | 1,237,694 | — | ||||||||||||
Consolidated obligations — fair value hedges | 38,583,735 | (94,305 | ) | 40,510,105 | (159,919 | ) | ||||||||||
Consolidated obligations — economic hedges | 1,260,000 | (1,157 | ) | 175,000 | (253 | ) | ||||||||||
Mortgage loans — commitment | 2,954 | (2 | ) | 9,497 | (35 | ) | ||||||||||
Cash Flow- anticipated transactions | 355,500 | 373 | — | — | ||||||||||||
Intermediary positions — economic hedges | 80,000 | 27 | 50,000 | 3 | ||||||||||||
Total notional and fair value | $ | 78,540,908 | $ | (228,478 | ) | $ | 77,597,411 | $ | (184,093 | ) | ||||||
Total derivatives, excluding accrued interest | $ | (228,478 | ) | $ | (184,093 | ) | ||||||||||
Accrued interest | 236,686 | 301,253 | ||||||||||||||
Net derivative balance | $ | 8,208 | $ | 117,160 | ||||||||||||
Net derivative asset balance | $ | 131,889 | $ | 224,775 | ||||||||||||
Net derivative liability balance | (123,681 | ) | (107,615 | ) | ||||||||||||
Net derivative balance | $ | 8,208 | $ | 117,160 | ||||||||||||
The categories — “Fair value,” “Commitment,” and “Cash flow” hedges — represent derivative transactions accounted for as hedges. The category of “Economic” hedges represents derivative transactions under hedge strategies that did not qualify for hedge accounting treatment under SFAS 133.
Derivative Credit Risk Exposure- In addition to market risk, the FHLBNY is subject to credit risk in derivative transactions because of the potential for non-performance by the counterparties, which could result in the FHLBNY having to acquire replacement derivatives from a different counterparty at a higher cost. The FHLBNY also is subject to operational risks in the execution and servicing of derivative transactions.
Although notional amount is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since derivative counterparties do not exchange the notional amount (except in the case of foreign currency swaps). Counterparties use the notional amounts of derivative instruments to calculate contractual cash flows to be exchanged. The fair value of a derivative in a gain position is a more meaningful measure of the FHLBNY’s current market exposure on derivatives. The FHLBNY estimates exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a gain position.
All derivative contracts with non-members are subject to master netting agreements or other right of offset arrangements. At March 31, 2007 and December 31, 2006, the FHLBNY’s maximum credit risk, as defined above, was approximately $131.9 million and $224.8 million without recognition of collateral held by the FHLBNY. In determining maximum credit risk, the FHLBNY considers accrued interest receivable and payable, and the legal right to offset assets and liabilities by counterparty. The FHLBNY mitigates its exposure by requiring derivative counterparties to pledge cash collateral, if the amount of exposure is above the collateral threshold agreements. Derivative counterparties had pledged $32.0 million in cash to the FHLBNY at March 31, 2007. At December 31, 2006, the comparable cash held by the FHLBNY was $124.0 million.
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Asset Quality
The following table summarizes the FHLBNY’s loan portfolios (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Advances | $ | 59,147,220 | $ | 59,012,394 | ||||
Mortgage loans before allowance for credit losses | $ | 1,489,559 | $ | 1,484,012 | ||||
Advances
The FHLBNY’s credit risk from advances at March 31, 2007 and December 31, 2006 was concentrated in commercial banks and savings institutions. All advances were fully collateralized. In addition, borrowing members pledge their stock of the FHLBNY as additional collateral for advances. The FHLBNY has not experienced any losses on credit extended to any member since its inception. Based on the collateral held as security and prior repayment history, no allowance for losses is currently deemed necessary.
Mortgage loans held-for-portfolio
Collectibility of mortgage loans is supported by liens on real estate securing the loan. For conventional loans, defined as mortgage loans other than VA and FHA insured loans, additional loss protection is provided by private mortgage insurance required for MPF loans with a loan-to-value ratio of more than 80% at origination, which is paid for by the borrower. The First Loss Account (“FLA”) memorializes the first tier of credit exposure. The amount of the FLA is not an indication of inherent losses in the loan portfolio, and is not a loan loss reserve. The FHLBNY is responsible for losses up to this “first loss level.” Losses beyond this layer are absorbed through credit enhancement provided by the member participating in the Mortgage Partnership Program. All residual credit exposure is FHLBNY’s responsibility. The amount of credit enhancement is computed with the use of a Standard & Poor’s model to determine the amount of credit enhancement necessary to bring a pool of uninsured loans to “AA” credit risk. The credit enhancement is an obligation of the member.
