10-Q 1 a18-18992_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

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)

 

Federally chartered corporation

 

13-6400946

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

101 Park Avenue, New York, N.Y.

 

10178

(Address of principal executive offices)

 

(Zip Code)

 

(212) 681-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

Non-accelerated filer x

 

Smaller reporting company o

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The number of shares outstanding of the issuer’s common stock as of October 31, 2018 was 59,332,300.

 

 

 


Table of Contents

 

FEDERAL HOME LOAN BANK OF NEW YORK

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

 

Table of Contents

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements (Unaudited):

 

 

Statements of Condition (Unaudited) as of September 30, 2018 and December 31, 2017

 

3

Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017

 

4

Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017

 

5

Statements of Capital (Unaudited) for the Nine Months Ended September 30, 2018 and 2017

 

6

Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017

 

7

Notes to Financial Statements (Unaudited)

 

9

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

57

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

114

 

 

 

Item 4. Controls and Procedures

 

118

 

 

 

PART II. OTHER INFORMATION

 

119

 

 

 

Item 1. Legal Proceedings

 

119

 

 

 

Item 1A. Risk Factors

 

119

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

119

 

 

 

Item 3. Defaults upon Senior Securities

 

119

 

 

 

Item 4. Mine Safety Disclosures

 

119

 

 

 

Item 5. Other Information

 

119

 

 

 

Item 6. Exhibits

 

120

 

2


Table of Contents

 

Federal Home Loan Bank of New York

Statements of Condition — Unaudited (In Thousands, Except Par Value of Capital Stock)

As of September 30, 2018 and December 31, 2017

 

 

 

September 30, 2018

 

December 31, 2017

 

Assets

 

 

 

 

 

Cash and due from banks (Note 3)

 

$

87,005

 

$

127,403

 

Securities purchased under agreements to resell (Note 4)

 

4,870,000

 

2,700,000

 

Federal funds sold (Note 4)

 

14,360,000

 

10,326,000

 

Trading securities (Note 5) (Includes $239,363 pledged as collateral at September 30, 2018 and $239,064 at December 31, 2017)

 

4,642,904

 

1,641,568

 

Equity Investments (Note 6)

 

52,150

 

 

Available-for-sale securities, net of unrealized gains of $4,909 at September 30, 2018 and $10,178 at December 31, 2017 (Note 7)

 

444,293

 

577,269

 

Held-to-maturity securities (Note 8) (Includes $4,813 pledged as collateral at September 30, 2018 and $5,728 at December 31, 2017)

 

17,859,215

 

17,824,533

 

Advances (Note 9) (Includes $0 at September 30, 2018 and $2,205,624 at December 31, 2017 at fair value under the fair value option)

 

100,165,960

 

122,447,805

 

Mortgage loans held-for-portfolio, net of allowance for credit losses of $794 at September 30, 2018 and $992 at December 31, 2017 (Note 10)

 

2,910,298

 

2,896,976

 

Accrued interest receivable

 

288,421

 

226,981

 

Premises, software, and equipment

 

45,260

 

29,697

 

Derivative assets (Note 17)

 

126,754

 

112,742

 

Other assets

 

5,224

 

7,398

 

 

 

 

 

 

 

Total assets

 

$

145,857,484

 

$

158,918,372

 

 

 

 

 

 

 

Liabilities and capital

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits (Note 11)

 

 

 

 

 

Interest-bearing demand

 

$

880,886

 

$

1,142,056

 

Non-interest-bearing demand

 

18,352

 

17,999

 

Term

 

37,000

 

36,000

 

 

 

 

 

 

 

Total deposits

 

936,238

 

1,196,055

 

 

 

 

 

 

 

Consolidated obligations, net (Note 12)

 

 

 

 

 

Bonds (Includes $679,155 at September 30, 2018 and $1,131,074 at December 31, 2017 at fair value under the fair value option)

 

85,909,679

 

99,288,048

 

Discount notes (Includes $0 at September 30, 2018 and $2,312,621 at December 31, 2017 at fair value under the fair value option)

 

50,821,648

 

49,613,671

 

 

 

 

 

 

 

Total consolidated obligations

 

136,731,327

 

148,901,719

 

 

 

 

 

 

 

Mandatorily redeemable capital stock (Note 14)

 

6,664

 

19,945

 

 

 

 

 

 

 

Accrued interest payable

 

208,985

 

162,176

 

Affordable Housing Program (Note 13)

 

160,501

 

131,654

 

Derivative liabilities (Note 17)

 

24,351

 

61,607

 

Other liabilities

 

207,585

 

204,178

 

 

 

 

 

 

 

Total liabilities

 

138,275,651

 

150,677,334

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 14, 17 and 19)

 

 

 

 

 

 

 

 

 

 

 

Capital (Note 14)

 

 

 

 

 

Capital stock ($100 par value), putable, issued and outstanding shares: 58,560 at September 30, 2018 and 67,500 at December 31, 2017

 

5,856,003

 

6,750,005

 

Retained earnings

 

 

 

 

 

Unrestricted

 

1,111,825

 

1,067,097

 

Restricted (Note 14)

 

566,748

 

479,185

 

Total retained earnings

 

1,678,573

 

1,546,282

 

Total accumulated other comprehensive income (loss)

 

47,257

 

(55,249

)

 

 

 

 

 

 

Total capital

 

7,581,833

 

8,241,038

 

 

 

 

 

 

 

Total liabilities and capital

 

$

145,857,484

 

$

158,918,372

 

 

The accompanying notes are an integral part of these financial statements.

 

3


Table of Contents

 

Federal Home Loan Bank of New York

Statements of Income — Unaudited (In Thousands, Except Per Share Data)

For the Three and Nine Months Ended September 30, 2018 and 2017

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Interest income

 

 

 

 

 

 

 

 

 

Advances, net (Note 9)

 

$

678,029

 

$

428,927

 

$

1,853,974

 

$

1,107,004

 

Interest-bearing deposits

 

105

 

51

 

259

 

132

 

Securities purchased under agreements to resell (Note 4)

 

25,288

 

10,481

 

55,125

 

18,794

 

Federal funds sold (Note 4)

 

84,349

 

50,403

 

228,205

 

113,876

 

Trading securities (Note 5)

 

22,134

 

548

 

44,479

 

762

 

Available-for-sale securities (Note 7)

 

3,081

 

2,625

 

9,008

 

7,323

 

Held-to-maturity securities (Note 8)

 

127,500

 

99,233

 

359,731

 

277,484

 

Mortgage loans held-for-portfolio (Note 10)

 

24,305

 

23,841

 

72,931

 

70,098

 

Loans to other FHLBanks (Note 20)

 

86

 

6

 

99

 

26

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

964,877

 

616,115

 

2,623,811

 

1,595,499

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds (Note 12)

 

492,448

 

301,131

 

1,308,708

 

746,547

 

Consolidated obligation discount notes (Note 12)

 

256,029

 

128,117

 

688,785

 

306,871

 

Deposits (Note 11)

 

5,032

 

5,944

 

12,980

 

10,831

 

Mandatorily redeemable capital stock (Note 14)

 

221

 

312

 

847

 

955

 

Cash collateral held and other borrowings

 

430

 

72

 

1,050

 

193

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

754,160

 

435,576

 

2,012,370

 

1,065,397

 

 

 

 

 

 

 

 

 

 

 

Net interest income before provision for credit losses

 

210,717

 

180,539

 

611,441

 

530,102

 

 

 

 

 

 

 

 

 

 

 

Provision (Reversal) for credit losses on mortgage loans

 

(95

)

(183

)

(403

)

(284

)

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for credit losses

 

210,812

 

180,722

 

611,844

 

530,386

 

 

 

 

 

 

 

 

 

 

 

Other income (loss)

 

 

 

 

 

 

 

 

 

Service fees and other

 

4,195

 

3,368

 

11,889

 

10,731

 

Instruments held at fair value - Unrealized gains (losses) (Note 18)

 

535

 

(1,476

)

173

 

(3,338

)

 

 

 

 

 

 

 

 

 

 

Total OTTI losses

 

 

 

(398

)

 

Net amount of impairment losses reclassified to (from) Accumulated other comprehensive income (loss)

 

 

 

257

 

 

Net impairment losses recognized in earnings

 

 

 

(141

)

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gains (losses) on derivatives and hedging activities (Note 17)

 

(3,197

)

(1,241

)

(27,282

)

(1,359

)

Net gains (losses) on Trading securities

 

(2,275

)

41

 

(4,695

)

(23

)

Fair value gains (losses) on Equity Investments (Note 6)

 

1,248

 

 

1,293

 

 

Provision for litigation settlement on derivative contracts

 

 

 

 

(70,000

)

 

 

 

 

 

 

 

 

 

 

Total other income (loss)

 

506

 

692

 

(18,763

)

(63,989

)

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

Operating

 

11,938

 

10,603

 

33,288

 

29,779

 

Compensation and benefits

 

18,639

 

17,673

 

54,896

 

51,662

 

Finance Agency and Office of Finance

 

4,034

 

3,495

 

11,934

 

10,472

 

Other expenses

 

2,891

 

1,006

 

6,412

 

3,022

 

Total other expenses

 

37,502

 

32,777

 

106,530

 

94,935

 

 

 

 

 

 

 

 

 

 

 

Income before assessments

 

173,816

 

148,637

 

486,551

 

371,462

 

 

 

 

 

 

 

 

 

 

 

Affordable Housing Program Assessments (Note 13)

 

17,404

 

14,895

 

48,740

 

37,242

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

156,412

 

$

133,742

 

$

437,811

 

$

334,220

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share (Note 15)

 

$

2.51

 

$

2.09

 

$

6.97

 

$

5.33

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per share

 

$

1.68

 

$

1.37

 

$

4.92

 

$

4.02

 

 

The accompanying notes are an integral part of these financial statements.

 

4


Table of Contents

 

Federal Home Loan Bank of New York

Statements of Comprehensive Income — Unaudited (In Thousands)

For the Three and Nine Months Ended September 30, 2018 and 2017

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

156,412

 

$

133,742

 

$

437,811

 

$

334,220

 

Other Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Net change in unrealized gains (losses) on available-for-sale securities

 

(131

)

1,006

 

(345

)

5,886

 

Net change in non-credit portion of other-than-temporary impairment losses on held-to-maturity securities

 

 

 

 

 

 

 

 

 

Non-credit portion of other-than-temporary impairment gains (losses)

 

 

 

(257

)

 

Accretion of non-credit portion of OTTI

 

823

 

1,250

 

3,162

 

8,388

 

Total net change in non-credit portion of other-than-temporary impairment losses on held-to-maturity securities

 

823

 

1,250

 

2,905

 

8,388

 

Net change in unrealized gains (losses) relating to hedging activities

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

25,119

 

5,381

 

103,014

 

1,681

 

Reclassification of (gains) losses included in net income

 

(64

)

301

 

(97

)

904

 

Total net change in unrealized gains (losses) relating to hedging activities

 

25,055

 

5,682

 

102,917

 

2,585

 

Net change in pension and postretirement benefits

 

637

 

340

 

1,953

 

1,020

 

Total other comprehensive income (loss)

 

26,384

 

8,278

 

107,430

 

17,879

 

Total comprehensive income (loss)

 

$

182,796

 

$

142,020

 

$

545,241

 

$

352,099

 

 

The accompanying notes are an integral part of these financial statements.

 

5


Table of Contents

 

Federal Home Loan Bank of New York

Statements of Capital — Unaudited (In Thousands, Except Per Share Data)

For the Nine Months Ended September 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Capital Stock (a)

 

 

 

 

 

 

 

Other

 

 

 

 

 

Class B

 

Retained Earnings

 

Comprehensive

 

Total

 

 

 

Shares

 

Par Value

 

Unrestricted

 

Restricted

 

Total

 

Income (Loss)

 

Capital

 

Balance, December 31, 2016

 

63,077

 

$

6,307,766

 

$

1,028,674

 

$

383,291

 

$

1,411,965

 

$

(95,650

)

$

7,624,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of capital stock

 

42,641

 

4,264,125

 

 

 

 

 

4,264,125

 

Repurchase/redemption of capital stock

 

(42,507

)

(4,250,762

)

 

 

 

 

(4,250,762

)

Shares reclassified to mandatorily redeemable capital stock

 

(30

)

(3,009

)

 

 

 

 

(3,009

)

Cash dividends ($4.02 per share) on capital stock

 

 

 

(248,456

)

 

(248,456

)

 

(248,456

)

Comprehensive income

 

 

 

267,375

 

66,845

 

334,220

 

17,879

 

352,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

63,181

 

$

6,318,120

 

$

1,047,593

 

$

450,136

 

$

1,497,729

 

$

(77,771

)

$

7,738,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

67,500

 

$

6,750,005

 

$

1,067,097

 

$

479,185

 

$

1,546,282

 

$

(55,249

)

$

8,241,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to opening balances (b)

 

 

 

4,924

 

 

4,924

 

(4,924

)

 

Proceeds from issuance of capital stock

 

58,012

 

5,801,206

 

 

 

 

 

5,801,206

 

Repurchase/redemption of capital stock

 

(66,929

)

(6,692,956

)

 

 

 

 

(6,692,956

)

Shares reclassified to mandatorily redeemable capital stock

 

(23

)

(2,252

)

 

 

 

 

(2,252

)

Cash dividends ($4.92 per share) on capital stock

 

 

 

(310,444

)

 

(310,444

)

 

(310,444

)

Comprehensive income

 

 

 

350,248

 

87,563

 

437,811

 

107,430

 

545,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

58,560

 

$

5,856,003

 

$

1,111,825

 

$

566,748

 

$

1,678,573

 

$

47,257

 

$

7,581,833

 

 


(a)   Putable stock

(b)   Cumulative catch-up adjustment upon adoption of ASU 2016-01 relating to change in the designation of funds in the grantor trusts from AFS to Equity Investments.

 

The accompanying notes are an integral part of these financial statements.

 

6


Table of Contents

 

Federal Home Loan Bank of New York

Statements of Cash Flows — Unaudited (In Thousands)

For the Nine Months Ended September 30, 2018 and 2017

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

437,811

 

$

334,220

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

Net premiums and discounts on consolidated obligations, investments, mortgage loans and other adjustments

 

109,892

 

(48,476

)

Concessions on consolidated obligations

 

1,971

 

3,195

 

Premises, software, and equipment

 

3,819

 

3,216

 

Provision (Reversal) for credit losses on mortgage loans

 

(403

)

(284

)

Credit impairment losses on held-to-maturity securities

 

141

 

 

Change in net fair value adjustments on derivatives and hedging activities

 

156,255

 

26,881

 

Net realized and unrealized (gains) losses on trading securities

 

4,695

 

23

 

Change in fair value on Equity Investments

 

(1,293

)

 

Change in fair value adjustments on financial instruments held at fair value

 

(173

)

3,402

 

Net change in:

 

 

 

 

 

Accrued interest receivable

 

(62,873

)

(52,969

)

Derivative assets due to accrued interest

 

(105,548

)

(22,298

)

Derivative liabilities due to accrued interest

 

88,224

 

44,962

 

Other assets

 

2,005

 

1,645

 

Affordable Housing Program liability

 

28,847

 

1,314

 

Accrued interest payable

 

46,809

 

27,597

 

Other liabilities

 

10,725

 

19,504

 

Total adjustments

 

283,093

 

7,712

 

Net cash provided by (used in) operating activities

 

720,904

 

341,932

 

Investing activities

 

 

 

 

 

Net change in:

 

 

 

 

 

Interest-bearing deposits

 

(11,260

)

220,331

 

Securities purchased under agreements to resell

 

(2,170,000

)

5,100,000

 

Federal funds sold

 

(4,034,000

)

(4,447,000

)

Deposits with other FHLBanks

 

171

 

(76

)

Premises, software, and equipment

 

(19,383

)

(19,296

)

Trading securities:

 

 

 

 

 

Net (increase) decrease in short-term

 

 

(239,394

)

Purchased (a)

 

(3,590,102

)

 

Repayments

 

255,149

 

 

Proceeds from sales

 

349,383

 

100,164

 

Equity Investments (b):

 

 

 

 

 

Purchased

 

(2,834

)

 

Proceeds from sales

 

1,342

 

 

Available-for-sale securities (b):

 

 

 

 

 

Purchased

 

 

(1,953

)

Repayments

 

84,263

 

101,629

 

Proceeds from sales

 

 

1,299

 

Held-to-maturity securities (c):

 

 

 

 

 

Long-term securities

 

 

 

 

 

Purchased

 

(2,674,589

)

(3,490,736

)

Repayments

 

2,629,997

 

1,775,664

 

Advances:

 

 

 

 

 

Principal collected

 

815,377,695

 

847,902,379

 

Made

 

(793,461,042

)

(851,796,175

)

Mortgage loans held-for-portfolio:

 

 

 

 

 

Principal collected

 

200,847

 

199,508

 

Purchased

 

(219,045

)

(338,666

)

Proceeds from sales of REO

 

1,666

 

3,728

 

Net change in loans to other FHLBanks

 

 

255,000

 

Net cash provided by (used in) investing activities

 

12,718,258

 

(4,673,594

)

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Statements of Cash Flows — Unaudited (In Thousands)

For the Nine Months Ended September 30, 2018 and 2017

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

Financing activities

 

 

 

 

 

Net change in:

 

 

 

 

 

Deposits and other borrowings

 

$

(195,541

)

$

193,601

 

Derivative contracts with financing element

 

(6,185

)

(14,903

)

Consolidated obligation bonds:

 

 

 

 

 

Proceeds from issuance

 

82,507,414

 

69,736,567

 

Payments for maturing and early retirement

 

(95,740,677

)

(53,619,642

)

Consolidated obligation discount notes:

 

 

 

 

 

Proceeds from issuance

 

928,411,518

 

850,323,038

 

Payments for maturing

 

(927,238,362

)

(861,973,327

)

Capital stock:

 

 

 

 

 

Proceeds from issuance of capital stock

 

5,801,206

 

4,264,125

 

Payments for repurchase/redemption of capital stock

 

(6,692,956

)

(4,250,762

)

Redemption of mandatorily redeemable capital stock

 

(15,533

)

(14,102

)

Cash dividends paid (d)

 

(310,444

)

(248,456

)

Net cash provided by (used in) financing activities

 

(13,479,560

)

4,396,139

 

Net increase (decrease) in cash and due from banks

 

(40,398

)

64,477

 

Cash and due from banks at beginning of the period (e)

 

127,403

 

151,769

 

Cash and due from banks at end of the period (e)

 

$

87,005

 

$

216,246

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

 

$

1,221,313

 

$

729,739

 

Interest paid for Discount Notes (f)

 

$

634,869

 

$

281,632

 

Affordable Housing Program payments (g)

 

$

19,893

 

$

35,928

 

Transfers of mortgage loans to real estate owned

 

$

659

 

$

759

 

Net amount of impairment losses reclassified to (from) Accumulated other comprehensive income (loss)

 

$

257

 

$

 

Capital stock subject to mandatory redemption reclassified from equity

 

$

2,252

 

$

3,009

 

 


Notes to Supplemental Disclosure:

 

The following non-cash transactions were not included in the Statements of Cash Flows in the nine months ended September 30, 2018:

 

(a)              Ambac corporate notes at fair values of $3.6 million were received as non-cash considerations on mortgage-backed securities insured by the Ambac Corporation.  The notes were designated as Trading Securities.

(b)              Equity Investments at fair values of $48.6 million were recorded at January 1, 2018 as a non-cash transfer from the available-for-sale category to Equity Investments upon adoption of ASU 2016-01.  The ASU requires certain equity investments to be measured at fair value through earnings, thus eliminating eligibility for the available-for-sale category.  Upon implementation of the ASU, a $4.9 million cumulative catch-up adjustment, representing net valuation gain at December 31, 2017, was reclassified from AOCI to retained earnings at January 1, 2018.

(c)               Non-cash $0.4 million principal pay-down on a held-to-maturity MBS; non-cash reduction of $3.3 million to the amortized cost basis of certain insured MBS.  The non-cash amounts were also part of the considerations received from Ambac Corporation.

 

Other Notes

 

(d)              Does not include payments to holders of mandatorily redeemable capital stock.  Such payments are considered as interest expense and reported within operating cash flows.

(e)               Cash and due from banks did not include any restricted cash or cash equivalents.  Includes pass-thru reserves at the Federal Reserve Bank of New York.  See Note 3. Cash and Due from Banks for further information.

(f)                 Interest paid disclosures have been supplemented for the nine months ended September 30, 2018 and 2017 under the disclosure guidance provided by ASU 2016-15 Statements of Cash flows (Topic 230), “Classification of Certain Cash Receipts and Cash Payments”, which the FHLBNY adopted on January 1, 2018: the line item is the portion of the cash payments at settlement of zero-coupon Consolidated obligation discount notes.

(g)              AHP payments = (beginning accrual - ending accrual) + AHP assessment for the period; payments represent funds released to the Affordable Housing Program.

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Background

 

The Federal Home Loan Bank of New York (“FHLBNY” or “the Bank”) is a federally chartered corporation, and is one of 11 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 FHLBNY’s defined geographic district is New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands.

 

Tax Status.  The FHLBanks, including the FHLBNY, are exempt from ordinary federal, state, and local taxation except for real property taxes.

 

Assessments.  Affordable Housing Program (“AHP”) Assessments — Each FHLBank, including the FHLBNY, 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 11 FHLBanks must allocate the greater of $100 million or 10% of their regulatory defined net income for the Affordable Housing Program.

 

Note 1.                                                         Significant Accounting Policies and Estimates.

 

Basis of Presentation

 

The accompanying financial statements of the Federal Home Loan Bank of New York have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”) and with the instructions provided by the Securities and Exchange Commission (“SEC”).

 

Significant Accounting Policies and Estimates

 

The FHLBNY has identified certain accounting policies that it believes are significant because they require management to make subjective judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or by using different assumptions.  These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios, evaluating the impairment of the FHLBNY’s securities portfolios, and estimating fair values of certain assets and liabilities.  Other than the recently adopted policies as discussed below, there have been no significant changes to accounting policies from those identified in Note 1. Significant Accounting Policies and Estimates in Notes to the Financial Statements in the Bank’s most recent Form 10-K filed on March 22, 2018, which contains a summary of the Bank’s significant accounting policies and estimates.

 

Recently Adopted Significant Accounting Policies:

 

Recognition and Measurement of Financial Assets and Financial Liabilities.  In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, as an amendment to Financial Instruments — Overall (Subtopic 825-10).  The amendments provide guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.

 

This ASU requires entities to present separately in OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  To evaluate this provision, we have analyzed the FHLBank issued Consolidated obligation debt (“CO debt”), for which the fair value option has been elected, and have estimated the instrument-specific credit risk of CO debt as de minimis, if any, and accordingly no cumulative catch-up reclassification was necessary upon adoption at January 1, 2018.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The ASU also requires certain equity investments to be measured at fair value with changes in fair value recognized in net income, thus eliminating eligibility for the current available-for-sale category.  Our analysis of this provision in the ASU identified certain mutual fund assets in grantor trusts that were designated as available-for-sale and subject to this provision of the ASU.  The adoption of the guidance on January 1, 2018, resulted in an immaterial cumulative catch-up reclassification of the fair values of the trust assets from AOCI to retained earnings.  Prior period financial statements were not required to be restated under the transition provisions of this ASU.

 

Revenue Recognition.  In May 2014, the FASB issued ASU No. 2014-09, (Topic 606): Revenue from Contracts with Customers.  The FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that would remove inconsistencies and improve comparability of revenue recognition practices across entities and industries, and provide more useful information to users of financial statements through improved disclosure requirements.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance provides entities with the option of using either of the following adoption methods: a full retrospective method, retrospectively to each prior reporting period presented; or a modified retrospective method, retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application.  The FHLBNY elected to use the modified retrospective method to adopt the guidance as of January 1, 2018.

 

Our net income is derived principally from net interest income on financial assets and liabilities, which is explicitly excluded from the scope of this guidance.  Certain other streams of non-interest revenues, which relate to fee revenues from commitments and financial letters of credit, were evaluated and we have concluded that such fees and associated expenses are out of scope of the standard and therefore will not be impacted by the adoption of this guidance.  We have also analyzed the recognition of gains and losses when mortgage loans are foreclosed and transferred to real estate owned status (“OREO”), and have concluded that while such line items are in-scope of the standard, adoption resulted in an immaterial impact on our financial condition, results of operations, and cash flows.

 

For information on policies adopted in 2017, see Recently Adopted Significant Accounting Policies in Note 1 in the Bank’s most recent Form 10-K filed on March 22, 2018.

 

Note 2.                                                         Recently Issued Accounting Standards and Interpretations, Not Yet Adopted:

 

Derivatives and Hedging.  In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815).  The FASB has issued this ASU with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements.  In addition to that main objective, the amendments in this ASU make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP.   The new guidance requires that we report the entire hedging effects of the hedging instruments in the same income statement line item as the hedged item.  While this is a change in presentation from the legacy standards, the impact for the FHLBNY will not be material.

 

The amendments in this guidance are effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for the FHLBNY).  While early application is permitted in any interim period after issuance of the ASU, the FHLBNY has elected to not early adopt the guidances under the ASU.

 

We expect to realize operational benefits upon adoption, and potentially to also benefit from expanded hedging opportunities permitted under the ASU.  Other than changes in disclosures required under the ASU, the FHLBNY does not believe adoption will have a material effect on its financial condition, results of operations, and cash flows.

 

On October 25, 2018, the FASB issued ASU 2018-16, Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for hedge Accounting Purposes (Topic 815). The new ASU adds the OIS rate based on SOFR as a U.S. benchmark rate to facilitate the LIBOR to SOFR transition.  The amendments in the ASU will be effective concurrently with the adoption of ASU 2017-12, which for the FHLBNY will be January 1, 2019.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Accounting for Financial Instruments Credit Losses.  In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326)The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.  The FASB’s CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired.  The expected credit losses are adjusted each period for changes in expected lifetime credit losses.  For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk.  This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized.  We have concluded our preliminary assessment of the impact of CECL on all our business lines, including advances, investments and other financial assets.  While the CECL model represents a significant departure from existing GAAP, based on our preliminary assessments, we do not expect adoption will have a material impact on our financial condition, results of operations, and cash flows.  This guidance is effective for interim and annual periods beginning on January 1, 2020.  Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018 (January 1, 2019 for the FHLBNY).  The FHLBNY does not intend to early adopt the ASU.

 

Lease Accounting.  In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability of accounting for lease transactions.  The ASU will require lessees to recognize all leases on the balance sheet as lease assets and lease liabilities and will require both quantitative and qualitative disclosures regarding key information about leasing arrangements.  The FHLBNY will adopt the guidance on its effective date of January 1, 2019.  Beginning January 1, 2019, all leases will be recognized on our balance sheet under ASU No. 2016-02 Leases (Topic 842).  The leasing standard is required to be applied to leases in existence as of the date of adoption, January 1, 2019, and under recent amendments to the ASU, entities may elect not to restate comparative periods.  We are developing methodologies to estimate the right-of-use assets and lease liabilities, which is based on present values of lease payments, and expect to recognize lease liabilities and corresponding right-of-use assets (at their present value) related to predominantly all of the $108 million of future minimum payments required under operating leases as disclosed in Note 19. Commitments and Contingencies.  We do not expect material changes to the recognition of operating lease expense in the FHLBNY’s Statements of income.

 

Note 3.                                                         Cash and Due from Banks.

 

Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Banks are included in Cash and due from banks.  The FHLBNY is exempted from maintaining any required clearing balance at the Federal Reserve Bank of New York.

 

Compensating Balances

 

The FHLBNY has arrangements with Citibank to maintain compensating collected cash balances in return for certain fee based safekeeping and back office operational services that the counterparty provides to the FHLBNY.  There are no restrictions on the withdrawal of funds.  There were no compensating balance at September 30, 2018 and at December 31, 2017, the compensating balance at Citibank included in Cash and due from banks was $41.1 million.

 

Pass-through Deposit Reserves

 

The FHLBNY acts as a pass-through correspondent for member institutions who are required by banking regulations to deposit reserves with the Federal Reserve Banks.  Pass-through reserves deposited with Federal Reserve Banks on behalf of the members by the FHLBNY were $83.2 million at September 30, 2018 and $84.2 million at December 31, 2017.  The liabilities offsetting the pass-through reserves were due to member institutions and were recorded in Other liabilities in the Statements of Condition.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 4.                                                         Federal Funds Sold and Securities Purchased Under Agreements to Resell.

 

Federal funds sold — Federal funds sold are unsecured advances to third parties.

 

Securities purchased under agreements to resell — As part of the FHLBNY’s banking activities, the FHLBNY may enter into secured financing transactions that mature overnight, and can be extended only at the discretion of the FHLBNY.  These transactions involve the lending of cash, against which marketable securities are taken as collateral.  The amount of cash loaned against the collateral is a function of the liquidity and quality of the collateral.  The collateral is typically in the form of securities that meet the FHLBNY’s credit quality standards, are highly-rated and readily marketable.  The FHLBNY has the ability to call for additional collateral if the value of the securities falls below a pre-defined haircut.  The FHLBNY can terminate the transaction and liquidate the collateral if the counterparty fails to post the additional margin.  Agreements generally allow the FHLBNY to repledge securities under certain conditions.  No adjustments for instrument-specific credit risk were deemed necessary as market values of collateral were in excess of principal amounts loaned.

 

At September 30, 2018 and December 31, 2017, the outstanding balances of Securities purchased under agreements to resell were $4.9 billion and $2.7 billion that matured overnight, and were executed through a tri-party arrangement that involved transfer of overnight funds to a segregated safekeeping account at the Bank of New York (“BONY”); BONY, acting as an independent agent on behalf of the FHLBNY and the counterparty to the transactions, assumes the responsibility of receiving eligible securities as collateral and releasing funds to the counterparty.  U.S. Treasury securities, market values $5.0 billion and $2.8 billion, were received at BONY to collateralize the overnight investments at September 30, 2018 and December 31, 2017.  No overnight investments had been executed bilaterally with counterparties.  Securities purchased under agreements to resell averaged $5.1 billion and $4.1 billion in the three and nine months ended September 30, 2018.  For the same periods in the prior year, transaction balances averaged $3.9 billion and $2.9 billion.  For the three and nine months ended September 30, 2018, interest income from securities purchased under agreements to resell were $25.3 million and $55.1 million, compared to interest income of $10.5 million and $18.8 million for the same periods in the prior year.

 

Transactions recorded as Securities purchased under agreements to resell (reverse repos) were accounted as collateralized financing transactions.

 

Note 5.                                                         Trading Securities.

 

The carrying value of a trading security equals its fair value.  The following table provides major security types at September 30, 2018 and December 31, 2017 (in thousands):

 

Fair value

 

September 30, 2018

 

December 31, 2017

 

GSE securities

 

$

761,454

 

$

356,899

 

Corporate notes

 

3,511

 

 

U.S. Treasury notes

 

3,877,939

 

1,045,605

 

U.S. Treasury bills

 

 

239,064

 

Total Trading securities

 

$

4,642,904

 

$

1,641,568

 

 

The FHLBNY received Ambac corporate notes from the Ambac Corporation as consideration for insurance claims on certain Ambac insured private-label mortgage-backed securities owned by the FHLBNY.  The Ambac notes were designated as trading securities.

 

The carrying values of trading securities included net unrealized fair value losses of $5.3 million at September 30, 2018 and $1.1 million at December 31, 2017.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Trading Securities Pledged

 

The FHLBNY had pledged marketable securities at fair values of $239.4 million at September 30, 2018 and $239.1 million at December 31, 2017 to derivative clearing organizations to fulfill the FHLBNY’s initial margin requirements as mandated under margin rules of the Commodities Futures Trading Commission (“CFTC”).  The clearing organizations have rights to sell or repledge the collateral securities under certain conditions.

 

Redemption Terms

 

The remaining maturities and estimated fair values of investments classified as trading (a) were as follows (dollars in thousands):

 

 

 

September 30, 2018

 

 

 

Due in one year
or less

 

Due after one year
through five years

 

Total Fair Value

 

GSE securities

 

$

761,454

 

$

 

$

761,454

 

Corporate notes

 

 

3,511

 

3,511

 

U.S. Treasury notes

 

2,644,119

 

1,233,820

 

3,877,939

 

Total Trading securities

 

$

3,405,573

 

$

1,237,331

 

$

4,642,904

 

Yield on Trading securities

 

1.92

%

1.99

%

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Due in one year
or less

 

Due after one year
through five years

 

Total Fair Value

 

GSE securities

 

$

210,390

 

$

146,509

 

$

356,899

 

U.S. Treasury notes

 

1,045,605

 

 

1,045,605

 

U.S. Treasury bills

 

239,064

 

 

239,064

 

Total Trading securities

 

$

1,495,059

(b)

$

146,509

(b)

$

1,641,568

 

Yield on Trading securities

 

1.34

%

1.28

%

 

 

 


(a)         We have classified investments acquired for purposes of meeting short-term contingency and other liquidity needs as trading securities, which are carried at their fair values.  In accordance with Finance Agency guidance, we do not participate in speculative trading practices.

(b)         Total amounts for the redemption categories were revised for mathematical error.  It was not necessary to revise any other data.

 

Note 6.                                                               Equity Investments.

 

The carrying value of Equity Investments equals fair value.  The following table provides types of funds in the grantor trusts owned by the FHLBNY (in thousands):

 

 

 

September 30, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains (b)

 

Losses (b)

 

Value (c)

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

986

 

$

 

$

 

$

986

 

Equity funds

 

26,321

 

7,041

 

(89

)

33,273

 

Fixed income funds

 

18,626

 

4

 

(739

)

17,891

 

Total Equity Investments (a)

 

$

45,933

 

$

7,045

 

$

(828

)

$

52,150

 

 


(a)        ASU 2016- 01 was adopted on January 1, 2018 and the FHLBNY made a non-cash transfer of grantor trusts to the Equity Investments category.  Prior to January 1, 2018 these investments were classified as available-for-sale.  The intent of the grantor trusts is to set aside cash to meet current and future payments for supplemental unfunded pension plans.  Neither the pension plans nor employees of the FHLBNY own the trust.

(b)       Changes in unrealized gains and losses are recorded through earnings, specifically in Other income in the Statements of Income.

(c)        The grantor trusts invest in money market, equity and fixed income and bond funds.  Daily net asset values (NAVs) are readily available and investments are redeemable at short notice.  NAVs are the fair values of the funds in the grantor trusts.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The portion of unrealized gains and losses for the period related to Equity Investments still held was calculated as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2018

 

September 30, 2018

 

Net gains (losses) recognized during the period

 

$

1,248

 

$

1,293

 

Less: Net gains (losses) recognized during the period on equity investments sold during the period

 

 

 

Unrealized gains (losses) recognized during the reporting period on equity investments still held at the reporting date

 

$

1,248

 

$

1,293

 

 

Note 7.                                                               Available-for-Sale Securities.

 

The carrying value of an AFS security equals its fair value.  At September 30, 2018 and December 31, 2017, no AFS security was other-than-temporarily impaired.  The following tables provide major security types (in thousands):

 

 

 

September 30, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains (b)

 

Losses (b)

 

Value

 

GSE and U.S. Obligations

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

CMO-Floating

 

$

421,047

 

$

4,875

 

$

(7

)

$

425,915

 

CMBS-Floating

 

18,337

 

41

 

 

18,378

 

Total Available-for-sale securities

 

$

439,384

 

$

4,916

 

$

(7

)

$

444,293

 

 

 

 

December 31, 2017

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains (b)

 

Losses (b)

 

Value

 

Cash equivalents (a)

 

$

893

 

$

 

$

 

$

893

 

Equity funds (a)

 

24,869

 

5,126

 

(3

)

29,992

 

Fixed income funds (a)

 

17,957

 

43

 

(243

)

17,757

 

GSE and U.S. Obligations

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

CMO-Floating

 

490,249

 

5,163

 

 

495,412

 

CMBS-Floating

 

33,123

 

92

 

 

33,215

 

Total Available-for-sale securities

 

$

567,091

 

$

10,424

 

$

(246

)

$

577,269

 

 


(a)         At December 31, 2017, funds in the FHLBNY’s grantor trusts were designated as available-for-sale.  Upon adoption of ASU 2016-01, the funds were designated as Equity Investments.  For more information, see Note 6.  Equity Investments.

(b)         Recorded in AOCI — Net unrealized fair value gains were $4.9 million at September 30, 2018 and $10.2 million at December 31, 2017.

 

Impairment Analysis of AFS Securities

 

The FHLBNY’s portfolio of MBS classified as AFS is comprised of GSE-issued collateralized mortgage obligations and floating rate CMBS, and U.S. Agency issued MBS.  The FHLBNY evaluates its GSE-issued securities by considering the creditworthiness and performance of the debt securities and the strength of the government-sponsored enterprises’ guarantees of the securities.  Fair values of substantially all mortgage-backed securities in the AFS portfolio were in excess of their amortized costs at September 30, 2018.  No security was in a loss position for 12 months or longer in the nine months ended September 30, 2018.  Based on the analysis, GSE-issued securities are performing in accordance with their contractual agreements.  The FHLBNY believes that it will recover its investments in GSE-issued securities given the current levels of collateral, credit enhancements and guarantees that exist to protect the investments.

 

14


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The following table summarize available-for-sale securities with estimated fair values below their amortized cost basis (in thousands):

 

 

 

September 30, 2018

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

MBS Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS-GSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae-CMOs

 

$

2,905

 

$

(7

)

$

 

$

 

$

2,905

 

$

(7

)

 

Redemption Terms

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.  The amortized cost and estimated fair value (a) of investments classified as AFS, by contractual maturity, were as follows (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amortized Cost (c)

 

Fair Value

 

Amortized Cost (c)

 

Fair Value

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

Due after one year through five years

 

$

18,337

 

$

18,378

 

$

33,123

 

$

33,215

 

Due after ten years

 

421,047

 

425,915

 

490,249

 

495,412

 

Fixed income/bond funds, equity funds and cash equivalents (b)

 

 

 

43,719

 

48,642

 

 

 

 

 

 

 

 

 

 

 

Total Available-for-sale securities

 

$

439,384

 

$

444,293

 

$

567,091

 

$

577,269

 

 


(a)         The carrying value of AFS securities equals fair value.

(b)         Funds in the grantor trusts are determined to be redeemable at short notice.  Fair values are the daily NAVs of the bond and equity funds.  See Note 6. Equity Investments for more information.

(c)          Amortized cost is after adjusting for net unamortized discounts of $1.6 million and $1.9 million at September 30, 2018 and December 31, 2017.

 

Interest Rate Payment Terms

 

The following table summarizes interest rate payment terms of investments in mortgage-backed securities classified as AFS securities (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

CMO floating - LIBOR

 

$

421,047

 

$

425,915

 

$

490,249

 

$

495,412

 

CMBS floating - LIBOR

 

18,337

 

18,378

 

33,123

 

33,215

 

 

 

 

 

 

 

 

 

 

 

Total Mortgage-backed securities (a)

 

$

439,384

 

$

444,293

 

$

523,372

 

$

528,627

 

 


(a)         Total will not agree to total AFS portfolio at December 31, 2017 because the grantor trusts, which primarily comprise of mutual funds, have been excluded.

 

15


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 8.                                                               Held-to-Maturity Securities.

 

Major Security Types (in thousands)

 

 

 

September 30, 2018

 

 

 

 

 

OTTI

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Recognized

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

Issued, guaranteed or insured:

 

Cost (d)

 

in AOCI

 

Value

 

Holding Gains (a)

 

Holding Losses (a)

 

Value

 

Pools of Mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

79,360

 

$

 

$

79,360

 

$

4,979

 

$

 

$

84,339

 

Freddie Mac

 

14,668

 

 

14,668

 

992

 

 

15,660

 

Total pools of mortgages

 

94,028

 

 

94,028

 

5,971

 

 

99,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

1,832,685

 

 

1,832,685

 

7,154

 

(11,545

)

1,828,294

 

Freddie Mac

 

1,126,898

 

 

1,126,898

 

6,447

 

(3,651

)

1,129,694

 

Ginnie Mae

 

12,245

 

 

12,245

 

197

 

 

12,442

 

Total CMOs/REMICs

 

2,971,828

 

 

2,971,828

 

13,798

 

(15,196

)

2,970,430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage-Backed Securities (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

2,692,396

 

 

2,692,396

 

1,417

 

(65,407

)

2,628,406

 

Freddie Mac

 

10,766,781

 

 

10,766,781

 

24,829

 

(115,101

)

10,676,509

 

Total commercial mortgage-backed securities

 

13,459,177

 

 

13,459,177

 

26,246

 

(180,508

)

13,304,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GSE MBS (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

CMOs/REMICs

 

6,585

 

(396

)

6,189

 

75

 

(27

)

6,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-Backed Securities (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufactured housing (insured)

 

38,254

 

 

38,254

 

1,550

 

 

39,804

 

Home equity loans (insured)

 

74,461

 

(6,695

)

67,766

 

27,219

 

(40

)

94,945

 

Home equity loans (uninsured)

 

44,590

 

(4,807

)

39,783

 

6,516

 

(420

)

45,879

 

Total asset-backed securities

 

157,305

 

(11,502

)

145,803

 

35,285

 

(460

)

180,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total MBS

 

16,688,923

 

(11,898

)

16,677,025

 

81,375

 

(196,191

)

16,562,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local housing finance agency obligations

 

1,182,190

 

 

1,182,190

 

280

 

(25,903

)

1,156,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Held-to-maturity securities

 

$

17,871,113

 

$

(11,898

)

$

17,859,215

 

$

81,655

 

$

(222,094

)

$

17,718,776

 

 

16


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

 

 

December 31, 2017

 

 

 

 

 

OTTI

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Recognized

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

Issued, guaranteed or insured:

 

Cost (d)

 

in AOCI

 

Value

 

Holding Gains (a)

 

Holding Losses (a)

 

Value

 

Pools of Mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

97,579

 

$

 

$

97,579

 

$

7,978

 

$

 

$

105,557

 

Freddie Mac

 

20,160

 

 

20,160

 

1,512

 

 

21,672

 

Total pools of mortgages

 

117,739

 

 

117,739

 

9,490

 

 

127,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

1,612,543

 

 

1,612,543

 

10,716

 

(662

)

1,622,597

 

Freddie Mac

 

960,374

 

 

960,374

 

7,485

 

(404

)

967,455

 

Ginnie Mae

 

14,513

 

 

14,513

 

175

 

 

14,688

 

Total CMOs/REMICs

 

2,587,430

 

 

2,587,430

 

18,376

 

(1,066

)

2,604,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage-Backed Securities (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

2,955,640

 

 

2,955,640

 

8,497

 

(15,639

)

2,948,498

 

Freddie Mac

 

10,834,852

 

 

10,834,852

 

76,196

 

(16,272

)

10,894,776

 

Total commercial mortgage-backed securities

 

13,790,492

 

 

13,790,492

 

84,693

 

(31,911

)

13,843,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GSE MBS (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

CMOs/REMICs

 

9,159

 

(172

)

8,987

 

85

 

(385

)

8,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-Backed Securities (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufactured housing (insured)

 

47,660

 

 

47,660

 

2,439

 

(40

)

50,059

 

Home equity loans (insured)

 

86,606

 

(8,746

)

77,860

 

26,479

 

(21

)

104,318

 

Home equity loans (uninsured)

 

52,740

 

(5,885

)

46,855

 

7,847

 

(973

)

53,729

 

Total asset-backed securities

 

187,006

 

(14,631

)

172,375

 

36,765

 

(1,034

)

208,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total MBS

 

16,691,826

 

(14,803

)

16,677,023

 

149,409

 

(34,396

)

16,792,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local housing finance agency obligations

 

1,147,510

 

 

1,147,510

 

204

 

(32,977

)

1,114,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Held-to-maturity securities

 

$

17,839,336

 

$

(14,803

)

$

17,824,533

 

$

149,613

 

$

(67,373

)

$

17,906,773

 

 


(a)         Unrecognized gross holding gains and losses represent the difference between fair value and carrying value.

(b)         Commercial mortgage-backed securities (“CMBS”) are Agency issued securities, collateralized by income-producing “multifamily properties”.  Eligible property types include standard conventional multifamily apartments, affordable multifamily housing, seniors housing, student housing, military housing, and rural rent housing.

(c)          The amounts represent non-agency private-label mortgage- and asset-backed securities.

(d)         Amortized cost — For securities that were deemed to be OTTI, amortized cost represents unamortized cost less credit OTTI, net of credit OTTI reversed due to improvements in cash flows.

 

Certain non-Agency Private-label MBS are insured by Ambac Assurance Corp (“Ambac”), MBIA Insurance Corp (“MBIA”) and Assured Guarantee Municipal Corp., (“AGM”).  Assumptions on the extent of expected reliance by the FHLBNY on insurance support by Ambac, AGM and MBIA to make whole expected cash shortfalls are noted under “Monoline insurance” within this Note 8.  Held-to-Maturity Securities.

 

Securities Pledged

 

The FHLBNY had pledged MBS, with an amortized cost basis of $4.8 million at September 30, 2018 and $5.7 million at December 31, 2017, to the FDIC in connection with deposits maintained by the FDIC at the FHLBNY.  The FDIC does not have rights to sell or repledge the collateral unless the FHLBNY defaults under the terms of its deposit arrangements with the FDIC.

 

17


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Unrealized Losses

 

The fair values and gross unrealized holding losses are aggregated by major security type and by the length of time the individual securities have been in a continuous unrealized loss position.  Unrealized losses represent the difference between fair value and amortized cost.  The baseline measure of an unrealized loss is amortized cost, which is not adjusted for non-credit OTTI.  Total unrealized losses in these tables will not equal unrecognized holding losses in the Major Security Types tables.  Unrealized losses are calculated after adjusting for credit OTTI.  In the previous tables, unrecognized holding losses are adjusted for credit and non-credit OTTI.

 

The following tables summarize held-to-maturity securities with estimated fair values below their amortized cost basis (in thousands):

 

 

 

September 30, 2018

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Non-MBS Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local housing finance agency obligations

 

$

276,556

 

$

(34

)

$

233,746

 

$

(25,869

)

$

510,302

 

$

(25,903

)

MBS Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS-GSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

2,307,159

 

(40,965

)

613,206

 

(35,987

)

2,920,365

 

(76,952

)

Freddie Mac

 

4,817,717

 

(85,857

)

1,047,334

 

(32,895

)

5,865,051

 

(118,752

)

Total MBS-GSE

 

7,124,876

 

(126,822

)

1,660,540

 

(68,882

)

8,785,416

 

(195,704

)

MBS-Private-Label

 

4,973

 

(2

)

27,479

 

(867

)

32,452

 

(869

)

Total MBS

 

7,129,849

 

(126,824

)

1,688,019

 

(69,749

)

8,817,868

 

(196,573

)

Total

 

$

7,406,405

 

$

(126,858

)

$

1,921,765

 

$

(95,618

)

$

9,328,170

 

$

(222,476

)

 

 

 

December 31, 2017

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Non-MBS Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local housing finance agency obligations

 

$

191,872

 

$

(73

)

$

343,791

 

$

(32,904

)

$

535,663

 

$

(32,977

)

MBS Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS-GSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

1,181,936

 

(7,047

)

331,845

 

(9,254

)

1,513,781

 

(16,301

)

Freddie Mac

 

2,051,154

 

(8,968

)

781,211

 

(7,708

)

2,832,365

 

(16,676

)

Total MBS-GSE

 

3,233,090

 

(16,015

)

1,113,056

 

(16,962

)

4,346,146

 

(32,977

)

MBS-Private-Label

 

10,674

 

(41

)

31,527

 

(1,545

)

42,201

 

(1,586

)

Total MBS

 

3,243,764

 

(16,056

)

1,144,583

 

(18,507

)

4,388,347

 

(34,563

)

Total

 

$

3,435,636

 

$

(16,129

)

$

1,488,374

 

$

(51,411

)

$

4,924,010

 

$

(67,540

)

 

The FHLBNY’s investments in housing finance agency bonds reported gross unrealized losses of $25.9 million at September 30, 2018 and $33.0 million at December 31, 2017.  Our analyses of the fair values of HFA bonds have concluded that the market is generally pricing the bonds to the “AA municipal sector”.  The bonds are performing to their contractual terms, and management has concluded that the gross unrealized losses on its housing finance agency bonds are temporary because the underlying collateral and credit enhancements are sufficient to protect the FHLBNY from losses based on current expectations.  The credit enhancements may include additional support from Monoline Insurance, Reserve and investment funds allocated to the securities that may be used to make principal and interest payments in the event that the underlying loans pledged for these securities are not sufficient to make the necessary payments, and the general obligation of the State issuing the bond.

 

18


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Redemption Terms

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment features.  The amortized cost and estimated fair value of held-to-maturity securities, arranged by contractual maturity, were as follows (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

 

 

Cost (a)

 

Fair Value

 

Cost (a)

 

Fair Value

 

State and local housing finance agency obligations

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

5,700

 

$

5,700

 

$

11,400

 

$

11,388

 

Due after one year through five years

 

22,515

 

22,377

 

5,785

 

5,855

 

Due after five years through ten years

 

27,835

 

26,745

 

47,830

 

45,602

 

Due after ten years

 

1,126,140

 

1,101,745

 

1,082,495

 

1,051,892

 

State and local housing finance agency obligations

 

1,182,190

 

1,156,567

 

1,147,510

 

1,114,737

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

523,793

 

522,049

 

880,774

 

880,780

 

Due after one year through five years

 

5,084,464

 

5,071,412

 

4,617,456

 

4,670,742

 

Due after five years through ten years

 

7,779,355

 

7,640,937

 

8,225,685

 

8,225,011

 

Due after ten years

 

3,301,311

 

3,327,811

 

2,967,911

 

3,015,503

 

Mortgage-backed securities

 

16,688,923

 

16,562,209

 

16,691,826

 

16,792,036

 

 

 

 

 

 

 

 

 

 

 

Total Held-to-maturity securities

 

$

17,871,113

 

$

17,718,776

 

$

17,839,336

 

$

17,906,773

 

 


(a)         Amortized cost is after adjusting for net unamortized premiums of $58.7 million and $51.8 million (net of unamortized discounts) at September 30, 2018 and December 31, 2017.

 

Interest Rate Payment Terms

 

The following table summarizes interest rate payment terms of securities classified as held-to-maturity (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amortized

 

Carrying

 

Amortized

 

Carrying

 

 

 

Cost

 

Value

 

Cost

 

Value

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

CMO

 

 

 

 

 

 

 

 

 

Fixed

 

$

725,171

 

$

724,775

 

$

880,842

 

$

880,671

 

Floating

 

2,252,165

 

2,252,165

 

1,714,068

 

1,714,068

 

Total CMO

 

2,977,336

 

2,976,940

 

2,594,910

 

2,594,739

 

CMBS

 

 

 

 

 

 

 

 

 

Fixed

 

7,854,128

 

7,854,128

 

7,310,487

 

7,310,487

 

Floating

 

5,605,049

 

5,605,049

 

6,480,005

 

6,480,005

 

Total CMBS

 

13,459,177

 

13,459,177

 

13,790,492

 

13,790,492

 

Pass Thru (a)

 

 

 

 

 

 

 

 

 

Fixed

 

217,978

 

206,476

 

262,569

 

248,499

 

Floating

 

34,432

 

34,432

 

43,855

 

43,293

 

Total Pass Thru

 

252,410

 

240,908

 

306,424

 

291,792

 

Total MBS

 

16,688,923

 

16,677,025

 

16,691,826

 

16,677,023

 

State and local housing finance agency obligations

 

 

 

 

 

 

 

 

 

Fixed

 

7,370

 

7,370

 

8,010

 

8,010

 

Floating

 

1,174,820

 

1,174,820

 

1,139,500

 

1,139,500

 

Total State and local housing finance agency obligations

 

1,182,190

 

1,182,190

 

1,147,510

 

1,147,510

 

Total Held-to-maturity securities

 

$

17,871,113

 

$

17,859,215

 

$

17,839,336

 

$

17,824,533

 

 


(a)         Includes MBS supported by pools of mortgages.

 

19


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Impairment Analysis (OTTI) of GSE-issued and Private Label Mortgage-backed Securities

 

The FHLBNY evaluates its individual securities issued by Fannie Mae, Freddie Mac and U.S. government agency, (collectively GSE-issued securities), by considering the creditworthiness and performance of the debt securities and the strength of the GSEs’ guarantees of the securities.  Based on analysis, GSE-issued securities are performing in accordance with their contractual agreements.  The FHLBNY believes that it will recover its investments in GSE- issued securities given the current levels of collateral, credit enhancements and guarantees that exist to protect the investments.  Management evaluates its investments in private-label MBS (“PLMBS”) for OTTI on a quarterly basis by performing cash flow tests on its entire portfolio of PLMBS.

 

OTTI — No mortgage-backed security was impaired in the third quarter of 2018.  Credit-related impairment (OTTI) of $141 thousand was recorded in the second quarter of 2018 and no impairment was recorded in the prior year period.  Based on cash flow testing, the Bank believes no additional material OTTI exists for the remaining investments at September 30, 2018.  The Bank’s conclusion is also based upon multiple factors, but not limited to the expected performance of the underlying collateral, and the evaluation of the fundamentals of the issuers’ financial condition.  Management has not made a decision to sell such securities at September 30, 2018, and has concluded that it will not be required to sell such securities before recovery of the amortized cost basis of the securities.

 

The following table provides rollforward information about the cumulative credit losses and other components of OTTI that will be recognized in future periods as recoveries (in thousands):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Beginning balance

 

$

19,295

 

$

25,817

 

$

22,731

 

$

29,117

 

Additional credit losses for which an OTTI charge was previously recognized

 

 

 

141

 

 

Realized credit losses

 

 

 

(49

)

(269

)

Increases in cash flows expected to be collected, recognized over the remaining life of the securities

 

(1,495

)

(602

)

(5,023

)

(3,633

)

Ending balance

 

$

17,800

 

$

25,215

 

$

17,800

 

$

25,215

 

 

Monoline insurance — Certain PLMBS owned by the FHLBNY are insured by third-party bond insurers (“monoline insurers”).  The bond insurance on these investments guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool.  The FHLBNY performs cash flow credit impairment tests on all of its PLMBS, and the analysis of the securities protected by such third-party insurance looks first to the performance of the underlying security, and considers its embedded credit enhancements in the form of excess spread, overcollateralization, and credit subordination, to determine the collectability of all amounts due.  If the embedded credit enhancement protections are deemed insufficient to make timely payment of all amounts due, then the FHLBNY considers the capacity of the third-party bond insurer to cover any shortfalls.  Certain monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures.  In estimating the insurers’ capacity to provide credit protection in the future to cover any shortfall in cash flows expected to be collected for securities deemed OTTI, the FHLBNY has developed a methodology to analyze and assess the ability of the monoline insurers to meet future insurance obligations.  Based on analysis performed, the FHLBNY has determined that for bond insurer Assured Guaranty Municipal (“AGM”), insurance guarantees can be relied upon to cover projected shortfalls.  For bond insurer MBIA, financial guarantee is at risk and no financial guarantees are assumed in 2018.  For bond insurer Ambac, our analysis has determined improvements in the insurer’s financial position, and we have expanded the reliance basis from 45% at December 31, 2017 to 100% for all periods through September 30, 2024.

 

20


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 9.                                                         Advances.

 

The FHLBNY offers to its members a wide range of fixed- and adjustable-rate advance loan products with different maturities, interest rates, payment characteristics, and optionality.

 

Redemption Terms

 

Contractual redemption terms and yields of advances were as follows (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

Weighted (a)

 

 

 

 

 

Weighted (a)

 

 

 

 

 

 

 

Average

 

Percentage

 

 

 

Average

 

Percentage

 

 

 

Amount

 

Yield

 

of Total

 

Amount

 

Yield

 

of Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overdrawn demand deposit accounts

 

$

920

 

3.13

%

%

$

 

%

%

Due in one year or less

 

63,243,466

 

2.31

 

62.75

 

85,291,491

 

1.62

 

69.51

 

Due after one year through two years

 

19,154,487

 

2.24

 

19.00

 

16,866,935

 

1.78

 

13.74

 

Due after two years through three years

 

6,205,493

 

2.19

 

6.16

 

9,513,504

 

1.97

 

7.75

 

Due after three years through four years

 

4,497,884

 

2.62

 

4.46

 

5,173,778

 

2.18

 

4.22

 

Due after four years through five years

 

1,441,074

 

2.78

 

1.43

 

2,757,648

 

2.42

 

2.25

 

Thereafter

 

6,247,464

 

2.50

 

6.20

 

3,104,085

 

2.27

 

2.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

100,790,788

 

2.32

%

100.00

%

122,707,441

 

1.72

%

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge valuation basis adjustments (b)

 

(624,828

)

 

 

 

 

(265,260

)

 

 

 

 

Fair value option valuation adjustments and accrued interest (c)

 

 

 

 

 

 

5,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

100,165,960

 

 

 

 

 

$

122,447,805

 

 

 

 

 

 


(a)         The weighted average yield is the weighted average coupon rates for advances, unadjusted for swaps.  For floating-rate advances, the weighted average rate is the rate outstanding at the reporting dates.

(b)         Hedge valuation basis adjustments represent changes in the fair values of fixed-rate advances due to changes in LIBOR, which is the FHLBNY’s benchmark rate in a Fair value hedge.

(c)          Valuation adjustments represent changes in the entire fair values of advances elected under the FVO.

 

Note 10.                                                        Mortgage Loans Held-for-Portfolio.

 

Mortgage Partnership Finance® program loans, or (MPF®), are mortgage loans held-for-portfolio.  The FHLBNY participates in the MPF program by purchasing conventional mortgage loans from its participating members, hereafter referred to as Participating Financial Institutions (“PFI”).  The FHLBNY manages the liquidity, interest rate and prepayment option risk of the MPF loans, while the PFIs retain servicing activities, and may credit-enhance the portion of the loans participated to the FHLBNY.  No intermediary trust is involved.

 

The FHLBNY classifies mortgage loans as held for investment, and accordingly reports them at their principal amount outstanding net of unamortized premiums, discounts, and unrealized gains and losses from loans initially classified as mortgage loan commitments.

 

21


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amount

 

Percentage
of Total

 

Amount

 

Percentage
of Total

 

Real Estate(a):

 

 

 

 

 

 

 

 

 

Fixed medium-term single-family mortgages

 

$

205,389

 

7.17

%

$

238,057

 

8.35

%

Fixed long-term single-family mortgages

 

2,660,560

 

92.83

 

2,612,315

 

91.65

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

2,865,949

 

100.00

%

2,850,372

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Unamortized premiums

 

45,905

 

 

 

48,011

 

 

 

Unamortized discounts

 

(1,777

)

 

 

(1,833

)

 

 

Basis adjustment (b)

 

1,015

 

 

 

1,418

 

 

 

Total mortgage loans held-for-portfolio

 

2,911,092

 

 

 

2,897,968

 

 

 

Allowance for credit losses

 

(794

)

 

 

(992

)

 

 

Total mortgage loans held-for-portfolio, net of allowance for credit losses

 

$

2,910,298

 

 

 

$

2,896,976

 

 

 

 


(a)         Conventional mortgages represent the majority of mortgage loans held-for-portfolio, with the remainder invested in FHA and VA insured loans (also referred to as government loans).

(b)         Balances represent unamortized fair value basis of closed delivery commitments.  A basis adjustment is recorded at the settlement of the loan and it represents the difference in trade price paid for acquiring the loan and the price at the settlement date for a similar loan.  The basis adjustment is amortized as a yield adjustment to Interest income.

 

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 bps, but this varies with the particular MPF product.  The amount of the first layer, or First Loss Account (“FLA”), was estimated at $35.2 million and $33.3 million at September 30, 2018 and December 31, 2017.  The FLA is not recorded or reported as a reserve for loan losses, as it serves as a memorandum or information account.  The FHLBNY is responsible for absorbing the first layer.  The second layer is that amount of credit obligations that the PFI has agreed to assume at the “Master Commitment” level.  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 $0.6 million and $1.8 million for the three and nine months ended September 30, 2018 and for the same periods in the prior year.  These fees were reported as a reduction to mortgage loan interest income.

 

In terms of the credit enhancement waterfall, the MPF program structures potential credit losses on conventional MPF loans into layers on each loan pool as follows:

 

(1)         The first layer of protection against loss is the liquidation value of the real property securing the loan.

 

(2)         The next layer of protection comes from the primary mortgage insurance (“PMI”) that is required for loans with a loan-to-value ratio greater than 80% at origination.

 

(3)         Losses that exceed the liquidation value of the real property and any PMI will be absorbed by the FHLBNY, limited to the amount of the FLA available under the Master Commitment.  For certain MPF products, the FHLBNY could recover previously absorbed losses by withholding future credit enhancement fees (“CE Fees”) otherwise payable to the PFI, and applying the amounts to recover losses previously absorbed.  In effect, the FHLBNY may recover losses allocated to the FLA from CE Fees.  The amount of CE Fees depends on the MPF product and the outstanding balances of loans funded in the Master Commitment.  CE Fees payable (and potentially available for loss recovery) will decline as the outstanding loan balances in the Master Commitment declines.

 

(4)         The second layer or portion of credit losses is incurred by the PFI and/or the Supplemental Mortgage Insurance (“SMI”) provider as follows:  The PFI absorbs losses in excess of any FLA up to the amount of the PFI’s credit obligation amount and/or to the SMI provider for MPF 125 Plus products if the PFI has selected SMI coverage.

 

(5)         The third layer of losses is absorbed by the FHLBNY.

 

22


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Allowance Methodology for Loan Losses

 

Allowance policy — Mortgage loans are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements.  The FHLBNY considers a loan to be seriously delinquent when it is past due 90 days or more.  The FHLBNY considers the occurrence of serious delinquency as a primary confirming event of a credit loss.  Bankruptcy and foreclosures are also considered as confirming events.  When a loan is seriously delinquent, or in bankruptcy or in foreclosure, the FHLBNY measures estimated credit losses on an individual loan basis by looking to the value of the real property collateral.  For such loans, the FHLBNY believes it is probable that we will be unable to collect all contractual interest and principal in accordance with the terms of the loan agreement.  For loans that have not been individually measured for estimated credit losses (i.e. they are not seriously delinquent, or in bankruptcy or in foreclosure), the FHLBNY measures estimated incurred credit losses on a collective basis and records a valuation reserve.

 

When a loan is delinquent 180 days or more, the FHLBNY will charge-off the excess carrying value over the net realizable value of the loan because the FHLBNY deems that foreclosure is probable at 180 days delinquency.  When the loan is foreclosed and the FHLBNY takes possession of real estate, the balance of the loan that has not been charged off is recorded as real estate owned at the lower of carrying value or net realizable value.

 

Periodic review — The FHLBNY performs periodic reviews of impaired mortgage loans within the MPF loan portfolio to identify the potential for credit losses inherent in the impaired loan to determine the likelihood of collection of the principal and interest.  We utilize an allowance for credit losses to reserve for estimated losses in our conventional mortgage loan portfolio (uninsured MPF loans).  The measurement of our allowance for credit losses is determined by (i) reviewing certain conventional mortgage loans for impairment on an individual basis, (ii) reviewing remaining conventional mortgage loans (not individually assessed) on a collective basis, and (iii) reviewing government insured loans (FHA- and VA-insured MPF loans) on a collective basis.

 

We compute the provision for credit losses without considering the private mortgage insurance and other accompanying credit enhancement features that provide credit assurance to the FHLBNY.

 

·                  Individually evaluated conventional mortgage loans — We evaluate impaired conventional mortgage loans for impairment individually.  A conventional mortgage loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The primary credit quality indicator that we use in evaluating impairment on mortgage loans includes a serious delinquency rate — MPF loans that are 90 days or more past due, in bankruptcy, or in the process of foreclosure.  We also individually measure credit losses on loans that are restructured in a troubled debt restructuring involving a modification of terms.  Loans discharged under Chapter 7 bankruptcy are considered TDR, and are individually measured for credit losses when seriously delinquent.  We measure estimated credit impairment based on the estimated fair value of the underlying collateral, which is determined using property values, less selling costs.

 

·                  Collectively evaluated conventional mortgage loans — We collectively evaluate the majority of our conventional mortgage loan portfolio for impairment (excluding those individually evaluated), and estimate an allowance for credit losses based primarily upon the following factors: (i) loan delinquencies, and (ii) actual historical loss severities.  We utilize a roll-rate methodology when estimating allowance for credit losses.  This methodology projects loans migrating to charge off status (180 days delinquency) based on historical average rates of delinquency.  We then apply a loss severity factor to calculate an estimate of credit losses.

 

·                  Collectively evaluated government insured loans — The FHLBNY invests in government-insured mortgage loans that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture.  The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency.  The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans.  Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the

 

23


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

servicers.  The FHLBNY’s credit risk for these loans is if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance.  We evaluate the credit worthiness of our member, the PFI.

 

Classes of the MPF loan portfolio would be subject to disaggregation to the extent that it is needed to understand the exposure to credit risk arising from these loans.  The FHLBNY has determined that no further disaggregation of portfolio segments is needed other than the methodology discussed above.

 

Credit Enhancement Fees

 

The credit enhancement fee (“CE fees”) due to the PFI for taking on a credit enhancement obligation is accrued based on the master commitments outstanding.  For certain MPF products, the CE fees are held back for 12 months and then paid monthly to the PFIs.  Under the MPF agreements with PFIs, the FHLBNY may recover credit losses from future CE fees.  The FHLBNY does not consider CE fees when computing the allowance for credit losses.  It is assumed that repayment is expected to be provided solely by the sale of the underlying property, and there is no other available and reliable source of repayment.  If losses were incurred, the FHLBNY would withhold CE fee payments to the PFI associated with the loan that is in a loss position.  The amount withheld would be commensurate with the credit loss and the loss layer for which the PFI has assumed the credit enhancement responsibility.  The FHLBNY’s loss experience has been insignificant and amounts of CE fees withheld have been insignificant in all periods in this report.

 

Allowance for Credit Losses

 

Allowances for credit losses have been recorded against the uninsured MPF loans.  All other types of mortgage loans were insignificant and no allowances were necessary.  The following table provides a rollforward analysis of the allowance for credit losses (in thousands):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

817

 

$

1,004

 

$

992

 

$

1,554

 

Charge-offs

 

(9

)

(83

)

(90

)

(532

)

Recoveries

 

81

 

132

 

295

 

132

 

Provision (Reversal) for credit losses on mortgage loans

 

(95

)

(183

)

(403

)

(284

)

Ending balance

 

$

794

 

$

870

 

$

794

 

$

870

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

Ending balance, individually evaluated for impairment

 

$

260

 

$

210

 

Ending balance, collectively evaluated for impairment

 

534

 

782

 

Total Allowance for credit losses

 

$

794

 

$

992

 

 

 

 

 

 

 

The FHLBNY’s total MPF loans and impaired MPF loans were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

Total Mortgage loans, carrying values net of allowance for credit losses (a)

 

$

2,910,298

 

$

2,896,976

 

Non-performing mortgage loans - Conventional (a)(b)

 

$

10,721

 

$

13,272

 

Insured MPF loans past due 90 days or more and still accruing interest (a)(b)

 

$

5,086

 

$

5,582

 

 


(a)         Includes loans classified as special mention, sub-standard, doubtful or loss under regulatory criteria, net of amounts charged-off if delinquent for 180 days or more.

(b)         Data in this table represents UPB, and would not agree to data reported in other tables at “recorded investment,” which includes interest receivable.

 

24


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The following summarizes the recorded investment in impaired loans (excluding insured FHA/VA loans), the unpaid principal balance, and the related allowance (individually assessed), and the average recorded investment of loans for which the related allowance was individually measured (in thousands):

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2018

 

September 30, 2018

 

September 30, 2018

 

 

 

 

 

Unpaid

 

 

 

Average

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

 

 

Investment

 

Balance

 

Allowance

 

Investment (d)

 

Conventional MPF Loans (a)(c)

 

 

 

 

 

 

 

 

 

 

 

No related allowance (b)

 

$

12,850

 

$

12,760

 

$

 

$

12,539

 

$

13,067

 

With a related allowance

 

1,063

 

1,041

 

260

 

1,111

 

1,198

 

Total individually measured for impairment

 

$

13,913

 

$

13,801

 

$

260

 

$

13,650

 

$

14,265

 

 

 

 

December 31, 2017

 

 

 

 

 

Unpaid

 

 

 

Average

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

 

 

Investment

 

Balance

 

Allowance

 

Investment (d)

 

Conventional MPF Loans (a)(c)

 

 

 

 

 

 

 

 

 

No related allowance (b)

 

$

14,343

 

$

14,222

 

$

 

$

14,386

 

With a related allowance

 

1,509

 

1,494

 

210

 

1,393

 

Total individually measured for impairment

 

$

15,852

 

$

15,716

 

$

210

 

$

15,779

 

 


(a)         Based on analysis of the nature of risks of the FHLBNY’s investments in MPF loans, including its methodologies for identifying and measuring impairment, management has determined that presenting such loans as a single class is appropriate.

(b)         Collateral values, net of estimated costs to sell, exceeded the recorded investments in impaired loans and no allowances were deemed necessary.

(c)          Interest received is not recorded as Interest income if an uninsured loan is past due 90 days or more.  Cash received is recorded as a liability on the assumption that cash was remitted by the servicer to the FHLBNY that could potentially be recouped by the borrower in a foreclosure.

(d)         Represents the average recorded investment for the three and nine months ended September 30, 2018 and the twelve months ended December 31, 2017.

 

The following tables summarize the recorded investment, the unpaid principal balance, and the average recorded investment of loans for which the related allowance was collectively measured (in thousands):

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2018

 

September 30, 2018

 

September 30, 2018

 

 

 

 

 

Unpaid

 

 

 

Average

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

 

 

Investment

 

Balance

 

Allowance

 

Investment (a)

 

Collectively measured for impairment

 

 

 

 

 

 

 

 

 

 

 

Insured loans

 

$

235,198

 

$

229,318

 

$

 

$

235,915

 

$

238,266

 

Uninsured loans

 

2,675,947

 

2,622,830

 

534

 

2,660,449

 

2,650,259

 

Total loans collectively measured for impairment

 

$

2,911,145

 

$

2,852,148

 

$

534

 

$

2,896,364

 

$

2,888,525

 

 

25


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

 

 

December 31, 2017

 

 

 

 

 

Unpaid

 

 

 

Average

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

 

 

Investment

 

Balance

 

Allowance

 

Investment (a)

 

Collectively measured for impairment

 

 

 

 

 

 

 

 

 

Insured loans

 

$

241,575

 

$

235,232

 

$

 

$

238,661

 

Uninsured loans

 

2,654,882

 

2,599,424

 

782

 

2,602,298

 

Total loans collectively measured for impairment

 

$

2,896,457

 

$

2,834,656

 

$

782

 

$

2,840,959

 

 


(a)         Represents the average recorded investment for the three and nine months ended September 30, 2018 and the twelve months ended December 31, 2017.

 

Recorded investments in MPF loans that were past due, and real estate owned are summarized below.  Recorded investment, which includes accrued interest receivable, would not equal carrying values reported elsewhere (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Conventional

 

Insured

 

Conventional

 

Insured

 

 

 

MPF Loans

 

Loans

 

MPF Loans

 

Loans

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

Past due 30 - 59 days

 

$

11,260

 

$

10,278

 

$

18,216

 

$

12,561

 

Past due 60 - 89 days

 

2,448

 

2,983

 

3,914

 

2,712

 

Past due 90 - 179 days

 

2,948

 

1,792

 

3,860

 

2,545

 

Past due 180 days or more

 

7,831

 

3,635

 

9,464

 

3,378

 

Total past due

 

24,487

 

18,688

 

35,454

 

21,196

 

Total current loans

 

2,665,373

 

216,510

 

2,635,280

 

220,379

 

Total mortgage loans

 

$

2,689,860

 

$

235,198

 

$

2,670,734

 

$

241,575

 

Other delinquency statistics:

 

 

 

 

 

 

 

 

 

Loans in process of foreclosure, included above

 

$

6,443

 

$

2,393

 

$

6,191

 

$

2,524

 

Number of foreclosures outstanding at period end

 

44

 

19

 

48

 

23

 

Serious delinquency rate (a)

 

0.40

%

2.31

%

0.50

%

2.45

%

Serious delinquent loans total used in calculation of serious delinquency rate

 

$

10,779

 

$

5,427

 

$

13,324

 

$

5,923

 

Past due 90 days or more and still accruing interest

 

$

 

$

5,427

 

$

 

$

5,923

 

Loans on non-accrual status

 

$

10,779

 

$

 

$

13,324

 

$

 

Troubled debt restructurings:

 

 

 

 

 

 

 

 

 

Loans discharged from bankruptcy (b)

 

$

7,676

 

$

855

 

$

8,772

 

$

648

 

Modified loans under MPF® program

 

$

1,430

 

$

 

$

1,144

 

$

 

Real estate owned

 

$

537

 

 

 

$

682

 

 

 

 


(a)         Serious delinquency rate is defined as recorded investments in loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of total loan class.

(b)         Loans discharged from Chapter 7 bankruptcies are considered as TDRs.

 

26


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 11.                                                        Deposits.

 

The FHLBNY accepts demand, overnight and term deposits from its members.  Also, a member that services mortgage loans may deposit funds collected in connection with the mortgage loans as a pending disbursement to the owners of the mortgage loans.  The following table summarizes deposits (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

Interest-bearing deposits

 

 

 

 

 

Interest-bearing demand

 

$

880,886

 

$

1,142,056

 

Term (a)

 

37,000

 

36,000

 

Total interest-bearing deposits

 

917,886

 

1,178,056

 

Non-interest-bearing demand

 

18,352

 

17,999

 

Total deposits (b)

 

$

936,238

 

$

1,196,055

 

 


(a)         Term deposits were for periods of one year or less.

(b)         Specific disclosures about deposits that exceed FDIC limits have been omitted as deposits are not insured by the FDIC.  Deposits are received in the ordinary course of the FHLBNY’s business.  The FHLBNY has pledged securities to the FDIC to collateralize deposits maintained at the FHLBNY by the FDIC; for more information, see Securities Pledged in Note 8. Held-to-Maturity Securities.

 

Interest rate payment terms for deposits are summarized below (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amount
Outstanding

 

Weighted
Average Interest
Rate 
(b)

 

Amount
Outstanding

 

Weighted
Average Interest
Rate 
(b)

 

Due in one year or less

 

 

 

 

 

 

 

 

 

Interest-bearing deposits (a)

 

$

917,886

 

1.60

%

$

1,178,056

 

0.85

%

Non-interest-bearing deposits

 

18,352

 

 

 

17,999

 

 

 

Total deposits

 

$

936,238

 

 

 

$

1,196,055

 

 

 

 


(a)         Primarily adjustable rate.

(b)         The weighted average interest rate is calculated based on the average balance.

 

Note 12.                                                  Consolidated Obligations.

 

Consolidated obligations are the joint and several obligations of the FHLBanks, and consist of bonds and discount notes.  The FHLBanks issue Consolidated obligations through the Office of Finance as their fiscal agent.  In connection with each debt issuance, a FHLBank specifies the amount of debt it wants issued on its behalf.  The Office of Finance tracks the amount of debt issued on behalf of each FHLBank.  Each FHLBank separately tracks and records as a liability for its specific portion of Consolidated obligations for which it is the primary obligor.  Consolidated obligation bonds (“CO bonds” or “Consolidated bonds”) are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity.

 

Consolidated obligation discount notes (“CO discount notes”, “Discount notes”, or “Consolidated discount notes”) are issued primarily to raise short-term funds.  Discount notes sell at less than their face amount and are redeemed at par value when they mature.

 

27


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The following table summarizes Consolidated obligations issued by the FHLBNY and outstanding at September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Consolidated obligation bonds-amortized cost

 

$

85,628,202

 

$

98,878,469

 

Hedge valuation basis adjustments (a)

 

151,585

 

273,585

 

Hedge basis adjustments on terminated hedges (b)

 

130,737

 

134,920

 

FVO (c) - valuation adjustments and accrued interest

 

(845

)

1,074

 

 

 

 

 

 

 

Total Consolidated obligation bonds

 

$

85,909,679

 

$

99,288,048

 

 

 

 

 

 

 

Discount notes-amortized cost

 

$

50,821,648

 

$

49,610,668

 

FVO (c) - valuation adjustments and remaining accretion

 

 

3,003

 

 

 

 

 

 

 

Total Consolidated obligation discount notes

 

$

50,821,648

 

$

49,613,671

 

 


(a)         Hedge valuation basis adjustments represent changes in the fair values due to changes in LIBOR on fixed-rate bonds in a Fair value hedge.

(b)         Hedge basis adjustments on terminated hedges represent the unamortized balances of valuation basis of fixed-rate bonds that were previously in a qualifying hedge relationship.  The valuation basis at the time of hedge termination is amortized as a yield adjustment through Interest expense.

(c)          Valuation adjustments represent changes in the entire fair values of bonds and discount notes elected under the FVO.

 

Redemption Terms of Consolidated Obligation Bonds

 

The following table is a summary of Consolidated obligation bonds outstanding by year of maturity (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

Percentage

 

 

 

Average

 

Percentage

 

Maturity

 

Amount

 

Rate (a)

 

of Total

 

Amount

 

Rate (a)

 

of Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

67,678,075

 

1.98

%

79.05

%

$

82,118,565

 

1.30

%

83.07

%

Over one year through two years

 

7,357,035

 

2.14

 

8.59

 

7,363,255

 

1.43

 

7.45

 

Over two years through three years

 

2,952,640

 

2.36

 

3.45

 

2,462,400

 

1.91

 

2.49

 

Over three years through four years

 

1,439,530

 

2.21

 

1.68

 

1,158,595

 

2.18

 

1.17

 

Over four years through five years

 

1,829,540

 

2.47

 

2.14

 

1,640,835

 

2.13

 

1.66

 

Thereafter

 

4,356,450

 

3.46

 

5.09

 

4,107,500

 

3.35

 

4.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

85,613,270

 

2.10

%

100.00

%

98,851,150

 

1.44

%

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond premiums (b)

 

44,967

 

 

 

 

 

54,654

 

 

 

 

 

Bond discounts (b)

 

(30,035

)

 

 

 

 

(27,335

)

 

 

 

 

Hedge valuation basis adjustments (c)

 

151,585

 

 

 

 

 

273,585

 

 

 

 

 

Hedge basis adjustments on terminated hedges (d)

 

130,737

 

 

 

 

 

134,920

 

 

 

 

 

FVO (e) - valuation adjustments and accrued interest

 

(845

)

 

 

 

 

1,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Consolidated obligation-bonds

 

$

85,909,679

 

 

 

 

 

$

99,288,048

 

 

 

 

 

 


(a)         Weighted average rate represents the weighted average contractual coupons of bonds, unadjusted for swaps.

(b)         Amortization of CO bond premiums and discounts are recorded in interest expense as yield adjustments.

(c)          Hedge valuation basis adjustments represent changes in the fair values due to changes in LIBOR on fixed-rate bonds in a Fair value hedge.

(d)         Hedge basis adjustments on terminated hedges represent the unamortized balances of valuation basis of fixed-rate bonds that were previously in a fair value hedging relationship.  Generally, when a hedging relationship is de-designated, the valuation basis is no longer adjusted for changes in the valuation of the debt for changes in the benchmark rate; instead, the basis is amortized over the debt’s remaining life, so that at maturity of the debt, the unamortized basis is reversed to zero.

(e)          Valuation adjustments represent changes in the entire fair values of bonds elected under the FVO.

 

28


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Interest Rate Payment Terms

 

The following table summarizes types of Consolidated obligation bonds issued and outstanding (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amount

 

Percentage
of Total

 

Amount

 

Percentage
of Total

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate, non-callable

 

$

19,041,270

 

22.24

%

$

24,080,150

 

24.36

%

Fixed-rate, callable

 

4,136,000

 

4.83

 

3,658,000

 

3.70

 

Step Up, callable

 

865,000

 

1.01

 

253,000

 

0.26

 

Single-index floating rate

 

61,571,000

 

71.92

 

70,860,000

 

71.68

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

85,613,270

 

100.00

%

98,851,150

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Bond premiums

 

44,967

 

 

 

54,654

 

 

 

Bond discounts

 

(30,035

)

 

 

(27,335

)

 

 

Hedge valuation basis adjustments (a)

 

151,585

 

 

 

273,585

 

 

 

Hedge basis adjustments on terminated hedges (b)

 

130,737

 

 

 

134,920

 

 

 

FVO (c) - valuation adjustments and accrued interest

 

(845

)

 

 

1,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Consolidated obligation-bonds

 

$

85,909,679

 

 

 

$

99,288,048

 

 

 

 


(a)         Hedge valuation basis adjustments represent changes in the fair values of fixed-rate CO bonds in a Fair value hedge due to changes in LIBOR.

(b)         Hedge basis adjustments on terminated hedges represent the unamortized balances of valuation basis of fixed-rate bonds that were previously in a hedging relationship.

(c)          Valuation adjustments represent changes in the entire fair values of bonds elected under the FVO.

 

Discount Notes

 

Consolidated obligation discount notes are issued to raise short-term funds.  Discount notes are Consolidated obligations with original maturities of up to one year.  These notes are issued at less than their face amount and redeemed at par when they mature.

 

The FHLBNY’s outstanding Consolidated obligation discount notes were as follows (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Par value

 

$

50,930,582

 

$

49,685,334

 

Amortized cost

 

$

50,821,648

 

$

49,610,668

 

FVO (a) - valuation adjustments and remaining accretion

 

 

3,003

 

Total discount notes

 

$

50,821,648

 

$

49,613,671

 

 

 

 

 

 

 

Weighted average interest rate

 

2.05

%

1.23

%

 


(a)         Valuation adjustments represent changes in the entire fair values of discount notes elected under the FVO.

 

29


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 13.                                                  Affordable Housing Program.

 

For more information about the Affordable Housing Program and the Bank’s liability, see the Bank’s most recent Form 10-K filed on March 22, 2018.  The following table provides rollforward information with respect to changes in Affordable Housing Program liabilities (in thousands):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

149,304

 

$

121,282

 

$

131,654

 

$

125,062

 

Additions from current period’s assessments

 

17,404

 

14,895

 

48,740

 

37,242

 

Net disbursements for grants and programs

 

(6,207

)

(9,801

)

(19,893

)

(35,928

)

Ending balance

 

$

160,501

 

$

126,376

 

$

160,501

 

$

126,376

 

 

Note 14.                                                  Capital Stock, Mandatorily Redeemable Capital Stock and Restricted Retained Earnings.

 

The FHLBanks, including the FHLBNY, have a cooperative structure.  To access the FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in the FHLBNY.  A member’s stock requirement is generally based on its use of FHLBNY products, subject to a minimum membership requirement as prescribed by the FHLBank Act and the FHLBNY’s Capital Plan.  FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share.  It is not publicly traded.  An option to redeem capital stock that is greater than a member’s minimum requirement is held by both the member and the FHLBNY.  The FHLBNY’s Capital Plan offers two sub-classes of Class B capital stock, membership and activity-based capital stock.  Membership and Activity-based Class B capital stock have the same voting rights and dividend rates.  Members can redeem Class B stock by giving five years notice.  The FHLBNY’s capital plan does not provide for the issuance of Class A capital stock.

 

The FHLBNY is subject to risk-based capital rules of the Finance Agency, the regulator of the FHLBanks.

 

Risk-based Capital — The following table summarizes the FHLBNY’s risk-based capital ratios (dollars in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Required (d)

 

Actual

 

Required (d)

 

Actual

 

Regulatory capital requirements:

 

 

 

 

 

 

 

 

 

Risk-based capital (a)(e)

 

$

919,904

 

$

7,541,240

 

$

912,620

 

$

8,316,231

 

Total capital-to-asset ratio

 

4.00

%

5.17

%

4.00

%

5.23

%

Total capital (b)

 

$

5,834,299

 

$

7,541,240

 

$

6,356,735

 

$

8,316,231

 

Leverage ratio

 

5.00

%

7.76

%

5.00

%

7.85

%

Leverage capital (c )

 

$

7,292,874

 

$

11,311,861

 

$

7,945,919

 

$

12,474,347

 

 


(a)         Actual “Risk-based capital” is capital stock and retained earnings plus mandatorily redeemable capital stock. Section 932.2 of the Finance Agency’s regulations also refers to this amount as “Permanent Capital.”

(b)         Required “Total capital” is 4.0% of total assets.

(c)          The required leverage ratio of total capital to total assets should be at least 5.0%.  For the purposes of determining the leverage ratio, total capital shall be computed by multiplying the Bank’s Permanent Capital by 1.5.

(d)         Required minimum.

(e)          Under regulatory guidelines issued by the Finance Agency in August 2011 that was consistent with guidance provided by other federal banking agencies with respect to capital rules, risk weights are maintained at AAA for U.S. Treasury securities and other securities issued or guaranteed by the U.S. Government, government agencies, and government-sponsored entities for purposes of calculating risk-based capital.

 

30


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Mandatorily Redeemable Capital Stock

 

Generally, the FHLBNY’s capital stock is redeemable at the option of either the member or the FHLBNY subject to certain conditions, including the provisions under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity.  In accordance with the accounting guidance, the FHLBNY generally reclassifies the stock subject to redemption from equity to a liability once a member irrevocably exercises a written redemption right, gives notice of intent to withdraw from membership, or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership.  Under such circumstances, the member shares will then meet the definition of a mandatorily redeemable financial instrument.