The following provides a roll-forward analysis of the memo First Loss Account (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Beginning balance | $ | 12,162 | $ | 11,318 | ||||
Additions | 210 | 125 | ||||||
Charge-offs | — | — | ||||||
Recoveries | — | — | ||||||
Ending balance | $ | 12,372 | $ | 11,443 | ||||
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The allowance for credit losses with respect to the mortgage loans held-for-portfolio was as follows (in thousands):
Three months ended | |||||||||
March 31, | |||||||||
2007 | 2006 | ||||||||
Beginning balance | $ | 593 | $ | 582 | |||||
Charge-offs | — | — | |||||||
Recoveries | — | — | |||||||
Net charge-offs | — | — | |||||||
Provision for credit losses | — | — | |||||||
Ending balance | $ | 593 | $ | 582 | |||||
Nonperforming mortgage loans represent conventional mortgage loans that are placed on non-accrual and nonperforming status when the collection of contractual principal or interest from the borrower is 90 days or more past due. Loans (excluding Federal Housing Administration and Veteran Administration insured loans) that are 90 days or more past due are considered as non-accrual. Other than the non-accrual loans, no mortgage loans or advances were impaired at March 31, 2007 or December 31, 2006.
Nonperforming mortgage loans and mortgage loans 90 days or more past due and still accruing were as follows (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Mortgage loans, net of provisions for credit losses | $ | 1,488,966 | $ | 1,483,419 | ||||
Non-performing mortgage loans held-for-portfolio | $ | 1,774 | $ | 2,089 | ||||
Mortgage loans past due 90 days or more and still accruing interest | $ | 636 | $ | 850 | ||||
The FHLBNY’s interest contractually due and actually received for nonperforming mortgage loans held-for-portfolio was as follows (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Interest contractually due1 | $ | 47 | $ | 21 | ||||
Interest actually received1 | 43 | — | ||||||
Shortfall | $ | 4 | $ | 21 | ||||
Interest reported as income 2 | $ | — | $ | — | ||||
1 | Represent cumulative interest due and received on past due uninsured loans. | |
2 | The Bank does not recognize interest received as income from uninsured loans past due 90-days or greater. |
At March 31, 2007 and December 31, 2006, mortgage loans in foreclosure totaled $0.9 million. The FHLBNY does not have any material amounts of real estate owned nor did it take possession of any material amounts of mortgage property during the three months ended March 31, 2007.
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Securities Impairment
Temporary impairment.
Note 2 to the unaudited financial statements summarizes held-to-maturity securities with fair values below their amortized cost, in an unrealized loss position, as of March 31, 2007 and December 31, 2006.
The FHLBNY has both the intent and financial ability to hold its temporarily impaired securities to anticipated recovery of their value. In addition, the FHLBNY has reviewed the investment security holdings and determined, based on creditworthiness of the securities and including any underlying collateral and any insurance provisions of the security, that unrealized losses in the analysis represent temporary impairment at March 31, 2007 and December 31, 2006.
Liquidity
The FHLBNY’s primary source of liquidity is the issuance of consolidated obligations. To refinance maturing consolidated obligations, the FHLBNY relies on the willingness of the investors to purchase new issuance. Member deposits and capital stock purchased by members are another source of funds. Short-term unsecured borrowings from other FHLBanks and in the Federal funds market provide additional sources of liquidity. In addition, the Secretary of the Treasury is authorized to purchase up to $4.0 billion of consolidated obligations. The FHLBNY’s liquidity position remains in compliance with all regulatory requirements and it does not foresee any changes to that position. Violations would invoke non-compliance penalties and corrective actions under discretionary powers given to the Finance Board under applicable regulations.
Liquidity Management
The FHLBNY actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member demand, and the maturity profile of the FHLBNY’s assets and liabilities. The FHLBNY recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the Bank is required to maintain certain liquidity measures in accordance with the FHLBank Act and policies developed by the FHLBNY management as approved by the FHLBNY’s Board of Directors.