 

Estimated redemption periods were as follows (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Redemption less than one year

 

$

949

 

$

13,672

 

Redemption from one year to less than three years

 

1,071

 

1,145

 

Redemption from three years to less than five years

 

429

 

445

 

Redemption from five years or greater

 

4,215

 

4,683

 

 

 

 

 

 

 

Total

 

$

6,664

 

$

19,945

 

 

The following table provides rollforward information with respect to changes in mandatorily redeemable capital stock liabilities (in thousands):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

17,707

 

$

20,559

 

$

19,945

 

$

31,435

 

Capital stock subject to mandatory redemption reclassified from equity

 

2,128

 

 

2,252

 

3,009

 

Redemption of mandatorily redeemable capital stock (a)

 

(13,171

)

(217

)

(15,533

)

(14,102

)

Ending balance

 

$

6,664

 

$

20,342

 

$

6,664

 

$

20,342

 

Accrued interest payable (b)

 

$

210

 

$

284

 

$

210

 

$

284

 

 


(a)         Redemption includes repayment of excess stock.

(b)         The annualized accrual rate was 6.75% for the three months ended September 30, 2018 and 5.50% for the three months ended September 30, 2017.  Accrual rates are based on estimated dividend rates.

 

Restricted Retained Earnings

 

Under the FHLBank Joint Capital Enhancement Agreement (“Capital Agreement”), each FHLBank is required to set aside 20% of its Net income each quarter to a restricted retained earnings account until the balance of that account equals at least one percent of that FHLBank’s average balance of outstanding Consolidated obligations.  The Capital Agreement is intended to enhance the capital position of each FHLBank.  These restricted retained earnings will not be available to pay dividends.  Retained earnings included $566.7 million and $479.2 million as restricted retained earnings in the FHLBNY’s Total Capital at September 30, 2018 and December 31, 2017.

 

31


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 15.                                                  Earnings Per Share of Capital.

 

The following table sets forth the computation of earnings per share.  Basic and diluted earnings per share of capital are the same.  The FHLBNY has no dilutive potential common shares or other common stock equivalents (dollars in thousands except per share amounts):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

156,412

 

$

133,742

 

$

437,811

 

$

334,220

 

 

 

 

 

 

 

 

 

 

 

Net income available to stockholders

 

$

156,412

 

$

133,742

 

$

437,811

 

$

334,220

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of capital

 

62,538

 

64,143

 

62,986

 

62,883

 

Less: Mandatorily redeemable capital stock

 

(123

)

(205

)

(165

)

(220

)

Average number of shares of capital used to calculate earnings per share

 

62,415

 

63,938

 

62,821

 

62,663

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

2.51

 

$

2.09

 

$

6.97

 

$

5.33

 

 

Note 16.                                                  Employee Retirement Plans.

 

The FHLBNY participates in the Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”), a tax-qualified, defined-benefit multiemployer pension plan that covers all officers and employees of the Bank.  The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan.  The FHLBNY also offers two non-qualified Benefit Equalization Plans, which are retirement plans.  The two plans restore defined benefits for those employees who have had their qualified Defined Benefit Plan and their Defined Contribution Plan limited by IRS regulations.  The non-qualified BEP that restores benefits to participant’s Defined Contribution Plan was introduced and became effective at January 1, 2017.  The two non-qualified Benefit Equalization Plans (“BEP”) are unfunded.

 

For more information about employee retirement plans, see Note 15. Employee Retirement Plans in the financial statements included in the most recent Form 10-K filed on March 22, 2018.

 

Retirement Plan Expenses Summary

 

The following table presents employee retirement plan expenses for the periods ended (in thousands):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Defined Benefit Plan

 

$

1,875

 

$

1,875

 

$

5,625

 

$

5,625

 

Benefit Equalization Plans (defined benefit and defined contribution)

 

1,868

 

1,458

 

5,336

 

4,249

 

Defined Contribution Plans

 

567

 

533

 

1,796

 

1,599

 

Postretirement Health Benefit Plan

 

(79

)

(124

)

(238

)

(371

)

 

 

 

 

 

 

 

 

 

 

Total retirement plan expenses

 

$

4,231

 

$

3,742

 

$

12,519

 

$

11,102

 

 

32


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Benefit Equalization Plan (BEP)

 

Components of the net periodic pension cost for the defined benefit component of the BEP were as follows (in thousands):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Service cost

 

$

274

 

$

222

 

$

822

 

$

666

 

Interest cost

 

539

 

523

 

1,617

 

1,570

 

Amortization of unrecognized net loss

 

886

 

638

 

2,658

 

1,915

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost -Defined Benefit BEP

 

1,699

 

1,383

 

5,097

 

4,151

 

 

 

 

 

 

 

 

 

 

 

Benefit Equalization plans - Thrift and Deferred incentive compensation plans (introduced in 2017)

 

169

 

75

 

239

 

98

 

Total

 

$

1,868

 

$

1,458

 

$

5,336

 

$

4,249

 

 

Postretirement Health Benefit Plan

 

Components of the net periodic benefit cost for the postretirement health benefit plan were as follows (in thousands):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Service cost (benefits attributed to service during the period)

 

$

27

 

$

31

 

$

81

 

$

92

 

Interest cost on accumulated postretirement health benefit obligation

 

143

 

144

 

428

 

432

 

Amortization of loss/(gain)

 

191

 

142

 

573

 

425

 

Amortization of prior service (credit)/cost

 

(440

)

(441

)

(1,320

)

(1,320

)

 

 

 

 

 

 

 

 

 

 

Net periodic postretirement health benefit (income) (a)

 

$

(79

)

$

(124

)

$

(238

)

$

(371

)

 


(a)         Plan amendments in a prior year reduced plan obligations by $8.8 million, and the resulting gain is being amortized over an actuarially determined period, reducing net periodic benefit costs.

 

Note 17.  Derivatives and Hedging Activities.

 

General — The FHLBNY accounts for its hedging activities in accordance with ASC 815, Derivatives and Hedging (formerly SFAS 133).  As a general rule, hedge accounting is permitted where the FHLBNY is exposed to a particular risk, such as interest-rate risk that causes changes in the fair value of an asset or liability or variability in the expected future cash flows of an existing asset, liability or a forecasted transaction that may affect earnings.

 

Derivative contracts hedging the risks associated with the changes in fair value are referred to as Fair value hedges, while contracts hedging the risks affecting the expected future cash flows are called Cash flow hedges.  For more information, see Derivatives in Note 1. Significant Accounting Polices and Estimates and Note 16.  Derivatives and Hedging Activities in the Bank’s most recent Form 10-K filed on March 22, 2018.

 

The FHLBNY, consistent with the Finance Agency’s regulations, may enter into interest-rate swaps, swaptions, and interest-rate cap and floor agreements to manage its interest rate exposure inherent in otherwise unhedged assets and funding positions.  We are not a derivatives dealer and do not trade derivatives for short-term profit.

 

Typically, we execute derivatives under three hedging strategies — by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction that qualifies for hedge accounting treatment; by acting as an intermediary; or by designating the derivative as an asset-liability management hedge (i.e. an “economic hedge”).

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

For fair value hedges, in which derivatives hedge the fair values of assets and liabilities, changes in the fair value of derivatives are recorded in Other income in the Statements of Income, together with fair values of the hedged item related to the hedged risk.  These amounts are expected to, and generally do, offset each other.

 

For cash flow hedges, in which derivatives hedge the variability of cash flows related to floating- and fixed-rate assets, liabilities or forecasted transactions, the accounting treatment depends on the effectiveness of the hedge.  To the extent these derivatives are effective in offsetting the variability of hedged cash flows, the effective portion of the changes in the derivatives’ fair values will not be included in current earnings, but is reported in AOCI.  These changes in fair value will be included in earnings of future periods when the hedged cash flows impact earnings.  To the extent these cash flow hedges are not effective, changes in their fair values are immediately recorded in Other income in the Statements of Income.

 

When designating a derivative in an economic hedge, it is after considering the operational costs and benefits of executing a hedge that would remain highly-effective through its term and qualify for hedge accounting.  When entering into such hedges that do not qualify for hedge accounting, changes in fair value of the derivatives is recorded in earnings with no offsetting fair value adjustments for the hedged asset, liability, or firm commitment.  As a result, an economic hedge introduces the potential for earnings variability.  Economic hedges are an acceptable hedging strategy under the FHLBNY’s risk management program, and the strategies comply with the Finance Agency’s regulatory requirements prohibiting speculative use of derivatives.

 

Credit Risk Due to Non-performance by Counterparties

 

The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, and serves as a basis for calculating periodic interest payments or cash flows.  Notional amount of a derivative does not measure the credit risk exposure, and the maximum credit exposure is substantially less than the notional amount.  The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans and purchased caps and floors (“derivatives”) in a gain position if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.

 

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors.  The FHLBNY executes derivatives with swap dealers and financial institution swap counterparties as negotiated contracts, which are usually referred to as over-the-counter (“OTC”) derivatives.

 

The majority of OTC derivative contracts at September 30, 2018 and December 31, 2017 were cleared derivatives.  The contracts are transacted bilaterally with executing swap counterparties, then cleared and settled through derivative clearing organizations (“DCOs”) as mandated under the Dodd-Frank Act.  When transacting a derivative for clearing, the FHLBNY utilizes a designated clearing agent, the Futures Clearing Merchant (“FCM”) that acts on behalf of the FHLBNY to clear and settle the interest rate exchange transaction through the DCO.  Once the transaction is accepted for clearing by the FCM, acting in the capacity of an intermediary between the FHLBNY and the DCO, the original transaction between the FHLBNY and the executing swap counterparty is extinguished, and is replaced by an identical transaction between the FHLBNY and the DCO.  The DCO becomes the counterparty to the FHLBNY.  However, the FCM remains as the principal operational contact and interacts with the DCO through the life cycle events of the derivative transaction on behalf of the FHLBNY.

 

The FHLBNY also transacts derivative contracts that are executed and settled bilaterally with counterparties, rather than settling the transaction with a DCO.  Such bilateral derivative transactions have not yet been mandated for clearing under the Dodd-Frank Act, typically because the transactions are complex and their ongoing pricing and settlement mechanisms have not yet been operationalized by the DCOs.

 

Credit risk on bilateral OTC — bilateral or uncleared derivative contracts — For derivatives that are not eligible for clearing with a DCO under the Dodd-Frank Act, the FHLBNY is subject to credit risk as a result of non-performance by swap counterparties to the derivative agreements.  The FHLBNY enters into master netting arrangements and bilateral security agreements with all active derivative counterparties that provide for delivery of

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

collateral at specified levels to limit the net unsecured credit exposure to these counterparties.  The FHLBNY makes judgments on each counterparty’s creditworthiness, and makes estimates of the collateral values in analyzing counterparty non-performance credit risk.  Bilateral agreements consider the credit risks and the agreement specifies thresholds to post or receive collateral with changes in credit ratings.  When the FHLBNY has more than one derivative transaction outstanding with the counterparty, and a legally enforceable master netting agreement exists with the counterparty, the net exposure (less collateral held) represents the appropriate measure of credit risk.  The FHLBNY conducts all its bilaterally executed derivative transactions under ISDA master netting agreements.

 

Credit risk on OTC cleared derivative transactions — The FHLBNY’s derivative transactions that are eligible for clearing are subject to mandatory clearing rules under the Commodity Futures Trading Commission (“CFTC”) as provided under the Dodd-Frank Act.  If a derivative transaction is listed as eligible for clearing, the FHLBNY must abide by the CFTC rules to clear the transaction through a DCO.  The FHLBNY’s cleared derivatives are also initially executed bilaterally with a swap dealer (the executing swap counterparty) in the OTC market.  The clearing process requires all parties to the derivative transaction to novate the contracts to a DCO, which then becomes the counterparty to all parties, including the FHLBNY, to the transaction.

 

The enforceability of offsetting rights incorporated in the agreements for the cleared derivative transactions has been analyzed by the FHLBNY to establish the extent to which supportive legal opinion, obtained from counsel of recognized standing, provides the requisite level of certainty regarding the enforceability of these agreements.  Further analysis was performed to reach a view that the exercise of rights by the non-defaulting party under these agreements would not be stayed, or avoided under applicable law upon an event of default including bankruptcy, insolvency or similar proceeding involving the DCO or the FHLBNY’s clearing agents or both.  Based on the analysis of the rules, and legal analysis obtained, the FHLBNY has made a determination that it has the right of setoff that is enforceable under applicable law that would allow it to net individual derivative contracts executed through a specific clearing agent, the FCM, to a designated DCO, so that a net derivative receivable or payable will be recorded for the DCO; that exposure (less margin held) would be represented by a single amount receivable from the DCO and the appropriate measure of credit risk.  This policy election for netting cleared derivatives is consistent with the policy election for netting bilaterally settled derivative transactions under master netting agreements.

 

For all cleared derivative contracts that have not matured, “Variation margin” is exchanged between the FHLBNY and the FCM, acting as agents on behalf of DCOs.  Variation margin is determined by the DCO and fluctuates with the fair values of the open contracts.  When the aggregate contract value of open derivatives is “in-the-money” for the FHLBNY (gain position), the FHLBNY would receive variation margin from the DCO.  If the value of the open contracts is “out-of-the-money” (liability position), the FHLBNY would post variation margin to the DCO.  At September 30, 2018 and December 31, 2017, our analysis concluded that variation margin exchanged with the DCOs - Chicago Mercantile Exchange (“CME”) and London Clearing House (“LCH”) were the daily settlement values of the derivative contracts, and not as collateral, and variation margin is a direct reduction of the fair values of the open contracts.

 

The FHLBNY is also required to post an “Initial margin” on open derivative contracts to the DCO through an FCM.  Initial margin is determined by the DCO and fluctuates with the volatility of the FHLBNY’s portfolio of cleared derivatives; volatility is measured by the speed and severity of market price changes of the portfolio.  Initial margin is considered as collateral, and if exchanged in cash, it would be netted against the fair values of open derivative contracts after applying variation margin.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Offsetting of Derivative Assets and Derivative Liabilities — Net Presentation

 

The following table presents the gross and net derivatives receivables by contract type and amount for those derivatives contracts for which netting is permissible under U.S. GAAP (“Derivative instruments Nettable”) (in thousands).  Derivatives receivables have been netted with respect to those receivables as to which the netting requirements have been met, including obtaining a legal analysis with respect to the enforceability of the netting.  Where such a legal analysis has not been either sought or obtained, the receivables were not netted, and were reported as Derivative instruments Not Nettable.  The table also presents security collateral, which are not permitted to be offset, but which would be eligible for offsetting to the extent an event of default occurred and a legal opinion supporting enforceability of the netting and collateral rights has been obtained.  See footnote (c) to the table.

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Derivative
Assets

 

Derivative
Liabilities

 

Derivative
Assets

 

Derivative
Liabilities

 

Derivative instruments - Nettable

 

 

 

 

 

 

 

 

 

Gross recognized amount

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

$

310,619

 

$

107,047

 

$

207,922

 

$

103,901

 

Cleared derivatives

 

261,608

 

271,118

 

672,494

 

221,976

 

Total derivatives fair values

 

572,227

 

378,165

 

880,416

 

325,877

 

Variation margin (Note 1)

 

 

 

(465,803

)

 

Total gross recognized amount

 

572,227

 

378,165

 

414,613

 

325,877

 

Gross amounts of netting adjustments and cash collateral

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

(184,695

)

(93,068

)

(95,190

)

(57,594

)

Cleared derivatives

 

(260,798

)

(260,799

)

(206,691

)

(206,691

)

Total gross amounts of netting adjustments and cash collateral

 

(445,493

)

(353,867

)

(301,881

)

(264,285

)

Net amounts after offsetting adjustments and cash collateral

 

$

126,734

 

$

24,298

 

$

112,732

 

$

61,592

 

 

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

$

125,924

 

$

13,979

 

$

112,732

 

$

46,307

 

Cleared derivatives

 

810

 

10,319

 

 

15,285

 

Total net amounts after offsetting adjustments and cash collateral

 

$

126,734

 

$

24,298

 

$

112,732

 

$

61,592

 

Derivative instruments - Not Nettable

 

 

 

 

 

 

 

 

 

Uncleared derivatives (a)

 

$

20

 

$

53

 

$

10

 

$

15

 

Total derivative assets and total derivative liabilities

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

125,944

 

14,032

 

112,742

 

46,322

 

Cleared derivatives

 

810

 

10,319

 

 

15,285

 

Total derivative assets and total derivative liabilities presented in the Statements of Condition (b)

 

$

126,754

 

$

24,351

 

$

112,742

 

$

61,607

 

Non-cash collateral received or pledged (c)

 

 

 

 

 

 

 

 

 

Can be sold or repledged

 

 

 

 

 

 

 

 

 

Security pledged as initial margin to Derivative Clearing Organization (d)

 

$

239,363

 

$

 

$

239,064

 

$

 

Cannot be sold or repledged

 

 

 

 

 

 

 

 

 

Uncleared derivatives securities received

 

(100,984

)

 

(103,036

)

 

 

 

 

 

 

 

 

 

 

 

Total net amount of non-cash collateral received or repledged

 

$

138,379

 

$

 

$

136,028

 

$

 

Total net exposure cash and non-cash (e)

 

$

265,133

 

$

24,351

 

$

248,770

 

$

61,607

 

Net unsecured amount - Represented by:

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

$

24,960

 

$

14,032

 

$

9,706

 

$

46,322

 

Cleared derivatives

 

240,173

 

10,319

 

239,064

 

15,285

 

Total net exposure cash and non-cash (e)

 

$

265,133

 

$

24,351

 

$

248,770

 

$

61,607

 

 


(a)         Derivative instruments without legal right of offset were synthetic derivatives representing forward mortgage delivery commitments of 45 business days or less.  Amounts were not material, and it was operationally not practical to separate receivable from payables, and net presentation was adopted.  No cash collateral was involved with the mortgage delivery commitments.

(b)         Amounts represented Derivative assets and liabilities recorded in the Statements of Conditions.  Derivative balances are not netted with non-cash collateral received or pledged, since legal ownership of the non-cash collateral remains with the pledging counterparty (see footnote c below).

(c)          Non-cash collateral received or pledged — For bilateral derivatives, certain counterparties have pledged U.S. Treasury securities to the FHLBNY as collateral.  Amounts also included non-cash mortgage collateral on derivative positions with member counterparties where we acted as an intermediary.  For cleared derivatives, we may also pledge marketable securities to collateralize initial margin, which is required under the CFTC rules.

(d)         Securities pledged to Derivative Clearing Organization to fulfill our initial margin obligations on cleared derivatives.  Securities pledged may be sold or repledged if the FHLBNY defaults on our obligations under rules established by the CFTC.

(e)          Amounts represented net exposure after applying non-cash collateral pledged to and by the FHLBNY.  Since legal ownership and control over the securities are not transferred, the net exposure represented in the table above is for information only and is not reported as such in the Statements of Condition.

 

Note 1            As discussed previously in this Note 17, variation margin is exchanged daily between the DCOs and the FHLBNY for cleared derivatives, and generally represented daily settlement of mark-to-market gains and losses on the derivative contracts.  In the 2018 periods, variation margin was netted as settlements of gross derivative fair values on a category-by-category basis in the table above.  At December 31, 2017, $465.8 million in variation margin received by the FHLBNY was netted and reported in aggregate as a reduction of the gross derivative fair values.

 

36


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Fair Value of Derivative Instruments

 

The following tables represent outstanding notional balances and estimated fair values of the derivatives outstanding at September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

 

 

Notional Amount
of Derivatives

 

Derivative
Assets

 

Derivative
Liabilities

 

 

 

 

 

 

 

 

 

Fair value of derivative instruments (a)

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Interest rate swaps

 

$

62,787,428

 

$

471,521

 

$

267,124

 

Total derivatives in hedging relationships

 

62,787,428

 

471,521

 

267,124

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Interest rate swaps

 

34,773,086

 

98,598

 

99,962

 

Interest rate caps or floors

 

803,000

 

893

 

3

 

Mortgage delivery commitments

 

25,015

 

20

 

53

 

Other (b)

 

578,000

 

1,215

 

11,076

 

Total derivatives not designated as hedging instruments

 

36,179,101

 

100,726

 

111,094

 

 

 

 

 

 

 

 

 

Total derivatives before netting and collateral adjustments

 

$

98,966,529

 

572,247

 

378,218

 

Netting adjustments

 

 

 

(331,543

)

(331,543

)

Cash Collateral and related accrued interest

 

 

 

(113,950

)

(22,324

)

Total netting adjustments and cash collateral

 

 

 

(445,493

)

(353,867

)

Total derivative assets and total derivative liabilities

 

 

 

$

126,754

 

$

24,351

 

Security collateral pledged as initial margin to Derivative Clearing Organization (d)

 

 

 

$

239,363

 

 

 

Security collateral received from counterparty (d)

 

 

 

(100,984

)

 

 

Net security

 

 

 

138,379

 

 

 

Net exposure

 

 

 

$

265,133

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Notional Amount
of Derivatives

 

Derivative
Assets

 

Derivative
Liabilities

 

 

 

 

 

 

 

 

 

Fair value of derivative instruments (a)

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Interest rate swaps

 

$

71,755,576

 

$

840,933

 

$

267,888

 

Total derivatives in hedging relationships

 

71,755,576

 

840,933

 

267,888

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Interest rate swaps

 

40,327,013

 

32,655

 

52,448

 

Interest rate caps or floors

 

2,695,000

 

893

 

 

Mortgage delivery commitments

 

12,952

 

10

 

15

 

Other (b)

 

386,000

 

5,935

 

5,541

 

Total derivatives not designated as hedging instruments

 

43,420,965

 

39,493

 

58,004

 

 

 

 

 

 

 

 

 

Total derivatives before netting, collateral adjustments and variation margin

 

$

115,176,541

 

880,426

 

325,892

 

Variation margin (c)

 

 

 

(465,803

)

 

Total derivatives before netting and collateral adjustments

 

 

 

414,623

 

325,892

 

Netting adjustments

 

 

 

(253,221

)

(253,221

)

Cash Collateral and related accrued interest

 

 

 

(48,660

)

(11,064

)

Total netting adjustments and cash collateral

 

 

 

(301,881

)

(264,285

)

Total derivative assets and total derivative liabilities

 

 

 

$

112,742

 

$

61,607

 

Security collateral pledged as initial margin to Derivative Clearing Organization (d)

 

 

 

$

239,064

 

 

 

Security collateral received from counterparty (d)

 

 

 

(103,036

)

 

 

Net security

 

 

 

136,028

 

 

 

Net exposure

 

 

 

$

248,770

 

 

 

 


(a)         All derivative assets and liabilities with swap dealers and counterparties are executed under collateral agreements; derivative instruments executed bilaterally are subject to legal right of offset under master netting agreements.

(b)         The Other category comprised of swaps intermediated for member, and notional amounts represent purchases by the FHLBNY from dealers and an offsetting purchase from us by the member.

(c)          Variation margin — See Note 1 in the previous table.

(d)         Non-cash security collateral is not permitted to be offset on the balance sheet, but would be eligible for offsetting in an event of default.  Amounts represent U.S. Treasury securities pledged to and received from counterparties as collateral at September 30, 2018 and December 31, 2017.

 

37


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Earnings Impact of Derivatives and Hedging Activities

 

The FHLBNY carries all derivative instruments on the Statements of Condition at fair value as Derivative Assets and Derivative Liabilities.  If derivatives meet the hedging criteria under hedge accounting rules, including effectiveness measures, changes in fair value of the associated hedged financial instrument attributable to the risk being hedged (benchmark interest-rate risk, which is LIBOR for the FHLBNY) may also be recorded so that some or all of the unrealized fair value gains or losses recognized on the derivatives are offset by corresponding unrealized gains or losses on the associated hedged financial assets and liabilities.  The net differential between fair value changes of the derivatives and the hedged items represents hedge ineffectiveness.  The net ineffectiveness from hedges that qualify under hedge accounting rules is recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income.  If derivatives do not qualify for the hedging criteria under hedge accounting rules, but are executed as economic hedges of financial assets or liabilities under a FHLBNY-approved hedge strategy, only the fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income.  The FHLBNY has elected to measure certain debt under the accounting designation for the fair value option (“FVO”), and has executed interest rate swaps as economic hedges of the debt.  While changes in fair values of the interest rate swap and the debt elected under the FVO are both recorded in earnings within Other income (loss), they are recorded as separate line items: Changes in the fair value of the swaps are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities; changes in the fair value of debt and advances elected under the FVO are recorded as an Unrealized (losses) or gains from Instruments held at fair value.

 

Components of net gains (losses) on Derivatives and hedging activities as presented in the Statements of Income are summarized below (in thousands):

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

 

 

Gains
(Losses) on
Derivative

 

Gains
(Losses)
on Hedged
Item

 

Earnings
Impact

 

Effect of
Derivatives
on Net
Interest
Income

 

Gains
(Losses) on
Derivative

 

Gains
(Losses)
on Hedged
Item

 

Earnings
Impact

 

Effect of
Derivatives
on Net
Interest
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

$

31,459

 

$

(31,220

)

$

239

 

$

64,525

 

$

44,549

 

$

(44,054

)

$

495

 

$

(29,188

)

Consolidated obligation bonds

 

(21,510

)

19,988

 

(1,522

)

(9,664

)

1,026

 

(1,255

)

(229

)

121

 

Net gains (losses) related to fair value hedges

 

9,949

 

(11,232

)

(1,283

)

$

54,861

 

45,575

 

(45,309

)

266

 

$

(29,067

)

Cash flow hedges

 

(28

)

 

 

(28

)

$

(1,977

)

141

 

 

 

141

 

$

(7,618

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

9,383

 

 

 

9,383

 

 

 

(3,433

)

 

 

(3,433

)

 

 

Caps or floors

 

(340

)

 

 

(340

)

 

 

(178

)

 

 

(178

)

 

 

Mortgage delivery commitments

 

(83

)

 

 

(83

)

 

 

200

 

 

 

200

 

 

 

Swaps economically hedging instruments designated under FVO

 

(245

)

 

 

(245

)

 

 

1,020

 

 

 

1,020

 

 

 

Accrued interest on swaps in economic hedging relationships

 

(7,315

)

 

 

(7,315

)

 

 

1,535

 

 

 

1,535

 

 

 

Net gains (losses) related to derivatives not designated as hedging instruments

 

1,400

 

 

 

1,400

 

 

 

(856

)

 

 

(856

)

 

 

Price alignment interest paid on variation margin

 

(3,286

)

 

 

(3,286

)

 

 

(792

)

 

 

(792

)

 

 

Net gains (losses) on derivatives and hedging activities

 

$

8,035

 

$

(11,232

)

$

(3,197

)

 

 

$

44,068

 

$

(45,309

)

$

(1,241

)

 

 

 

38


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

 

 

Gains
(Losses) on
Derivative

 

Gains
(Losses)
on Hedged
Item

 

Earnings
Impact

 

Effect of
Derivatives
on Net
Interest
Income

 

Gains
(Losses) on
Derivative

 

Gains
(Losses)
on Hedged
Item

 

Earnings
Impact

 

Effect of
Derivatives
on Net
Interest
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

$

360,690

 

$

(359,786

)

$

904

 

$

132,478

 

$

54,890

 

$

(53,644

)

$

1,246

 

$

(128,149

)

Consolidated obligation bonds

 

(124,583

)

122,018

 

(2,565

)

(22,881

)

11,691

 

(14,302

)

(2,611

)

15,729

 

Net gains (losses) related to fair value hedges

 

236,107

 

(237,768

)

(1,661

)

$

109,597

 

66,581

 

(67,946

)

(1,365

)

$

(112,420

)

Cash flow hedges

 

2

 

 

 

2

 

$

(10,206

)

332

 

 

 

332

 

$

(23,691

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

3,859

 

 

 

3,859

 

 

 

3,913

 

 

 

3,913

 

 

 

Caps or floors

 

(20

)

 

 

(20

)

 

 

(3,784

)

 

 

(3,784

)

 

 

Mortgage delivery commitments

 

(229

)

 

 

(229

)

 

 

639

 

 

 

639

 

 

 

Swaps economically hedging instruments designated under FVO

 

72

 

 

 

72

 

 

 

4,765

 

 

 

4,765

 

 

 

Accrued interest on swaps in economic hedging relationships

 

(20,913

)

 

 

(20,913

)

 

 

(3,792

)

 

 

(3,792

)

 

 

Net gains (losses) related to derivatives not designated as hedging instruments

 

(17,231

)

 

 

(17,231

)

 

 

1,741

 

 

 

1,741

 

 

 

Price alignment interest paid on variation margin

 

(8,392

)

 

 

(8,392

)

 

 

(2,067

)

 

 

(2,067

)

 

 

Net gains (losses) on derivatives and hedging activities

 

$

210,486

 

$

(237,768

)

$

(27,282

)

 

 

$

66,587

 

$

(67,946

)

$

(1,359

)

 

 

 

Cash Flow Hedges

 

The effect of interest rate swaps in cash flow hedging relationships was as follows (in thousands):

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

 

 

AOCI

 

AOCI

 

 

 

Gains/(Losses)

 

Gains/(Losses)

 

 

 

Recognized in
AOCI 
(c) 

 

Location:
Reclassified to
Earnings 
(c)

 

Amount
Reclassified to
Earnings 
(c)

 

Ineffectiveness
Recognized in
Earnings

 

Recognized in
AOCI 
(c)

 

Location:
Reclassified to
Earnings 
(c)

 

Amount
Reclassified to
Earnings 
(c)

 

Ineffectiveness
Recognized in
Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds (a)

 

$

55

 

Interest Expense

 

$

64

 

$

(28

)

$

184

 

Interest Expense

 

$

(301

)

$

141

 

Consolidated obligation discount notes (b)

 

25,064

 

Interest Expense

 

 

 

5,197

 

Interest Expense

 

 

 

 

 

$

25,119

 

 

 

$

64

 

$

(28

)

$

5,381

 

 

 

$

(301

)

$

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

 

 

AOCI

 

AOCI

 

 

 

Gains/(Losses)

 

Gains/(Losses)

 

 

 

Recognized in
AOCI 
(c)

 

Location:
Reclassified to
Earnings 
(c)

 

Amount
Reclassified to
Earnings 
(c)

 

Ineffectiveness
Recognized in
Earnings

 

Recognized in
AOCI 
(c)

 

Location:
Reclassified to
Earnings 
(c)

 

Amount
Reclassified to
Earnings 
(c)

 

Ineffectiveness
Recognized in
Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds (a)

 

$

889

 

Interest Expense

 

$

97

 

$

2

 

$

(237

)

Interest Expense

 

$

(904

)

$

332

 

Consolidated obligation discount notes (b)

 

102,125

 

Interest Expense

 

 

 

1,918

 

Interest Expense

 

 

 

 

 

$

103,014

 

 

 

$

97

 

$

2

 

$

1,681

 

 

 

$

(904

)

$

332

 

 


(a)    Cash flow hedges of anticipated issuance of Consolidated obligation bonds

 

Changes in period recognized in AOCI — Amounts reported typically represent fair value gains and losses recorded in AOCI under the CO bond cash flow hedge strategy during the periods, and including fair values of hedging contracts open at period end dates.  Fair values recorded in AOCI are adjusted for any hedge ineffectiveness on the contracts.  When a cash flow hedge is closed, the fair value gain or loss on the derivative is recorded in AOCI, and is amortized and reclassified to interest expense with an offset to the cumulative balance in AOCI.

 

Amount Reclassified to Earnings — Amounts represented amortization of unrecognized gains and losses from previously closed CO bond cash flow hedging contracts that were recorded as a yield adjustment to interest expense with an offset to reduce the unamortized balance in AOCI.

 

Ineffectiveness Recognized in Earnings — Amounts represented ineffectiveness primarily arising from CO bond cash flow hedging strategies.  Ineffectiveness is recorded in earnings as a gain or loss from derivative activities in Other income, while the effective portion is recorded in AOCI.  Amounts recorded in AOCI are subsequently reclassified prospectively as a yield adjustment to debt expense over the term of the debt.

 

(b)     Hedges of discount notes in rolling issuances

 

Changes in period recognized in AOCI — Amounts represented period-over-period change in the fair values of open swap contracts in this CO discount note cash flow hedging strategy (Rolling issuances of discount notes).  The cash flow hedges mitigated exposure to the variability in future cash flows over a maximum period of 14 years.

 

(c)     Ineffectiveness recognized in earnings — The effective portion of the fair values of open contracts is recorded in AOCI.  Ineffectiveness is recorded in Other income as a component of derivatives and hedging gains and losses.

 

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Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Cash Flow Hedges — Fair Value changes in AOCI Rollforward Analysis (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Rollover Hedge
Program

 

Anticipatory Hedge
Program

 

Rollover Hedge
Program

 

Anticipatory Hedge
Program

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

(23,342

)

$

3,465

 

$

(49,312

)

$

2,294

 

Changes in fair values (a)

 

102,125

 

133

 

25,970

 

(1,772

)

Amount reclassified

 

 

(97

)

 

1,141

 

Fair Value - closed contract

 

 

756

 

 

1,802

 

Ending balance

 

$

78,783

 

$

4,257

 

$

(23,342

)

$

3,465

 

 

 

 

 

 

 

 

 

 

 

Notional amount of swaps outstanding

 

$

2,664,000

 

$

100,900

 

$

2,349,000

 

$

30,000

 

 


(a)             Changes in fair value of contracts that were outstanding at the beginning and at the end of the nine- and twelve-month periods in the Rollforward table above.

 

There were no amounts that were reclassified into earnings due to discontinuation of cash flow hedges.  Reclassification would occur if 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.

 

It is expected that over the next 12 months, $0.3 million of the unrecognized gain in AOCI will be recognized as a yield adjustment to debt interest expense.

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 18.                 Fair Values of Financial Instruments.

 

Estimated Fair Values — Summary Tables — The carrying values, estimated fair values and the levels within the fair value hierarchy were as follows (in thousands):

 

 

 

September 30, 2018

 

 

 

 

 

Estimated Fair Value

 

 

 

Financial Instruments

 

Carrying Value

 

Total

 

Level 1

 

Level 2

 

Level 3 (a)

 

Netting
Adjustment and
Cash Collateral

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

87,005

 

$

87,005

 

$

87,005

 

$

 

$

 

$

 

Securities purchased under agreements to resell

 

4,870,000

 

4,870,016

 

 

4,870,016

 

 

 

Federal funds sold

 

14,360,000

 

14,360,063

 

 

14,360,063

 

 

 

Trading securities

 

4,642,904

 

4,642,904

 

3,877,939

 

764,965

 

 

 

Equity Investments

 

52,150

 

52,150

 

52,150

 

 

 

 

Available-for-sale securities

 

444,293

 

444,293

 

 

 

444,293

 

 

 

Held-to-maturity securities

 

17,859,215

 

17,718,776

 

 

16,375,344

 

1,343,432

 

 

Advances

 

100,165,960

 

100,135,584

 

 

100,135,584

 

 

 

Mortgage loans held-for-portfolio, net

 

2,910,298

 

2,789,242

 

 

2,789,242

 

 

 

Accrued interest receivable

 

288,421

 

288,421

 

 

288,421

 

 

 

Derivative assets

 

126,754

 

126,754

 

 

572,247

 

 

(445,493

)

Other financial assets

 

537

 

537

 

 

 

537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

936,238

 

936,224

 

 

936,224

 

 

 

Consolidated obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

85,909,679

 

85,533,025

 

 

85,533,025

 

 

 

Discount notes

 

50,821,648

 

50,817,773

 

 

50,817,773

 

 

 

Mandatorily redeemable capital stock

 

6,664

 

6,664

 

6,664

 

 

 

 

Accrued interest payable

 

208,985

 

208,985

 

 

208,985

 

 

 

Derivative liabilities

 

24,351

 

24,351

 

 

378,218

 

 

(353,867

)

Other financial liabilities

 

83,180

 

83,180

 

83,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

Estimated Fair Value

 

 

 

Financial Instruments

 

Carrying Value

 

Total

 

Level 1

 

Level 2

 

Level 3 (a)

 

Netting
Adjustment and
Cash Collateral

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

127,403

 

$

127,403

 

$

127,403

 

$

 

$

 

$

 

Securities purchased under agreements to resell

 

2,700,000

 

2,700,008

 

 

2,700,008

 

 

 

Federal funds sold

 

10,326,000

 

10,325,920

 

 

10,325,920

 

 

 

Trading securities

 

1,641,568

 

1,641,568

 

1,284,669

 

356,899

 

 

 

Available-for-sale securities

 

577,269

 

577,269

 

48,642

 

528,627

 

 

 

Held-to-maturity securities

 

17,824,533

 

17,906,773

 

 

16,575,243

 

1,331,530

 

 

Advances

 

122,447,805

 

122,401,759

 

 

122,401,759

 

 

 

Mortgage loans held-for-portfolio, net

 

2,896,976

 

2,886,189

 

 

2,886,189

 

 

 

 

Accrued interest receivable

 

226,981

 

226,981

 

 

226,981

 

 

 

Derivative assets

 

112,742

 

112,742

 

 

414,623

 

 

(301,881

)

Other financial assets

 

682

 

682

 

 

 

682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,196,055

 

1,196,027

 

 

1,196,027

 

 

 

Consolidated obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

99,288,048

 

99,130,116

 

 

99,130,116

 

 

 

Discount notes

 

49,613,671

 

49,609,537

 

 

49,609,537

 

 

 

Mandatorily redeemable capital stock

 

19,945

 

19,945

 

19,945

 

 

 

 

Accrued interest payable

 

162,176

 

162,176

 

 

162,176

 

 

 

Derivative liabilities

 

61,607

 

61,607

 

 

325,892

 

 

(264,285

)

Other financial liabilities

 

84,194

 

84,194

 

84,194

 

 

 

 

 

The fair value amounts recorded on the Statements of Condition or presented have been determined by the FHLBNY using available market information and our reasonable judgment of appropriate valuation methods.

 


(a)         Level 3 Instruments — The fair values of non-Agency private-label MBS and housing finance agency bonds were estimated by management based on pricing services.  Valuations may have required pricing services to use significant inputs that were subjective because of the current lack of significant market activity; the inputs may not be market based and observable.

 

41


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Fair Value Hierarchy

 

The FHLBNY records trading securities, available-for-sale securities, derivative assets, derivative liabilities, and Consolidated obligations and advances elected under the FVO at fair values on a recurring basis.  On a non-recurring basis, when held-to-maturity securities are determined to be OTTI, the securities are written down, they are recorded at their fair values, and when mortgage loans held-for-portfolio are written down or are foreclosed as Other real estate owned (“REO” or “OREO”), they are recorded at the fair values of the real estate collateral supporting the mortgage loans.

 

The accounting standards under Fair Value Measurement defines fair value, establishes a consistent framework for measuring fair value and requires disclosures about fair value measurements.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Among other things, the standard requires the FHLBNY to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard specifies a hierarchy of inputs based on whether the inputs are observable or unobservable.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the FHLBNY’s market assumptions.

 

These two types of inputs have created the following fair value hierarchy, and an entity must disclose the level within the fair value hierarchy in which the measurements are classified for all assets and liabilities measured on a recurring or non-recurring basis:

 

·                  Level 1 Inputs — Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.

·                  Level 2 Inputs — Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly.  If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.  Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and volatilities).

·                  Level 3 Inputs — Inputs that are unobservable and significant to the valuation of the asset or liability.

 

The inputs are evaluated on an overall level for the fair value measurement to be determined.  This overall level is an indication of market observability of the fair value measurement for the asset or liability.  Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities.  These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur.  There were no such transfers in any periods in this report.

 

The availability of observable inputs can vary from product to product and is affected by a wide variety of factors including, for example, the characteristics peculiar to the transaction.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, the degree of judgment exercised by the FHLBNY in determining fair value is greatest for instruments categorized as Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

Summary of Valuation Techniques and Primary Inputs

 

The fair value of a financial instrument that is an asset is defined as the price the FHLBNY would receive to sell the asset in an orderly transaction with market participants.  A financial liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.  Where available, fair values are based on observable market prices or parameters, or derived from such prices or parameters.  Where observable prices are not available, valuation models and inputs are utilized.  These valuation techniques involve some level of management estimation and judgment, the degree of which is

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

dependent on the price transparency for the instruments or markets and the instruments’ complexity.  Because an active secondary market does not exist for a portion of the FHLBNY’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change.  The fair values of financial assets and liabilities reported in the tables above are discussed below:

 

Investment Debt Securities — The fair value of investment debt securities is estimated by the FHLBNY using pricing primarily from pricing services.  The pricing vendors typically use market multiples derived from a set of comparables, including matrix pricing, and other techniques.

 

Mortgage-backed securities — The FHLBNY’s valuation technique incorporates prices from up to three designated third-party pricing services at September 30, 2018 and December 31, 2017.  The FHLBNY’s base investment pricing methodology establishes a median price for each security using a formula that is based on the number of prices received.  If three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used, typically subject to further validation.  Vendor prices that are outside of a defined tolerance threshold of the median price are identified as outliers and subject to additional review, including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates, or use of internal model prices, which are deemed to be reflective of all relevant facts and circumstances that a market participant would consider.  Such analysis is also applied in those limited instances where no third-party vendor price or only one third-party vendor price is available in order to arrive at an estimated fair value.

 

In its analysis, the FHLBNY employs the concept of cluster pricing and cluster tolerances.  Once the median prices are computed from the three pricing vendors, the second step is to determine which of the sourced prices fall within the required tolerance level interval to the median price, which forms the “cluster” of prices to be averaged.  This average will determine a “default” price for the security.  The cluster tolerance guidelines shall be reviewed annually and may be revised as necessary.  To be included among the cluster, each price must fall within 7 points of the median price for residential PLMBS and within 3 points of the median price for GSE-issued MBS.  The final step is to determine the final price of the security based on the cluster average and an evaluation of any outlier prices.  If the analysis confirms that an outlier is not representative of fair value and that the average of the vendor prices within the tolerance threshold of the median price is the best estimate, then the average of the vendor prices within the tolerance threshold of the median price is used as the final price.  If, on the other hand, an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price.  In all cases, the final price is used to determine the fair value of the security.

 

The FHLBNY has also concluded that the pricing vendors use methods that generally employ, but are not limited to benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing.  To validate vendor prices of PLMBS, the FHLBNY has also adopted a formal process to examine yields as an additional validation method.  The FHLBNY calculates an implied yield for each of its PLMBS using estimated fair values derived from cash flows on a bond-by-bond basis.  This yield is then compared to the implied yield for comparable securities according to price information from third-party MBS “market surveillance reports”.  Significant variances or inconsistencies are evaluated in conjunction with all of the other available pricing information.  The objective is to determine whether an adjustment to the fair value estimate is appropriate.

 

Based on the FHLBNY’s review processes, management has concluded that inputs into the pricing models employed by pricing services for the FHLBNY’s investments in GSE securities are market based and observable and are considered to be within Level 2 of the fair value hierarchy.  The valuation of the private-label securities, all designated as held-to-maturity, may require pricing services to use significant inputs that are subjective and are considered to be within Level 3 of the fair value hierarchy.  This determination was made based on management’s view that the private-label instruments may not have an active market because of the specific vintage of the securities as well as inherent conditions surrounding the trading of private-label MBS, so that the inputs may not be market based and observable.  At September 30, 2018, no held-to-maturity private-label MBS was deemed OTTI.  An immaterial amount of OTTI was recorded in the 2018 second quarter.  At December 31, 2017, no held-to-

 

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Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

maturity private-label MBS was deemed OTTI that would have required the OTTI security to be written down to its fair value.

 

Housing finance agency bonds — The fair value of housing finance agency bonds is estimated by management using information primarily from pricing services.  Because of the current lack of significant market activity, their fair values were categorized within Level 3 of the fair value hierarchy as inputs into vendor pricing models may not be market based and observable.

 

Trading Securities — The FHLBNY classifies trading securities as Level 1 of the fair value hierarchy when we use quoted market prices in active markets to determine the fair value of trading securities, such as U.S. government securities.  We classify trading securities as Level 2 of the fair value hierarchy when we use quoted market prices in less active markets to determine the fair value of trading securities.

 

Equity Investments — The FHLBNY has grantor trusts, which invest in money market, equity and fixed income and bond funds.  Investments in the trusts were classified as AFS before January 1, 2018.  Daily net asset values (“NAVs”) are readily available and investments are redeemable at short notice.  NAVs are the fair values of the funds in the grantor trusts.  Because of the highly liquid nature of the investments at their NAVs, they are categorized as Level 1 financial instruments under the valuation hierarchy.

 

Advances — The FHLBNY has elected the FVO designation for certain advances and recorded their fair values in the Statements of Condition for such advances.  The fair values are computed using standard option valuation models.  The most significant inputs to the valuation model are (1) Consolidated obligation debt curve (“CO Curve”), published by the Office of Finance and available to the public, and (2) LIBOR swap curves and volatilities.  Both these inputs are considered to be market based and observable as they can be directly corroborated by market participants.

 

The CO Curve is the primary input, which is market based and observable.  Inputs to apply spreads, which are FHLBNY specific, were not material.  Fair values were classified within Level 2 of the valuation hierarchy.

 

The FHLBNY determines the fair values of advances elected under the FVO by calculating the present value of expected future cash flows from the advances, a methodology also referred to as the Income approach under the Fair Value Measurement standards.  The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms.  In accordance with the Finance Agency’s “Advances” regulations, an advance with a maturity or repricing period greater than six months requires a prepayment fee sufficient to make a FHLBank financially indifferent to the borrower’s decision to prepay the advance.  Therefore, the fair value of an advance does not assume prepayment risk.

 

The inputs used to determine fair value of advances elected under the FVO are as follows:

 

·                              CO Curve.  The FHLBNY uses the CO Curve, which represents its cost of funds, as an input to estimate the fair value of advances, and to determine current advance rates.  This input is considered market observable and therefore a Level 2 input.

·                              Volatility assumption.  To estimate the fair value of advances with optionality, the FHLBNY uses market-based expectations of future interest rate volatility implied from current market prices for similar options. This input is considered a Level 2 input as it is market based and market observable.

·                              Spread adjustment.  Adjustments represent the FHLBNY’s mark-up based on its pricing strategy.  The input is considered as unobservable, and is classified as a Level 3 input.  The spread adjustment is not a significant input to the overall fair value of an advance.

 

The FHLBNY creates an internal curve, which is interpolated from its advance rates.  Advance rates are calculated by applying a spread to an underlying “base curve” derived from the FHLBNY’s cost of funds, which is based on the CO Curve, inputs to which have been determined to be market observable and classified as Level 2.  The spreads applied to the base advance pricing curve typically represent the FHLBNY’s mark-ups over the FHLBNY’s cost of funds, and are not market observable inputs, but are based on the FHLBNY’s advance pricing strategy.  Such inputs have been classified as a Level 3 input, and were considered as not significant.

 

44


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

To determine the appropriate classification of the overall measurement in the fair value hierarchy of an advance, an analysis of the inputs to the entire fair value measurement was performed at September 30, 2018 and December 31, 2017.  If the unobservable spread to the FHLBNY’s cost of funds was not significant to the overall fair value, then the measurement was classified as Level 2.  Conversely, if the unobservable spread was significant to the overall fair value, then the measurement would be classified as Level 3.  The impact of the unobservable input was calculated as the difference in the value determined by discounting an advance’s cash flows using the FHLBNY’s advance curve and the value determined by discounting an advance’s cash flows using the FHLBNY’s cost of funds curve.  Given the relatively small mark-ups over the FHLBNY’s cost of funds, the results of the FHLBNY’s quantitative analysis confirmed the FHLBNY’s expectations that the measurement of the FHLBNY’s advances was Level 2.  The unobservable mark-up spreads were not significant to the overall fair value of the instrument.  A quantitative threshold for the significance factor has been established at 10%, with additional qualitative factors to be considered if the ratio exceeded the threshold.

 

Consolidated Obligations — The FHLBNY estimates the fair values of Consolidated obligations elected under the FVO based on the present values of expected future cash flows due on the debt obligations.  Calculations are performed by using the FHLBNY’s industry standard option adjusted valuation models.  Inputs are based on the cost of comparable term debt.  The FHLBNY’s internal valuation models use standard valuation techniques and estimate fair values based on the following inputs:

 

·                              CO Curve and LIBOR Swap Curve.  The Office of Finance constructs an internal curve, referred to as the CO Curve, using the U.S. Treasury Curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources.  These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades and secondary market activity.  The FHLBNY considers the inputs as Level 2 inputs as they are market observable.

·                              Volatility assumption.  To estimate the fair values of Consolidated obligations with optionality, the FHLBNY uses market-based expectations of future interest rate volatility implied from current market prices for similar options.  These inputs are also considered Level 2 as they are market based and observable.

 

The CO Curve and volatility assumptions (for debt with call options) were primary inputs, which are market based and observable.  Fair values were classified within Level 2 of the valuation hierarchy.

 

Derivative Assets and Liabilities The FHLBNY’s derivatives (cleared derivatives and bilaterally executed derivatives) are executed in the over-the-counter market and are valued using internal valuation techniques as no quoted market prices exist for such instruments.  Discounted cash flow analysis is the primary methodology employed by the FHLBNY’s valuation models to measure the fair values of interest rate swaps.  The valuation technique is considered as an “Income approach”.  Interest rate caps and floors are valued under the “Market approach”.  Interest rate swaps and interest rate caps and floors, collectively “derivatives”, were valued in industry-standard option adjusted valuation models, which generated fair values.  The valuation models employed multiple market inputs including interest rates, prices and indices to create continuous yield or pricing curves and volatility factors.  These multiple market inputs were corroborated by management to independent market data, and to relevant benchmark indices.  In addition, derivative valuations were compared by management to counterparty valuations received as part of the collateral exchange process.  These derivative positions were classified within Level 2 of the valuation hierarchy at September 30, 2018 and December 31, 2017.

 

The FHLBNY’s valuation model utilizes a modified Black-Karasinski methodology.  Significant market based and observable inputs into the valuation model include volatilities and interest rates.  The Bank’s valuation model employs industry standard market-observable inputs (inputs that are actively quoted and can be validated to external sources).  Inputs by class of derivative were as follows:

 

Interest-rate related:

 

·                              LIBOR Swap Curve.

·                              Volatility assumption.  Market-based expectations of future interest rate volatility implied from current market prices for similar options.

·                              Prepayment assumption (if applicable).

·                              Federal funds curve (OIS curve).

 

45


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Mortgage delivery commitments (considered a derivative):

 

·          TBA security prices are adjusted for differences in coupon, average loan rate and seasoning. OIS — The FHLBNY incorporates the overnight indexed swap (“OIS”) curves as fair value measurement inputs for the valuation of its derivatives, as the OIS curves reflect the interest rates paid on cash collateral provided against the fair value of these derivatives.  The FHLBNY believes using relevant OIS curves as inputs to determine fair value measurements provides a more representative reflection of the fair values of these collateralized interest-rate related derivatives.  The OIS curve (federal funds rate curve) is an input to the valuation model.  The input for the federal funds curve is obtained from industry standard pricing vendors and the input is available and observable over its entire term structure.

 

Management considers the federal funds curve to be a Level 2 input.  The FHLBNY’s valuation model utilizes industry standard OIS methodology.  The model generates forecasted cash flows using the OIS calibrated 3-month LIBOR curve.  The model then discounts the cash flows by the OIS curve to generate fair values.

 

Credit risk and credit valuation adjustments — The FHLBNY is subject to credit risk in derivatives transactions due to the potential non-performance of its derivatives counterparties or a DCO.

 

To mitigate this risk, the FHLBNY has entered into master netting agreements and credit support agreements with its derivative counterparties for its bilaterally executed derivative contracts that provide for the delivery of collateral at specified levels at least weekly.  The computed fair values of the derivatives took into consideration the effects of legally enforceable master netting agreements that allow the FHLBNY to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis.

 

For derivative transactions executed as a cleared derivative, the transactions are fully collateralized in cash and for the most part exchanged and settled daily with the DCO.  The FHLBNY has also established the enforceability of offsetting rights incorporated in the agreements for the cleared derivative transactions.

 

As a result of these practices and agreements and the FHLBNY’s assessment of any change in its own credit spread, the FHLBNY has concluded that the impact of the credit differential between the FHLBNY and its derivative counterparties and DCO was sufficiently mitigated to an immaterial level that no credit adjustments were deemed necessary to the recorded fair value of Derivative assets and Derivative liabilities in the Statements of Condition at September 30, 2018 and December 31, 2017.

 

Fair Value Measurement

 

The tables below present the fair value of those assets and liabilities that are recorded at fair value on a recurring or non-recurring basis at September 30, 2018 and December 31, 2017, by level within the fair value hierarchy.  The FHLBNY also measures certain held-to-maturity securities at fair value on a non-recurring basis when a credit loss is recognized and the carrying value of the asset is adjusted to fair value.  Certain mortgage loans that were partially charged-off were recorded at their collateral values on a non-recurring basis.  Other real estate owned (“OREO”) is measured at fair value when the asset’s fair value less costs to sell is lower than its carrying amount.

 

46


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Items Measured at Fair Value on a Recurring Basis (in thousands):

 

 

 

September 30, 2018

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Netting
Adjustment and
Cash Collateral

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

 

 

 

 

 

 

 

 

 

 

GSE securities

 

$

761,454

 

$

 

$

761,454

 

$

 

$

 

Corporate notes

 

3,511

 

 

3,511

 

 

 

U.S. Treasury securities

 

3,877,939

 

3,877,939

 

 

 

 

Equity Investments

 

52,150

 

52,150

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

GSE/U.S. agency issued MBS

 

444,293

 

 

444,293

 

 

 

Derivative assets (a)

 

 

 

 

 

 

 

 

 

 

 

Interest-rate derivatives

 

126,734

 

 

572,227

 

 

(445,493

)

Mortgage delivery commitments

 

20

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring fair value measurement - assets

 

$

5,266,101

 

$

3,930,089

 

$

1,781,505

 

$

 

$

(445,493

)

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Bonds (to the extent FVO is elected) (b)

 

$

(679,155

)

$

 

$

(679,155

)

$

 

$

 

Derivative liabilities (a)

 

 

 

 

 

 

 

 

 

 

 

Interest-rate derivatives

 

(24,298

)

 

(378,165

)

 

353,867

 

Mortgage delivery commitments

 

(53

)

 

(53

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring fair value measurement - liabilities

 

$

(703,506

)

$

 

$

(1,057,373

)

$

 

$

353,867

 

 

 

 

December 31, 2017

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Netting
Adjustment and
Cash Collateral

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

 

 

 

 

 

 

 

 

 

 

GSE securities

 

$

356,899

 

$

 

$

356,899

 

$

 

$

 

U.S. Treasury securities

 

1,284,669

 

1,284,669

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

GSE/U.S. agency issued MBS

 

528,627

 

 

528,627

 

 

 

Equity and bond funds

 

48,642

 

48,642

 

 

 

 

Advances (to the extent FVO is elected)

 

2,205,624

 

 

2,205,624

 

 

 

Derivative assets (a)

 

 

 

 

 

 

 

 

 

 

 

Interest-rate derivatives

 

112,732

 

 

414,613

 

 

(301,881

)

Mortgage delivery commitments

 

10

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring fair value measurement - assets

 

$

4,537,203

 

$

1,333,311

 

$

3,505,773

 

$

 

$

(301,881

)

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligations:

 

 

 

 

 

 

 

 

 

 

 

Discount notes (to the extent FVO is elected)

 

$

(2,312,621

)

$

 

$

(2,312,621

)

$

 

$

 

Bonds (to the extent FVO is elected) (b)

 

(1,131,074

)

 

(1,131,074

)

 

 

Derivative liabilities (a)

 

 

 

 

 

 

 

 

 

 

 

Interest-rate derivatives

 

(61,592

)

 

(325,877

)

 

264,285

 

Mortgage delivery commitments

 

(15

)

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring fair value measurement - liabilities

 

$

(3,505,302

)

$

 

$

(3,769,587

)

$

 

$

264,285

 

 


(a)         Based on analysis of the nature of the risk, the presentation of derivatives as a single class is appropriate.

(b)         Based on analysis of the nature of risks of Consolidated obligation bonds measured at fair value, the FHLBNY has determined that presenting the bonds as a single class is appropriate.

 

47


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Items Measured at Fair Value on a Non-recurring Basis (in thousands):

 

 

 

September 30, 2018

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held-for-portfolio

 

$

795

 

$

 

$

795

 

$

 

Real estate owned

 

659

 

 

 

659

 

Total non-recurring assets at fair value

 

$

1,454

 

$

 

$

795

 

$

659

 

 

 

 

December 31, 2017

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held-for-portfolio

 

$

2,519

 

$

 

$

2,519

 

$

 

Real estate owned

 

1,071

 

 

 

1,071

 

Total non-recurring assets at fair value

 

$

3,590

 

$

 

$

2,519

 

$

1,071

 

 

Fair Value Option Disclosures

 

The fair value option (“FVO”) provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value.  It requires entities to display the fair value of those assets and liabilities for which the entity has chosen to use fair value on the face of the Statements of Condition.  Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income.  Interest income and interest expense on advances and Consolidated obligations at fair value are recognized solely on the contractual amount of interest due or unpaid.  Any transaction fees or costs are immediately recognized into non-interest income or non-interest expense.

 

The FHLBNY has elected the FVO for certain advances and certain Consolidated obligations that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements, primarily in an effort to mitigate the potential income statement volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value.  Advances have also been elected under the FVO when analysis indicated that changes in the fair values of the advance would be an offset to fair value volatility of debt elected under the FVO.  The FVO election is made at inception of the contracts for advances and debt obligations.

 

For instruments for which the fair value option has been elected, the related contractual interest income, contractual interest expense and the discount amortization on fair value option discount notes are recorded as part of net interest income in the Statements of Income.  The remaining changes in fair value for instruments for which the fair value option has been elected are recorded as net gains (losses) on financial instruments held under fair value option in the Statements of Income.  The change in fair value does not include changes in instrument-specific credit risk.  The FHLBNY has determined that no adjustments to the fair values of its instruments recorded under the fair value option for instrument-specific credit risk were necessary at September 30, 2018 and December 31, 2017.

 

Advances elected under the FVO were short-term in nature, with tenors that were generally less than 24 months.  As with all advances, the loans were fully collateralized through their terms to maturity.  Consolidated obligation bonds and discount notes elected under the FVO are high credit quality, highly-rated instruments, and changes in fair values were generally related to changes in interest rates and investor preference, including investor asset allocation strategies.  The FHLBNY believes the credit-quality of Consolidated obligation debt has remained stable, and changes in fair value attributable to instrument-specific credit risk, if any, were not material given that the debt elected under the FVO had been issued within the past 24 months, and no adverse changes have been observed in their credit characteristics.

 

48


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The following tables summarize the activity related to financial instruments for which the FHLBNY elected the fair value option (in thousands):

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

 

 

Advances

 

Bonds

 

Discount Notes

 

Balance, beginning of the period

 

$

250,532

 

$

2,741,800

 

$

(29,784

)

$

(399,794

)

$

 

$

(3,679,025

)

New transactions elected for fair value option

 

 

 

(650,000

)

 

 

(268,375

)

Maturities and terminations

 

(250,000

)

(35,079

)

 

369,000

 

 

3,670,424

 

Net gains (losses) on financial instruments held under fair value option

 

(175

)

(174

)

710

 

(148

)

 

(1,154

)

Change in accrued interest/unaccreted balance

 

(357

)

510

 

(81

)

1,062

 

 

9,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of the period

 

$

 

$

2,707,057

 

$

(679,155

)

$

(29,880

)

$

 

$

(268,762

)

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

 

 

Advances

 

Bonds

 

Discount Notes

 

Balance, beginning of the period

 

$

2,205,624

 

$

9,873,157

 

$

(1,131,074

)

$

(2,052,513

)

$

(2,312,621

)

$

(12,228,412

)

New transactions elected for fair value option

 

 

5,000,000

 

(765,000

)

 

(1,564,375

)

(3,938,799

)

Maturities and terminations

 

(2,200,000

)

(12,159,568

)

1,215,000

 

2,019,550

 

3,873,993

 

15,875,322

 

Net gains (losses) on financial instruments held under fair value option

 

(590

)

(3,726

)

758

 

51

 

5

 

337

 

Change in accrued interest/unaccreted balance

 

(5,034

)

(2,806

)

1,161

 

3,032

 

2,998

 

22,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of the period

 

$

 

$

2,707,057

 

$

(679,155

)

$

(29,880

)

$

 

$

(268,762

)

 

The following tables present the change in fair value included in the Statements of Income for financial instruments for which the fair value option has been elected (in thousands):

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

 

 

Interest
Income

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

Interest Income

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

$

1,284

 

$

(175

)

$

1,109

 

$

10,232

 

$

(174

)

$

10,058

 

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

 

 

Interest
Income

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

Interest Income

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

$

10,085

 

$

(590

)

$

9,495

 

$

44,442

 

$

(3,726

)

$

40,716

 

 

49


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

 

 

Interest Expense

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

Interest Expense

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds

 

$

(348

)

$

710

 

$

362

 

$

(412

)

$

(148

)

$

(560

)

Consolidated obligation discount notes

 

 

 

 

(3,206

)

(1,154

)

(4,360

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(348

)

$

710

 

$

362

 

$

(3,618

)

$

(1,302

)

$

(4,920

)

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

 

 

Interest Expense

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

Interest Expense

 

Net Gains
(Losses) Due to
Changes in Fair
Value

 

Total Change in Fair
Value Included in
Current Period
Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds

 

$

(4,517

)

$

758

 

$

(3,759

)

$

(5,069

)

$

51

 

$

(5,018

)

Consolidated obligation discount notes

 

(12,332

)

5

 

(12,327

)

(25,162

)

337

 

(24,825

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(16,849

)

$

763

 

$

(16,086

)

$

(30,231

)

$

388

 

$

(29,843

)

 

The following tables compare the aggregate fair value and aggregate remaining contractual principal balance outstanding of financial instruments for which the fair value option has been elected (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Aggregate
Unpaid Principal
Balance

 

Aggregate Fair
Value

 

Fair Value
Over/(Under)
Aggregate Unpaid
Principal Balance

 

Aggregate
Unpaid Principal
Balance

 

Aggregate Fair
Value

 

Fair Value
Over/(Under)
Aggregate Unpaid
Principal Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances (a)

 

$

 

$

 

$

 

$

2,200,000

 

$

2,205,624

 

$

5,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds (b)

 

$

680,000

 

$

679,155

 

$

(845

)

$

1,130,000

 

$

1,131,074

 

$

1,074

 

Consolidated obligation discount notes (c)

 

 

 

 

2,309,618

 

2,312,621

 

3,003

 

 

 

$

680,000

 

$

679,155

 

$

(845

)

$

3,439,618

 

$

3,443,695

 

$

4,077

 

 


(a)         Advances — The FHLBNY has elected the FVO for certain advances, primarily short- and intermediate-term floating-rate advances.  The elections were made primarily as a natural fair value offset to debt elected under the FVO.

(b)         The FHLBNY has elected the FVO for certain short-term CO bonds, primarily fixed-rate shorter-term debt, because management was not able to assert with confidence that the debt would qualify for hedge accounting as such short-term debt may not remain highly effective hedges through the maturity of the bonds.

(c)          Discount notes were elected under the FVO because management was not able to assert with confidence that the debt would qualify for hedge accounting as the short-term discount note debt may not remain highly effective hedges through maturity.

 

50


Table of Contents

 

Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 19.                                                  Commitments and Contingencies.

 

Consolidated obligations — The FHLBanks have joint and several liability for all the Consolidated obligations issued on their behalf.  Accordingly, should one or more of the FHLBanks be unable to repay their participation in the Consolidated obligations, each of the other FHLBanks could be called upon to repay all or part of such obligations, as determined or approved by the Finance Agency.  Neither the FHLBNY nor any other FHLBank has ever had to assume or pay the Consolidated obligations of another FHLBank.  The FHLBNY does not believe that it will be called upon to pay the Consolidated obligations of another FHLBank in the future.  Under the provisions of accounting standards for guarantees, the 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 liabilities as similar to a related party guarantee, which meets the scope exception under the accounting standard for guarantees.  Accordingly, the FHLBNY has not recognized the fair value of a liability for its joint and several obligations related to other FHLBanks’ Consolidated obligations, which in aggregate were par amounts of $1.0 trillion as of September 30, 2018 and as of December 31, 2017.

 

The following table summarizes significant contractual obligations and contingencies as of September 30, 2018 (in thousands):

 

 

 

September 30, 2018

 

 

 

Payments Due or Expiration Terms by Period

 

 

 

 

 

Greater Than

 

Greater Than

 

 

 

 

 

 

 

Less Than

 

One Year

 

Three Years

 

Greater Than

 

 

 

 

 

One Year

 

to Three Years

 

to Five Years

 

Five Years

 

Total

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds at par (a)

 

$

67,678,075

 

$

10,309,675

 

$

3,269,070

 

$

4,356,450

 

$

85,613,270

 

Consolidated obligation discount notes at par

 

50,930,582

 

 

 

 

50,930,582

 

Mandatorily redeemable capital stock (a)

 

949

 

1,071

 

429

 

4,215

 

6,664

 

Premises (lease obligations) (b)

 

5,597

 

13,569

 

14,198

 

74,226

 

107,590

 

Other liabilities (c)

 

126,380

 

9,407

 

7,506

 

64,292

 

207,585

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual obligations

 

118,741,583

 

10,333,722

 

3,291,203

 

4,499,183

 

136,865,691

 

Other commitments

 

 

 

 

 

 

 

 

 

 

 

Standby letters of credit

 

19,122,304

 

13,447

 

 

 

19,135,751

 

Consolidated obligation bonds/discount notes traded not settled

 

370,000

 

 

 

 

370,000

 

Commitments to fund additional advances

 

204,500

 

 

 

 

204,500

 

Open delivery commitments (MPF)

 

25,015

 

 

 

 

25,015

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other commitments

 

19,721,819

 

13,447

 

 

 

19,735,266

 

 

 

 

 

 

 

 

 

 

 

 

 

Total obligations and commitments

 

$

138,463,402

 

$

10,347,169

 

$

3,291,203

 

$

4,499,183

 

$

156,600,957

 

 


(a)         Callable bonds contain an exercise date or a series of exercise dates that may result in a shorter redemption period.  Redemption dates of mandatorily redeemable capital stock are assumed to correspond to maturity dates of member advances.  Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock.

(b)         We renewed the lease for the New York City office in June 2017.  In addition, our existing office lease in New Jersey expires in the fourth quarter of 2018, and in December 2017, we executed a new lease agreement for new space.  The Bank plans to adopt ASU 2016-02, Leases (Topic 842) in 2019.  Upon adoption, the lease obligations will be recorded in the Statements of Condition.  Until then, lease obligations will continue to be reported as commitments under existing GAAP.  Immaterial amounts of equipment leases and shared offsite data backup site have been excluded.

(c)          Includes accounts payable and accrued expenses, Pass-through reserves due to member institutions held at the FRB, and projected payment obligations for pension plans.  Where it was not possible to estimate the exact timing of payment obligations, they were assumed to be due within one year; amounts were not material.  For more information about employee retirement plans in general, see Note 16. Employee Retirement Plans.

 

The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses is required.

 

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Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Note 20.                                                  Related Party Transactions.

 

The FHLBNY is a cooperative and the members own almost all of the stock of the FHLBNY.  Stock issued and outstanding 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, and considers its transactions with its members and non-member stockholders as related party transactions in addition to transactions with other FHLBanks, the Office of Finance, and the Finance Agency.  The FHLBNY conducts all transactions with members and non-members in the ordinary course of business.  All transactions with all members, including those whose officers may serve as directors of the FHLBNY, are at terms that are no more favorable than comparable transactions with other members.  The FHLBNY may from time to time borrow or sell overnight and term federal funds at market rates to members.

 

Debt Assumptions and Transfers.   When debt is transferred or assumed, the transactions would be executed in the ordinary course of the FHLBNY’s business and at negotiated market pricing.

 

Debt assumptions — No debt was assumed from another FHLBank in the nine months ended September 30, 2018 and in the same period in the prior year.

 

Debt transfers — No debt was transferred to another FHLBank in the nine months ended September 30, 2018 and in the same period in the prior year.

 

Advances Sold or Transferred

 

No advances were transferred or sold to the FHLBNY or from the FHLBNY to another FHLBank in any periods in this report. When an advance is transferred or assumed, the transactions would be executed in the ordinary course of the FHLBNY’s business and at negotiated market pricing.

 

MPF Program

 

In the MPF program, the FHLBNY may participate to the FHLBank of Chicago portions of its purchases of mortgage loans from its members.  Transactions are participated at market rates.  Since 2004, the FHLBNY has not shared its purchases with the FHLBank of Chicago.  From the inception of the program through 2004, the cumulative share of MPF Chicago’s participation in the FHLBNY’s MPF loans that has remained outstanding was $9.2 million and $11.5 million at September 30, 2018 and December 31, 2017.

 

Fees paid to the FHLBank of Chicago for providing MPF program services were approximately $0.6 million and $2.0 million for the three and nine months ended September 30, 2018, compared to $0.6 million and $1.7 million for the same periods in the prior year.

 

Mortgage-backed Securities

 

No mortgage-backed securities were acquired from other FHLBanks during the periods in this report.

 

We pay an annual fee of $6.0 thousand to the FHLBank of Chicago for the use of MBS cash flow models in connection with OTTI analysis performed by the FHLBNY for certain of our private-label MBS.

 

Intermediation

 

From time to time, the FHLBNY acts as an intermediary to purchase derivatives to accommodate its smaller members.  At September 30, 2018 and December 31, 2017, outstanding notional amounts were $289.0 million and $193.0 million and represented derivative contracts in which the FHLBNY acted as an intermediary to execute derivative contracts with members.  Separately, the contracts were offset with contracts purchased from unrelated derivatives dealers.  Net fair value exposures of these transactions at September 30, 2018 and December 31, 2017 were not significant.  The intermediated derivative transactions with members were fully collateralized.

 

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Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Loans to Other Federal Home Loan Banks

 

In the three and nine months ended September 30, 2018, overnight loans extended to other FHLBanks averaged $17.5 million and $7.1 million compared to $2.2 million and $4.4 million in the same periods in the prior year.  Generally, loans made to other FHLBanks are uncollateralized.  Interest income from such loans was immaterial in the periods in this report.

 

Borrowings from Other Federal Home Loan Banks

 

The FHLBNY borrows from other FHLBanks, generally for a period of one day.  There were no borrowings from other FHLBanks in the three and nine months ended September 30, 2018 and in the same periods of the prior year.

 

Cash and Due from Banks

 

During the nine months ended September 30, 2018, there was no compensating cash balances held at Citibank.  The balance was $41.1 million at December 31, 2017.  Citibank is a member and stockholder of the FHLBNY.  For more information, see Note 3. Cash and Due from Banks.

 

The following tables summarize significant balances and transactions with related parties at September 30, 2018 and December 31, 2017 and transactions for the three and nine months ended September 30, 2018 and September 30, 2017 (in thousands):

 

Related Party:  Outstanding Assets, Liabilities and Capital

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Related

 

Related

 

Assets

 

 

 

 

 

Advances

 

$

100,165,960

 

$

122,447,805

 

Accrued interest receivable

 

218,650

 

175,926

 

 

 

 

 

 

 

Liabilities and capital

 

 

 

 

 

Deposits

 

$

936,238

 

$

1,196,055

 

Mandatorily redeemable capital stock

 

6,664

 

19,945

 

Accrued interest payable

 

418

 

443

 

Affordable Housing Program (a)

 

160,501

 

131,654

 

Other liabilities (b)

 

83,180

 

84,194

 

 

 

 

 

 

 

Capital

 

$

7,581,833

 

$

8,241,038

 

 


(a)           Represents funds not yet allocated or disbursed to AHP programs.

(b)           Related column includes member pass-through reserves at the Federal Reserve Bank of New York.

 

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Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

Related Party: Income and Expense Transactions

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

Related

 

Related

 

Related

 

Related

 

Interest income

 

 

 

 

 

 

 

 

 

Advances

 

$

678,029

 

$

428,927

 

$

1,853,974

 

$

1,107,004

 

Interest-bearing deposits

 

1

 

2

 

3

 

2

 

Loans to other FHLBanks

 

86

 

6

 

99

 

26

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

$

5,032

 

$

5,944

 

$

12,980

 

$

10,831

 

Mandatorily redeemable capital stock

 

221

 

312

 

847

 

955

 

 

 

 

 

 

 

 

 

 

 

Service fees and other

 

$

3,426

 

$

2,950

 

$

10,177

 

$

8,835

 

 

Note 21.                                                  Segment Information and Concentration.

 

The FHLBNY manages its operations as a single business segment.  Management and the FHLBNY’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance.  Advances to large members constitute a significant percentage of the FHLBNY’s advance portfolio and its source of revenues.

 

The FHLBNY’s total assets and capital could significantly decrease if one or more large members were to withdraw from membership or decrease business with the FHLBNY.  Members might withdraw or reduce their business as a result of consolidating with an institution that was a member of another FHLBank, or for other reasons.  The FHLBNY has considered the impact of losing one or more large members.  In general, a withdrawing member would be required to repay all indebtedness prior to the redemption of its capital stock.  Under current conditions, the FHLBNY does not expect the loss of a large member to impair its operations, since the FHLBank Act, as amended, does not allow the FHLBNY to redeem the capital of an existing member if the redemption would cause the FHLBNY to fall below its capital requirements.  Consequently, the loss of a large member should not result in an inadequate capital position for the FHLBNY.  However, such an event could reduce the amount of capital that the FHLBNY has available for continued growth.  This could have various ramifications for the FHLBNY, including a possible reduction in net income and dividends, and a lower return on capital stock for remaining members.

 

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Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

The top ten advance holders at September 30, 2018, December 31, 2017 and September 30, 2017 and associated interest income for the periods then ended are summarized as follows (dollars in thousands):

 

Interest Income — Principal Sources

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Par Value

 

Three Months

 

Nine Months

 

 

 

 

 

 

 

Par

 

of

 

Interest

 

 

 

Interest

 

 

 

 

 

City

 

State

 

Advances

 

Advances

 

Income

 

Percentage (a)

 

Income

 

Percentage (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Citibank, N.A.

 

New York

 

NY

 

$

20,995,000

 

20.83

%

$

171,519

 

36.40

%

$

504,757

 

38.41

%

Metropolitan Life Insurance Company

 

New York

 

NY

 

14,245,000

 

14.13

 

77,973

 

16.55

 

208,775

 

15.89

 

New York Community Bancorp, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York Community Bank (b)

 

Westbury

 

NY

 

13,256,000

 

13.15

 

66,140

 

14.03

 

178,483

 

13.58

 

New York Commercial Bank (b)

 

Westbury

 

NY

 

25,000

 

 

7

 

 

853

 

0.07

 

Subtotal New York Community Bancorp, Inc.

 

 

 

 

 

13,281,000

 

13.15

 

66,147

 

14.03

 

179,336

 

13.65

 

Investors Bank (b)

 

Short Hills

 

NJ

 

4,528,774

 

4.49

 

24,140

 

5.12

 

70,006

 

5.33

 

Sterling National Bank

 

Montebello

 

NY

 

4,427,000

 

4.39

 

25,229

 

5.35

 

68,084

 

5.18

 

Signature Bank

 

New York

 

NY

 

4,210,000

 

4.18

 

24,072

 

5.11

 

66,060

 

5.03

 

Valley National Bank (b)

 

Wayne

 

NJ

 

3,912,000

 

3.88

 

24,339

 

5.16

 

61,704

 

4.70

 

New York Life Insurance Company

 

New York

 

NY

 

3,175,000

 

3.15

 

19,175

 

4.07

 

48,244

 

3.67

 

HSBC Bank USA, National Association (c)

 

Mc Lean

 

VA

 

3,100,000

 

3.08

 

21,059

 

4.47

 

56,562

 

4.30

 

AXA Equitable Life Insurance Company

 

New York

 

NY

 

3,000,415

 

2.98

 

17,614

 

3.74

 

50,455

 

3.84

 

Total

 

 

 

 

 

$

74,874,189

 

74.26

%

$

471,267

 

100.00

%

$

1,313,983

 

100.00

%

 


(a) Interest income percentage is the member’s interest income from advances as a percentage of the top 10 members.

(b) At September 30, 2018, an officer of this member bank also served on the Board of Directors of the FHLBNY.

(c)  For Bank membership purposes, principal place of business is New York, NY.

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

 

 

 

 

Par

 

Total Par Value

 

Twelve Months

 

 

 

City

 

State

 

Advances

 

of Advances

 

Interest Income

 

Percentage (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Citibank, N.A.

 

New York

 

NY

 

$

43,100,000

 

35.12

%

$

450,596

 

36.83

%

Metropolitan Life Insurance Company

 

New York

 

NY

 

14,445,000

 

11.77

 

221,310

 

18.09

 

New York Community Bancorp, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

New York Community Bank

 

Westbury

 

NY

 

11,830,600

 

9.64

 

182,103

 

14.88

 

New York Commercial Bank

 

Westbury

 

NY

 

273,900

 

0.22

 

3,822

 

0.31

 

Subtotal New York Community Bancorp, Inc.

 

 

 

 

 

12,104,500

 

9.86

 

185,925

 

15.19

 

Sterling National Bank (b)(d)

 

Montebello

 

NY

 

4,507,000

 

3.67

 

58,049

 

4.74

 

Investors Bank (b)

 

Short Hills

 

NJ

 

4,326,053

 

3.53

 

82,894

 

6.77

 

Signature Bank

 

New York

 

NY

 

4,195,000

 

3.42

 

36,503

 

2.98

 

Goldman Sachs Bank USA

 

New York

 

NY

 

3,390,000

 

2.76

 

30,433

 

2.49

 

HSBC Bank USA, National Association (c)

 

Mc Lean

 

VA

 

3,100,000

 

2.53

 

68,391

 

5.59

 

AXA Equitable Life Insurance Company

 

New York

 

NY

 

3,000,415

 

2.45

 

52,308

 

4.27

 

New York Life Insurance Company

 

New York

 

NY

 

2,625,000

 

2.14

 

37,263

 

3.05

 

Total

 

 

 

 

 

$

94,792,968

 

77.25

%

$

1,223,672

 

100.00

%

 


(a) Interest income percentage is the member’s interest income from advances as a percentage of the top 10 members.

(b) At December 31, 2017, officer of member bank also served on the Board of Directors of the FHLBNY.

(c)  For Bank membership purposes, principal place of business is New York, NY.

(d) Astoria Bank merged into Sterling National Bank in the fourth quarter 2017.  Both entities are member banks and are related parties.  The par advance balance represents advances outstanding with Sterling, the merged entity.  Interest income reported in the table represented interest income received from Astoria and Sterling in 2017.

 

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Federal Home Loan Bank of New York

Notes to Financial Statements — Unaudited

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Par Value

 

Three Months

 

Nine Months

 

 

 

 

 

 

 

Par

 

of

 

Interest

 

 

 

Interest

 

 

 

 

 

City

 

State

 

Advances

 

Advances

 

Income

 

Percentage (a)

 

Income

 

Percentage (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Citibank, N.A.

 

New York

 

NY

 

$

36,350,000

 

32.13

%

$

128,745

 

38.99

%

$

308,580

 

35.37

%

Metropolitan Life Insurance Company

 

New York

 

NY

 

14,445,000

 

12.77

 

57,653

 

17.46

 

162,418

 

18.62

 

New York Community Bancorp, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York Community Bank

 

Westbury

 

NY

 

11,280,600

 

9.97

 

46,260

 

14.01

 

135,048

 

15.48

 

New York Commercial Bank

 

Westbury

 

NY

 

273,900

 

0.24

 

959

 

0.29

 

2,863

 

0.33

 

Subtotal New York Community Bancorp, Inc.

 

 

 

 

 

11,554,500

 

10.21

 

47,219

 

14.30

 

137,911

 

15.81

 

HSBC Bank USA, National Association (c)

 

Mc Lean

 

VA

 

4,900,000

 

4.33

 

19,592

 

5.93

 

54,119

 

6.20

 

Investors Bank (b)

 

Short Hills

 

NJ

 

4,349,145

 

3.84

 

21,101

 

6.39

 

62,333

 

7.15

 

Valley National Bank (b)

 

Wayne

 

NJ

 

3,072,000

 

2.72

 

14,238

 

4.31

 

38,298

 

4.39

 

Sterling National Bank

 

Montebello

 

NY

 

3,016,000

 

2.67

 

8,485

 

2.57

 

19,064

 

2.19

 

AXA Equitable Life Insurance Company

 

New York

 

NY

 

2,715,415

 

2.40

 

13,730

 

4.16

 

37,317

 

4.28

 

Signature Bank

 

New York

 

NY

 

2,545,023

 

2.25

 

9,626

 

2.92

 

25,399

 

2.91

 

New York Life Insurance Company

 

New York

 

NY

 

2,225,000

 

1.97

 

9,804

 

2.97

 

26,858

 

3.08

 

Total

 

 

 

 

 

$

85,172,083

 

75.29

%

$

330,193

 

100.00

%

$

872,297

 

100.00

%

 


(a) Interest income percentage is the member’s interest income from advances as a percentage of the top 10 members.

(b) At September 30, 2017, officer of member bank also served on the Board of Directors of the FHLBNY.

(c)  For Bank membership purposes, principal place of business is New York, NY.

 

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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 (“we,” “us,” “our,” “the Bank” or the “FHLBNY”), 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, and include statements related to, among others, gains and losses on derivatives, plans to pay dividends and repurchase excess capital stock, future other-than-temporary impairment charges, future classification of securities, and housing reform legislation.  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 Part I, Item 1A. Risk Factors in the Bank’s most recent Form 10-K filed on March 22, 2018, and from time to time in the Bank’s other filings with the SEC, and elsewhere in this report.

 

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Table of Contents

 

Organization of Management’s Discussion and Analysis (“MD&A”).

 

This MD&A is designed to provide information that will assist the readers in better understanding the FHLBNY’s financial statements, the changes in key items in the Bank’s financial statements from period to period and the primary factors driving those changes as well as how accounting principles affect the FHLBNY’s financial statements.  The MD&A is organized as follows:

 

 

 

Page

 

 

 

Executive Overview

 

59

Business Outlook

 

61

Results of Operations

 

65

Net Income

 

65

Net Interest Income, Margin and Interest Rate Spreads

 

67

Interest Income

 

73

Interest Expense

 

75

Earnings Impact of Derivatives and Hedging Activities

 

80

Operating Expense, Compensation and Benefits, and Other Expenses

 

84

Financial Condition

 

86

Advances

 

89

Investments

 

94

Mortgage Loans Held-for-Portfolio

 

98

Debt Financing Activity and Consolidated Obligations

 

100

Stockholders’ Capital

 

105

Derivative Instruments and Hedging Activities

 

107

Liquidity, Short-Term Borrowings and Short-Term Debt

 

108

Legislative and Regulatory Developments

 

112

 

MD&A TABLE REFERENCE

 

Table(s)

 

Description

 

Page(s)

 

 

Selected Financial Data

 

63 - 64

1.1 - 1.14

 

Results of Operations

 

65 - 84

2.1

 

Assessments

 

85

3.1

 

Financial Condition

 

86

4.1 - 4.7

 

Advances

 

90 - 93

5.1 - 5.6

 

Investments

 

94 - 98

6.1 - 6.3

 

Mortgage Loans

 

98 - 99

7.1 - 7.9

 

Consolidated Obligations

 

101 - 105

8.1 - 8.3

 

Capital

 

105 - 106

9.1

 

Derivatives

 

107

10.1 - 10.3

 

Liquidity

 

109

10.4

 

Short-Term Debt

 

110

 

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Executive Overview

 

This overview of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Form 10-Q.  For a more complete understanding of events, trends and uncertainties, as well as the liquidity, capital, credit and market risks, and critical accounting estimates, affecting the Federal Home Loan Bank of New York (“FHLBNY” or “Bank”), this Form 10-Q should be read in its entirety and in conjunction with the Bank’s most recent Form 10-K filed on March 22, 2018.

 

Cooperative business model.  As a cooperative, we seek to maintain a balance between our public policy mission and our ability to provide adequate returns on the capital supplied by our members.  We achieve this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and also by paying a dividend on members’ capital stock.  Our financial strategies are designed to enable us to expand and contract in response to member credit needs.  By investing capital in high-quality, short- and medium-term financial instruments, we maintain sufficient liquidity to satisfy member demand for short- and long-term funds, repay maturing Consolidated obligations, and meet other obligations.  The dividends we pay are largely the result of earnings on invested member capital, net earnings on advances to members, mortgage loans and investments, offset in part by operating expenses and assessments.  Our Board of Directors and Management determine the pricing of member credit and dividend policies based on the needs of our members and the cooperative.

 

Business segment.  We manage our operations as a single business segment.  Advances to members are our primary focus and the principal factor that impacts our operating results.

 

Highlights 2018 Third Quarter

 

Net income — For the FHLBNY, Net income is Net interest income, minus credit losses on mortgage loans, plus Other income (loss), less Other expenses and Assessments set aside for the FHLBNY’s Affordable Housing Program.

 

In the third quarter of 2018, Net income was $156.4 million, an increase of $22.7 million, or 17.0%, compared to the same period in the prior year, and up $1.2 million, or 0.8%, from the 2018 second quarter Net income of $155.2 million.  Net interest income is our principal source of Net income.  It represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.

 

Net interest income — Net interest income (“NII”) is typically driven by the volume of earning assets, as measured by average balances of earning assets, and the net interest spread earned in the period.  Prepayment fees earned when advances are early terminated by our borrowing members and the impact of cash flows on interest rate swaps that hedge our assets and liabilities could also be significant factors.

 

In the third quarter of 2018, Net interest income was $210.7 million, an increase of $30.2 million, or 16.7%, from the same period in the prior year, and up $3.0 million, or 1.4%, from the 2018 second quarter Net interest income of $207.7 million.

 

The higher interest rate environment in 2018 was the primary driver for the increase in Net interest income from the prior year period.  Market yields improved period-over-period on LIBOR-indexed investments and adjustable-rate advances.  Market yields also increased on liquidity investments contributing to Net interest income while allowing us to meet higher liquidity targets.  Funding costs continued to benefit from the favorable price/yield environment for the issuance of shorter-term LIBOR-indexed CO bonds, which were issued at advantageous sub-LIBOR funding.  Net interest margin benefited as the sub-LIBOR cost of debt was typically utilized to fund LIBOR-indexed assets, primarily variable-rate ARC advances and floating-rate mortgage-backed securities.  The rising LIBOR contributed incremental cash flows on interest rate swaps in ASC 815 qualifying hedges.  In aggregate, interest accruals contributed $52.9 million to Net interest income in the third quarter of 2018, in contrast to an expense of $36.7 million in the same period in 2017.