The specific liquidity requirements applicable to the FHLBNY are described in the next three sections:
Deposit Liquidity.The FHLBNY is required to invest an aggregate amount at least equal to the amount of current deposits received from the FHLBNY’s members in (1) obligations of the U.S. government; (2) deposits in banks or trust companies; or (3) advances to members with maturities not exceeding five years. In addition to accepting deposits from its members, the FHLBNY may accept deposits from any other FHLBanks, or from any other governmental instrumentality. The FHLBNY met these requirements at all times.
Deposit liquidity is calculated daily. Quarterly average reserve requirements and actual reserves are summarized below (in millions):
Average Deposit | Average Actual | |||||||||||
For the quarters ended | Reserve Required | Deposit Liquidity | Excess | |||||||||
March 31, 2007 | $ | 1,796 | $ | 37,559 | $ | 35,763 | ||||||
December 31, 2006 | 1,944 | 42,386 | 40,442 |
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Operational Liquidity. The FHLBNY must be able to fund its activities as its balance sheet changes from day-to-day. The FHLBNY maintains the capacity to fund balance sheet growth through its regular money market and capital market funding activities. Management monitors the Bank’s operational liquidity needs by regularly comparing the Bank’s demonstrated funding capacity with its potential balance sheet growth. Management then takes such actions as may be necessary to maintain adequate sources of funding for such growth. Operational liquidity is measured daily. The FHLBNY met these requirements at all times.
The following table summarizes excess operational liquidity (in millions):
Average Balance Sheet | Average Actual | |||||||||||
For the quarters ended | Liquidity Requirement | Operational Liquidity | Excess | |||||||||
March 31, 2007 | $ | 3,482 | $ | 16,033 | $ | 12,551 | ||||||
December 31, 2006 | 5,852 | 16,970 | 11,118 |
Contingent Liquidity .The FHLBNY is required by Finance Board regulations to hold “contingency liquidity” in an amount sufficient to meet its liquidity needs if it is unable to access the consolidated obligation debt markets for at least five business days. Contingency liquidity includes (1) marketable assets with a maturity of one year or less; (2) self-liquidating assets with a maturity of one year or less; (3) assets that are generally acceptable as collateral in the repurchase market; and (4) irrevocable lines of credit from financial institutions receiving not less than the second-highest credit rating from a nationally recognized statistical rating organization. Contingency liquidity is reported daily. The FHLBNY met these requirements at all times.
The following table summarizes excess contingency liquidity (in millions):
Average Five Day | Average Actual | |||||||||||
For the quarters ended | Requirement | Contingency Liquidity | Excess | |||||||||
March 31, 2007 | $ | 1,476 | $ | 14,509 | $ | 13,033 | ||||||
December 31, 2006 | 2,130 | 14,852 | 12,722 |
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Leverage and unpledged assets to debt requirements
Finance Board regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and such securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located.
The FHLBNY met the qualifying unpledged asset requirements in each of the periods reported as follows (in thousands):
March 31, 2007 | December 31, 2006 | |||||||
Consolidated Obligations: | ||||||||
Bonds | $ | 60,780,476 | $ | 62,042,675 | ||||
Discount Notes | 14,002,278 | 12,191,553 | ||||||
Total consolidated obligations | 74,782,754 | 74,234,228 | ||||||
Unpledged assets | ||||||||
Cash | 18,845 | 38,850 | ||||||
Less: Member pass-through reserves at the FRB | (44,258 | ) | (43,265 | ) | ||||
Secured Advances | 59,147,220 | 59,012,394 | ||||||
Investments | 20,768,083 | 20,503,175 | ||||||
Mortgage Loans | 1,488,966 | 1,483,419 | ||||||
Other loans | 43 | 112 | ||||||
Accrued interest receivable on advances and investments | 396,430 | 406,123 | ||||||
Less: Pledged Assets | — | — | ||||||
81,775,329 | 81,400,808 | |||||||
Excess unpledged assets | $ | 6,992,575 | $ | 7,166,580 | ||||
Mortgage investment authority
Finance Board investment regulations limit the holding of mortgage-backed securities to 300% of capital. The FHLBNY was in compliance with the regulations at all times.