 

Net interest spread was 44 basis points in the third quarter of 2018, compared to 40 basis points in the same period in the prior year, and flat compared to the 2018 second quarter spread.

 

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Other income (loss) — primarily includes correspondent banking fees and revenues from financial letters of credit, the effects of hedging and derivatives, and the impact of financial instruments elected under the Fair Value Option.  In the third quarter of 2018, Other income (loss) reported a gain of $0.5 million, compared to a gain of $0.7 million in the same period in the prior year, and a net loss of $0.7 million in the 2018 second quarter.

 

Other expenses were $37.5 million in the third quarter of the current year, compared to $32.8 million in the same period in the prior year, and $34.5 million in the 2018 second quarter.  Other expenses are primarily Operating expenses, Compensation and benefits, and our share of expenses of the Office of Finance and the Federal Housing Finance Agency.

 

·                  Operating expenses were $11.9 million in the third quarter of the current year, up from $10.6 million in the same period in the prior year.  Expense increases were primarily due to new long-term lease agreement executed for our New Jersey location.

·                  Compensation and benefits expenses were $18.6 million in the third quarter of the current year, up from $17.7 million in the same period in the prior year.

·                  The expenses allocated for our share of the costs to operate the Office of Finance and the Federal Housing Finance Agency were $4.0 million in the third quarter of the current year, compared to $3.5 million in the same period in the prior year.

 

AHP assessments allocated from Net income were $17.4 million in the third quarter of the current year, compared to $14.9 million in the same period in the prior year, and $17.3 million in the 2018 second quarter.  Assessments are calculated as a percentage of Net income, and changes in allocations were in parallel with changes in Net income.

 

Dividend payments — A quarterly cash dividend of $1.68 per share of capital (6.75% annualized) was paid in the three months ended September 30, 2018, compared to $1.37 per share of capital stock (5.50% annualized) paid in the same period in 2017.

 

Financial Condition — September 30, 2018 compared to December 31, 2017

 

Total assets decreased to $145.9 billion at September 30, 2018 from $158.9 billion at December 31, 2017, a decrease of $13.0 billion, or 8.2%.

 

Cash at banks was $87.0 million at September 30, 2018, compared to $127.4 million at December 31, 2017.

 

Money market investments at September 30, 2018 were $14.4 billion in federal funds sold and $4.9 billion in overnight resale agreements.  At December 31, 2017, money market investments were $10.3 billion in federal funds sold and $2.7 billion in overnight resale agreements.  Market yields for overnight and term money market investments have improved, creating opportunities for earning a positive margin, and at the same time fulfilling our liquidity targets.

 

Advances — Par balances decreased at September 30, 2018 to $100.8 billion, compared to $122.7 billion at December 31, 2017.  Short-term fixed-rate advances decreased by 34.8% to $15.5 billion at September 30, 2018, down from $23.8 billion at December 31, 2017.  ARC advances, which are adjustable-rate borrowings, decreased by 36.5% to $23.5 billion at September 30, 2018, compared to $37.1 billion at December 31, 2017.

 

Long-term investment debt securities — Long-term investment debt securities are designated as available-for-sale (“AFS”) or held-to-maturity (“HTM”).  The heavy concentration of GSE and Agency issued (“GSE-issued”) securities, and a declining balance of private-label MBS, less than 1%, is our investment profile.

 

In the AFS portfolio, long-term investments at September 30, 2018 were floating-rate GSE-issued mortgage-backed securities carried on the balance sheet at fair values of $444.3 million, compared to $528.6 million at December 31, 2017.

 

In the HTM portfolio, long-term investments at September 30, 2018 were predominantly GSE-issued fixed- and floating-rate mortgage-backed securities and housing finance agency bonds.  Securities in the HTM portfolio are

 

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recorded at amortized cost, adjusted for any OTTI.  Fixed- and floating-rate mortgage-backed securities (“MBS”), including PLMBS, in the HTM portfolio, were $16.7 billion at September 30, 2018 and $16.7 billion at December 31, 2017.  Investments in PLMBS were less than 1% of the HTM portfolio.  Housing finance agency bonds, primarily New York and New Jersey, were carried at an amortized cost basis of $1.2 billion at September 30, 2018 and $1.1 billion at December 31, 2017.

 

Trading securities (liquidity portfolio) — The objective of the trading portfolio is to meet short-term contingency liquidity needs.  We invested in highly liquid U.S. Treasury bills, U.S. Treasury notes and GSE-issued securities.  Trading investments are carried at fair value, with changes recorded through earnings.  At September 30, 2018, trading investments were $3.9 billion in U.S. Treasury notes, $761.5 million in GSE securities, and $3.5 million in Ambac corporate notes.  At December 31, 2017, trading investments were $239.1 million in U.S. Treasury bills, $1.0 billion in U.S. Treasury notes and $356.9 million in GSE securities.

 

We will periodically evaluate our liquidity needs and may dispose these liquidity investments as deemed prudent based on liquidity and market conditions.  The Finance Agency prohibits speculative trading practices but allows permitted securities to be deemed held for liquidity if invested in a trading portfolio.

 

Equity Investments — We own grantor trusts that invest in highly-liquid registered mutual funds, which were carried on the balance sheet at fair values of $52.2 million at September 30, 2018.  At December 31, 2017, the funds were classified as AFS and carried at fair values of $48.6 million.

 

Mortgage loans held-for-portfolio — Mortgage loans were investments in Mortgage Partnership Finance loans (“MPF” or “MPF Program”).  Unpaid principal balance of MPF loans stood at $2.9 billion at September 30, 2018, an increase of $15.6 million from the balance at December 31, 2017.  Loans are primarily fixed-rate, single-family mortgages acquired through the MPF Program.  Paydowns in the nine months of 2018 were $200.8 million, slightly higher than $199.5 million in the prior year same period.  Credit performance has been strong and delinquency low.  Loan origination by members and acceptable pricing are key factors that drive acquisitions.  Residential collateral values have remained stable in the New York and New Jersey sectors, the primary geographic concentration for our MPF portfolio, and historical loss experience remains very low.

 

Capital ratios — Our capital position remains strong.  At September 30, 2018, actual risk-based capital was $7.5 billion, compared to required risk-based capital of $919.9 million.  To support $145.9 billion of total assets at September 30, 2018, the minimum required total capital was $5.8 billion or 4.0% of assets.  Our actual regulatory risk-based capital was $7.5 billion, exceeding required total capital by $1.7 billion.  These ratios have remained consistently above the required regulatory ratios through all periods in this report.  For more information, see financial statements, Note 14.  Capital Stock, Mandatorily Redeemable Capital Stock and Restricted Retained Earnings.

 

Liquidity and Debt — Our liquidity position remains strong, and in compliance with all regulatory requirements, and we do not foresee any changes to that position.  Our liquidity measures, Deposit liquidity and Operational liquidity, and other liquidity buffers remain in excess of required reserves.  For more information about our liquidity measures, see section Liquidity, Cash Flows, Short-Term Borrowings and Short-Term Debt in this MD&A.

 

In addition to $4.6 billion in the trading portfolio, liquid assets at September 30, 2018 included $85.5 million as demand cash balances at the Federal Reserve Bank of New York (“FRBNY”), $19.2 billion in short-term and overnight loans in the federal funds and the repo markets, and $444.3 million of high credit quality GSE-issued available-for-sale securities that are investment quality and readily marketable.

 

During the periods in this report, we maintained continual access to funding and adapted our debt issuance to meet the liquidity needs of our members and our asset/liability risk management objectives.

 

Business Outlook

 

The following forward-looking statements are based upon the current beliefs and expectations of the FHLBNY’s management and are subject to risks and uncertainties, which could cause our actual results to differ materially from those set forth in such forward-looking statements.

 

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Earnings Our earnings performance is the result of many factors, among them: the state of the economy; conditions in the capital markets; level and shape of the yield curve; ability of members to source deposits and make loans; and impact of regulations on members’ business.  Changes to these and other factors could have significant effects, positive or negative, on the Bank’s financial results.  Based on our assumptions for these and other factors, we currently project 2018 Net income to exceed earnings in 2017, benefiting primarily from better than expected funding environment and higher yields from investments in a rising rate environment.

 

Advances — We expect a stable book of advance business through 2018, although at levels lower than at December 31, 2017.  The pace of balance sheet growth in the prior year was concentrated along short-term borrowing.  The borrowing activities of a few large members have been the predominant driver of our book of advance business.  We cannot predict if short-term advances will be rolled over, or if advances borrowed by our larger members will be rolled over at maturity or prepaid prior to maturity.  At September 30, 2018, three members’ advance borrowings exceeded 10.0% of total advances outstanding Citibank, N.A. 20.8% (35.1% at December 31, 2017), Metropolitan Life Insurance Company 14.1% (11.8% at December 31, 2017), and New York Community Bank/New York Commercial Bank 13.2% (9.9% at December 31, 2017).

 

We expect continued demand for variable-rate advances and short-term fixed-rate advances.  We expect limited demand for large, intermediate and long-term advances because many members have adequate liquidity.  Member banks are also likely to develop liquidity strategies to address regulatory liquidity frameworks, and those strategies may lead certain member banks to prepay advances ahead of their maturities.  Because of the complex interactions among a number of factors driving large banking institutions to address regulatory liquidity guidance, we are unable to predict future trends particularly with respect to borrowings by our larger members.  When advances are prepaid, we receive prepayment penalty fees to make us economically whole, and the FHLBNY’s earnings may not be adversely impacted in the periods when prepayments occur, but may impact revenue streams in future periods.

 

Demand for FHLBank debt — Relative to LIBOR, favorable funding conditions, specifically for short-maturity variable-rate bonds have continued through the first nine months of 2018.  The LIBOR index is a widely applied benchmark by the FHLBNY.  We expect similar favorable funding conditions to exist through the remainder of 2018, although we may experience some volatility in funding conditions, especially leading up to and around Federal Open Market Committee meeting dates.

 

The cost of FHLBank debt is a key driver of profitability, and we expect to be able to issue CO bonds and discount notes at reasonable spreads to yields earned from advances and investments.  Consolidated obligation discount notes and floating-rate notes have been in demand by investors, and pricing and yields have been attractive, specifically relative to LIBOR.  Our business plans and funding strategies are predicated on the expectation that investor demand will continue.

 

However, our ability to obtain funds through the issuance of Consolidated obligations depends in part on prevailing conditions in the capital markets, which are beyond our control.  If we cannot access funding when needed on acceptable terms, our ability to support and continue operations could be adversely affected, which could negatively affect our financial condition and results of operations.  The pricing of our longer-term debt remains at levels that are still unfavorable.  To the extent we receive sub-optimal funding, our member institutions in turn may experience higher costs for advance borrowings.  To the extent the FHLBanks may not be able to issue long-term debt at economical spreads to the 3-month LIBOR, borrowing choices may also be less economical for our members, potentially affecting their demand for advances.

 

Rating — The U.S. Government’s credit is rated by Moody’s as Aaa with the outlook as stable, and AA+ and stable by Standard & Poor’s (“S&P”).  Consolidated obligations of FHLBanks are rated Aaa/P-1 by Moody’s, and AA+/A- 1+ by S& P.  Any rating actions on the US Government would likely result in all individual FHLBanks’ long-term deposit ratings and the FHLBank System long-term bond rating moving in lock step with any US sovereign rating action.

 

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Selected Financial Data (Unaudited).

 

Statements of Condition 

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

September 30,

 

(dollars in millions)

 

2018

 

2018

 

2018

 

2017

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments (a) 

 

$

42,229

 

$

42,269

 

$

36,306

 

$

33,069

 

$

31,796

 

Advances

 

100,166

 

110,782

 

112,202

 

122,448

 

113,081

 

Mortgage loans held-for-portfolio, net of allowance for credit losses (b) 

 

2,910

 

2,887

 

2,880

 

2,897

 

2,881

 

Total assets

 

145,857

 

156,560

 

151,882

 

158,918

 

148,349

 

Deposits and borrowings

 

936

 

1,191

 

1,310

 

1,196

 

1,441

 

Consolidated obligations, net

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

85,910

 

101,392

 

85,656

 

99,288

 

100,893

 

Discount notes

 

50,821

 

45,470

 

56,510

 

49,614

 

37,681

 

Total consolidated obligations

 

136,731

 

146,862

 

142,166

 

148,902

 

138,574

 

Mandatorily redeemable capital stock

 

7

 

18

 

19

 

20

 

20

 

AHP liability

 

161

 

149

 

137

 

132

 

126

 

Capital

 

 

 

 

 

 

 

 

 

 

 

Capital stock

 

5,856

 

6,276

 

6,311

 

6,750

 

6,318

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

Unrestricted

 

1,112

 

1,090

 

1,071

 

1,067

 

1,048

 

Restricted

 

567

 

535

 

505

 

479

 

450

 

Total retained earnings

 

1,679

 

1,625

 

1,576

 

1,546

 

1,498

 

Accumulated other comprehensive income (loss)

 

47

 

21

 

(4

)

(55

)

(78

)

Total capital

 

7,582

 

7,922

 

7,883

 

8,241

 

7,738

 

Equity to asset ratio (c)(j)

 

5.20

%

5.06

%

5.19

%

5.19

%

5.22

%

 

 

 

Three months ended

 

Nine months ended

 

Statements of Condition Averages

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

September 30,

 

September 30,

 

September 30,

 

(See note below; dollars in millions)

 

2018

 

2018

 

2018

 

2017

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments (a)

 

$

45,246

 

$

43,591

 

$

42,360

 

$

37,661

 

$

39,268

 

$

43,743

 

$

36,557

 

Advances

 

107,180

 

107,740

 

117,764

 

111,127

 

113,185

 

110,856

 

108,534

 

Mortgage loans held-for-portfolio, net of allowance for credit losses

 

2,903

 

2,884

 

2,888

 

2,894

 

2,867

 

2,892

 

2,819

 

Total assets

 

155,923

 

154,723

 

163,508

 

152,167

 

155,951

 

158,024

 

148,729

 

Interest-bearing deposits and other borrowings

 

1,076

 

1,078

 

1,095

 

1,634

 

2,437

 

1,083

 

1,813

 

Consolidated obligations, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

95,245

 

94,746

 

95,765

 

100,680

 

98,178

 

95,250

 

90,882

 

Discount notes

 

50,979

 

50,420

 

57,848

 

41,376

 

46,664

 

53,057

 

47,419

 

Total consolidated obligations

 

146,224

 

145,166

 

153,613

 

142,056

 

144,842

 

148,307

 

138,301

 

Mandatorily redeemable capital stock

 

12

 

18

 

19

 

20

 

20

 

16

 

22

 

AHP liability

 

152

 

141

 

132

 

128

 

122

 

142

 

121

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital stock

 

6,161

 

6,136

 

6,552

 

6,235

 

6,394

 

6,282

 

6,266

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrestricted

 

1,082

 

1,068

 

1,059

 

1,041

 

1,020

 

1,070

 

1,011

 

Restricted

 

547

 

515

 

489

 

461

 

433

 

517

 

411

 

Total retained earnings

 

1,629

 

1,583

 

1,548

 

1,502

 

1,453

 

1,587

 

1,422

 

Accumulated other comprehensive income (loss)

 

26

 

11

 

(21

)

(65

)

(95

)

5

 

(93

)

Total capital

 

7,816

 

7,730

 

8,079

 

7,672

 

7,752

 

7,874

 

7,595

 

 

Note — Average balance calculation.  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.

 

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Operating Results and Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in millions)

 

Three months ended

 

Nine months ended

 

(except earnings and dividends 

 

September 30,

 

June 30,

 

March 31,

 

December 31

 

September 30,

 

September 30,

 

September 30,

 

per share, and headcount)

 

2018

 

2018

 

2018

 

2017

 

2017

 

2018

 

2017

 

Net income

 

$

157

 

$

155

 

$

126

 

$

145

 

$

134

 

$

438

 

$

334

 

Net interest income (d)

 

211

 

208

 

193

 

191

 

181

 

612

 

530

 

Dividends paid in cash (e)

 

103

 

105

 

102

 

97

 

84

 

310

 

248

 

AHP expense

 

18

 

17

 

14

 

16

 

15

 

49

 

37

 

Return on average equity (f)(g)(j)

 

7.94

%

8.05

%

6.34

%

7.51

%

6.84

%

7.43

%

5.88

%

Return on average assets (g)(j)

 

0.40

%

0.40

%

0.31

%

0.38

%

0.34

%

0.37

%

0.30

%

Other non-interest income (loss)

 

 

 

(19

)

6

 

1

 

(19

)

(64

)

Operating expenses (h)(k)

 

31

 

28

 

29

 

31

 

28

 

88

 

81

 

Finance Agency and Office of Finance expenses

 

4

 

4

 

4

 

4

 

4

 

12

 

11

 

Other expenses (k)

 

3

 

2

 

2

 

1

 

1

 

7

 

3

 

Total other expenses

 

38

 

34

 

35

 

36

 

33

 

107

 

95

 

Operating expenses ratio (g)(i)(j)

 

0.08

%

0.07

%

0.07

%

0.08

%

0.07

%

0.07

%

0.07

%(k)

Earnings per share

 

$

2.51

 

$

2.53

 

$

1.93

 

$

2.33

 

$

2.09

 

$

6.97

 

$

5.33

 

Dividends per share

 

$

1.68

 

$

1.60

 

$

1.64

 

$

1.51

 

$

1.37

 

$

4.92

 

$

4.02

 

Headcount (Full/part time)

 

308

 

324

 

314

 

308

 

308

 

308

 

308

 

 


(a)

Investments include trading securities, available-for-sale securities, held-to-maturity securities, equity investments in grantor trusts owned by the FHLBNY, securities purchased under agreements to resell, federal funds, loans to other FHLBanks, and other interest-bearing deposits.

(b)

Allowances for credit losses were $0.8 million, $0.8 million, $0.7 million, $1.0 million and $0.9 million for the periods ended September 30, 2018, June 30, 2018, March 31, 2018, December 31, 2017 and September 30, 2017.

(c)

Equity to asset ratio is Capital stock plus Retained earnings and Accumulated other comprehensive income (loss) as a percentage of Total assets.

(d)

Net interest income is net interest income before the provision for credit losses on mortgage loans.

(e)

Excludes dividends accrued to non-members classified as interest expense under the accounting standards for certain financial instruments with characteristics of both liabilities and equity.

(f)

Return on average equity is Net income as a percentage of average Capital Stock plus average retained earnings and average Accumulated other comprehensive income (loss).

(g)

Annualized.

(h)

Operating expenses include Compensation and Benefits.

(i)

Operating expenses as a percentage of Total average assets.

(j)

All percentage calculations are performed using amounts in thousands, and may not agree if calculations are performed using amounts in millions.

(k)

Previously reported comparative numbers have been reclassified to conform to the retrospective adoption of ASU 2017-07 Compensation — Retirement Benefits (Topic 715). The ASU requires only the service cost component of Net periodic benefit cost of pension expenses to be included in compensation costs.

 

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Results of Operations

 

The following section provides a comparative discussion of the FHLBNY’s results of operations for the three and nine months ended September 30, 2018 compared to the same periods in the prior year.  For a discussion of the significant accounting estimates used by the FHLBNY that affect the results of operations, see financial statements, Note 1. Significant Accounting Policies and Estimates in the most recent Form 10-K filed on March 22, 2018.

 

Net Income

 

Interest income from advances is the principal source of revenue.  Other sources of revenue are interest income from investment debt securities, mortgage loans in the MPF portfolio, securities purchased under agreements to resell and federal funds sold.  The primary expense is interest paid on Consolidated obligation debt.  Other expenses are Compensation and benefits, Operating expenses, our share of operating expenses of the Office of Finance and the FHFA, and affordable housing program assessments on Net income.  Other significant factors affecting our Net income include the volume and timing of investments in mortgage-backed securities, prepayments of advances, charges due to debt repurchased, gains and losses from derivatives and hedging activities, and earnings from investing our shareholders’ capital.

 

Summarized below are the principal components of Net income (in thousands):

 

Table 1.1:      Principal Components of Net Income

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

964,877

 

$

616,115

 

$

2,623,811

 

$

1,595,499

 

Total interest expense

 

754,160

 

435,576

 

2,012,370

 

1,065,397

 

Net interest income before provision for credit losses

 

210,717

 

180,539

 

611,441

 

530,102

 

Provision (Reversal) for credit losses on mortgage loans

 

(95

)

(183

)

(403

)

(284

)

Net interest income after provision for credit losses

 

210,812

 

180,722

 

611,844

 

530,386

 

Total other income (loss)

 

506

 

692

 

(18,763

)

(63,989

)

Total other expenses

 

37,502

 

32,777

 

106,530

 

94,935

 

Income before assessments

 

173,816

 

148,637

 

486,551

 

371,462

 

Affordable Housing Program Assessments

 

17,404

 

14,895

 

48,740

 

37,242

 

Net income

 

$

156,412

 

$

133,742

 

$

437,811

 

$

334,220

 

 

2018 Third Quarter Compared to 2017 Third Quarter

 

Net income — For the FHLBNY, Net income is Net interest income, minus credit losses on mortgage loans, plus Other income (loss), less Other expenses and Assessments set aside for the FHLBNY’s Affordable Housing Program.

 

In the third quarter of 2018, Net income was $156.4 million, an increase of $22.7 million, or 17.0%, compared to the same period in the prior year.  Summarized below are the primary components of our Net income:

 

Net interest income — Net interest income (“NII”) is typically driven by the volume of earning assets, as measured by average balances of earning assets, and the net interest spread earned in the period.  Prepayment fees earned when advances are early terminated by our borrowing members and the impact of cash flows on interest rate swaps that hedge our assets and liabilities could also be significant factors.

 

In the third quarter of 2018, Net interest income was $210.7 million, an increase of $30.2 million, or 16.7%, from the same period in the prior year.  In the third quarter of 2018, yields earned on LIBOR-indexed assets, primarily ARC advances and floating-rate mortgage-backed securities, benefited from the rising LIBOR.  Overnight and short-term investments in the federal funds and the overnight repurchase agreements benefited from rising yields for

 

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money market investments.  Although funding costs were also higher in the rising rate environment, the price/yield for the issuance of shorter-term floating-rate CO bonds continued to be at advantageous sub-LIBOR funding spreads.  Net interest spread was 44 basis points in the third quarter of 2018, compared to 40 basis points in the same period in the prior year.

 

Other income (loss) — In the third quarter of 2018, Other income (loss) reported a gain of $0.5 million, compared to a gain of $0.7 million in the same period in the prior year.

 

·                  Service fees and other are primarily correspondent banking fees and fee revenues from financial letters of credit.  Such revenues were $4.2 million in the third quarter of the current year, compared to $3.4 million in the same period in the prior year.

·                  Financial instruments carried at fair values reported a net valuation gain of $0.5 million in the third quarter of the current year, compared to a net loss of $1.5 million in the same period in the prior year.  For more information, see financial statements, Fair Value Option Disclosures in Note 18.  Fair Values of Financial Instruments.  Also see Table 1.10 Other Income (Loss) and accompanying discussions in this MD&A.

·                  Derivative and hedging activities reported a net loss of $3.2 million in the third quarter of the current year, compared to a net loss of $1.2 million in the same period in the prior year.  For more information, see financial statements, Earnings Impact of Derivatives and Hedging Activities disclosures in Note 17.  Derivatives and Hedging Activities.  Also see Table 1.12 Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type and accompanying discussions in this MD&A.

 

Other expenses were $37.5 million in the third quarter of the current year, compared to $32.8 million in the same period in the prior year.  Other expenses are primarily Operating expenses, Compensation and benefits, and our share of expenses of the Office of Finance and the Federal Housing Finance Agency.

 

·                  Operating expenses were $11.9 million in the third quarter of the current year, up from $10.6 million in the same period in the prior year.  Expense increases were primarily due to new long-term lease agreements executed in the second half of the prior year.

·                  Compensation and benefits expenses were $18.6 million in the third quarter of the current year, up from $17.7 million in the same period in the prior year.

·                  The expenses allocated for our share of the costs to operate the Office of Finance and the Federal Housing Finance Agency were $4.0 million in the third quarter of the current year, compared to $3.5 million in the same period in the prior year.

 

AHP assessments allocated from Net income were $17.4 million in the third quarter of the current year, compared to $14.9 million in the same period in the prior year.  Assessments are calculated as a percentage of Net income, and changes in allocations were in parallel with changes in Net income.

 

Year-to-Date Period Ended September 30, 2018 Compared to September 30, 2017

 

In the first nine months of the current year, Net income was $437.8 million, an increase of $103.6 million, or 31.0%, compared to the same period in the prior year.  Summarized below are the primary components of our Net income:

 

In the first nine months of the current year, Net interest income was $611.4 million, an increase of $81.3 million, or 15.3%, from the same period in the prior year.  Net interest income benefited from higher average earning assets, which grew to $157.4 billion in the first nine months of the current year, up from $147.9 billion in the same period in the prior year.  Average advance balances were $110.9 billion in the first nine months of the current year, compared to $108.5 billion in the same period in the prior year.

 

Net interest spread was 43 basis points in the first nine months of the current year, compared to 42 basis points in the same period in the prior year.

 

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Other income (loss) — In the first nine months of the current year, Other income (loss) reported a loss of $18.8 million, compared to a loss of $64.0 million in the same period in the prior year.  In the prior year period, a $70.0 million legal charge was recorded on the Lehman settlement matter.  For more information about the Lehman settlement, see Note 18.  Commitments and Contingencies in the FHLBNY’s most recent Form 10-K filed on March 22, 2018.

 

·                  Service fees and other were $11.9 million in the first nine months of the current year, compared to $10.7 million in the same period in the prior year.

·                  Financial instruments carried at fair values reported a net valuation gain of $0.2 million in the first nine months of the current year, compared to a net loss of $3.3 million in the same period in the prior year.

·                  Derivative and hedging activities reported a net loss of $27.3 million in the first nine months of the current year, compared to a net loss of $1.4 million in the same period in the prior year.

 

Other expenses were $106.5 million in the first nine months of the current year, compared to $94.9 million in the same period in the prior year.

 

·                  Operating expenses were $33.3 million in the first nine months of the current year, up from $29.8 million in the same period in the prior year.

·                  Compensation and benefits expenses were $54.9 million in the first nine months of the current year, up from $51.7 million in the same period in the prior year.

·                  The expenses allocated for our share of the costs to operate the Office of Finance and the Federal Housing Finance Agency were $11.9 million in the first nine months of the current year, compared to $10.5 million in the same period in the prior year.

 

AHP assessments allocated from Net income were $48.7 million in the first nine months of the current year, compared to $37.2 million in the same period in the prior year.

 

Net Interest Income, Margin and Interest Rate Spreads — 2018 Periods Compared to 2017 Periods

 

Net interest income is our principal source of Net income.  It represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.

 

Period-over-period changes in Net interest income are typically driven by changes in the volume of earning assets, as measured by average balances of earning assets, and the impact of market interest rates on earnings assets and funding costs.  Interest income and expense accruals on interest rate swaps that qualified under the ASC 815 hedge accounting rules may impact period-over-period changes.  Shareholders’ capital stock and retained earnings are also factors that impact net interest income as they provide interest free funding.   In a period when members prepay advances, the prepayment fees, which we receive may cause period-over-period fluctuations in income.  For more information about factors that impact Interest income and Interest expense, see Table 1.3 Net Interest Adjustments from Hedge Qualifying Interest Rate Swaps and discussions thereto.  Also, see Table 1.4 Spread and Yield Analysis, and Table 1.5 Rate and Volume Analysis.

 

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The following table summarizes Net interest income (dollars in thousands):

 

Table 1.2:               Net Interest Income

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

Percentage

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

Total interest income (a)

 

$

964,877

 

$

616,115

 

56.61

%

$

2,623,811

 

$

1,595,499

 

64.45

%

Total interest expense (a)

 

754,160

 

435,576

 

(73.14

)

2,012,370

 

1,065,397

 

(88.88

)

Net interest income before provision for credit losses (b)(c)

 

$

210,717

 

$

180,539

 

16.72

%

$

611,441

 

$

530,102

 

15.34

%

 


(a)         Total Interest Income and Total Interest Expense — See Tables 1.6 and 1.8 and accompanying discussions

 

(b)         Attribution of the primary factors driving changes in Net interest income are summarized below:

 

The higher interest rate environment in 2018 was the primary driver for the increase in Net interest income.  Market yields improved period-over-period on LIBOR-indexed investments and adjustable-rate advances.  Market yields also increased on liquidity investments — overnight federal funds and repos, and shorter-term U.S. Treasury securities — contributing to Net interest income while allowing us to meet higher liquidity targets.

 

Funding costs continued to benefit from the favorable price/yield environment for the issuance of shorter-term LIBOR-indexed CO bonds, which were issued at advantageous sub-LIBOR funding.  Net interest margin benefited as the sub-LIBOR cost of debt was typically utilized to fund LIBOR-indexed assets, primarily variable-rate ARC advances and floating-rate mortgage-backed securities.

 

Additionally, the rising LIBOR contributed incremental cash flows from interest rate swaps in ASC 815 qualifying hedges.  The rising LIBOR has driven up the LIBOR-indexed cash flows we received, such that in the 2018 periods the cash flows we received exceeded the fixed payment we made on interest rate swap contracts hedging fixed-rate advances.  While the rising LIBOR had an adverse impact on LIBOR-indexed cash flows paid on swaps in ASC 815 fair value and cash flow hedges of debt, the impact was small.  In aggregate, interest accruals contributed $52.9 million to Net interest income in the third quarter of 2018, in contrast to an expense of $36.7 million in the same period in 2017.  On a year-to-date basis, ASC qualifying hedges contributed $99.4 million in interest accruals in the 2018 period, in contrast to $136.1 million of accruals that were a charge to net interest income in the 2017 period.

 

Net interest income in the third quarter was $210.7 million in the 2018 period, compared to $180.5 million in the 2017 period.  Average interest-earning assets totaled $155.2 billion in the 2018 third quarter, almost unchanged from the same period in the 2017 period;  the impact on Net interest income from volume-related changes in assets and funding mix made a positive contribution of $16.3 million and rate-related changes contributed $13.8 million.  Net interest spread, which is the yield from earning assets minus interest paid to fund earning assets, was 44 basis points in the 2018 period, compared to 40 basis points in the 2017 period.  Net interest margin, a measure of margin efficiency, which is calculated as Net interest income divided by average earning assets, was 54 basis points in the 2018 period, compared to 46 basis points in the 2017 period.

 

Net interest income in the year-to-date period was $611.4 million in 2018, compared to $530.1 million in 2017.  Volume-related changes in net interest income was significant, $70.5 million; rate-related changes contributed $10.9 million.  Net interest spread was 43 basis points in the 2018 period, compared to 42 basis points in the 2017 period.

 

(c)          Net interest income from investing member capital.

 

We earn interest income from investing our members’ capital to fund interest-earning assets.  Such earnings are sensitive to the changes in short-term interest rates (Rate effects), and changes in the average outstanding capital and non-interest bearing liabilities (Volume effects).  Typically, we invest capital and net non-interest costing liabilities to fund short-term investment assets that yield money market rates.  In the periods in this report, market yields for investments in the federal funds and repo markets have improved and the contribution to interest margin from member capital has also improved.  Member capital is retained earnings and capital stock, which increases or decreases in parallel with the volume of advances borrowed by members.  Average capital was $7.8 billion, a little lower in the third quarter of 2018, compared to the 2017 period.  On a year-to-date basis, average capital was $7.9 billion in the 2018 period, compared to $7.7 billion in the 2017 period.

 

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Impact of Qualifying Hedges on Net Interest Income — 2018 Periods Compared to 2017 Periods

 

The following table summarizes the impact of net interest adjustments from hedge qualifying interest-rate swaps (in thousands):

 

Table 1.3:               Net Interest Adjustments from Hedge Qualifying Interest Rate Swaps

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$

900,352

 

$

645,303

 

$

2,491,333

 

$

1,723,648

 

Net interest adjustment from interest rate swaps

 

64,525

 

(29,188

)

132,478

 

(128,149

)

Reported interest income

 

964,877

 

616,115

 

2,623,811

 

1,595,499

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

742,519

 

428,079

 

1,979,283

 

1,057,435

 

Net interest adjustment from interest rate swaps and basis amortization

 

11,641

 

7,497

 

33,087

 

7,962

 

Reported interest expense

 

754,160

 

435,576

 

2,012,370

 

1,065,397

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

210,717

 

$

180,539

 

$

611,441

 

$

530,102

 

 

 

 

 

 

 

 

 

 

 

Net interest adjustment - interest rate swaps

 

$

52,884

 

$

(36,685

)

$

99,391

 

$

(136,111

)

 

See Table 1.12 Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type in this MD&A for discussions and analysis.

 

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Spread and Yield Analysis 2018 Periods Compared to 2017 Periods

 

Table 1.4:               Spread and Yield Analysis

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Average

 

Income/

 

 

 

Average

 

Income/

 

 

 

(Dollars in thousands)

 

Balance

 

Expense

 

Rate (a)

 

Balance

 

Expense

 

Rate (a)

 

Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

$

107,180,010

 

$

678,029

 

2.51

%

$

113,185,495

 

$

428,927

 

1.50

%

Interest bearing deposits and others

 

20,957

 

105

 

1.98

 

111,800

 

51

 

0.18

 

Federal funds sold and other overnight funds

 

22,220,707

 

109,637

 

1.96

 

20,983,543

 

60,884

 

1.15

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

4,196,494

 

22,134

 

2.09

 

202,035

 

548

 

1.08

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

8,831,636

 

66,408

 

2.98

 

8,073,784

 

59,261

 

2.91

 

Floating

 

8,634,121

 

55,649

 

2.56

 

8,676,728

 

37,661

 

1.72

 

State and local housing finance agency obligations

 

1,199,233

 

8,524

 

2.82

 

1,115,210

 

4,936

 

1.76

 

Mortgage loans held-for-portfolio

 

2,903,065

 

24,305

 

3.32

 

2,867,194

 

23,841

 

3.30

 

Loans to other FHLBanks

 

17,500

 

86

 

1.96

 

2,174

 

6

 

1.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

$

155,203,723

 

$

964,877

 

2.47

%

$

155,217,963

 

$

616,115

 

1.57

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funded By:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

$

24,550,134

 

$

135,205

 

2.18

%

$

30,749,692

 

$

117,612

 

1.52

%

Floating

 

70,694,405

 

357,243

 

2.00

 

67,428,405

 

183,519

 

1.08

 

Consolidated obligation discount notes

 

50,979,146

 

256,029

 

1.99

 

46,664,081

 

128,117

 

1.09

 

Interest-bearing deposits and other borrowings

 

1,068,730

 

5,462

 

2.03

 

2,438,461

 

6,016

 

0.98

 

Mandatorily redeemable capital stock

 

12,320

 

221

 

7.11

 

20,469

 

312

 

6.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

147,304,735

 

754,160

 

2.03

%

147,301,108

 

435,576

 

1.17

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other non-interest-bearing funds

 

108,685

 

 

 

 

70,485

 

 

 

 

Capital

 

7,790,303

 

 

 

 

7,846,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Funding

 

$

155,203,723

 

$

754,160

 

 

 

$

155,217,963

 

$

435,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income/Spread

 

 

 

$

210,717

 

0.44

%

 

 

$

180,539

 

0.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

(Net interest income/Earning Assets)

 

 

 

 

 

0.54

%

 

 

 

 

0.46

%

 

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Table of Contents

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Average

 

Income/

 

 

 

Average

 

Income/

 

 

 

(Dollars in thousands)

 

Balance

 

Expense

 

Rate (a)

 

Balance

 

Expense

 

Rate (a)

 

Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

$

110,856,013

 

$

1,853,974

 

2.24

%

$

108,534,164

 

$

1,107,004

 

1.36

%

Interest bearing deposits and others

 

19,366

 

259

 

1.79

 

195,998

 

132

 

0.09

 

Federal funds sold and other overnight funds

 

21,891,407

 

283,330

 

1.73

 

18,802,355

 

132,670

 

0.94

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

3,059,799

 

44,479

 

1.94

 

97,762

 

762

 

1.04

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

8,611,345

 

191,847

 

2.98

 

7,823,808

 

175,296

 

3.00

 

Floating

 

8,842,344

 

154,338

 

2.33

 

8,529,069

 

96,382

 

1.51

 

State and local housing finance agency obligations

 

1,188,264

 

22,554

 

2.54

 

1,098,103

 

13,129

 

1.60

 

Mortgage loans held-for-portfolio

 

2,891,857

 

72,931

 

3.37

 

2,818,957

 

70,098

 

3.32

 

Loans to other FHLBanks

 

7,088

 

99

 

1.86

 

4,432

 

26

 

0.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

$

157,367,483

 

$

2,623,811

 

2.23

%

$

147,904,648

 

$

1,595,499

 

1.44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funded By:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligation bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

$

26,314,126

 

$

393,539

 

2.00

%

$

32,948,317

 

$

341,539

 

1.39

%

Floating

 

68,935,640

 

915,169

 

1.77

 

57,933,837

 

405,008

 

0.93

 

Consolidated obligation discount notes

 

53,057,161

 

688,785

 

1.74

 

47,418,588

 

306,871

 

0.87

 

Interest-bearing deposits and other borrowings

 

1,081,899

 

14,030

 

1.73

 

1,815,940

 

11,024

 

0.81

 

Mandatorily redeemable capital stock

 

16,500

 

847

 

6.87

 

21,981

 

955

 

5.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

149,405,326

 

2,012,370

 

1.80

%

140,138,663

 

1,065,397

 

1.02

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other non-interest-bearing funds

 

93,330

 

 

 

 

77,788

 

 

 

 

Capital

 

7,868,827

 

 

 

 

7,688,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Funding

 

$

157,367,483

 

$

2,012,370

 

 

 

$

147,904,648

 

$

1,065,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income/Spread

 

 

 

$

611,441

 

0.43

%

 

 

$

530,102

 

0.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

(Net interest income/Earning Assets)

 

 

 

 

 

0.52

%

 

 

 

 

0.48

%

 


(a)   Reported yields with respect to advances and Consolidated obligations 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 we issue fixed-rate debt that is hedged with an interest rate swap, the hedge effectively converts the debt into a simple floating-rate bond.  Similarly, we make fixed-rate advances to members and hedge the advances with a pay-fixed and receive-variable interest rate swap that effectively converts the fixed-rate asset to one that floats with prevailing LIBOR rates.  Average balance sheet information is presented, as it is more representative of activity throughout the periods presented.  For most components of the average balances, a daily weighted average balance is calculated for the period.  When daily weighted average balance information is not available, a simple monthly average balance is calculated.  Average yields are derived by dividing income by the average balances of the related assets, and average costs are derived by dividing expenses by the average balances of the related liabilities.  Yields and spreads are annualized.

 

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Rate and Volume Analysis — 2018 Periods Compared to 2017 Periods

 

The Rate and Volume Analysis presents changes in interest income, interest expense and net interest income that are due to changes in both interest rates and the volume of interest-earning assets and interest-bearing liabilities, and their impact on interest income and interest expense (in thousands):

 

Table 1.5:               Rate and Volume Analysis

 

 

 

For the three months ended

 

 

 

September 30, 2018 vs. September 30, 2017

 

 

 

Increase (Decrease)

 

 

 

Volume

 

Rate

 

Total

 

Interest Income

 

 

 

 

 

 

 

Advances

 

$

(23,877

)

$

272,979

 

$

249,102

 

Interest bearing deposits and others

 

(63

)

117

 

54

 

Federal funds sold and other overnight funds

 

3,785

 

44,968

 

48,753

 

Investments

 

 

 

 

 

 

 

Trading securities

 

20,611

 

975

 

21,586

 

Mortgage-backed securities

 

 

 

 

 

 

 

Fixed

 

5,670

 

1,477

 

7,147

 

Floating

 

(186

)

18,174

 

17,988

 

State and local housing finance agency obligations

 

397

 

3,191

 

3,588

 

Other investments

 

 

 

 

 

 

 

Mortgage loans held-for-portfolio

 

299

 

165

 

464

 

Loans to other FHLBanks

 

73

 

7

 

80

 

 

 

 

 

 

 

 

 

Total interest income

 

6,709

 

342,053

 

348,762

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

Consolidated obligation bonds

 

 

 

 

 

 

 

Fixed

 

(26,990

)

44,583

 

17,593

 

Floating

 

9,297

 

164,427

 

173,724

 

Consolidated obligation discount notes

 

12,833

 

115,079

 

127,912

 

Deposits and borrowings

 

(4,624

)

4,070

 

(554

)

Mandatorily redeemable capital stock

 

(140

)

49

 

(91

)

 

 

 

 

 

 

 

 

Total interest expense

 

(9,624

)

328,208

 

318,584

 

 

 

 

 

 

 

 

 

Changes in Net Interest Income

 

$

16,333

 

$

13,845

 

$

30,178

 

 

 

 

For the nine months ended

 

 

 

September 30, 2018 vs. September 30, 2017

 

 

 

Increase (Decrease)

 

 

 

Volume

 

Rate

 

Total

 

Interest Income

 

 

 

 

 

 

 

Advances

 

$

24,172

 

$

722,798

 

$

746,970

 

Interest bearing deposits and others

 

(217

)

344

 

127

 

Federal funds sold and other overnight funds

 

24,788

 

125,872

 

150,660

 

Investments

 

 

 

 

 

 

 

Trading securities

 

42,506

 

1,211

 

43,717

 

Mortgage-backed securities

 

 

 

 

 

 

 

Fixed

 

17,550

 

(999

)

16,551

 

Floating

 

3,662

 

54,294

 

57,956

 

State and local housing finance agency obligations

 

1,156

 

8,269

 

9,425

 

Mortgage loans held-for-portfolio

 

1,829

 

1,004

 

2,833

 

Loans to other FHLBanks

 

22

 

51

 

73

 

 

 

 

 

 

 

 

 

Total interest income

 

115,468

 

912,844

 

1,028,312

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

Consolidated obligation bonds

 

 

 

 

 

 

 

Fixed

 

(78,288

)

130,288

 

52,000

 

Floating

 

88,971

 

421,190

 

510,161

 

Consolidated obligation discount notes

 

40,371

 

341,543

 

381,914

 

Deposits and borrowings

 

(5,777

)

8,783

 

3,006

 

Mandatorily redeemable capital stock

 

(264

)

156

 

(108

)

 

 

 

 

 

 

 

 

Total interest expense

 

45,013

 

901,960

 

946,973

 

 

 

 

 

 

 

 

 

Changes in Net Interest Income

 

$

70,455

 

$

10,884

 

$

81,339

 

 

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Interest Income 2018 Periods Compared to 2017 Periods

 

Interest income from advances, investments in mortgage-backed securities and MPF loans, federal funds and repurchase agreements are our principal sources of income.  Changes in both rate and intermediation volume (average interest-yielding assets) explain the change in the current year period from the prior year period.  Reported interest income is net of the impact of cash flows associated with interest rate swaps hedging certain fixed-rate advances that were converted to floating-rate generally indexed to short-term LIBOR.