March 31, 2007 | December 31, 2006 | |||||||||||||||
Actual | Limits | Actual | Limits | |||||||||||||
Mortgage securities investment authority1 | 256 | % | 300 | % | 254 | % | 300 | % | ||||||||
1 | The measurement date was on a one-month “look-back” basis. |
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The credit ratings of the FHLBNY and changes thereof were as follows at March 31, 2007.
Long Term:
Moody’s Investors Service | S & P | |||||||||||
Year | Outlook | Rating | Long-Term Outlook | Rating | ||||||||
2002 | July 31, 2002 - Affirmed | Aaa/Stable | March 22, 2002 | Long Term rating affirmed | outlook stable | AAA/Stable | ||||||
2003 | September 26, 2003 - Affirmed | Aaa/Stable | March 17, 2003 | Long Term rating affirmed | outlook stable | AAA/Stable | ||||||
August 8, 2003 | Long Term rating affirmed | outlook negative | AAA/Negative | |||||||||
September 26, 2003 | Long Term rating downgraded | outlook stable | AA+/Stable | |||||||||
November 17, 2003 | Long Term rating affirmed | outlook stable | AA+/Stable | |||||||||
2004 | April 15, 2004 | Long Term rating affirmed | outlook stable | AA+/Stable | ||||||||
2005 | October 14, 2005 - Affirmed | Aaa/Stable | April 29, 2005 | Long Term rating affirmed | outlook stable | AA+/Stable | ||||||
2006 | February 9, 2006 - Affirmed | Aaa/Stable | August 11, 2006 | Long Term rating affirmed | outlook stable | AA+/Stable | ||||||
September 21, 2006 | Long Term rating upgraded | outlook stable | AAA/Stable | |||||||||
Short Term: | ||||||||||||
Moody’s Investors Service | S & P | |||||||||||
Year | Outlook | Rating | Short-Term Outlook | Rating | ||||||||
2002 | July 31, 2002 - Affirmed | P-1 | March 22, 2002 | Short Term rating affirmed | A-1+ | |||||||
2003 | March 17, 2003 | Short Term rating affirmed | A-1+ | |||||||||
August 8, 2003 | Short Term rating affirmed | A-1+ | ||||||||||
September 26, 2003 | Short Term rating affirmed | A-1+ | ||||||||||
November 17, 2003 | Short Term rating affirmed | A-1+ | ||||||||||
2004 | April 15, 2004 | Short Term rating affirmed | A-1+ | |||||||||
2005 | October 14, 2005 - Affirmed | P-1 | April 29, 2005 | Short Term rating affirmed | A-1+ | |||||||
2006 | February 9, 2006 - Affirmed | P-1 | August 11, 2006 | Short Term rating affirmed | A-1+ | |||||||
September 21, 2006 | Short Term rating affirmed | A-1+ |
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk Management.Market risk, or interest rate risk, is the risk of loss in market value or future earnings that may result from changes in interest rates or market volatility. The FHLBNY’s tolerances for market risk are defined by the Risk Management Policy approved by its Board of Directors. The Risk Management Policy was amended during the first quarter of 2007 to lower the risk limits. The new limit requires that the Bank maintain its duration of equity, or interest rate sensitivity, within a range of +/- four years (where it had previously been +/- five years). The FHLBNY uses option adjusted duration measurements to detail the sensitivity of equity market value and includes all financial instruments, including hedges. The amended policy also requires that, in simulated environments where market interest rates are increased or decreased by 200 basis points relative to current market rates, the FHLBNY’s duration of equity must remain within a range of +/- six years, down from +/- seven years previously. Management actively monitors and evaluates the effects of interest rate and market risk on earnings and on the market value of equity. The shock levels are chosen in accordance with internal policy and regulatory requirements to estimate the effects of significant interest rate changes on the FHLBNY’s market value.
The key elements of the FHLBNY’s strategy for interest rate risk management include (1) matching the cash flow patterns of assets and liabilities through time and under different interest rate scenarios; and (2) actively measuring and managing the balance sheet’s exposure to changes in interest rate levels (and associated spreads) and market volatilities.
Over the three-month period from December 31, 2006 to March 31, 2007, duration of equity increased from 1.10 years to 1.12 years, indicating marginally higher sensitivity to changes in interest rates. The Bank’s risk level remained within its risk limits. As of March 31, 2007, the cumulative one-year gap between assets and liabilities was $2.5 billion, down $288 million from December 2006.