 

The principal categories of Interest Income are summarized below (dollars in thousands):

 

Table 1.6:               Interest Income — Principal Sources

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

Percentage

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances (a)

 

$

678,029

 

$

428,927

 

58.08

%

$

1,853,974

 

$

1,107,004

 

67.48

%

Interest-bearing deposits

 

105

 

51

 

105.88

 

259

 

132

 

96.21

 

Securities purchased under agreements to resell (b)

 

25,288

 

10,481

 

141.27

 

55,125

 

18,794

 

193.31

 

Federal funds sold (b)

 

84,349

 

50,403

 

67.35

 

228,205

 

113,876

 

100.40

 

Trading securities (c)

 

22,134

 

548

 

3,939.05

 

44,479

 

762

 

5,737.14

 

Mortgage-backed securities (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

66,408

 

59,261

 

12.06

 

191,847

 

175,296

 

9.44

 

Floating

 

55,649

 

37,661

 

47.76

 

154,338

 

96,382

 

60.13

 

State and local housing finance agency obligations

 

8,524

 

4,936

 

72.69

 

22,554

 

13,129

 

71.79

 

Mortgage loans held-for-portfolio

 

24,305

 

23,841

 

1.95

 

72,931

 

70,098

 

4.04

 

Loans to other FHLBanks

 

86

 

6

 

1,333.33

 

99

 

26

 

280.77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

964,877

 

$

616,115

 

56.61

%

$

2,623,811

 

$

1,595,499

 

64.45

%

 

Interest income in the third quarter of 2018 grew to $964.9 million, yielding 247 basis points, compared to $616.1 million yielding 157 basis points in the 2017 period.  On a year-to-date basis, Interest income in 2018 was $2.6 billion yielding 223 basis points, compared to $1.6 billion yielding 144 basis points in the 2017 period.

 

Primary factors driving changes period-over-period in Interest income are summarized below:

 


(a)         Interest income from Advances

 

Interest income from advances grew to $678.0 million, yielding 251 basis points in the third quarter of 2018, compared to $428.9 million, yielding 150 basis points in the same period in the prior year.  On a year-to-date basis, Interest income from advances grew to $1.9 billion, yielding 224 basis points in 2018, compared to $1.1 billion, yielding 136 basis points in the same period in the prior year.

 

The rising rate environment drove up our funding costs and that in turn drove up our yields on advances.  Additionally, the higher LIBOR benefited our adjustable-rate LIBOR-indexed (ARC) advances.   The quarterly average 3-month LIBOR was 234 basis points in the third quarter of 2018, compared to 131 basis points in the same period in the prior year.  On a year-to-date basis, the average 3-month LIBOR was 220 basis points in 2018, compared to 120 basis points in the same period in the prior year.

 

Variable-rate advances, short-term fixed rate and overnight Advance borrowings by members have remained significant in the periods in this report and benefited from rising market interest rates in each successive quarter.  Variable-rate borrowings re-price typically at monthly intervals and coupons continued to benefit from an increasing LIBOR yield curve.  Short-term fixed-rate and overnight advances re-priced at their maturities at frequent intervals (when rolled over by borrowing members), and benefited from higher coupons along an upwardly sloping yield curve at each successive re-pricing period.

 

Rate-related increases were partly offset by decline in advance transaction volume, as measured by average outstanding advances, which declined to $107.2 billion in the 2018 third quarter, compared to $113.2 billion in the 2017 period.   Volume-related decline in interest income was $23.9 million, offset by $273.0 million in rate-related increases in interest income.  On a year-to-date basis, volume was a little higher, contributing $24.2 million to interest income; rate-related increases in interest income was $722.8 million.  For information about the effects of changes in rates and business volume, see Table 1.4 Spread and Yield Analysis and Table 1.5 Rate and Volume analysis.

 

The rising LIBOR also contributed to favorable changes in interest cash flows exchanged with swap dealers on swaps qualifying under ASC 815 hedging rules that hedged fixed-rate advances.  The cash flows exchanged in the interest rate swaps are recorded directly as adjustments to

 

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interest income from advances.  Period-over-period changes in interest accruals on the swaps have been a significant, and is one factor to consider in making period-over-period comparisons of interest income.  Interest accruals from ASC 815 qualifying interest rate swaps hedging advances are pay fixed-rate in exchange for receive floating-rate cash flows.  Historically, the interest rate exchanges have resulted in a net accrual expense that reduced interest income from hedged advances.  In the current rising rate environment for the 3-month LIBOR, the swap accruals were a net benefit of $64.5 million in the current year third quarter, in contrast to an expense of $29.2 million in the prior year period,  a favorable quarter-over-quarter change of $93.7 million.  On a year-to-date basis, the swap accruals resulted in a net benefit of $132.5 million in the 2018 period, in contrast to a net charge of $128.1 million in the prior year period, a favorable change of $260.6 million.  For more information, see Table 1.7 Impact of Interest Rate Swaps on Interest Earned from Advances.

 

(b)         Federal funds and Securities purchased under agreements to resell

 

Interest income from federal funds and repurchase agreements increased in parallel with higher investments, which have grown in line with our liquidity objectives.  Income growth was also driven by higher investment yields in line with improved market yields.

 

In the third quarter of 2018, average outstanding balance was $22.2 billion, compared to $21.0 billion in the same period in 2017.  Yields grew to 196 basis points in the current year quarter, compared to 115 basis points in the same period in 2017.

 

In the year-to-date period ended September 30, average outstanding balance was $21.9 billion in 2018, up from $18.8 billion in the same period in 2017.  Yields grew to 173 basis points in the current year period, compared to 94 basis points in the same period in 2017.

 

(c)          Trading securities

 

Portfolio comprised primarily of shorter-term, highly liquid U.S. Treasury and GSE securities that were available to enhance and meet our liquidity objectives; securities were not acquired for speculative purpose.  Interest income grew significantly in the 2018 periods primarily due to higher volume of acquisitions.  Reported income does not include fair value unrealized and realized gains and losses, which are recorded in Other income (outside the net interest margin line). For more information about trading securities, see financial statements Note 5. Trading Securities.

 

(d)         Mortgage-backed securities Investment yields and interest income

 

Interest income from investments in mortgage-backed securities (“MBS”) were generated by fixed- and floating-rate securities in our held-to-maturity and available-for-sale portfolios.

 

Interest income from MBS was $122.1 million in the 2018 third quarter, compared to $96.9 million in the 2017 period.

 

·                  Fixed-rate MBS yielded 298 basis points, or $66.4 million in the 2018 period, compared to a yield of 291 basis points, or $59.3 million in the 2017 period.  Reported yields are a blend of accretable yields on OTTI securities and yields based on amortized cost on all other MBS securities.  Interest income has increased, driven by higher investment balances, which averaged $8.8 billion in the 2018 period, up from $8.1 billion in the 2017 period.

 

·                  Floating-rate MBS yielded 256 basis points, or $55.7 million in the 2018 period, compared to a yield of 172 basis points, or $37.6 million in the 2017 period.  Contributing factors were higher 1-month LIBOR and higher invested balances.  The floating-rate portfolio re-priced in line with the rising 1- month LIBOR, which is the primary index on the floating-rate securities.  The average 1-month LIBOR was 211 basis points in 2018, compared to 123 basis points in 2017.  Investment volume averaged $8.6 billion in 2018, a little lower than $8.7 billion in 2017.

 

Interest income from MBS was $346.2 million in the 2018 year-to-date period, compared to $271.7 million in the 2017 period.

 

·                  Fixed-rate MBS yielded 298 basis points, or $191.9 million in the 2018 year-to-date period, compared to a yield of 300 basis points, or $175.3 million in the 2017 period.  Interest income has increased, driven by higher investment balances, which averaged $8.6 billion in the 2018 period, up from $7.8 billion in the 2017 period.  High-yielding vintage MBS have continued to pay down, impacting interest income.

 

·                  Floating-rate MBS yielded 233 basis points, or $154.3 million in the 2018 year-to-date period, compared to a yield of 151 basis points, or $96.4 million in the 2017 period.  Contributing factors were higher 1-month LIBOR and higher invested balances.   The average 1- month LIBOR was 191 basis points in the 2018 year-to-date period, compared to 104 basis points in the 2017 period.  Investment volume averaged $8.8 billion in the 2018 period, up from $8.5 billion in the 2017 period.

 

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Impact of hedging on Interest income from advances — 2018 Periods Compared to 2017 Periods

 

We have executed interest rate swaps to modify the effective interest rate terms of many of our fixed-rate advance products and typically all of our putable advances, effectively converting a fixed-rate stream of cash flows from fixed-rate advances to a floating-rate stream of cash flows, typically indexed to LIBOR.  The cash flow patterns achieved our interest rate risk management practices of synthetically converting much of our fixed-rate interest exposures to a LIBOR exposure.

 

The table below summarizes interest income earned from advances and the impact of interest rate derivatives (in thousands):

 

Table 1.7:               Impact of Interest Rate Swaps on Interest Income Earned from Advances

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Advance Interest Income

 

 

 

 

 

 

 

 

 

Advance interest income before adjustment for interest rate swaps

 

$

613,504

 

$

458,115

 

$

1,721,496

 

$

1,235,153

 

Net interest adjustment from interest rate swaps (a)

 

64,525

 

(29,188

)

132,478

 

(128,149

)

Total Advance interest income reported

 

$

678,029

 

$

428,927

 

$

1,853,974

 

$

1,107,004

 

 


(a)         In a Fair value hedge under ASC 815, certain fixed-rate advances are hedged by the execution of interest rate swaps; the hedges create synthetic floaters.  A fair value hedge of an advance is accomplished by the execution of an interest rate swap in which we pay fixed-rate cash flows and receive LIBOR-indexed variable rate cash flows.  The difference between the two cash exchanges determines the net interest adjustments under ASC 815.  Historically, the fixed-rate cash flows we pay to swap dealers on swaps hedging advances have been greater than the LIBOR indexed cash flows we receive from swap dealers, resulting in a net cash outflow.  While the charge reduces interest income from hedged advances, the cash flow exchange meets our hedging objectives.  That differential, between fixed-rate payments and variable-rate receipts, has narrowed in the current year periods.  The higher LIBOR-indexed cash flows we have received in the 2018 periods have reversed the typical unfavorable expense adjustments, so that net benefits to advance income were recorded in the 2018 periods, compared to net charges in the 2017 periods.

 

Interest Expense 2018 Periods Compared to 2017 Periods

 

Our primary source of funding is through the issuance of Consolidated obligation bonds and discount notes in the global debt markets.  Consolidated obligation bonds are generally medium- and long-term bonds, while discount notes are short-term instruments.  To fund our assets, our management considers our interest rate risk and liquidity requirements in conjunction with consolidated obligation buyers’ preferences and capital market conditions when determining the characteristics of debt to be issued.  Typically, we have used fixed-rate callable and non-callable CO bonds to fund mortgage-related assets and advances.  CO discount notes are generally issued to fund advances and investments with shorter interest rate reset characteristics.

 

Changes in rate and intermediation volume (average interest-costing liabilities), the mix of debt issuances between CO bonds and CO discount notes, and the impact of hedging strategies explain the changes in interest expense.  Reported Interest expense is net of the impact of hedge strategies.  The primary hedging strategy is the Fair value hedge that creates LIBOR-indexed funding.  We also use the Cash Flow hedge strategy that creates long-term fixed-rate funding to lock in future net interest margin.  In a Fair value hedge strategy of a bond or discount note, we generally pay variable-rate LIBOR-indexed cash flows to swap counterparties.  In exchange, we receive fixed-rate cash flows, which typically mirror the fixed-rate coupon payments to investors holding the FHLBank debt.  This exchange effectively converts fixed-rate coupons to floating-rate coupons indexed to the 3-month LIBOR.  The primary cash flow hedge strategy is designed to eliminate the variability of cash flows attributable to changes in the benchmark interest rate (3-month LIBOR), hedging long-term issuances of consolidated obligation discount notes and create long-term fixed-rate funding.

 

Certain floating-rate CO bonds were designated in economic hedges, primarily basis hedges that converted a contractual variable index to a preferred funding variable index, typically the 3-month LIBOR.  Interest rate swaps designated in an economic hedge do not qualify as an ASC 815 hedge, and interest accrual is not recorded as an adjustment to debt interest expense (as would a swap that qualified); swap accruals together with changes in the fair

 

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values of the swaps are reported in Other income (below net interest income) as an impact of derivative and hedging activities in the Statements of income.

 

The principal categories of Interest expense are summarized below (dollars in thousands):

 

Table 1.8:               Interest Expenses Principal Categories

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

Percentage

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

Interest Expense (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated obligations bonds (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

$

135,205

 

$

117,612

 

(14.96

)%

$

393,539

 

$

341,539

 

(15.23

)%

Floating

 

357,243

 

183,519

 

(94.66

)

915,169

 

405,008

 

(125.96

)

Consolidated obligations discount notes (b)

 

256,029

 

128,117

 

(99.84

)

688,785

 

306,871

 

(124.45

)

Deposits

 

5,032

 

5,944

 

15.34

 

12,980

 

10,831

 

(19.84

)

Mandatorily redeemable capital stock

 

221

 

312

 

29.17

 

847

 

955

 

11.31

 

Cash collateral held and other borrowings

 

430

 

72

 

(497.22

)

1,050

 

193

 

(444.04

)

Total interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

754,160

 

$

435,576

 

(73.14

)%

$

2,012,370

 

$

1,065,397

 

(88.88

)%

 


(a)         Total interest expense in the third quarter of 2018 was $754.2 million, at a costing yield of 203 basis points, compared to $435.6 million at a costing yield of 117 basis points in the same period in the prior year.  On a year-to-date basis, Interest expense was $2.0 billion, at a cost of 180 basis points in the 2018 period, compared to $1.1 billion at a cost of 102 basis points in the 2017 period.

 

Our primary source of funding is through the issuance of Consolidated obligation bonds and discount notes.

 

(b)         Interest expense on Consolidated obligation bonds and discount notes While interest expense on debt (CO bonds and CO discount notes) has increased in a rising rate environment, shorter maturity CO floating-rate bonds indexed to LIBOR have continued to be in demand at relatively attractive sub-LIBOR pricing.  CO discount note issuances have also been in demand by investors and the sub-LIBOR coupons have remained attractive.

 

Our funding mix in the 2018 periods, between the use of floating-rate CO bonds and fixed-rate CO bonds, has continued in the direction of greater utilization of floating-rate CO bonds to fund our growing book of variable-rate LIBOR-indexed assets and also short-term fixed-rate advances, which tend to re-price at frequent intervals when rolled over.  Usage of CO discount notes in the 2018 third quarter has remained largely unchanged from the 2018 second quarter and down from the 2018 first quarter.  Relative to prior year periods, utilization of fixed-rate CO bonds has also declined.

 

Our hedging strategies under ASC 815 have remained unchanged. Generally, the longer-term fixed-rate CO bonds and bonds with call options are hedged under ASC 815, i.e. cash flows are swapped from fixed-rate to LIBOR-indexed variable-rate cash flows, synthetically converting fixed debt expense to a sub-LIBOR level.

 

·                  Fixed-rate Consolidated obligation bonds — In a rising rate environment, interest expense on CO bonds has also increased.  Usage of fixed-rate bonds declined period-over-period.

 

In the third quarter of 2018, interest expense was $135.2 million at a funding cost of 218 basis points, compared to $117.6 million at a funding cost of 152 basis points in the same period in 2017.  The usage of fixed-rate funding has declined quarter-over-quarter in 2018 in line with increased usage of floating-rate CO bonds to fund the book of variable-rate and short-term assets that re-price frequently.  Interest rate swaps designated in an ASC 815 hedge recorded $9.7 million in interest accrual expense in the third quarter of 2018, in contrast to $0.1 million in interest accrual income in the prior year period.  The change period-over-period was in line with the rising 3-month LIBOR, which is the payment index; in exchange we receive fixed-rate cash flows in a fair value hedge.  The 3-month LIBOR averaged 234 basis points in the current year quarter, compared to 131 basis points in the same quarter in the prior year.

 

In the year-to-date period ending September 30, interest expense was $393.5 million at a funding cost of 200 basis points in the 2018 period, compared to $341.5 million at a funding cost of 139 basis points in the same period in 2017.  Rate-related increase was the primary driver, partly offset by volume-related decline due to decline in the usage of fixed-rate funding.  Interest accruals on swaps in ASC 815 hedges reported interest accrual expense of $22.9 million in the current year period, in contrast to an accrual income of $15.7 million in the same period in the prior year.

 

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·                  Floating-rate Consolidated obligation bonds Floating-rate bonds were indexed to LIBOR and costing yields have risen in line with the rising LIBOR.  Usage of floating-rate bonds has also increased period-over-period.

 

In the current year third quarter, interest expense on floating-rate CO bonds was $357.2 million at a funding cost of 200 basis points, compared to $183.5 million at a funding cost of 108 basis points in the same quarter in 2017.  The average outstanding balance grew to $70.7 billion in current year quarter, up from $67.4 billion in the same quarter in the prior year.  Variable-rate balance sheet assets have become a significant factor, driving up the need for variable-rate funding.  Floating-rate bonds were typically indexed to the 1-month LIBOR, and higher yields paid in the 2018 period were primarily in line with a rising LIBOR.  The average 1-month LIBOR was 211 basis points in the third quarter of 2018, compared to 123 basis points in the same period in 2017.  Certain 1-month LIBOR indexed CO bonds were converted to 3-month LIBOR by the execution of basis swaps, which were designated as economic hedges of the 1-month LIBOR indexed CO bonds.  In compliance with hedge accounting rules for economic hedges, interest accruals on the basis swaps were not recorded as adjustments to the cost of funds, rather the accruals were recorded in Other income together with fair value gains and losses from derivatives and hedging activities.  For more information about the impact of economic hedging and accruals, see Table 1.12 Earnings Impact of Derivatives and Hedging Activities By Financial Instrument Type.

 

In the year-to-date period ending September 30, interest expense was $915.2 million at a funding cost of 177 basis points in the 2018 period, compared to $405.0 million at a funding cost of 93 basis points in the same period in 2017.  The increase was driven by the rising LIBOR (the average 1- month LIBOR was 191 basis points in the 2018 period, compared to 104 basis points in the 2017 period) and due to increased usage of floating-rate funding period-over-period.

 

·                  Consolidated obligation discount notes (“CO discount notes” or “discount notes”) — In a rising rate environment, costing yields on CO discount notes have also increased.  Usage of discounts notes has increased a little period-over-period.

 

Interest expense on discount notes was $256.0 million at a funding cost of 199 basis points in the third quarter of 2018, compared to $128.1 million at a cost of 109 basis points in the 2017 period.  Increase in interest expense was primarily rate related as discount notes are short-term and re-priced to higher coupons in a rising rate environment when new discount notes were issued to replace maturing debt.  Increase in interest expense was also in line with the increased utilization of discount notes (volume effects) as measured by average balances outstanding.  Cash flow hedging programs under ASC 815 have synthetically converted the 91-day variability of cash flows on $2.7 billion of discount notes to long-term fixed-rate swap yields.  The hedging strategy increased interest expense by $2.0 million in the third quarter of 2018, compared to an increase of $7.6 million in the same period in 2017.  However, the hedging strategy assured us of long-term funding at predictable rates.

 

In the year-to-date period ended September 30, 2018, interest income on discount notes was $688.8 million, compared to $306.9 million in the same period in 2017.  While utilization was higher in the current year period, the impact of higher rates was the primary factor.

 

Impact of Hedging on Interest Expense on Debt — 2018 Periods Compared to 2017 Periods

 

Derivative strategies are primarily used to manage the interest rate risk inherent in fixed-rate debt by converting the fixed-rate funding to floating-rate debt that is indexed to 3-month LIBOR, our preferred funding base.  The strategies are designed to protect future interest margins.  A significant percentage of non-callable fixed-rate debt is swapped to plain vanilla 3-month LIBOR indexed cash flows.  We also issue fixed-rate callable debt that is typically issued with the simultaneous execution of cancellable interest rate swaps to modify the effective interest rate terms and the effective durations of our fixed-rate callable debt.  The cash flow objectives are accomplished by utilizing a Fair value hedging strategy, benefiting us in two principal ways.  First, the issuances of fixed-rate debt and the simultaneous execution of interest rate swaps convert the debt to an adjustable-rate instrument tied to the 3-month LIBOR.  Second, fixed-rate callable bonds issued in conjunction with the execution of interest rate swaps containing a call feature (that mirrors the option embedded in the callable bond), enables us to meet our funding needs at yields not otherwise directly attainable through the issuance of callable debt.  We may also issue floating rate debt indexed to other than the 3-month LIBOR (Prime, federal funds rate and 1-month LIBOR).  Typically, we would then execute interest rate swaps that would convert the cash flows to the 3-month LIBOR, and designate the hedge as an economic hedge.

 

We have also created synthetic long-term fixed rate funding to fund long-term investments, utilizing a Cash Flow hedging strategy that converted forecasted long-term discount note variable-rate funding to fixed-rate funding by the use of long-term swaps.  For such discount notes, the recorded interest expense is equivalent to long-term fixed rate coupons.  Cash Flow hedging strategies are also discussed under Table 1.13 Accumulated Other Comprehensive Income (loss) to Current Period Income from Cash Flow Hedges.

 

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The table below summarizes interest expense paid on Consolidated obligation bonds and discount notes and the impact of interest rate swaps (in thousands):

 

Table 1.9:               Impact of Interest Rate Swaps on Consolidated Obligations Interest Expense

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Bonds and discount notes-Interest expense

 

 

 

 

 

 

 

 

 

Bonds-Interest expense before adjustment for swaps

 

$

482,784

 

$

301,252

 

$

1,285,826

 

$

762,276

 

Discount notes-Interest expense before adjustment for swaps

 

254,052

 

120,499

 

678,580

 

283,180

 

Amortization of basis adjustments

 

(1,440

)

(1,047

)

(4,262

)

(3,165

)

Net interest adjustment for interest rate swaps (a)

 

13,081

 

8,544

 

37,349

 

11,127

 

Total bonds and discount notes-Interest expense

 

$

748,477

 

$

429,248

 

$

1,997,493

 

$

1,053,418

 

 


(a)         CO bond and discount note hedging — Fair value and cash flow hedges under ASC 815 have been executed to hedge certain fixed-rate CO bonds and discount notes.  The cash flows exchanged in the two hedging strategies resulted in Net interest adjustments (also referred to as interest accruals) as noted in the table above and discussed below:

 

·                  A fair value hedge of Consolidated obligation bonds is accomplished by the execution of interest rate swaps in which we receive fixed-rate cash flows, and pay LIBOR-indexed variable cash flows, creating synthetic floating-rate cash flows.  The cash flows exchanged between the receive-leg and pay-leg of the cash determine the net interest adjustments.  Historically, in a fair value hedge of our debt, the fixed-rate cash flows received from swap dealers on swaps hedging CO bonds have been greater than the LIBOR indexed cash flows we pay to swap dealers, and has typically resulted in favorable sub-LIBOR cash flows.  However, in a rising rate environment for LIBOR, that favorable differential associated with swap cash flows has been narrowing in 2018 and 2017, and the cash exchanges have resulted in net interest expense.

 

·                  Cash flow hedges under ASC 815 have been executed to hedge future issuances of designated CO discount notes.  Long-term interest rate swaps have been executed that have created synthetic fixed-rate cash flows we pay fixed-rate cash flows and receive LIBOR-indexed variable rate cash flows.  The pay fixed-rate cash flows are typically based on long-term swap rates, which have remained significantly higher than the 3-month LIBOR that we receive in exchange.  Although the cash flow exchanged in the hedge results in a net interest expense, it achieves our hedging objective of a stable and predictable long-term funding expense.

 

For further information, see Table 1.8 Interest Expenses and accompanying discussions.

 

Allowance for Credit Losses 2018 Periods Compared to 2017 Periods

 

·                  Mortgage loans held-for-portfolio Credit quality continues to be strong, delinquencies low, and allowance for credit losses have remained insignificant.

 

We recorded a net recovery of $95 thousand in the current year quarter, compared to a net reversal of $0.2 million in the same period in the prior year.

 

On a year-to-date basis, we recorded a net recovery of $0.4 million in the current year period, compared to a net recovery of $0.3 million in the same period in the prior year.

 

We evaluate impaired conventional mortgage loans on an individual (loan-by-loan) basis, and compare the fair values of collateral (net of liquidation costs) to recorded investment values in order to calculate/measure credit losses on impaired loans.  Loans are considered impaired when they are seriously delinquent (typically 90 days or more) or in bankruptcy or foreclosure, and loan loss allowances are computed at that point.  When a loan is seriously delinquent, we believe it is probable that we will be unable to collect all contractual interest and principal in accordance with the terms of the loan agreement.  We also perform a loss migration analysis to collectively measure impairment of loans that have not already been individually evaluated for impairment.  FHA/VA (Insured mortgage loans) guaranteed loans are also evaluated collectively for impairment based on the credit worthiness of the PFI.

 

The low amounts of reserves for credit losses are consistent with our historical experience with foreclosures or losses.  Additionally, collateral values of impaired loans have continued to remain steady and have improved in the New York and New Jersey sectors, and the low loan loss reserves were reflective of the stability in home prices in our residential loan markets.  For more information, see financial statements Note 10. Mortgage Loans Held-for-Portfolio.

 

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·                  Advances Based on the collateral held as security and prior repayment history, no allowance for losses was currently deemed necessary.  Our credit risk from advances was concentrated in commercial banks, savings institutions and insurance companies.  All advances were fully collateralized during their entire term.  In addition, borrowing members pledged their stock in the FHLBNY as additional collateral for advances.

 

Analysis of Non-Interest Income (Loss) 2018 Periods Compared to 2017 Periods

 

The principal components of non-interest income (loss) are summarized below (in thousands):

 

Table 1.10:        Other Income (Loss)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Other income (loss):

 

 

 

 

 

 

 

 

 

Service fees and other (a)

 

$

4,195

 

$

3,368

 

$

11,889

 

$

10,731

 

Instruments held at fair value - Unrealized gains (losses) (b)

 

535

 

(1,476

)

173

 

(3,338

)

Total OTTI losses

 

 

 

(398

)

 

Net amount of impairment losses reclassified to (from) Accumulated other comprehensive income (loss)

 

 

 

257

 

 

Net impairment losses recognized in earnings

 

 

 

(141

)

 

Net realized and unrealized gains (losses) on derivatives and hedging activities (c)

 

(3,197

)

(1,241

)

(27,282

)

(1,359

)

Net gains (losses) on Trading securities

 

(2,275

)

41

 

(4,695

)

(23

)

Fair value gains (losses) on Equity Investments

 

1,248

 

 

1,293

 

 

Provision for litigation settlement on derivative contracts (d)

 

 

 

 

(70,000

)

Total other income (loss)

 

$

506

 

$

692

 

$

(18,763

)

$

(63,989

)

 


(a)         Service fees and other — Service fees are derived primarily from providing correspondent banking services to members, primarily fees earned on standby financial letters of credit issued by the FHLBNY on behalf of members.  Fee income earned on financial letters of credit were $3.8 million and $3.0 million in the third quarter of the current year and in the same period in the prior year.  Letters of credit are primarily issued on behalf of members to units of state and local governments to collateralize their deposits at member banks.

 

On a year-to-date basis, Service fees earned on financial letters of credit were $10.8 million in the current year, compared to $8.9 million in the same period in the prior year.

 

(b)         Changes in fair values on advances and debt elected under the FVO were not material in the 2018 periods in parallel with the decline in new elections to replace run offs.

 

(c)          Net realized and unrealized gains (losses) on derivatives and hedging activities Hedging activities reported a net loss of $3.2 million and $1.2 million in the three months ended September 30, 2018 and in the same period in the prior year.  On a year-to-date basis, hedging activities reported a net loss of $27.3 million in the 2018 periods, compared to a net loss of $1.4 million in the same period in the prior year.  See Table 1.12 Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type  for more information.

 

(d)         Litigation settlement In the first quarter of 2017, we took a charge of $70.0 million and settled the long-standing dispute with Lehman Brothers Special Financing Inc. (“Lehman”) in a Chapter 11 bankruptcy proceeding.

 

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The following table summarizes unrealized and realized gains (losses) in the trading portfolio at September 30, 2018 and December 31, 2017 (in thousands):

 

Table 1.11:        Net Gains (Losses) on Trading Securities (a)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net unrealized gains (losses) on Trading securities held at period-end

 

$

(2,460

)

$

41

 

$

(4,709

)

$

(10

)

Net unrealized and realized gains (losses) on Trading securities sold/matured during the period

 

185

 

 

14

 

(13

)

Net gains (losses) on Trading securities

 

$

(2,275

)

$

41

 

$

(4,695

)

$

(23

)

 


(a)         Securities classified as trading are held for liquidity objectives and carried at fair values.  We record changes in the fair value of these investments through Other income as net unrealized gains (losses) on trading securities.  FHFA regulations prohibit trading in or the speculative use of financial instruments.

 

Earnings Impact of Derivatives and Hedging Activities 2018 Periods Compared to 2017 Periods

 

We may designate a derivative as either a hedge of (1) the fair value changes of a recognized fixed-rate asset (Advance) or liability (Consolidated obligation debt), or an unrecognized firm commitment; (2) a forecasted transaction; or (3) the variability of future cash flows of a floating-rate asset or liability (Cash flow hedge).  We may also designate a derivative as an economic hedge, which does not qualify for hedge accounting under the accounting standards.

 

Derivative fair values are driven largely by the rise and fall of the forward swap curve, which determines forward cash flows, and by changes in the OIS curve, which is the discounting basis.  Hedged advances and debt fair values are also driven largely by the rise and fall of the LIBOR curve, which is the discounting basis of hedged advances and bonds in a fair value hedge.  Other market factors include interest rate spreads and interest rate volatility.  The volume of derivatives and their duration to maturity are factors that are also key drivers of changes in fair values.

 

For derivatives that are not designated in a hedging relationship (i.e. in an economic hedge), the derivatives are considered as a “standalone” instrument and fair value changes are recorded as net unrealized gains or losses, without the offset of a hedged item.  Net interest accruals on such “standalone” derivative instruments in economic hedges may also have a significant impact on reported derivatives gains and losses.

 

Generally for the FHLBNY, derivative and hedging gains and losses are primarily from two sources.  Hedge ineffectiveness from hedges that qualify under hedge accounting rules (fair value effects of derivatives, net of the fair value effects of hedged items), and fair value changes of standalone derivatives in an economic hedge (fair value changes of derivatives without the offsetting fair value changes of the hedged items).  Typically, the largest source of gains or losses from derivative and hedging activities arise from derivatives designated as standalone derivatives.  For the FHLBNY, standalone derivatives have typically comprised of swaps in economic hedges of debt elected under the FVO, interest rate caps in economic hedges of capped floating-rate MBS, and basis swaps hedging floating-rate debt indexed to other than the 3-month LIBOR.  For both categories, derivatives that are standalone, and derivatives and hedged items that qualify under hedge accounting rules, fair value gains and losses are unrealized and sum to zero if held to maturity.  Interest accruals on standalone derivatives are considered as hedging gains or losses on standalone hedges, and realized at the periodic accrual settlement dates.

 

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Summarized below is the impact of hedging activities on earnings, and a description of where the primary components of expenses and income are reported in the Statements of income (in thousands):

 

Table 1.12:        Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

 

 

 

Consolidated

 

Consolidated
Obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MPF

 

Obligation

 

Discount

 

Balance

 

Intermediary

 

 

 

 

 

Earnings Impact

 

Advances

 

Investments

 

Loans

 

Bonds

 

Notes

 

Sheet

 

Positions

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization/accretion/interest accruals of hedging activities reported in net interest income

 

$

64,525

 

$

 

$

(44

)

$

(9,664

)

$

(1,977

)

$

 

$

 

$

 

$

52,840

 

Net realized and unrealized gains (losses) on derivatives and hedging activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) on fair value hedges

 

239

 

 

 

(1,522

)

 

 

 

 

(1,283

)

Gains (losses) on cash flow hedges

 

 

 

 

(28

)

 

 

 

 

(28

)

Net fair value gains (losses) and interest income on swaps in economic hedges of FVO instruments

 

 

 

 

(235

)

 

 

 

 

(235

)

Net gains (losses) on swaps and caps in other economic hedges

 

(26

)

2,549

 

(83

)

(477

)

 

(337

)

9

 

 

1,635

 

Price alignment interest paid on variation margin

 

 

 

 

 

 

 

 

(3,286

)

(3,286

)

Net realized and unrealized gains (losses) on derivatives and hedging activities (a)

 

213

 

2,549

 

(83

)

(2,262

)

 

(337

)

9

 

(3,286

)

(3,197

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings impact

 

$

64,738

 

$

2,549

 

$

(127

)

$

(11,926

)

$

(1,977

)

$

(337

)

$

9

 

$

(3,286

)

$

49,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

 

 

 

Consolidated

 

Consolidated
Obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MPF

 

Obligation

 

Discount

 

Balance

 

Intermediary

 

 

 

 

 

Earnings Impact

 

Advances

 

Investments

 

Loans

 

Bonds

 

Notes

 

Sheet

 

Positions

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization/accretion/interest accruals of hedging activities reported in net interest income

 

$

(29,188

)

$

 

$

(16

)

$

121

 

$

(7,618

)

$

 

$

 

$

 

$

(36,701

)

Net realized and unrealized gains (losses) on derivatives and hedging activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) on fair value hedges

 

495

 

 

 

(229

)

 

 

 

 

266

 

Gains (losses) on cash flow hedges

 

 

 

 

141

 

 

 

 

 

141

 

Net fair value gains (losses) and interest income on swaps in economic hedges of FVO instruments

 

 

 

 

12

 

1

 

 

 

 

13

 

Net gains (losses) on swaps and caps in other economic hedges

 

14

 

(3

)

200

 

(909

)

 

(172

)

1

 

 

(869

)

Price alignment interest paid on variation margin

 

 

 

 

 

 

 

 

(792

)

(792

)

Net realized and unrealized gains (losses) on derivatives and hedging activities (a)

 

509

 

(3

)

200

 

(985

)

1

 

(172

)

1

 

(792

)

(1,241

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings impact

 

$

(28,679

)

$

(3

)

$

184

 

$

(864

)

$

(7,617

)

$

(172

)

$

1

 

$

(792

)

$

(37,942

)

 

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Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

Consolidated

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MPF

 

Obligation

 

Obligation

 

Balance

 

Intermediary

 

 

 

 

 

Earnings Impact

 

Advances

 

Investments

 

Loans

 

Bonds

 

Discount Notes

 

Sheet

 

Positions

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization/accretion/interest accruals of hedging activities reported in net interest income

 

$

132,478

 

$

 

$

(203

)

$

(22,881

)

$

(10,206

)

$

 

$

 

$

 

$

99,188

 

Net realized and unrealized gains (losses) on derivatives and hedging activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) on fair value hedges

 

904

 

 

 

(2,565

)

 

 

 

 

(1,661

)

Gains (losses) on cash flow hedges

 

 

 

 

2

 

 

 

 

 

2

 

Net fair value gains (losses) and interest income on swaps in economic hedges of FVO instruments

 

 

 

 

(384

)

(12

)

 

 

 

(396

)

Net gains (losses) on swaps and caps in other economic hedges

 

222

 

5,380

 

(228

)

(22,401

)

 

(11

)

203

 

 

(16,835

)

Price alignment paid on variation margin

 

 

 

 

 

 

 

 

(8,392

)

(8,392

)

Net realized and unrealized gains (losses) on derivatives and hedging activities (b)

 

1,126

 

5,380

 

(228

)

(25,348

)

(12

)

(11

)

203

 

(8,392

)

(27,282

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings impact

 

$

133,604

 

$

5,380

 

$

(431

)

$

(48,229

)

$

(10,218

)

$

(11

)

$

203

 

$

(8,392

)

$

71,906

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

Consolidated

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MPF

 

Obligation

 

Obligation

 

Balance

 

Intermediary

 

 

 

 

 

Earnings Impact

 

Advances

 

Investments

 

Loans

 

Bonds

 

Discount Notes

 

Sheet

 

Positions

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization/accretion/interest accruals of hedging activities reported in net interest income

 

$

(128,149

)

$

 

$

(187

)

$

15,729

 

$

(23,691

)

$

 

$

 

$

 

$

(136,298

)

Net realized and unrealized gains (losses) on derivatives and hedging activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) on fair value hedges

 

1,246

 

 

 

(2,611

)

 

 

 

 

(1,365

)

Gains (losses) on cash flow hedges

 

 

 

 

332

 

 

 

 

 

332

 

Net fair value gains (losses) and interest income on swaps in economic hedges of FVO instruments

 

11

 

 

 

(114

)

(857

)

 

 

 

(960

)

Net gains (losses) on swaps and caps in other economic hedges

 

66

 

58

 

639

 

5,659

 

(63

)

(3,767

)

109

 

 

2,701

 

Price alignment interest paid on variation margin

 

 

 

 

 

 

 

 

(2,067

)

(2,067

)

Net realized and unrealized gains (losses) on derivatives and hedging activities (b)

 

1,323

 

58

 

639

 

3,266

 

(920

)

(3,767

)

109

 

(2,067

)

(1,359

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings impact

 

$

(126,826

)

$

58

 

$

452

 

$

18,995

 

$

(24,611

)

$

(3,767

)

$

109

 

$

(2,067

)

$

(137,657

)

 


(a)   Net realized and unrealized gains and losses on derivatives and hedging activities recorded a net loss $3.2 million in the third quarter of 2018, compared to a net loss of $1.2 million in the same period in 2017.  The primary components were - Price alignment interest (“PAI”, the interest expense paid on variation margin) was $3.3 million in the current year third quarter, compared to $0.8 million in the same period in 2017; ASC 815 hedging effects recorded a net fair value loss of $1.3 million in the current year third quarter, compared to a net fair value gain of $0.3 million in the same period in 2017; standalone derivatives in economic hedges recorded a net gain of $1.6 million in the current year third quarter, compared to a net loss of $0.9 million in the same period in 2017.

 

(b)   Net realized and unrealized gains and losses on derivatives and hedging activities in the year-to-date period ended September 30, 2018 recorded a net loss of $27.3 million, compared to a net loss of $1.4 million in the same period in 2017.  The primary components were - PAI expense was $8.4 million in the current year period, compared to $2.1 million in the same period in 2017; hedging under ASC 815 recorded a net fair value loss of $1.7 million in the current year period, compared to a net fair value loss of $1.4 million in the same period in 2017; standalone derivatives in economic hedges recorded a net loss of $16.8 million (primarily accrued interest paid on interest rate basis swaps in economic hedges of floating-rate CO bonds indexed to the 1-month LIBOR), compared to a net fair value gain of $2.7 million in the same period in 2017.

 

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Impact of Cash flow hedging on earnings and AOCI and Derivative gains and losses reclassified from AOCI to income.

 

The following table summarizes changes in derivative gains and (losses), including reclassifications into earnings from AOCI in the Statements of Condition (in thousands):

 

Table 1.13:        Accumulated Other Comprehensive Income (Loss) to Current Period Income from Cash Flow Hedges

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Accumulated other comprehensive income (loss) from cash flow hedges

 

 

 

 

 

 

 

 

 

Beginning of period

 

$

57,985

 

$

(50,115

)

$

(19,877

)

$

(47,018

)

Net hedging transactions (a)

 

25,119

 

5,381

 

103,014

 

1,681

 

Reclassified into earnings

 

(64

)

301

 

(97

)

904

 

End of period (b)

 

$

83,040

 

$

(44,433

)

$

83,040

 

$

(44,433

)

 


(a)         Net hedging transactions represented the effects of valuation changes of interest rate swaps in ASC 815 cash flow hedges.  Valuation gains were unrealized and were consistent with higher long-term swap rates at September 30, 2018, compared to long-term swap rates at the beginning of the three and nine months ended on that date.

 

Valuation changes recorded in AOCI were associated with the two cash flow programs described below, but primarily represented changes in fair values of swaps in the discount note cash flow hedging program.  In this program, valuation changes are typically determined by changes in long-term swap rates; and generally, valuation gains will be recorded when long-term swap rates rise, and valuation losses will be recorded when long-term swap rates decline.

 

(b)         End of period balances represent effective portions of fair values of contracts that were open at period end.  Ineffectiveness, if any associated with the open contracts were de minimis and were recorded through earnings.  For more information, see table: Cash Flow hedges — Fair Value changes in AOCI Rollforward Analysis in financial statements Note 17.  Derivatives and Hedging Activities.

 

The two Cash Flow hedging strategies were:

 

Hedges of anticipated issuances of Consolidated obligation bonds From time to time, we execute interest rate swaps on the anticipated issuance of debt to “lock-in” a spread between the earning asset that is expected to settle in a future period and the cost of funding.  The swaps are structured to pay fixed-rate, receive LIBOR indexed cash flows.  Open swap contracts are valued at the end of each reporting period and fair values are recorded in the balance sheet as a derivative asset or a liability, with an offset to AOCI.  The effective portion of changes in the fair values of the swaps is recorded in AOCI.  Ineffectiveness, if any, is recorded through earnings.  In this program, the swap is typically terminated upon issuance of the debt instrument.  The termination fair value is recorded in AOCI and reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued.  The maximum period of time that we typically hedge our exposure to the variability in future cash flows (for forecasted transactions to issue Consolidated obligation bonds) is between three and six months.

 

Hedges of discount note issuances In the “rollover” cash flow hedge strategy, fair values of derivatives are recorded as a derivative asset or a liability in the balance sheet, and the effective portion is recorded as an offset to AOCI.  The ineffective portion is recorded in earnings.  The objective of this cash flow strategy is to hedge the long-term issuances of Consolidated obligation discount notes, to eliminate the variability of cash flows attributable to changes in the benchmark interest rate (3-month LIBOR), and to create predictable long-term fixed-rate funding.

 

For more information about cash flow strategies, see financial statements, Note 17.  Derivatives and Hedging Activities.