During the period December 31, 2006 to March 31, 2007, the FHLBNY’s market risk profile changed as summarized in Duration of Equity tables in subsequent sections of “Market Risk Management”. They illustrate that the FHLBNY has remained within its policy and regulatory requirements during the period.
The FHLBNY’s funding consists of a combination of short- and long-term debt instruments which do not necessarily have matching interest rate sensitivities with the FHLBNY’s investments. To more closely match the sensitivity, the FHLBNY uses derivative instruments to adjust the effective maturities, repricing frequencies, or option characteristics of the debt in a way that is consistent with the overall risk management objectives of match funding.
The FHLBNY typically enters into interest rate swaps, swaptions and cap and floor agreements (collectively referred to as derivatives). The FHLBNY uses such derivatives in three ways: (1) as fair value or cash flow hedges of an underlying financial instrument or a forecasted transaction; (2) as economic hedges to offset derivative positions (e.g., caps) sold to members; and (3) as tools of asset/liability management. In the context of its asset/liability management strategy, the FHLBNY uses derivatives to adjust the interest rate sensitivity of consolidated obligations to more closely approximate the interest rate sensitivity of assets. For instance, the FHLBNY may use a swap to effectively convert a fixed-rate consolidated obligation into a floating-rate obligation with repricing characteristics close to those of the investment being funded.
More information with respect to derivatives and hedging activities is available in Note 19 to annual financial statements included in Form 10-K filed on March 29, 2007.
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Because a significant portion (about 14.2%) of the FHLBNY’s balance sheet as of March 31, 2007 consists of mortgage-backed securities and other mortgage-related assets, the FHLBNY is exposed to mortgage prepayment risk. The FHLBNY is exposed to a degree of interest rate risk because the cash flows of the mortgage assets and the associated liabilities that fund them are not perfectly matched through time and across all possible interest rate scenarios. The cash flows from mortgage assets are highly sensitive to changes in interest rates because of the borrowers’ prepayment option. As interest rates decrease, borrowers are more likely to refinance fixed-rate mortgages, resulting in increased prepayments and mortgage cash flows that are received earlier than would otherwise occur. Replacing the higher-rate loans that are prepaid with lower-rate loans has the potential to reduce the FHLBNY’s interest spread unless the Bank can also reduce its debt cost. Conversely, an increase in interest rates may result in slower prepayments and mortgage cash flows being received later than would otherwise occur. In this case, the FHLBNY runs the risk that the debt may reprice faster than the mortgage assets and at a higher cost. This could also reduce the interest spread.
When purchasing mortgage assets, the FHLBNY attempts to issue liabilities with similar cash flows in order to achieve a stable net interest spread. The FHLBNY issues a mix of debt securities across a broad spectrum of final maturities to achieve the desired liability characteristics. Because the estimated lives of mortgage assets change as interest rates change, the FHLBNY issues callable debt or uses derivatives to alter the estimated life of liabilities and offset the expected change in cash flows of our mortgage assets.
Risk measurement at the FHLBNY takes two major forms: (1) ongoing business risk measures and analyses; and, (2) stress test scenarios. These two categories of measures help the FHLBNY in its day-to-day risk management decisions. Stress test scenarios identify and quantify the FHLBNY’s exposure to extreme but improbable events.
Ongoing business risk measures and analyses seek to quantify the level of net interest income at risk (i.e., how much income the FHLBNY could lose as a result of various types of arbitrarily large interest rate shocks). These calculations essentially amount to studying the impact of stressful interest rate shocks on projected net interest income. The projections start from a “snapshot” of the current balance sheet and simulate its evolution, over a one-year horizon, taking into account business projections of the likely behavior of advances and assumptions about the net spread earned on each asset category. The result is a one-year projection of net interest income. Changes to that initial forecast by stressful interest rate scenarios then give the FHLBNY a measure of how much income it could gain or lose under each scenario. Experience has shown that such analyses, even though they rely heavily on assumptions, provide a reasonable measure of the risks that the FHLBNY incurs as a going concern, regardless of the interest rate environment. As defined by the FHLBNY, net interest income at risk measures the percentage change in projected net interest income from the spread between asset yields and liability costs resulting from an instantaneous, parallel +/- 200 basis-point rate shock. This risk measure is reported to the Board of Directors in accordance with the Risk Management Policy. To manage its interest rate risk, the FHLBNY keeps close watch on the difference between the interest rate sensitivity (duration) of its assets and the duration of its liabilities. This difference between the estimated durations of portfolio assets and liabilities is called the duration gap. The duration gap represents the extent to which estimated cash flows for assets and liabilities are matched, on average, over time and across interest rate scenarios. A positive duration gap signals a greater exposure to rising interest rates because it indicates that the duration of assets exceeds the duration of liabilities. A negative duration gap signals a greater exposure to declining interest rates because the duration of assets is less than the duration of liabilities.
A stress test aims at capturing the impact of extreme (but rare) market rate changes on the market value of equity and net interest income. The FHLBNY has developed a technique to identify the interest rate and volatility scenario that can cause the most severe loss in the market value of equity, given current market and balance sheet conditions. Every month, this scenario is applied to the FHLBNY’s balance sheet and the resulting loss in the market value of equity is evaluated. Besides providing a measure of the potential loss under the extreme scenario, this technique enables the FHLBNY to identify the nature of the changes in market risk factors to which it is the most sensitive, allowing FHLBNY to take appropriate action to address those risk factors. The FHLBNY views such additional tests as an integral part of its risk management strategy.
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The FHLBNY monitors the balance sheet and adjusts it as necessary to contain interest rate risk within the Bank’s policy limits on the sensitivity of net interest income from spread, the size of periodic repricing gaps, and equity duration.
Net Interest Income at Risk. In the first quarter, there were no substantive changes to the FHLBNY’s modeling processes. As of March 31, 2007, the FHLBNY’s one-year net interest income from spread at risk measures were -9.92% and 11.66% compared to
-1.96% and -2.23% on December 31, 2006 under the 200 basis-point up and down shocks. These figures are calculated from the perspective of an ongoing business and are, therefore, based on certain assumptions regarding the probable evolution of the FHLBNY’s main line of business, advances, and its cost of funds. The FHLBNY’s limit on net interest income from spread at risk is
-15%. The Bank was, therefore, within its limit for net interest income sensitivity at March 31, 2007 and at December 31, 2006. The FHLBNY monitors its repricing gaps primarily to limit the variability of net interest income.
-1.96% and -2.23% on December 31, 2006 under the 200 basis-point up and down shocks. These figures are calculated from the perspective of an ongoing business and are, therefore, based on certain assumptions regarding the probable evolution of the FHLBNY’s main line of business, advances, and its cost of funds. The FHLBNY’s limit on net interest income from spread at risk is
-15%. The Bank was, therefore, within its limit for net interest income sensitivity at March 31, 2007 and at December 31, 2006. The FHLBNY monitors its repricing gaps primarily to limit the variability of net interest income.
Sensitivity of Duration of Equity
The following table summarizes the sensitivity of the duration of equity as of March 31, 2007, and December 31, 2006 (in years):
Duration of Equity (in years) | March 31, 2007 | December 31, 2006 | ||||||
Base | 1.12 | 1.10 | ||||||
Up-Base | 2.93 | 2.84 | ||||||
Down-Base | (2.91 | ) | (3.11 | ) | ||||
Duration Gap (in years) | 0.03 | 0.03 |
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The following tables track the behavior of the FHLBNY’s duration of equity at the end of the following months during 2007 and 2006.