 

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Operating Expenses, Compensation and Benefits, and Other Expenses 2018 Periods Compared to 2017 Periods

 

The following table sets forth the major categories of operating expenses (dollars in thousands):

 

Table 1.14:        Operating Expenses, and Compensation and Benefits

 

 

 

Three months ended September 30,

 

 

 

2018

 

Percentage of
Total

 

2017

 

Percentage of
Total

 

Operating Expenses (a)

 

 

 

 

 

 

 

 

 

Occupancy

 

$

2,134

 

17.88

%

$

1,475

 

13.91

%

Depreciation and leasehold amortization

 

1,284

 

10.76

 

1,155

 

10.89

 

All others (b)

 

8,520

 

71.36

 

7,973

 

75.20

 

Total Operating Expenses

 

$

11,938

 

100.00

%

$

10,603

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Total Compensation and Benefits

 

$

18,639

 

 

 

$

17,673

 

 

 

Finance Agency and Office of Finance (c)

 

$

4,034

 

 

 

$

3,495

 

 

 

Other expenses (d)

 

$

2,891

 

 

 

$

1,006

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2018

 

Percentage of
Total

 

2017

 

Percentage of
Total

 

Operating Expenses (a)

 

 

 

 

 

 

 

 

 

Occupancy

 

$

6,213

 

18.66

%

$

3,904

 

13.11

%

Depreciation and leasehold amortization

 

3,819

 

11.47

 

3,216

 

10.80

 

All others (b)

 

23,256

 

69.87

 

22,659

 

76.09

 

Total Operating Expenses

 

$

33,288

 

100.00

%

$

29,779

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Total Compensation and Benefits

 

$

54,896

 

 

 

$

51,662

 

 

 

Finance Agency and Office of Finance (c)

 

$

11,934

 

 

 

$

10,472

 

 

 

Other expenses (d)

 

$

6,412

 

 

 

$

3,022

 

 

 

 


(a)         Operating expenses included the administrative and overhead costs of operating the FHLBNY, as well as the operating costs of providing advances and managing collateral associated with the advances, managing the investment portfolios, and providing correspondent banking services to members.  Occupancy expense has increased in line with new long-term lease agreements effective beginning in the second half of 2017.

(b)         The category “All others” included temporary workers, computer service agreements, contractual services, professional and legal fees, audit fees, director fees and expenses, insurance and telecommunications.  Expenses increased in the current year periods primarily due to increase in consulting fees for technology related projects.

(c)          We are also assessed for our share of the operating expenses for the Finance Agency and the Office of Finance.  The FHLBanks and two other GSEs share the entire cost of the Finance Agency.  Expenses are allocated by the Finance Agency and the Office of Finance.

(d)         The category Other expenses included contributions to homeowners and small businesses under a newly established hurricane relief grant program, the non-service elements of Net periodic pension benefit costs, and derivative clearing fees.

 

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Assessments 2018 Periods Compared to 2017 Periods

 

For more information about assessments, see Affordable Housing Program and Other Mission Related Programs and Assessments under Part I Item 1 Business in the most recent Form 10-K filed on March 22, 2018.

 

The following table provides rollforward information with respect to changes in AHP liabilities (in thousands):

 

Table 2.1:               Affordable Housing Program Liabilities

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

149,304

 

$

121,282

 

$

131,654

 

$

125,062

 

Additions from current period’s assessments

 

17,404

 

14,895

 

48,740

 

37,242

 

Net disbursements for grants and programs

 

(6,207

)

(9,801

)

(19,893

)

(35,928

)

Ending balance

 

$

160,501

 

$

126,376

 

$

160,501

 

$

126,376

 

 

AHP assessments allocated from net income totaled $17.4 million for the quarter ended September 30, 2018, compared to $14.9 million for the same period in the prior year.  On a year-to-date basis, AHP assessments allocated from net income totaled $48.7 million for the 2018 period, compared to $37.2 million for the prior year period.  Assessments are calculated as a percentage of Net income, and the changes in allocations were in parallel with changes in Net income.

 

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Financial Condition

 

Table 3.1:               Statements of Condition — Period-Over-Period Comparison

 

 

 

 

 

 

 

Net change in

 

Net change in

 

(Dollars in thousands)

 

September 30, 2018

 

December 31, 2017

 

dollar amount

 

percentage

 

Assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

87,005

 

$

127,403

 

$

(40,398

)

(31.71

)%

Securities purchased under agreements to resell

 

4,870,000

 

2,700,000

 

2,170,000

 

80.37

 

Federal funds sold

 

14,360,000

 

10,326,000

 

4,034,000

 

39.07

 

Trading securities

 

4,642,904

 

1,641,568

 

3,001,336

 

182.83

 

Equity Investments

 

52,150

 

 

52,150

 

NM

 

Available-for-sale securities

 

444,293

 

577,269

 

(132,976

)

(23.04

)

Held-to-maturity securities

 

17,859,215

 

17,824,533

 

34,682

 

0.19

 

Advances

 

100,165,960

 

122,447,805

 

(22,281,845

)

(18.20

)

Mortgage loans held-for-portfolio

 

2,910,298

 

2,896,976

 

13,322

 

0.46

 

Accrued interest receivable

 

288,421

 

226,981

 

61,440

 

27.07

 

Premises, software, and equipment

 

45,260

 

29,697

 

15,563

 

52.41

 

Derivative assets

 

126,754

 

112,742

 

14,012

 

12.43

 

Other assets

 

5,224

 

7,398

 

(2,174

)

(29.39

)

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

145,857,484

 

$

158,918,372

 

$

(13,060,888

)

(8.22

)%

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

880,886

 

$

1,142,056

 

$

(261,170

)

(22.87

)%

Non-interest-bearing demand

 

18,352

 

17,999

 

353

 

1.96

 

Term

 

37,000

 

36,000

 

1,000

 

2.78

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

936,238

 

1,196,055

 

(259,817

)

(21.72

)

 

 

 

 

 

 

 

 

 

 

Consolidated obligations

 

 

 

 

 

 

 

 

 

Bonds

 

85,909,679

 

99,288,048

 

(13,378,369

)

(13.47

)

Discount notes

 

50,821,648

 

49,613,671

 

1,207,977

 

2.43

 

Total consolidated obligations

 

136,731,327

 

148,901,719

 

(12,170,392

)

(8.17

)

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable capital stock

 

6,664

 

19,945

 

(13,281

)

(66.59

)

 

 

 

 

 

 

 

 

 

 

Accrued interest payable

 

208,985

 

162,176

 

46,809

 

28.86

 

Affordable Housing Program

 

160,501

 

131,654

 

28,847

 

21.91

 

Derivative liabilities

 

24,351

 

61,607

 

(37,256

)

(60.47

)

Other liabilities

 

207,585

 

204,178

 

3,407

 

1.67

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

138,275,651

 

150,677,334

 

(12,401,683

)

(8.23

)

 

 

 

 

 

 

 

 

 

 

Capital

 

7,581,833

 

8,241,038

 

(659,205

)

(8.00

)

 

 

 

 

 

 

 

 

 

 

Total liabilities and capital

 

$

145,857,484

 

$

158,918,372

 

$

(13,060,888

)

(8.22

)%

 

NM — Not meaningful.

 

Balance Sheet overview September 30, 2018 and December 31, 2017

 

Total assets decreased to $145.9 billion at September 30, 2018 from $158.9 billion at December 31, 2017, a decrease of $13.0 billion, or 8.2%.

 

Cash at banks was $87.0 million at September 30, 2018, compared to $127.4 million at December 31, 2017.

 

Money market investments at September 30, 2018 were $14.4 billion in federal funds sold and $4.9 billion in overnight resale agreements.  At December 31, 2017, money market investments were $10.3 billion in federal funds sold and $2.7 billion in overnight resale agreements.  Market yields for overnight and term money market investments have improved, creating opportunities for earning a positive margin, and at the same time fulfilling our liquidity targets.

 

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Advances — Par balances decreased at September 30, 2018 to $100.8 billion, compared to $122.7 billion at December 31, 2017.  Short-term fixed-rate advances decreased by 34.8% to $15.5 billion at September 30, 2018, down from $23.8 billion at December 31, 2017.  ARC advances, which are adjustable-rate borrowings, decreased by 36.5% to $23.5 billion at September 30, 2018, compared to $37.1 billion at December 31, 2017.

 

Long-term investment debt securities — Long-term investment debt securities are designated as available-for-sale (“AFS”) or held-to-maturity (“HTM”).  The heavy concentration of GSE and Agency issued (“GSE-issued”) securities, and a declining balance of private-label MBS, less than 1%, is our investment profile.

 

In the AFS portfolio, long-term investments at September 30, 2018 were floating-rate GSE-issued mortgage-backed securities carried on the balance sheet at fair values of $444.3 million, compared to $528.6 million at December 31, 2017.

 

In the HTM portfolio, long-term investments at September 30, 2018 were predominantly GSE-issued fixed- and floating-rate mortgage-backed securities and housing finance agency bonds.  Securities in the HTM portfolio are recorded at amortized cost, adjusted for any OTTI.  Fixed- and floating-rate mortgage-backed securities (“MBS”), including PLMBS, in the HTM portfolio, were $16.7 billion at September 30, 2018 and at December 31, 2017.  Investments in PLMBS were less than 1% of the HTM portfolio. We acquired $1.3 billion of fixed-rate GSE-issued MBS and $1.2 billion of floating-rate GSE-issued MBS in the nine months of 2018.

 

In the HTM portfolio, housing finance agency bonds, primarily New York and New Jersey, were carried at an amortized cost basis of $1.2 billion at September 30, 2018 and $1.1 billion at December 31, 2017.  We acquired par amounts of $100.0 million in the first nine months of 2018 and paydowns were $65.3 million.  In the same period in 2017, we acquired par amounts of $61.5 million in housing finance bonds and paydowns were $9.8 million.

 

Trading securities (liquidity portfolio) — The objective of the trading portfolio is to meet short-term contingency liquidity needs.  During the periods in this report, we have invested in highly liquid U.S. Treasury bills, U.S. Treasury notes and GSE-issued securities.  Trading investments are carried at fair value, with changes recorded through earnings.  At September 30, 2018, trading investments were $3.9 billion in U.S. Treasury notes, $761.5 million in GSE securities, and $3.5 million in Ambac corporate notes.  We acquired $3.2 billion of U.S. Treasury notes, and $421.7 million in GSE securities in the first nine months of 2018.  Ambac corporate notes par $3.4 million were received from the Ambac Corporation as consideration for insurance claims on certain PLMBS.  At December 31, 2017, trading investments were $239.1 million in U.S. Treasury bills, $1.0 billion in U.S. Treasury notes and $356.9 million in GSE securities.

 

We will periodically evaluate our liquidity needs and may dispose these liquidity investments as deemed prudent based on liquidity and market conditions.  The Finance Agency prohibits speculative trading practices but allows permitted securities to be deemed held for liquidity if invested in a trading portfolio.

 

Equity Investments — We own grantor trusts that invest in highly-liquid registered mutual funds, which were reclassified as of January 1, 2018 from AFS to Equity Investments.  These investments were carried on the balance sheet at fair values of $52.2 million at September 30, 2018.  At December 31, 2017, the funds were classified as AFS and carried at fair values of $48.6 million.

 

Mortgage loans held-for-portfolio — Mortgage loans were investments in Mortgage Partnership Finance loans (“MPF” or “MPF Program”).  Unpaid principal balance of MPF loans stood at $2.9 billion at September 30, 2018, an increase of $15.6 million from the balance at December 31, 2017.  Loans are primarily fixed-rate, single-family mortgages acquired through the MPF Program.  Paydowns in the nine months of 2018 were $200.8 million, slightly higher than $199.5 million in the prior year same period.  Acquisitions in the nine months of 2018 were $219.0 million, compared to $338.7 million in the prior year same period.  Credit performance has been strong and delinquency low.  Loan origination by members and acceptable pricing are key factors that drive acquisitions.  Residential collateral values have remained stable in the New York and New Jersey sectors, the primary geographic concentration for our MPF portfolio, and historical loss experience remains very low.

 

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Stress test results — Pursuant to the Dodd-Frank Act, the FHFA, regulator of the Federal Home Loan Banks (FHLBanks), has adopted supervisory stress tests for the FHLBanks.  The FHFA requires the annual stress testing for the FHLBanks based on the FHFA’s scenarios, summary instructions and guidance.  The tests are designed to determine whether the FHLBanks have the capital to absorb losses as a result of adverse economic conditions.  The FHFA rules require that the FHLBanks consider the results of the annual stress test into account in making any changes, as appropriate, to its capital structure (including the level and composition of capital); its exposure, concentration, and risk positions; any plans for recovery and resolution; and to improve overall risk management.  Consultation with FHFA supervisory staff is expected in making such improvements.  In accordance with these rules, the FHLBNY executed its third annual stress test, and publicly disclosed the most recent stress test results on November 16, 2017 on our website (www.fhlbny.com).

 

The stress test results in all scenarios, including the scenario run under the FHFA’s severely adverse economic scenario, demonstrated capital adequacy.

 

Capital ratios — Our capital position remains strong.  At September 30, 2018, actual risk-based capital was $7.5 billion, compared to required risk-based capital of $919.9 million.  To support $145.9 billion of total assets at September 30, 2018, the minimum required total capital was $5.8 billion or 4.0% of assets.  Our actual regulatory risk-based capital was $7.5 billion, exceeding required total capital by $1.7 billion.  These ratios have remained consistently above the required regulatory ratios through all periods in this report.  For more information, see financial statements, Note 14.  Capital Stock, Mandatorily Redeemable Capital Stock and Restricted Retained Earnings.

 

Leverage — At September 30, 2018, balance sheet leverage (based on U.S. GAAP) was 19.2 times shareholders’ equity.  Balance sheet leverage has generally remained steady over the last several years, although from time to time we have maintained excess liquidity in highly liquid investments, or cash balances at the Federal Reserve Bank of New York (“FRBNY”) to meet unexpected member demand for funds.  Increases or decreases in investments have a direct impact on leverage, but generally growth in or shrinkage of advances does not significantly impact balance sheet leverage under existing capital stock management practices.  Members are required to purchase activity-based capital stock to support their borrowings from us, and when activity-based capital stock is in excess of the amount that is required to support advance borrowings, we redeem the excess capital stock immediately.  Therefore, stockholders’ capital increases and decreases with members’ advance borrowings, and the capital to asset ratio remains relatively unchanged.

 

Liquidity and Debt — In addition to the trading portfolio maintained for liquidity, liquid assets at September 30, 2018 included $85.5 million as demand cash balances at the Federal Reserve Bank of New York (“FRBNY”), $19.2 billion in short-term and overnight loans in the federal funds and the repo markets, and $444.3 million of high credit quality GSE-issued available-for-sale securities that are investment quality, and readily marketable.  In December 2016, we established a trading portfolio with the primary objective of increasing our liquidity.  The trading portfolio is invested in highly-liquid U.S. Treasury bonds and GSE-issued securities.  Our liquidity position remains strong, and in compliance with all regulatory requirements, and we do not foresee any changes to that position.

 

The primary source of our funds is the issuance of Consolidated obligation bonds and discount notes to the public.  Our GSE status enables the FHLBanks to raise funds at rates that are typically at a small to moderate spread above U.S. Treasury security yields.  Our ability to access the capital markets, which has a direct impact on our cost of funds, is dependent to a degree on our credit ratings from the major ratings organizations.  The FHLBank debt performance has withstood the impact of the controversy surrounding the debt ceiling in the recent past.  However, we cannot say with certainty the long-term impact of such actions on our liquidity position, which could be adversely affected by many causes both internal and external to our business.

 

During the periods in this report, we maintained continual access to funding and adapted our debt issuance to meet the liquidity needs of our members and our asset/liability risk management objectives.  Our short-term funding was largely driven by member demand for short-term advances and was achieved through the issuance of Consolidated discount notes and short-term Consolidated bonds.  Access to short-term debt markets has been reliable.  Investor demand has been strong, partly due to the money market fund reform and partly due to investors’ preference for

 

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liquidity.  Investors have sought the FHLBank’s short-term debt as an asset of choice, and that has led to advantageous funding opportunities and increased utilization of shorter-term debt.

 

There are inherent risks in utilizing short-term funding and we may be exposed to refinancing and investor concentration risks or market access risk.  Market access risk includes the risk that we would be unable to issue Consolidated obligations in the event of disruptions in the capital markets.  Refinancing risk includes the risk that we could have difficulty rolling over short-term obligations when market conditions become unfavorable for debt issuance.

 

We measure and monitor interest rate-risk with commonly used methods, which include the calculations of market value of equity, duration of equity, and duration gap.

 

Among other liquidity measures, the Finance Agency requires FHLBanks to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios.  The first scenario assumes that we cannot access capital markets for 15 days, and during that period members do not renew their maturing, or prepay or exercise their option to call advances that are callable.  The second scenario assumes that we cannot access the capital markets for five days, and during that period, members renew maturing advances.  We remain in compliance with regulations under both scenarios.

 

We also hold contingency liquidity in an amount sufficient to meet our liquidity needs if we are unable to access the Consolidated obligation debt market for at least 5 days.  The actual contingency liquidity under the 5-day scenario in the current year quarter was $34.2 billion, well in excess of the required $3.6 billion.

 

We also have other liquidity measures in place, deposit liquidity and operational liquidity, and those liquidity buffers remain in excess of required reserves.  For more information about our liquidity measures, please see section Liquidity, Cash Flows, Short-Term Borrowings and Short-Term Debt in this MD&A.

 

Advances

 

Our primary business is making collateralized loans to members, referred to as advances.  Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and term funding.  This demand is driven by economic factors such as availability of alternative funding sources that are more attractive, or by the interest rate environment and the outlook for the economy.  Members may choose to prepay advances (which may generate prepayment penalty fees) based on their expectations of interest rate changes and demand for liquidity.

 

Advance volume is also influenced by merger activity, where members are either acquired by non-members or acquired by members of another FHLBank.  When our members are acquired by members of another FHLBank or by non-members, these former members no longer qualify for membership and we may not offer renewals or additional advances to the former members.  If maturing advances are not replaced, it will have an impact on business volume.  Period-end advance balances were lower at September 30, 2018 compared to December 31, 2017, primarily due to third quarter prepayments and run-offs of adjustable-rate advances (“ARC”) near the second quarter-end in the current year.  On a period-over-period basis, volume of advance business, as measured by average balances, was higher in the nine months of 2018 compared to the 2017 period.

 

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Member demand for advance products

 

Table 4.1:               Advance Trends

 

Advance Trends

 

GRAPHIC

 

Par amount of advances outstanding was $100.8 billion at September 30, 2018, compared to $122.7 billion at December 31, 2017.

 

Carrying value of advances outstanding at September 30, 2018 was $100.2 billion, compared to $122.4 billion at December 31, 2017.  Carrying values included unrealized net fair value hedging basis adjustments recorded on hedges eligible under ASC 815, and basis adjustments recorded on advances elected under the fair value option (“FVO”).  For advances hedged under the ASC 815 qualifying hedging rules, the basis adjustment was a fair value net loss of $624.8 million at September 30, 2018 and a fair value loss of $265.3 million at December 31, 2017.  For more information about basis adjustments, see Table 4.4 Advances by Maturity and Yield Type in this MD&A.

 

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Advances — Product Types

 

The following table summarizes par values of advances by product type (dollars in thousands):

 

Table 4.2:               Advances by Product Type

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

Percentage

 

 

 

Percentage

 

 

 

Amounts

 

of Total

 

Amounts

 

of Total

 

 

 

 

 

 

 

 

 

 

 

Adjustable Rate Credit - ARCs

 

$

23,533,467

 

23.35

%

$

37,060,467

 

30.20

%

Fixed Rate Advances

 

50,268,670

 

49.87

 

50,517,644

 

41.17

 

Short-Term Advances

 

15,534,563

 

15.41

 

23,818,181

 

19.41

 

Mortgage Matched Advances

 

328,493

 

0.33

 

352,859

 

0.29

 

Overnight & Line of Credit (OLOC) Advances

 

3,804,054

 

3.78

 

3,748,677

 

3.05

 

All other categories

 

7,321,541

 

7.26

 

7,209,613

 

5.88

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

100,790,788

 

100.00

%

122,707,441

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Hedge valuation basis adjustments

 

(624,828

)

 

 

(265,260

)

 

 

Fair value option valuation adjustments and accrued interest

 

 

 

 

5,624

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

100,165,960

 

 

 

$

122,447,805

 

 

 

 

For more information about advance product types, see our most recent Form 10-K filed on March 22, 2018.

 

Advances — Interest Rate Terms

 

The following table summarizes interest-rate payment terms for advances (dollars in thousands):

 

Table 4.3:               Advances by Interest-Rate Payment Terms

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

Percentage

 

 

 

Percentage

 

 

 

Amount

 

of Total

 

Amount

 

of Total

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate (a)

 

$

77,223,677

 

76.62

%

$

85,587,792

 

69.75

%

Variable-rate (b)

 

23,563,191

 

23.38

 

37,116,649

 

30.25

 

Variable-rate capped or floored (c)

 

3,000

 

 

3,000

 

 

Overdrawn demand deposit accounts

 

920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

100,790,788

 

100.00

%

122,707,441

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Hedge valuation basis adjustments

 

(624,828

)

 

 

(265,260

)

 

 

Fair value option valuation adjustments and accrued interest

 

 

 

 

5,624

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

100,165,960

 

 

 

$

122,447,805

 

 

 

 


(a)         Fixed-rate borrowings remained the largest category of advances borrowed by members.  The presentation above includes long-term and short-term fixed-rate advances.  Long-term advances remain a small segment of the portfolio at September 30, 2018, with only 6.2% of advances in the remaining maturity bucket of greater than 5 years (2.5% at December 31, 2017).  For more information, see financial statements Note 9. Advances.

(b)         ARC advances are typically indexed to LIBOR.  The FHLBNY’s larger members are generally borrowers of variable-rate advances.

(c)          Category represents ARCs with options that “cap” increase or “floor” decrease in the LIBOR index at predetermined strikes (We have also purchased cap/floor options that mirror the terms of the options embedded in the advances sold to members, offsetting our exposure on the advance).

 

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The following table summarizes maturity and yield characteristics of advances (dollars in thousands):

 

Table 4.4:               Advances by Maturity and Yield Type

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

Percentage

 

 

 

Percentage

 

 

 

Amount

 

of Total

 

Amount

 

of Total

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

46,890,172

 

46.52

%

$

54,923,033

 

44.76

%

Due after one year

 

30,333,505

 

30.10

 

30,664,759

 

24.99

 

Total Fixed-rate

 

77,223,677

 

76.62

 

85,587,792

 

69.75

 

 

 

 

 

 

 

 

 

 

 

Variable-rate

 

 

 

 

 

 

 

 

 

Due in one year or less

 

16,354,214

 

16.22

 

30,368,458

 

24.75

 

Due after one year

 

7,212,897

 

7.16

 

6,751,191

 

5.50

 

Total Variable-rate

 

23,567,111

 

23.38

 

37,119,649

 

30.25

 

Total par value

 

100,790,788

 

100.00

%

122,707,441

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Hedge valuation basis adjustments (a)

 

(624,828

)

 

 

(265,260

)

 

 

Fair value option valuation adjustments and accrued interest (b)

 

 

 

 

5,624

 

 

 

Total

 

$

100,165,960

 

 

 

$

122,447,805

 

 

 

 

Fair value basis and valuation adjustmentsKey determinants of valuation adjustments are factors such as advance run offs and new transactions designated in hedging relationships or elected under the FVO, the forward swap curve, the volatility of the swap rates, the remaining duration to maturity, and for advances elected under the FVO, the changes in the spread between the swap rate and the Consolidated obligation debt yields.  For FVO advances change in interest receivable is also a factor as it is a component of the entire fair value of FVO advances.

 


(a)         Hedging valuation basis adjustments The reported carrying values of hedged advances are adjusted for changes in their fair values (fair value basis adjustments or fair value) that are attributable to the risk being hedged, which is LIBOR for the FHLBNY, and is the discounting basis for computing changes in fair values for hedged advances.  The notional amount of advances hedged under ASC 815 was $47.7 billion at September 30, 2018 and $53.6 billion at December 31, 2017.  The application of this accounting methodology resulted in the recognition of net unrealized hedge valuation basis losses at the two dates.  The LIBOR curve, which is the valuation basis for hedged advances under ASC 815, has continued to rise.  Valuations of fixed-rate LIBOR benchmark hedge advances move inversely with the LIBOR curve, and the net cumulative basis losses were consistent with the upward-sloping LIBOR yield curve at September 30, 2018 and December 31, 2017.  Valuation basis losses increased at September 30, 2018 in line with the significant steepening of the forward LIBOR discounting curve at September 30, 2018, relative to December 31, 2017.

 

Generally, hedge valuation basis gains and losses are unrealized and will reverse to zero if the hedged advances are held to maturity or are put or called on the early option exercise dates.

 

For more information, see Table 1.12: Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type.

 

(b)         FVO fair values Valuation basis adjustments are recorded to recognize changes in the entire fair values of advances elected under the FVO, including changes in accrued interest receivable.  The discounting basis for computing fair values of FVO advances is the Advance pricing curve, which is primarily derived from the FHLBNY’s cost of funds (yields paid on Consolidated obligation debt).  Fair value basis of a FVO advance reflects changes in the term structure and shape of the Advance pricing curve at the measurement dates.

 

No advances elected under the FVO were outstanding at September 30, 2018.  Run-offs of advances elected under the FVO were not replaced by new transactions.  At December 31, 2017, valuation adjustments and interest accrued receivable taken together reported net basis gains $5.6 million.  When we elect the FVO, the election is on an instrument-by-instrument basis.  With respect to credit risk on advances elected under the FVO, we have concluded that it has not been necessary to estimate changes attributable to instrument-specific credit risk, as we consider our advances to remain fully collateralized through to maturity.  For more information, see financial statements, Fair Value Option Disclosures in Note 18 Fair Values of Financial Instruments.

 

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Hedge volume — We hedge putable advances and certain “bullet” fixed-rate advances under the hedge accounting provisions when they qualify under those standards and as economic hedges when the hedge accounting provisions are operationally difficult to establish or a high degree of hedge effectiveness cannot be asserted.

 

The following table summarizes hedged advances by type of option feature (in thousands):

 

Table 4.5:               Hedged Advances by Type

 

Par Amount

 

September 30, 2018

 

December 31, 2017

 

Qualifying Hedges

 

 

 

 

 

Fixed-rate bullets (a)

 

$

44,059,003

 

$

52,983,896

 

Fixed-rate putable (b)

 

3,611,250

 

567,000

 

Fixed-rate callable

 

16,575

 

16,575

 

Fixed-rate with embedded cap

 

30,000

 

30,000

 

 

 

 

 

 

 

Total Qualifying Hedges

 

$

47,716,828

 

$

53,597,471

 

 

 

 

 

 

 

Aggregate par amount of advances hedged (c)

 

$

49,282,828

 

$

53,674,759

 

Fair value basis (Qualifying hedging adjustments)

 

$

(624,828

)

$

(265,260

)

 


(a)         Generally, non-callable fixed-rate medium- and longer term advances are hedged to mitigate the risk in fixed-rate lending.

(b)         Putable advances are hedged by cancellable swaps, and the paired long put and short call options mitigate the put/call option risks; additionally, fixed-rate is synthetically converted to LIBOR, mitigating the risk in fixed-rate lending for the FHLBNY.  In a rising rate environment, swap dealers would likely exercise their call option, and the FHLBNY will exercise its put option with the member and both instruments terminate at par.  Members may borrow new advances at the then prevailing rate.

(c)          Represents par values of advances in ASC 815 qualifying hedge relationships.  Typically, the longer term fixed-rate advances and advances with optionality are hedged.

 

Advances elected under the FVO — No Advances elected under the FVO were outstanding at September 30, 2018.  Advances elected under the FVO at December 31, 2017 were shorter-term adjustable-rate (“ARCs”).  When we have elected the FVO for an asset instrument (the advance), the objective has been to offset some of the volatility in earnings due to the designation of debt (liability) under the FVO.  Changes in the fair values of the advance elected under the FVO are recorded through earnings, and the offset is recorded as a fair value basis adjustment to the carrying values of the FVO advances.

 

The following table summarizes par amounts of advances elected under the FVO (in thousands):

 

Table 4.6:               Advances under the Fair Value Option (FVO)

 

 

 

Advances

 

Par Amount

 

September 30, 2018

 

December 31, 2017

 

Advances designated under FVO (a)

 

 

$

2,200,000

 

 


(a)         No advance elected under the FVO was outstanding at September 30, 2018 as run-offs were not replaced.

 

The following table summarizes par amounts of advances that were still putable or callable, with one or more pre-determined option exercise dates remaining (in thousands):

 

Table 4.7:               Putable and Callable Advances

 

 

 

Advances

 

Par Amount

 

September 30, 2018

 

December 31, 2017

 

Putable/callable

 

$

3,627,825

 

$

597,825

 

No-longer putable/callable

 

$

647,000

 

$

1,020,500

 

 

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Investments

 

We maintain long-term investment portfolios, which are principally mortgage-backed securities issued by GSEs and U.S. Agency (“GSE-issued”).  Investments include a small portfolio of MBS issued by private enterprises, and bonds issued by state or local housing finance agencies.  We also maintain short-term investments for our liquidity resources, for funding daily stock repurchases and redemptions, for ensuring the availability of funds to meet the credit needs of our members, and to provide additional earnings.  In December 2016, management approved a trading portfolio, the purpose of which is to augment our liquidity needs.  Investments in the trading portfolio were U.S Treasury securities and GSE-issued securities, all carried at their fair values.  The Finance Agency prohibits speculative investments, but allows the designation of a trading portfolio for liquidity purposes.  We may dispose such investments if liquidity needs are met and market conditions deem the sale as advantageous.

 

We are subject to credit risk on our investments, generally transacted with GSEs and large financial institutions that are considered to be investment quality.  The Finance Agency defines investment quality as a security with adequate financial backing so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security.  For more information about investment policies, restrictions and practices, see the most recent Form 10-K filed on March 22, 2018.

 

The following table summarizes changes in investments by categories: Money market investments, Trading securities, Equity Investments in Grantor Trusts, Available-for-sale securities and Held-to-maturity securities (Carrying values, dollars in thousands):

 

Table 5.1:               Investments by Categories

 

 

 

September 30,

 

December 31,

 

Dollar

 

Percentage

 

 

 

2018

 

2017

 

Variance

 

Variance

 

State and local housing finance agency obligations (a)

 

$

1,182,190

 

$

1,147,510

 

$

34,680

 

3.02

%

Trading securities (b)

 

4,642,904

 

1,641,568

 

3,001,336

 

182.83

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value (c)

 

444,293

 

528,627

 

(84,334

)

(15.95

)

Held-to-maturity securities, at carrying value (c)

 

16,677,025

 

16,677,023

 

2

 

0.00

 

Total securities

 

22,946,412

 

19,994,728

 

2,951,684

 

14.76

 

 

 

 

 

 

 

 

 

 

 

Equity investments in Grantor trusts (d)

 

52,150

 

48,642

 

3,508

 

7.21

 

Securities purchased under agreements to resell

 

4,870,000

 

2,700,000

 

2,170,000

 

80.37

 

Federal funds sold

 

14,360,000

 

10,326,000

 

4,034,000

 

39.07

 

 

 

 

 

 

 

 

 

 

 

Total investments

 

$

42,228,562

 

$

33,069,370

 

$

9,159,192

 

27.70

%

 


(a)         State and local housing finance agency bonds were designated as HTM and were carried at amortized cost.  We acquired par amounts of $100.0 million in the first nine months of 2018 and paydowns were $65.3 million.

(b)         Trading securities were U.S. Treasury securities, GSE securities and corporate notes.  Trading portfolio is for liquidity and not for speculative purposes.  We acquired par amounts of $3.2 billion of U.S. Treasury notes and $421.7 million of GSE securities in the first nine months of 2018.  We received par amounts of $3.4 million of Ambac corporate notes from the insurer Ambac Corporation as consideration for insurance claims on certain insured private-label MBS.

(c)          Mortgage-backed securities classified as AFS.  No acquisitions were designated as AFS in the first nine months of 2018.  AFS securities outstanding are all GSE and U.S. Agency issued floating-rate MBS carried at fair value.  Mortgage-backed securities classified as HTM $2.6 billion of GSE-issued MBS were acquired in 2018 and designated as HTM.  MBS in the HTM portfolio are predominantly GSE-issued, and less than 1% are PLMBS.

(d)        Funds in the grantor trusts were designated as Equity Investments at January 1, 2018.  Prior to January 1, 2018, the funds were classified as AFS.  In the first nine months of 2018, investments made were $2.8 million and payouts to retirees were $1.3 million.  Trust fund balances represent investments in registered mutual funds and other fixed-income and equity funds.  Funds are highly liquid and readily redeemable at their NAVs, which are the fair values of the investments.  The funds are owned by the FHLBNY, and the intent is to utilize investments to fund current and potential future payment obligations of the non-qualified Benefit Equalization Pension plans.  For more information about the pension plans, see financial statements, Note 15. Employee Retirement Plans in the Bank’s most recent Form 10-K filed on March 22, 2018.

 

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Mortgage-Backed Securities — By Issuer

 

The following table summarizes our investment debt securities issuer concentration (dollars in thousands):

 

Table 5.2:               Investment Debt Securities Issuer Concentration

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Carrying value as a

 

 

 

 

 

Carrying value as a

 

 

 

Carrying (a)

 

 

 

Percentage

 

Carrying (a)

 

 

 

Percentage

 

Long Term Investment (c)

 

Value

 

Fair Value

 

of Capital

 

Value

 

Fair Value

 

of Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

4,888,644

 

$

4,825,242

 

64.48

%

$

5,009,067

 

$

5,019,957

 

60.78

%

Freddie Mac

 

12,056,624

 

11,970,140

 

159.02

 

11,986,984

 

12,055,501

 

145.45

 

Ginnie Mae

 

24,058

 

24,256

 

0.32

 

28,237

 

28,412

 

0.34

 

All Others - PLMBS

 

151,992

 

186,864

 

2.00

 

181,362

 

216,793

 

2.20

 

Non-MBS (b)

 

1,182,190

 

1,156,567

 

15.59

 

1,196,152

 

1,163,379

 

14.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Debt Securities

 

$

18,303,508

 

$

18,163,069

 

241.41

%

$

18,401,802

 

$

18,484,042

 

223.28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Categorized as:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale Securities

 

$

444,293

 

$

444,293

 

 

 

$

577,269

 

$

577,269

 

 

 

Held-to-Maturity Securities

 

$

17,859,215

 

$

17,718,776

 

 

 

$

17,824,533

 

$

17,906,773

 

 

 

 


(a)         Carrying values include fair values for AFS securities.

(b)         Non-MBS Housing finance agency bonds were included at September 30, 2018 and December 31, 2017.  The line also included funds in grantor trusts at December 31, 2017.

(c)          Excludes Trading portfolio.

 

External rating information of the held-to-maturity portfolio was as follows (carrying values in thousands):

 

Table 5.3:               External Rating of the Held-to-Maturity Portfolio

 

 

 

September 30, 2018

 

 

 

AAA-rated (a)

 

AA-rated (b)

 

A-rated

 

BBB-rated

 

Below
Investment
Grade

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

820

 

$

16,526,350

 

$

106,097

 

$

9,172

 

$

34,586

 

$

16,677,025

 

State and local housing finance agency obligations

 

30,700

 

1,128,265

 

5,895

 

17,330

 

 

1,182,190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Long-term securities

 

$

31,520

 

$

17,654,615

 

$

111,992

 

$

26,502

 

$

34,586

 

$

17,859,215

 

 

 

 

December 31, 2017

 

 

 

AAA-rated (a)

 

AA-rated (b)

 

A-rated

 

BBB-rated

 

Below
Investment
Grade

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

989

 

$

16,497,280

 

$

114,833

 

$

19,637

 

$

44,284

 

$

16,677,023

 

State and local housing finance agency obligations

 

36,400

 

1,085,220

 

25,890

 

 

 

1,147,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Long-term securities

 

$

37,389

 

$

17,582,500

 

$

140,723

 

$

19,637

 

$

44,284

 

$

17,824,533

 

 

See footnotes (a) and (b) under Table 5.4.

 

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External rating information of the AFS portfolio was as follows (the carrying values of AFS investments are at fair values; in thousands):

 

Table 5.4:               External Rating of the Available-for-Sale Portfolio

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

AA-rated (b)

 

Unrated

 

Total

 

AA-rated (b)

 

Unrated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

444,293

 

$

 

$

444,293

 

$

528,627

 

$

 

$

528,627

 

Other - Grantor trust

 

 

 

 

 

48,642

 

48,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Available-for-sale securities

 

$

444,293

 

$

 

$

444,293

 

$

528,627

 

$

48,642

 

$

577,269

 

 

Footnotes to Table 5.3 and Table 5.4.

 


(a)         Certain PLMBS and housing finance bonds have been assigned AAA, based on the ratings by S&P and Moody’s.

(b)         We have assigned GSE-issued MBS a rating of AA+ based on the credit rating assigned to long-term senior debt issued by Fannie Mae, Freddie Mac and U.S. Agency.  The debt ratings are based on S&P’s rating of AA+ for the GSE Senior long-term debt and AA+ for the debt issued by the U.S. government; Moody’s debt rating is Aaa for the GSE Senior long-term debt and the U.S. government.

 

External credit rating information has been provided in Table 5.3 and Table 5.4 as the information is used as another data point to supplement our credit quality indicators, and they serve as a useful indicator when analyzing the degree of credit risk to which we are exposed.  Significant changes in credit ratings classifications of our investment debt securities portfolio could indicate increased credit risk for us that could be accompanied by a reduction in the fair values of our investment debt securities portfolio.

 

Fair Value Levels of Investment Debt Securities, and Unrecognized and Unrealized Holding Losses

 

To compute fair values, multiple vendor prices were received for substantially all of our MBS holdings, and substantially all of those prices fell within specified thresholds.  The relative proximity of the prices received from the multiple vendors supported our conclusion that the final computed prices were reasonable estimates of fair values.  GSE securities priced under such a valuation technique using the market approach are typically classified within Level 2 of the valuation hierarchy.  For a comparison of carrying values and fair values of investment debt securities, see financial statements, Note 5. Trading securities, Note 7. Available-for-Sale Securities and Note 8. Held-to-Maturity Securities.  For more information about the corroboration and other analytical procedures performed, see Note 18. Fair Values of Financial Instruments.

 

Weighted average rates — Mortgage-backed securities (HTM and AFS) — The following table summarizes weighted average rates and amortized cost by contractual maturities (dollars in thousands):

 

Table 5.5:               Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amortized

 

Weighted

 

Amortized

 

Weighted

 

 

 

Cost

 

Average Rate

 

Cost

 

Average Rate

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

523,793

 

2.19

%

$

880,774

 

2.45

%

Due after one year through five years

 

5,102,801

 

3.00

 

4,650,579

 

2.78

 

Due after five years through ten years

 

7,779,355

 

2.87

 

8,225,685

 

2.23

 

Due after ten years

 

3,722,358

 

2.90

 

3,458,160

 

2.57

 

 

 

 

 

 

 

 

 

 

 

Total mortgage-backed securities

 

$

17,128,307

 

2.90

%

$

17,215,198

 

2.46

%

 

A significant portion of the MBS portfolio consisted of floating-rate securities and the weighted average rates will change in parallel with changes in the LIBOR rate.

 

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OTTI — Base Case and Adverse Case Scenario

 

We evaluated our PLMBS under a base case (or best estimate) scenario by performing a cash flow analysis for each security under assumptions that forecasted increased credit default rates or loss severities, or both.  The stress test scenario and associated results do not represent our current expectations and therefore should not be construed as a prediction of future results, market conditions or the actual performance of these securities.  Cash flow analysis in the nine months ended September 30, 2018 identified de minimis deterioration in the performance parameters of previously impaired private-label MBS.  Credit OTTI charged to earnings was $141 thousand in the second quarter of 2018.  No OTTI was recorded in the third quarter of 2018 and in the same period in 2017.

 

Short-term investments

 

We typically maintain substantial investments in high quality short- and intermediate-term financial instruments such as secured overnight transactions collateralized by securities, and unsecured overnight and term federal funds sold to highly-rated financial institutions who also satisfy other credit quality factors.  These investments provide the liquidity necessary to meet members’ credit needs.  Short-term investments also provide a flexible means of implementing the asset/liability management decisions to adjust liquidity.  In December 2016, a trading portfolio was established with the objective of expanding our choice of investing for liquidity.

 

Monitoring — We actively monitor our credit exposures and the credit quality of our counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, and sovereign support as well as related market signals, and actively limit or suspend existing exposures, as appropriate.  In addition, we are required to manage our unsecured portfolio subject to regulatory limits, prescribed by the Finance Agency, our regulator.  The Finance Agency regulations include limits on the amount of unsecured credit that may be extended to a counterparty or a group of affiliated counterparties, based upon a percentage of eligible regulatory capital and the counterparty’s overall credit rating.  Under these regulations, the level of eligible regulatory capital is determined as the lesser of our regulatory capital or the eligible amount of regulatory capital of the counterparty determined in accordance with Finance Agency regulations.

 

The Finance Agency regulations also permit us to extend additional unsecured credit, which could be comprised of overnight extensions and sales of federal funds subject to continuing contract.  Our total unsecured overnight exposure to a single counterparty may not exceed twice the regulatory limit for term exposures.  We are prohibited by Finance Agency regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks, and we did not own any financial instruments issued by foreign sovereign governments, including those countries that are members of the European Union in any periods in this report.  For more information about our policies and practices, see the most recent Form 10-K filed on March 22, 2018.

 

Securities purchased under agreements to resell — As part of our banking activities with counterparties, we have entered into secured financing transactions that mature overnight, and can be extended only at our discretion.  These transactions involve the lending of cash against securities, which are accepted as collateral.  The balance outstanding under such agreements was $4.9 billion at September 30, 2018 and $2.7 billion at December 31, 2017.  For more information, see financial statements, Note 4.  Federal Funds Sold, and Securities Purchased under Agreements to Resell.

 

Federal funds sold — Federal funds sold was $14.4 billion at September 30, 2018 and $10.3 billion at December 31, 2017, representing unsecured lending to major banks and financial institutions.  We are a major lender in this market, particularly in the overnight market.  The amount of unsecured credit risk that may be extended to individual counterparties is commensurate with the counterparty’s credit quality as assessed by our management, and the assessment would include reviews of credit ratings of counterparty’s debt securities or deposits as reported by NRSROs.  Overnight and short-term federal funds allow us to warehouse funds and provide balance sheet liquidity to meet unexpected member borrowing demands.

 

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The following table summarizes par value, amortized cost and the carrying value (fair value) of the trading portfolio (in thousands):

 

Table 5.6:               Trading Securities

 

 

 

Trading Securities

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Par value

 

$

4,678,351

 

$

1,648,377

 

Amortized cost

 

$

4,648,191

 

$

1,642,637

 

Carrying/Fair value

 

$

4,642,904

 

$

1,641,568

 

 

The Finance Agency prohibits speculative investments but allows permitted securities to be deemed held for liquidity if invested in a trading portfolio.  We may dispose such investments if liquidity needs are met and market conditions deem the sale as advantageous.  For more information about fair values of securities in the trading portfolio, see Note 5. Trading Securities in the Notes to the Financial Statements.

 

Mortgage Loans Held-for-Portfolio

 

Mortgage loans are carried in the Statements of Condition at amortized cost, less allowance for credit losses.  The outstanding unpaid principal balance was $2.9 billion at September 30, 2018, an increase of $15.6 million (net of acquisitions and paydowns) from the balance at December 31, 2017.  Mortgage loans were investments in Mortgage Partnership Finance loans (“MPF” or “MPF Program”).