March 31, 2007 Duration Measures | ||||||||||||||||
(as of month-end, in years) | ||||||||||||||||
Duration of | Duration of | Duration | Duration of | |||||||||||||
Assets | Liabilities | Gap | Equity | |||||||||||||
January | 0.61 | 0.57 | 0.05 | 1.48 | ||||||||||||
February | 0.58 | 0.56 | 0.02 | 0.96 | ||||||||||||
March | 0.57 | 0.54 | 0.03 | 1.12 | ||||||||||||
Note: Numbers may not add due to rounding. | ||||||||||||||||
2006 Duration Measures | ||||||||||||||||
(as of month-end, in years) | ||||||||||||||||
Duration of | Duration of | Duration | Duration of | |||||||||||||
Assets | Liabilities | Gap | Equity | |||||||||||||
January | 0.59 | 0.58 | 0.01 | 0.81 | ||||||||||||
February | 0.59 | 0.58 | 0.00 | 0.66 | ||||||||||||
March | 0.61 | 0.58 | 0.03 | 1.16 | ||||||||||||
April | 0.61 | 0.56 | 0.04 | 1.38 | ||||||||||||
May | 0.62 | 0.56 | 0.06 | 1.84 | ||||||||||||
June | 0.59 | 0.55 | 0.04 | 1.41 | ||||||||||||
July | 0.55 | 0.52 | 0.03 | 1.16 | ||||||||||||
August | 0.55 | 0.54 | 0.00 | 0.62 | ||||||||||||
September | 0.54 | 0.55 | (0.01 | ) | 0.42 | |||||||||||
October | 0.57 | 0.56 | 0.01 | 0.71 | ||||||||||||
November | 0.53 | 0.55 | (0.02 | ) | 0.10 | |||||||||||
December | 0.60 | 0.58 | 0.03 | 1.10 |
Note: Numbers may not add due to rounding.
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The following tables display the FHLBNY’s maturity/repricing gaps as of March 31, 2007 (in millions):
Interest Rate Sensitivity | ||||||||||||||||||||
March 31, 2007 | ||||||||||||||||||||
More than | More than | More than | ||||||||||||||||||
6 Months or | 6 Months to | 1 Year to | 3 Years to | More than | ||||||||||||||||
Less | 1 Year | 3 Years | 5 Years | 5 Years | ||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||
Non-MBS Investments | $ | 10,401 | $ | 117 | $ | 423 | $ | 312 | $ | 815 | ||||||||||
MBS Investments | 1,302 | 1,208 | 3,860 | 1,797 | 2,024 | |||||||||||||||
Adjustable-rate loans and advances | 13,260 | — | — | — | — | |||||||||||||||
Net unswapped | 24,963 | 1,324 | 4,283 | 2,109 | 2,839 | |||||||||||||||
Fixed-rate loans and advances | 4,980 | 2,819 | 8,758 | 7,029 | 22,170 | |||||||||||||||
Swaps hedging advances | 35,806 | (1,594 | ) | (5,643 | ) | (6,572 | ) | (21,998 | ) | |||||||||||
Net fixed-rate loans and advances | 40,786 | 1,225 | 3,115 | 457 | 172 | |||||||||||||||
Loans to other FHLBanks | — | — | — | — | — | |||||||||||||||
Total interest-earning assets | $ | 65,749 | $ | 2,550 | $ | 7,398 | $ | 2,566 | $ | 3,011 | ||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||
Deposits | $ | 2,208 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Discount notes | 13,989 | 13 | — | — | — | |||||||||||||||
Swapped discount notes | — | — | — | — | — | |||||||||||||||
Net discount notes | 13,989 | 13 | — | — | — | |||||||||||||||
Consolidated Obligation Bonds | ||||||||||||||||||||
FHLB bonds | 15,103 | 14,658 | 22,990 | 4,827 | 3,291 | |||||||||||||||
Swaps hedging bonds | 31,091 | (11,278 | ) | (15,914 | ) | (2,130 | ) | (1,770 | ) | |||||||||||
Net FHLB bonds | 46,194 | 3,380 | 7,076 | 2,697 | 1,521 | |||||||||||||||
Total interest-bearing liabilities | $ | 62,392 | $ | 3,393 | $ | 7,076 | $ | 2,697 | $ | 1,521 | ||||||||||
Post hedge gaps: | ||||||||||||||||||||
Periodic gap | $ | 3,357 | $ | (844 | ) | $ | 322 | $ | (131 | ) | $ | 1,490 | ||||||||
Cumulative gaps | $ | 3,357 | $ | 2,513 | $ | 2,835 | $ | 2,703 | $ | 4,193 |
Note: Numbers may not add due to rounding.
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The following tables display the FHLBNY’s maturity/repricing gaps as of December 31, 2006 (in millions):
Interest Rate Sensitivity | ||||||||||||||||||||
December 31, 2006 | ||||||||||||||||||||
More than | More than | More than | ||||||||||||||||||
6 Months or | 6 Months to | 1 Year to | 3 Years to | More than | ||||||||||||||||
Less | 1 Year | 3 Years | 5 Years | 5 Years | ||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||
Non-MBS Investments | $ | 9,669 | $ | 126 | $ | 408 | $ | 309 | $ | 843 | ||||||||||
MBS Investments | 1,150 | 994 | 4,153 | 1,907 | 2,428 | |||||||||||||||
Adjustable-rate loans and advances | 13,251 | — | — | — | — | |||||||||||||||
Net unswapped | 24,071 | 1,120 | 4,561 | 2,216 | 3,271 | |||||||||||||||
Fixed-rate loans and advances | 5,678 | 2,744 | 9,799 | 7,073 | 20,444 | |||||||||||||||
Swaps hedging advances | 34,745 | (1,593 | ) | (6,415 | ) | (6,483 | ) | (20,254 | ) | |||||||||||
Net fixed-rate loans and advances | 40,423 | 1,151 | 3,384 | 590 | 189 | |||||||||||||||
Loans to other FHLBanks | — | — | — | — | — | |||||||||||||||
Total interest-earning assets | $ | 64,494 | $ | 2,271 | $ | 7,946 | $ | 2,806 | $ | 3,460 | ||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||
Deposits | $ | 2,389 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Discount notes | 12,171 | 21 | — | — | — | |||||||||||||||
Swapped discount notes | — | — | — | — | — | |||||||||||||||
Net discount notes | 12,171 | 21 | — | — | — | |||||||||||||||
Consolidated Obligation Bonds | ||||||||||||||||||||
FHLB bonds | 18,339 | 11,747 | 23,070 | 5,560 | 3,481 | |||||||||||||||
Swaps hedging bonds | 28,344 | (9,045 | ) | (15,071 | ) | (2,313 | ) | (1,915 | ) | |||||||||||
Net FHLB bonds | 46,683 | 2,701 | 7,999 | 3,247 | 1,566 | |||||||||||||||
Total interest-bearing liabilities | $ | 61,243 | $ | 2,722 | $ | 7,999 | $ | 3,247 | $ | 1,566 | ||||||||||
Post hedge gaps: | ||||||||||||||||||||
Periodic gap | $ | 3,251 | $ | (451 | ) | $ | (53 | ) | $ | (441 | ) | $ | 1,894 | |||||||
Cumulative gaps | $ | 3,251 | $ | 2,801 | $ | 2,747 | $ | 2,306 | $ | 4,201 |
Note: Numbers may not add due to rounding.
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Item 4. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures: An evaluation of the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”) was carried out under the supervision and with the participation of the Bank’s President and Chief Executive Officer, Alfred A. DelliBovi, and Senior Vice President and Chief Financial Officer Patrick A. Morgan, at March 31, 2007. Based on this evaluation, they concluded that as of March 31, 2007, the Bank’s disclosure controls and procedures were effective, at a reasonable level of assurance, in ensuring that the information required to be disclosed by the Bank in the reports it files or submits under the Act is (i) accumulated and communicated to the Bank’s management (including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. | ||
(b) | Changes in Internal Control Over Financial Reporting: There were no changes in the Bank’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the Bank’s first quarter that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting. |
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Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, the FHLBNY is involved in disputes or regulatory inquiries that arise in the ordinary course of business. At the present time there are no material pending legal proceedings against the FHLBNY.
Item 1A. RISK FACTORS
There have been no material changes from the risk factors included in the FHLBNY’s Form 10-K for the fiscal year ended December 31, 2006.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
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Item 6. EXHIBITS
Exhibit No. | Identification of Exhibit | |
10.01 | 2007 Incentive Compensation Plan | |
31.01 | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer | |
31.02 | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer | |
32.01 | Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act 2002, 18 U.S.C. Section 1350 | |
32.02 | Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act 2002, 18 U.S.C. Section 1350 |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF NEW YORK (Registrant) | ||||||
By: | /s/ Patrick A. Morgan | |||||
Patrick A. Morgan | ||||||
Senior Vice President and Chief Financial Officer Federal Home Loan Bank of New York (on behalf of the Registrant and as Principal Financial Officer) |
Date: May 11, 2007
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EXHIBIT INDEX
Exhibit No. | Identification of Exhibit | |
10.01 | 2007 Incentive Compensation Plan | |
31.01 | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer | |
31.02 | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer | |
32.01 | Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act 2002, 18 U.S.C. Section 1350 | |
32.02 | Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act 2002, 18 U.S.C. Section 1350 |