 

Mortgage Partnership Finance Program - We invest in mortgage loans through the MPF Program, which is a secondary mortgage market structure under which eligible mortgage loans are purchased or funded from or through members who are Participating Financial Institutions (“PFI”).  We may also acquire MPF loans through participations with other FHLBanks, although our current acquisition strategy is to limit acquisitions through our PFIs.  MPF loans are conforming conventional and Government i.e., insured or guaranteed by the Federal Housing Administration (“FHA”), the Department of Veterans Affairs (“VA”) or the Rural Housing Service of the Department of Agriculture (“RHS”), fixed-rate mortgage loans secured primarily by single-family residential properties with maturities ranging from five to 30 years or participations in such mortgage loans.  The FHLBank of Chicago (“MPF Provider”) developed the MPF Program in order to help fulfill the housing mission and to provide an additional source of liquidity to FHLBank members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolios.  Finance Agency regulations define the acquisition of Acquired Member Assets (“AMA”) as a core mission activity of the FHLBanks.  In order for MPF loans to meet the AMA requirements, the purchase and funding are structured so that the credit risk associated with MPF loans is shared with PFIs.  For more information about the MPF program, see Mortgage Loans Held-for-Portfolio in the MD&A in the Bank’s most recent Form 10-K filed on March 22, 2018.

 

We provide this product to members as another alternative for them to sell their mortgage production.  Loan origination by members and acceptable pricing are key factors that drive growth.

 

Mortgage loans — Conventional and Insured Loans - The following table classifies mortgage loans between conventional loans and loans insured by FHA/VA (in thousands):

 

Table 6.1:               MPF by Conventional and Insured Loans

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Federal Housing Administration and Veteran Administration insured loans

 

$

229,318

 

$

235,232

 

Conventional loans

 

2,636,631

 

2,615,140

 

 

 

 

 

 

 

Total par MPF loans

 

$

2,865,949

 

$

2,850,372

 

 

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Mortgage Loans — Loss Sharing and the Credit Enhancement Waterfall - For all loans acquired prior to June 1, 2017, the credit enhancement was computed as the amount that would bring an uninsured loan to “Double A” credit risk.  For loans acquired after June 1, 2017, the credit enhancement is computed to a “Single A” credit risk.  In the credit enhancement waterfall, we are responsible for the first loss layer.  The second loss layer is the credit obligation of the PFI.  We assume all residual risk.  Also, see financial statements, Note 10.  Mortgage Loans Held-for-Portfolio.

 

Loan and PFI Concentration Loan concentration was in New York State, which is to be expected since the largest PFIs are located in New York.  The tables below summarize concentrations — Geographic and PFI:

 

Table 6.2:               Geographic Concentration of MPF Loans

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Number of
loans %

 

Amounts
outstanding %

 

Number of
loans %

 

Amounts
outstanding %

 

 

 

 

 

 

 

 

 

 

 

New York State

 

69.0

%

60.3

%

69.1

%

59.5

%

 

Table 6.3:               Top Five Participating Financial Institutions — Concentration (par value, dollars in thousands)

 

 

 

September 30, 2018

 

 

 

Mortgage

 

Percent of Total

 

 

 

Loans

 

Mortgage Loans

 

 

 

 

 

 

 

New York Community Bank (a)

 

$

259,335

 

9.05

%

Sterling National Bank (b)

 

244,050

 

8.52

 

Bethpage Federal Credit Union

 

243,411

 

8.49

 

Teachers Federal Credit Union

 

183,825

 

6.41

 

Investors Bank

 

178,795

 

6.24

 

All Others

 

1,756,533

 

61.29

 

 

 

 

 

 

 

Total

 

$

2,865,949

 

100.00

%

 

 

 

December 31, 2017

 

 

 

Mortgage

 

Percent of Total

 

 

 

Loans

 

Mortgage Loans

 

 

 

 

 

 

 

New York Community Bank (a)

 

$

273,060

 

9.58

%

Sterling National Bank (b)

 

265,526

 

9.32

 

Bethpage Federal Credit Union

 

189,025

 

6.63

 

Investors Bank

 

186,397

 

6.54

 

Teachers Federal Credit Union

 

177,230

 

6.22

 

All Others

 

1,759,134

 

61.71

 

 

 

 

 

 

 

Total

 

$

2,850,372

 

100.00

%

 


(a)         New York Community Bancorp, Inc., parent of New York Community Bank, sold its mortgage banking business in June 2017 to Freedom Mortgage Corporation, a non-member.

(b)         Sterling National Bank, a member of the FHLBNY, acquired Astoria Bank in October 2017.

 

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Debt Financing Activity and Consolidated Obligations

 

Our primary source of funds continues to be the issuance of Consolidated obligation bonds and discount notes.

 

Consolidated obligation bonds The carrying value of Consolidated obligation bonds (“CO bonds” or “Consolidated obligation bonds”) was $85.9 billion (par, $85.6 billion) at September 30, 2018, compared to $99.3 billion (par, $98.9 billion) at December 31, 2017.  On average, CO bonds funded 60.5% and 61.4% of earning assets in the nine months ended September 30, 2018 and in the same period in the prior year.

 

A significant percentage of CO bonds was designated under an ASC 815 fair value accounting hedge.  Also, certain CO bonds were hedged by interest rate swaps in economic hedges.  We may also hedge the anticipatory issuance of fixed-rate CO bonds in a cashflow hedge under ASC 815.  Certain CO bonds were elected under the FVO.  Carrying values of CO bonds included valuation basis adjustments on bonds hedged under ASC 815, and on CO bonds elected under the FVO.  For more information about valuation basis adjustments, see Table 7.1 Consolidated Obligation Bonds by Type.

 

Consolidated obligation discount notes The carrying value of Consolidated obligation discount notes outstanding was $50.8 billion at September 30, 2018 and $49.6 billion at December 31, 2017.  On average, discount notes funded 33.7% of earning assets in the nine months ended September 30, 2018, compared to 32.1% in the same period in the prior year.  No discount notes had been hedged under an ASC 815 fair value accounting hedge at September 30, 2018 and December 31, 2017, although from time to time we have designated the instruments in economic hedges during the periods in this report.  Certain discount notes were hedged under an ASC 815 cash flow accounting hedge, and are discussed in financial statements, Note 17. Derivatives and Hedging Activities.  Certain discount notes were elected under the FVO.  Carrying values included valuation basis adjustments on discount notes elected under the FVO.  For more information about valuation basis adjustments, see Table 7.7 Discount Notes Outstanding.

 

A FHLBank’s ability to access the capital markets to issue debt, as well as our cost of funds, is dependent on credit ratings from Nationally Recognized Statistical Rating Organizations.  Consolidated obligations of FHLBanks are rated Aaa/P-1 by Moody’s, and AA+/A-1+ by S& P.  Any rating actions on the US Government would likely result in all individual FHLBanks’ long-term deposit ratings and the FHLBank System long-term bond rating moving in lock step with any US sovereign rating action.

 

The issuance and servicing of Consolidated obligation debt is performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Agency.  Each FHLBank independently determines its participation in each issuance of Consolidated obligations based on, among other factors, its own funding and operating requirements, maturities, interest rates and other terms available for Consolidated obligations in the market place.  The two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP issue programs.  We participate in both programs.  For more information about these programs, see our most recent Form 10-K filed on March 22, 2018.

 

Joint and Several Liability

 

Although we are primarily liable for our portion of Consolidated obligations (i.e. those issued on our behalf), we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the Consolidated obligations of all the FHLBanks.  For more information, see financial statements, Note 19.  Commitments and Contingencies.

 

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Consolidated obligation bonds

 

The following table summarizes types of Consolidated obligation bonds issued and outstanding (dollars in thousands):

 

Table 7.1:               Consolidated Obligation Bonds by Type

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amount

 

Percentage
of Total

 

Amount

 

Percentage
of Total

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate, non-callable

 

$

19,041,270

 

22.24

%

$

24,080,150

 

24.36

%

Fixed-rate, callable

 

4,136,000

 

4.83

 

3,658,000

 

3.70

 

Step Up, callable

 

865,000

 

1.01

 

253,000

 

0.26

 

Single-index floating rate

 

61,571,000

 

71.92

 

70,860,000

 

71.68

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

85,613,270

 

100.00

%

98,851,150

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Bond premiums

 

44,967

 

 

 

54,654

 

 

 

Bond discounts

 

(30,035

)

 

 

(27,335

)

 

 

Hedge valuation basis adjustments (a)

 

151,585

 

 

 

273,585

 

 

 

Hedge basis adjustments on terminated hedges (b)

 

130,737

 

 

 

134,920

 

 

 

FVO (c) - valuation adjustments and accrued interest

 

(845

)

 

 

1,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Consolidated obligation-bonds

 

$

85,909,679

 

 

 

$

99,288,048

 

 

 

 

Fair value basis and valuation adjustmentsKey determinants are factors such as run offs and new transactions designated under an ASC 815 hedge or elected under the FVO, the forward swap curve, the volatility of the swap rates, the remaining duration to maturity, and for bonds elected under the FVO, the changes in the spread between the swap rate and the Consolidated obligation debt yields, and changes in interest payable, which is a component of the entire fair value of FVO bonds.

 


(a)         Hedge valuation basis The reported carrying values of hedged Consolidated bonds are adjusted for changes to their fair values (fair value basis adjustments or fair value) that are attributable to the risk being hedged, which is LIBOR for the FHLBNY, and is the discounting basis for computing changes in fair values basis for hedged debt.  The LIBOR discounting curve has continued to increase and has generated period-over-period valuation gains.  Coupon rates on vintage hedged debt is another factor that would impact valuation gains and losses, as would the volume of debt that is hedged.  The notional amount of CO bonds hedged under the fair value hedging standards under ASC 815 was $12.3 billion at September 30, 2018 and $15.8 billion at December 31, 2017.

 

The application of the valuation and accounting methodology resulted in the recognition of net unrealized hedge valuation basis losses at the two balance sheet dates, primarily due to vintage long-term bonds, which had been issued in the then prevailing higher interest rate environment.  The remaining hedged bonds - short and medium-term fixed-rate debt, which had been issued in recent years at coupons lower than the prevailing yields, generated valuation basis gains, partly offsetting the valuation basis losses on the vintage hedged debt.  The small period-over-period decline in unrealized valuation losses were consistent with the decline in the volume of hedged debt, partly offset by valuation gains due to the sharp steepening of the swap yield curve at September 30, 2018.  Generally, hedge valuation basis are unrealized and will reverse to zero if hedged debt are held to their maturity or to their call dates.  Also, see Table 7.2 Bonds Hedged under Qualifying Fair Value Hedges.

 

(b)         Valuation basis of terminated hedges Represents unamortized cumulative valuation basis of certain CO bonds that were no longer in fair value hedge relationships.  When hedging relationships for the debt were de-designated, the net unrealized cumulative losses at the hedge termination dates were no longer adjusted for changes in the benchmark rate.  Instead, the valuation basis are being amortized on a level yield method, and the net amortization is recorded as a reduction of Interest expense.  If the CO bonds are held to maturity, the basis losses will be fully amortized as an interest expense.

 

(c)          FVO valuation adjustments Valuation basis adjustments and accrued interest payable are recorded to recognize changes in the entire fair value (the full fair value) of CO bonds elected under the FVO.  The notional amounts of CO bonds elected under the FVO were $680.0 million at September 30, 2018 and $1.1 billion at December 31, 2017.  Run-offs of bonds elected under the FVO were not replaced by new transactions, explaining the decline in the valuation basis.

 

The discounting basis for computing the change in fair value basis of bonds elected under the FVO is the observable (FHLBank) CO bond yield curve.  All FVO bonds were short- and medium-term, and fluctuations in their valuations were not significant as the bonds re-priced relatively frequently to market indices, keeping valuations near to par, although inter-period valuation volatility is likely.

 

We have elected the FVO on an instrument-by-instrument basis.  For bonds elected under the FVO, it was not necessary to estimate changes attributable to instrument-specific credit risk, as we consider the credit worthiness of the FHLBanks to be secure and credit related adjustments unnecessary.  More information about debt elected under the FVO is provided in financial statements, Note 18.  Fair Values of Financial Instruments (See Fair Value Option Disclosures).

 

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Hedge volume Tables 7.2 — 7.4 provide information with respect to par amounts of bonds based on accounting designation: (1) under hedge qualifying rules, (2) under the FVO, and (3) as an economic hedge (in thousands):

 

Table 7.2:               Bonds Hedged under Qualifying Fair Value Hedges

 

Qualifying hedges Generally, fixed-rate (bullet and callable) medium and long-term Consolidated obligation bonds are hedged in a Fair value ASC 815 qualifying hedge.  Decline in ASC 815 fair value hedges of fixed-rate debt reflects an asset-liability management decision to replace maturing fixed-rate CO bonds with floating-rate CO bonds, which are typically hedged on an economic basis.

 

 

 

Consolidated Obligation Bonds

 

Par Amount

 

September 30, 2018

 

December 31, 2017

 

Qualifying Hedges

 

 

 

 

 

Fixed-rate bullet bonds

 

$

9,452,700

 

$

14,326,105

 

Fixed-rate callable bonds

 

2,853,000

 

1,453,000

 

 

 

$

12,305,700

 

$

15,779,105

 

 

Table 7.3:               Bonds Elected under the Fair Value Option (FVO)

 

CO bonds elected under the FVO If at inception of a hedge we do not believe that a hedge would be highly effective in offsetting fair value changes between the derivative and the debt (hedged item), we may designate the debt under the FVO if operationally practical.  We would record fair value changes of the FVO debt through earnings, and to the extent the debt is economically hedged, record changes of the fair values of the interest rate swap through earnings.  The recorded balance sheet value of debt under the FVO would include the fair value basis adjustments, so that the debt’s balance sheet carrying values would be its full fair value.

 

 

 

Consolidated Obligation Bonds

 

Par Amount

 

September 30, 2018

 

December 31, 2017

 

Bonds designated under FVO

 

$

680,000

 

$

1,130,000

 

 

CO bonds elected under the FVO were generally in economic hedges by the execution of interest rate swaps that converted the fixed-rate bonds to a variable-rate instrument.  We elected to account for the bonds under the FVO when we were generally unable to assert with confidence that the short- and intermediate-term bonds, or callable bonds, with short lock-out periods to the exercise of call options, would remain effective hedges as required under hedge accounting rules.  Issuances of fixed-rate CO bonds have generally declined and run offs of CO bonds elected under the FVO were not replaced in an asset-liability management decision.  See financial statements, Fair Value Option Disclosures in Note 18.  Fair Values of Financial Instruments.

 

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Table 7.4:               Economic Hedged Bonds (Excludes CO bonds elected under the FVO and designated in an economic hedge)

 

Economically hedged bonds We also issue variable-rate debt with coupons that are not indexed to the 3-month LIBOR, our preferred funding base.  During the periods in this report, we issued variable-rate bonds indexed to the 1-month LIBOR.  To mitigate the economic risk of a change in the variable-rate basis between the 3-month LIBOR and the 1-month LIBOR, we have executed basis rate swaps that have synthetically created 3-month LIBOR debt.  The operational cost of designating the debt instruments in an ASC 815 qualifying hedge outweighed the accounting benefits of marking the debt and the swap to fair values.  We opted instead to designate the hedging basis swaps as standalone derivatives, and recorded changes in their fair values through earnings.  The carrying value of the debt would not include fair value basis since the debt is recorded at amortized cost.

 

 

 

Consolidated Obligation Bonds

 

Par Amount

 

September 30, 2018

 

December 31, 2017

 

Bonds designated as economically hedged

 

 

 

 

 

Floating-rate bonds (a)

 

$

27,835,000

 

$

35,390,000

 

Fixed-rate bonds (b)

 

20,000

 

15,000

 

 

 

$

27,855,000

 

$

35,405,000

 

 


(a)         Floating-rate debt Floating-rate bonds were typically indexed to 1-month LIBOR.  With the execution of basis hedges, the bonds were swapped in economic hedges to 3-month LIBOR, mitigating the basis risk between the 1-month LIBOR and the 3-month LIBOR, which is our benchmark rate.  The decline in floating-rate bonds was due to decline in funding requirements in line with the decline in variable-rate advances.

(b)         Fixed-rate debt Bonds that were previously hedged and have fallen out of effectiveness.  The unamortized basis was not significant.

 

Consolidated obligation bonds — maturity or next call date (a)

 

Callable bonds contain an exercise date or a series of exercise dates that may result in a shorter redemption period.  The following table summarizes Consolidated bonds outstanding by years to maturity or next call date (dollars in thousands):

 

Table 7.5:               Consolidated Obligation Bonds — Maturity or Next Call Date

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Amount

 

Percentage
of Total

 

Amount

 

Percentage
of Total

 

Year of maturity or next call date

 

 

 

 

 

 

 

 

 

Due or callable in one year or less

 

$

72,237,075

 

84.38

%

$

84,436,565

 

85.42

%

Due or callable after one year through two years

 

6,064,035

 

7.08

 

7,266,255

 

7.35

 

Due or callable after two years through three years

 

1,667,640

 

1.95

 

1,917,400

 

1.94

 

Due or callable after three years through four years

 

1,009,530

 

1.18

 

973,595

 

0.98

 

Due or callable after four years through five years

 

1,001,540

 

1.17

 

947,835

 

0.96

 

Thereafter

 

3,633,450

 

4.24

 

3,309,500

 

3.35

 

 

 

 

 

 

 

 

 

 

 

Total par value

 

85,613,270

 

100.00

%

98,851,150

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Bond premiums

 

44,967

 

 

 

54,654

 

 

 

Bond discounts

 

(30,035

)

 

 

(27,335

)

 

 

Hedge valuation basis adjustments

 

151,585

 

 

 

273,585

 

 

 

Hedge basis adjustments on terminated hedges

 

130,737

 

 

 

134,920

 

 

 

FVO - valuation adjustments and accrued interest

 

(845

)

 

 

1,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Total bonds

 

$

85,909,679

 

 

 

$

99,288,048

 

 

 

 


(a)   Contrasting Consolidated obligation bonds by contractual maturity dates (see financial statements, Note 12. Consolidated Obligations  — Redemption Terms of Consolidated Obligation Bonds) with potential call dates (as reported in table above) illustrates the impact of hedging on the effective duration of the bond.  With a callable bond, we have purchased the option to terminate debt at agreed upon dates from investors.  The call options are exercisable as either a one-time option or quarterly.  Our current practice is to exercise our option to call a bond when the swap counterparty exercises its option to call the cancellable swap hedging the callable bond.  Thus, issuance of a callable bond with an associated callable swap significantly alters the contractual maturity characteristics of the original bond and introduces the possibility of an exercise call date that is significantly shorter than the contractual maturity.

 

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The following table summarizes callable bonds versus non-callable CO bonds outstanding (par amounts, in thousands):

 

Table 7.6:               Outstanding Callable CO Bonds versus Non-callable CO bonds

 

 

 

September 30, 2018

 

December 31, 2017

 

Callable

 

$

5,001,000

 

$

3,911,000

 

Non-Callable

 

$

80,612,270

 

$

94,940,150

 

 

Discount Notes

 

The following table summarizes discount notes issued and outstanding (dollars in thousands):

 

Table 7.7:               Discount Notes Outstanding

 

 

 

September 30, 2018

 

December 31, 2017

 

Par value

 

$

50,930,582

 

$

49,685,334

 

Amortized cost

 

$

50,821,648

 

$

49,610,668

 

FVO (a) - valuation adjustments and remaining accretion

 

 

3,003

 

Total discount notes

 

$

50,821,648

 

$

49,613,671

 

Weighted average interest rate

 

2.05

%

1.23

%

 


(a)         At December 31, 2017, valuation basis adjustment losses, including unaccreted discounts, were recorded to recognize changes in the entire or full fair values of CO discount notes elected under the FVO.  The full fair values include unaccreted discounts.  At September 30, 2018, no discount notes elected under the FVO were outstanding, as run offs were not replaced.  The discounting basis for computing changes in fair values of discount notes elected under the FVO is the observable FHLBank discount note yield curve.  Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, and the growth or decline in volume.  When held to maturity, unaccreted discounts will be fully accreted to par, and unrealized fair value gains and losses will sum to zero over the term to maturity.

 

The following table summarizes discount notes under the FVO (in thousands):

 

Table 7.8:               Discount Notes under the Fair Value Option (FVO)

 

 

 

Consolidated Obligation Discount Notes

 

Par Amount

 

September 30, 2018

 

December 31, 2017

 

Discount notes designated under FVO (a)

 

$

 

$

2,309,618

 

 

CO Discount notes elected under the FVO were generally in economic hedges with the execution of interest rate swaps that converted the fixed-rate notes to a variable-rate instrument.  We elected to account for the discount notes under the FVO when we were generally unable to assert with confidence that the discount notes would remain effective hedges as required under hedge accounting rules.  See financial statements, Fair Value Option Disclosures in Note 18.  Fair Values of Financial Instruments.

 


(a)         When we elect the FVO for discount notes, the intent is to partly offset the volatility of floating-rate advances elected under the FVO.  No discount notes elected under the FVO were outstanding, as run offs were not replaced in parallel with the decline in advances under the FVO.  When we have elected discount notes under the FVO, it has not been necessary to estimate changes attributable to instrument-specific credit risk, as we consider the credit worthiness of the FHLBanks to be secured and credit related adjustments unnecessary.

 

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The following table summarizes Cash flow hedges of discount notes (in thousands):

 

Table 7.9:               Cash Flow Hedges of Discount Notes

 

 

 

Consolidated Obligation Discount Notes

 

Principal Amount

 

September 30, 2018

 

December 31, 2017

 

Discount notes hedged under qualifying hedge (a)

 

$

2,664,000

 

$

2,349,000

 

 


(a)         Par amounts represent discounts notes issued in cash flow “rollover” hedge strategies that hedged the variability of 91-day discount notes issued in sequence typically for periods up to 14 years.  In this strategy, the discount note expense, which resets every 91 days, is synthetically converted to fixed cash flows over the hedge periods, thereby achieving hedge objectives.  For more information, see financial statements, Cash Flow Hedges in Note 17. Derivatives and Hedging Activities.

 

Stockholders’ Capital

 

The following table summarizes the components of Stockholders’ capital (in thousands):

 

Table 8.1:               Stockholders’ Capital

 

 

 

September 30, 2018

 

December 31, 2017

 

Capital Stock (a)

 

$

5,856,003

 

$

6,750,005

 

Unrestricted retained earnings (b)

 

1,111,825

 

1,067,097

 

Restricted retained earnings (c)

 

566,748

 

479,185

 

Accumulated Other Comprehensive Income (Loss)

 

47,257

 

(55,249

)

Total Capital

 

$

7,581,833

 

$

8,241,038

 

 


(a)         Stockholders’ Capital — Capital stock decreased in line with the decrease in advances borrowed.  When an advance matures or is prepaid, the excess capital stock is repurchased by the FHLBNY.  When an advance is borrowed or a member joins the FHLBNY’s membership, the member is required to purchase capital stock.  For more information about activity and membership stock, see Note 13. Capital Stock, Mandatorily Redeemable Capital Stock and Restricted Retained Earnings in the FHLBNY’s most recent Form 10-K filed on March 22, 2018.

 

(b)         Unrestricted retained earnings Net Income for the nine months ended September 30, 2018 was $437.8 million; $4.9 million of a cumulative adjustment from adoption of ASU 2016-01 at January 1, 2018 was added to Unrestricted retained earnings; $87.6 million was set aside towards Restricted retained earnings.  From the remaining amount, we paid $310.4 million to members as dividends in the nine months ended September 30, 2018.  As a result, Unrestricted retained earnings increased by $44.7 million to $1.1 billion at September 30, 2018.

 

(c)          Restricted retained earnings Restricted retained earnings balance at September 30, 2018 has grown to $566.7 million from the third quarter of 2011 when the FHLBanks, including the FHLBNY agreed to set up a restricted retained earnings account.  The FHLBNY will allocate at least 20% of its net income to the FHLBNY’s Restricted retained earnings account until the balance of the account equals at least 1% of FHLBNY’s average balance of outstanding Consolidated Obligations for the previous quarter.

 

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The following table summarizes the components of AOCI (in thousands):

 

Table 8.2:               Accumulated Other Comprehensive Income (Loss) (“AOCI”)

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

Non-credit portion of OTTI on held-to-maturity

 

 

 

 

 

securities, net of accretion (a)

 

$

(11,898

)

$

(14,803

)

Net unrealized gains (losses) on available-for-sale securities (b)

 

4,909

 

10,178

 

Net unrealized gains (losses) on hedging activities (c)

 

83,040

 

(19,877

)

Employee supplemental retirement plans (d)

 

(28,794

)

(30,747

)

Total Accumulated other comprehensive income (loss)

 

$

47,257

 

$

(55,249

)

 


(a)         OTTI — Non-credit OTTI losses in AOCI have declined at September 30, 2018, primarily due to accretion recorded as a reduction in AOCI (and a corresponding increase in the balance sheet carrying values of the OTTI securities); non-credit adjustments recorded in AOCI in the third quarter of 2018 were not material.

 

(b)         Fair values of available-for-sale securities — Balance represents net unrealized fair value basis of MBS securities; at December 31, 2017, the balance also included grantor trust funds, which had then been designated as available-for-sale.

 

(c)          Cash flow hedge valuation gains (losses) — Balances represented cumulative fair value basis on the two cash flow hedging strategies at the balance sheet dates.  Financial statements, Note 17.  Derivatives and Hedging Activities, includes a rollforward analysis, which provides more information with respect to changes in AOCI.

 

(d)         Employee supplemental plans — Balances represent actuarially determined supplemental pension and postretirement health benefit liabilities that were not recognized through earnings.  Amounts are amortized as an expense through Compensation and benefits over an actuarially determined period.  For more information, see financial statements, Note 15.  Employee Retirement Plans in the FHLBNY’s most recent Form 10-K filed on March 22, 2018.

 

Dividends — By Finance Agency regulation, dividends may be paid out of current earnings or if certain conditions are met, may be paid out of previously retained earnings.  We may be restricted from paying dividends if we do not comply with any of the Finance Agency’s minimum capital requirements or if payment would cause us to fail to meet any of the minimum capital requirements, including our Retained earnings target as established by the Board of Directors of the FHLBNY.  In addition, we may not pay dividends if any principal or interest due on any Consolidated obligations has not been paid in full, or if we fail to satisfy certain liquidity requirements under applicable Finance Agency regulations.  None of these restrictions applied for any period presented.

 

The following table summarizes dividends paid and payout ratios:

 

Table 8.3:               Dividends Paid and Payout Ratios

 

 

 

Nine months ended

 

 

 

September 30, 2018

 

September 30, 2017

 

Cash dividends paid per share

 

$

4.92

 

$

4.02

 

Dividends paid (a) (c)

 

$

310,444

 

$

248,456

 

Pay-out ratio (b)

 

70.91

%

74.34

%

 


(a)         In thousands.

(b)         Dividend paid during the period divided by net income for the period.

(c)          Does not include dividend paid to non-member; for accounting purposes, such dividends are recorded as interest expense.

 

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Derivative Instruments and Hedging Activities

 

Interest rate swaps, swaptions, cap and floor agreements (collectively, derivatives) enable us to manage our exposure to changes in interest rates by adjusting the effective maturity, repricing frequency, or option characteristics of financial instruments.  To a limited extent, we also use interest rate swaps to hedge changes in interest rates prior to debt issuance and essentially lock in funding costs. Finance Agency regulations prohibit the speculative use of derivatives.

 

Derivative Credit Risk Exposure and Concentration

 

In addition to market risk, we are 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 a replacement derivative from a different counterparty at a cost that may exceed its recorded fair values.  We are also subject to operational risks in the execution and servicing of derivative transactions.  The degree of counterparty credit risk may depend on, among other factors, the extent to which netting procedures and/or the provision of collateral are used to mitigate the risk.   For more information about our risk measurement and risk mitigation processes, see Note 16.  Derivatives and Hedging Activities in the most recent Form 10-K filed on March 22, 2018.

 

The following tables summarize notional amounts and fair values for the FHLBNY’s derivative exposures as represented by derivatives in fair value gain positions.  For derivatives where the FHLBNY was in a liability position and counterparties were in gain positions, the fair values and notional amounts were grouped together (in thousands):

 

Table 9.1:               Derivatives Counterparty Credit Ratings

 

 

 

September 30, 2018

 

Credit Rating

 

Notional Amount

 

Net Derivatives Fair
Value Before
Collateral

 

Cash Collateral
Pledged To (From)
Counterparties 
(a)

 

Balance Sheet
Net Credit
Exposure

 

Non-Cash Collateral
Pledged To (From)
Counterparties 
(b)

 

Net Credit
Exposure to
Counterparties

 

Non-member counterparties

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset positions with credit exposure

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Single A asset (c) 

 

$

6,185,064

 

$

200,416

 

$

(75,310

)

$

125,106

 

$

(100,984

)

$

24,122

 

Cleared derivatives assets (d)

 

23,355,709

 

810

 

 

810

 

 

810

 

 

 

29,540,773

 

201,226

 

(75,310

)

125,916

 

(100,984

)

24,932

 

Liability positions with credit exposure

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Double A liability

 

210,000

 

(1,331

)

1,360

 

29

 

 

29

 

Single A liability (c)

 

1,652,595

 

(13,304

)

14,113

 

809

 

 

809

 

Cleared derivatives liability (d)

 

62,110,157

 

 

 

 

239,363

 

239,363

 

 

 

63,972,752

 

(14,635

)

15,473

 

838

 

239,363

 

240,201

 

Total derivative positions with non-member counterparties to which the Bank had credit exposure

 

93,513,525

 

186,591

 

(59,837

)

126,754

 

138,379

 

265,133

 

Total

 

$

93,513,525

 

$

186,591

 

$

(59,837

)

$

126,754

 

$

138,379

 

$

265,133

 

Derivative positions without credit exposure

 

5,453,004

 

 

 

 

 

 

 

 

 

 

 

Total notional

 

$

98,966,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Credit Rating

 

Notional Amount

 

Net Derivatives Fair
Value Before
Collateral

 

Cash Collateral
Pledged To (From)
Counterparties 
(a)

 

Balance Sheet
Net Credit
Exposure

 

Non-Cash Collateral
Pledged To (From)
Counterparties 
(b)

 

Net Credit
Exposure to
Counterparties

 

Non-member counterparties

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset positions with credit exposure

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncleared derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Single A asset (c)

 

$

2,430,433

 

$

157,922

 

$

(45,180

)

$

112,742

 

$

(103,036

)

$

9,706

 

Liability positions with credit exposure

 

 

 

 

 

 

 

 

 

 

 

 

 

Cleared derivatives liability (d)

 

103,391,947

 

 

 

 

239,064

 

239,064

 

Total derivative positions with non-member counterparties to which the Bank had credit exposure

 

105,822,380

 

157,922

 

(45,180

)

112,742

 

136,028

 

248,770

 

Total

 

$

105,822,380

 

$

157,922

 

$

(45,180

)

$

112,742

 

$

136,028

 

$

248,770

 

Derivative positions without credit exposure

 

9,354,161

 

 

 

 

 

 

 

 

 

 

 

Total notional

 

$

115,176,541

 

 

 

 

 

 

 

 

 

 

 

 


(a)   Includes margins in excess of fair values that were posted to counterparties, and were classified as a component of derivative assets, as they represented a receivable and an exposure for the FHLBNY.

(b)   Non-cash collateral securities.  Non-cash collateral is not deducted from net derivative assets on the balance sheet as control over the securities are not transferred.

(c)    NRSRO Ratings.

(d)   On Cleared derivatives, we are required to pledge initial margin to Derivative Clearing Organizations (“DCOs”).  At September 30, 2018 and December 31, 2017, we had pledged $239.4 million and $239.1 million in marketable securities to fulfill our obligation to pledge initial margin as collateral.

 

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For additional information, and an analysis of our exposure due to non-performance of swap counterparties, see Table “Offsetting of Derivative Assets and Derivative Liabilities Net Presentation” in Note 17. Derivatives and Hedging Activities to financial statements.  For information about the methodologies adopted for the fair value measurement of derivatives, see financial statements, Note 18.  Fair Values of Financial Instruments.

 

Liquidity, Short-Term Borrowings and Short-Term Debt

 

Our primary source of liquidity is the issuance of Consolidated obligation bonds and discount notes.  To refinance maturing Consolidated obligations, we rely on the willingness of our investors to purchase new issuances.  We have access to the discount note market, and the efficiency of issuing discount notes is an important source of liquidity, since discount notes can be issued any time and in a variety of amounts and maturities.  Member deposits and capital stock purchased by members are another source of funds.  Short-term unsecured borrowings from other FHLBanks and in the federal funds market provide additional sources of liquidity.  In addition, the Secretary of the Treasury is authorized to purchase up to $4.0 billion of Consolidated obligations from the FHLBanks.  Our liquidity position remains in compliance with all regulatory requirements and management does not foresee any changes to that position.

 

Finance Agency Regulations — Liquidity

 

Regulatory requirements are specified in Parts 932, 1239 and 1270 of the Finance Agency regulations.  Each FHLBank shall at all times have at least an amount of liquidity equal to the current deposits received from its members that may be invested in: (1) Obligations of the United States; (2) Deposits in banks or trust companies; or (3) Advances with a remaining maturity not to exceed five years that are made to members in conformity with part 1266.

 

In addition, each FHLBank shall provide for contingency liquidity, which is defined as the sources of cash a FHLBank may use to meet its operational requirements when its access to the capital markets is impeded.  We met our contingency liquidity requirements during all periods in this report.  Liquidity in excess of requirements is summarized in the table titled Contingency Liquidity.  Violations of the liquidity requirements would result in non-compliance penalties under discretionary powers given to the Finance Agency under applicable regulations, which include other corrective actions.

 

Liquidity Management

 

We actively manage our 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 our assets and liabilities. We recognize that managing liquidity is critical to achieving our statutory mission of providing low-cost funding to our members.  In managing liquidity risk, we are required to maintain certain liquidity measures in accordance with the FHLBank Act and policies developed by management and approved by our Board of Directors.  The applicable liquidity requirements are described in the next four sections.

 

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Deposit Liquidity. We are required to invest an aggregate amount at least equal to the amount of current deposits received from members in: (1) Obligations of the United States; (2) Deposits in banks or trust companies; or (3) Advances with a remaining maturity not to exceed five years that are made to members in conformity with part 1266.  In addition to accepting deposits from our members, we may accept deposits from other FHLBanks or from any other governmental instrumentality.  We met these requirements at all times.  Quarterly average reserves and actual reserves are summarized below (in millions):

 

Table 10.1:        Deposit Liquidity

 

 

 

Average Deposit

 

Average Actual

 

 

 

For the Quarters Ended

 

Reserve Required

 

Deposit Liquidity

 

Excess

 

September 30, 2018

 

$

1,100

 

$

101,586

 

$

100,486

 

June 30, 2018

 

1,102

 

103,651

 

102,549

 

March 31, 2018

 

1,115

 

114,922

 

113,807

 

December 31, 2017

 

1,654

 

108,241

 

106,587

 

 

Operational LiquidityWe must be able to fund our activities as our balance sheet changes from day-to-day.  We maintain the capacity to fund balance sheet growth through regular money market and capital market funding and investment activities.  We monitor our operational liquidity needs by regularly comparing our demonstrated funding capacity with potential balance sheet growth.  We take such actions as may be necessary to maintain adequate sources of funding for such growth.  Operational liquidity is measured daily.  We met these requirements at all times.

 

The following table summarizes excess operational liquidity (in millions):

 

Table 10.2:        Operational Liquidity

 

 

 

Average Balance Sheet

 

Average Actual

 

 

 

For the Quarters Ended

 

Liquidity Requirement

 

Operational Liquidity

 

Excess

 

September 30, 2018

 

$

10,125

 

$

38,739

 

$

28,614

 

June 30, 2018

 

10,059

 

38,398

 

28,339

 

March 31, 2018

 

7,941

 

38,370

 

30,429

 

December 31, 2017

 

9,705

 

33,398

 

23,693

 

 

Contingency LiquidityWe are required by Finance Agency regulations to hold “contingency liquidity” in an amount sufficient to meet our liquidity needs if we are 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 NRSRO.  We consistently exceeded the regulatory minimum requirements for contingency liquidity.  Contingency liquidity is measured daily.  We met these requirements at all times.

 

The following table summarizes excess contingency liquidity (in millions):

 

Table 10.3:        Contingency Liquidity

 

 

 

Average Five Day

 

Average Actual

 

 

 

For the Quarters Ended

 

Requirement

 

Contingency Liquidity

 

Excess

 

September 30, 2018

 

$

3,603

 

$

34,156

 

$

30,553

 

June 30, 2018

 

3,320

 

33,846

 

30,526

 

March 31, 2018

 

4,040

 

33,494

 

29,454

 

December 31, 2017

 

2,276

 

29,131

 

26,855

 

 

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The standards in our risk management policy address our day-to-day operational and contingency liquidity needs.  These standards enumerate the specific types of investments to be held to satisfy such liquidity needs and are outlined above.  These standards also establish the methodology to be used in determining our operational and contingency needs.  We continually monitor and project our cash needs, daily debt issuance capacity, and the amount and value of investments available for use in the market for repurchase agreements.  We use this information to determine our liquidity needs and to develop appropriate liquidity plans.

 

Advance “Roll-Off” and “Roll-Over” Liquidity Guidelines.  The Finance Agency’s Minimum Liquidity Requirement Guidelines expanded the existing liquidity requirements to include additional cash flow requirements under two scenarios:  Advance “Roll-Over” and “Roll-Off” scenarios.  Each FHLBank, including the FHLBNY, must have positive cash balances to be able to maintain positive cash flows for 15 days under the Roll-Off scenario, and for 5 days under the Roll-Over scenario.  The Roll-Off scenario assumes that advances maturing under their contractual terms would mature, and in that scenario we would maintain positive cash flows for a minimum of 15 days on a daily basis.  The Roll-Over scenario assumes that maturing advances borrowed by members with assets below $100 billion would be rolled over, and in that scenario we would maintain positive cash flows for a minimum of 5 days on a daily basis.  We calculate the amount of cash flows under each scenario on a daily basis and have been in compliance with these guidelines.

 

Other Liquidity Contingencies.  As discussed more fully under the section Debt Financing Activity and Consolidated Obligations, we are primarily liable for Consolidated obligations issued on our behalf.  We are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the Consolidated obligations of all the FHLBanks.  If the principal or interest on any Consolidated obligation issued on our behalf is not paid in full when due, we may not pay dividends, redeem or repurchase shares of stock of any member or non-member stockholder until the Finance Agency approves our Consolidated obligation payment plan or other remedy and until we pay all the interest or principal currently due on all our Consolidated obligations.  The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any Consolidated obligations.

 

Finance Agency regulations also state that the FHLBanks must maintain, free from any lien or pledge, the following types of assets in an amount at least equal to the amount of Consolidated obligations outstanding: Cash; Obligations of, or fully guaranteed by, the United States; Secured advances; Mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States; and investments described in section 16(a) of the FHLBank Act, including securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.

 

Short-term Borrowings and Short-term Debt

 

Our primary source of funds is the issuance of FHLBank debt.  Consolidated obligation discount notes are issued with maturities up to one year and provide us with short-term funds.  Discount notes are principally used in funding short-term advances, some long-term advances, as well as money market instruments.  We also issue short-term Consolidated obligation bonds as part of our asset-liability management strategy.  We may also borrow from another FHLBank, generally for a period of one day.  Such borrowings have been insignificant historically.

 

The following table summarizes short-term debt and their key characteristics (dollars in thousands):

 

Table 10.4:        Short-term Debt

 

 

 

Consolidated Obligations-Discount Notes

 

Consolidated Obligations-Bonds With
Original Maturities of One Year or Less

 

 

 

September 30, 2018

 

December 31, 2017

 

September 30, 2018

 

December 31, 2017

 

Outstanding at end of the period (a)

 

$

50,821,648

 

$

49,613,671

 

$

55,593,000

 

$

56,494,100

 

Weighted-average rate at end of the period (b)

 

2.05

%

1.23

%

2.04

%

1.31

%

Average outstanding for the period (a)

 

$

53,057,161

 

$

45,895,662

 

$

59,881,944

 

$

39,454,853

 

Weighted-average rate for the period

 

1.67

%

0.85

%

1.75

%

0.96

%

Highest outstanding at any month-end (a)

 

$

59,769,950

 

$

57,330,972

 

$

70,377,100

 

$

56,494,100

 

 


(a)         Outstanding balances represent the carrying value of discount notes and par value of bonds (one year or less) issued and outstanding at the reported dates.

(b)         Weighted-average rate is calculated on outstanding balances at period-end.

 

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Off-Balance Sheet Arrangements, Guarantees, and Other Commitments In accordance with regulations governing the operations of the FHLBanks, each FHLBank, including the FHLBNY, is jointly and severally liable for the FHLBank System’s Consolidated obligations issued under sections 11(a) and 11(c) of the FHLBank Act.  The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on Consolidated obligations for which another FHLBank is the primary obligor.

 

In addition, in the ordinary course of business, the FHLBNY engages in financial transactions that, in accordance with U.S. GAAP, are not recorded on the FHLBNY’s balance sheet or may be recorded on the FHLBNY’s balance sheet in amounts that are different from the full contract or notional amount of the transactions.  For example, the Bank routinely enters into commitments to purchase MPF loans from PFIs, and issues standby letters of credit.  These commitments may represent future cash requirements of the Bank, although the standby letters of credit usually expire without being drawn upon.  For more information about contractual obligations and commitments, see financial statements, Note 19. Commitments and Contingencies.

 

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Legislative and Regulatory Developments

 

Significant regulatory actions and developments for the period covered by this report are summarized below.

 

Advisory Bulletin (“AB”) 2018-07 Federal Home Loan Bank Liquidity Guidance (“Liquidity Guidance AB”). On August 23, 2018, the FHFA issued a final AB on FHLBank liquidity that communicates the FHFA’s expectations with respect to the maintenance of sufficient liquidity to enable the FHLBanks to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources. As of March 31, 2019, the Liquidity Guidance AB rescinds 2009 liquidity guidance issued by the FHFA. Contemporaneously with the issuance of the Liquidity Guidance AB, the FHFA issued a supervisory letter that identifies initial thresholds for measures of liquidity.

 

The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit (“SLOCs”). In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.

 

With respect to base case liquidity, the FHFA revised previous guidance that required the FHLBanks to assume a 5-day period without access to capital markets due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, FHLBanks will be required to hold positive cash flow assuming no access to capital markets for an increased period of between ten and thirty calendar days, with a specific measurement period set forth in the supervisory letter. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to SLOCs, the guidance states that FHLBanks should maintain a liquidity reserve of between one percent and 20 percent of its outstanding SLOC commitments, as specified in the supervisory letter.

 

With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10 to -20%) and one-year (-25 to -35 percent) maturity horizons, with specific initial percentages within these ranges identified in the supervisory letter. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short term debt funding, which may increase debt rollover risk.

 

The Liquidity Guidance AB also addressed liquidity stress testing, contingency funding plans and an adjustment to the FHLBNY’s core mission achievement calculation. Portions of the Liquidity Guidance AB will be implemented beginning December 31, 2018, with further implementation on March 31, 2019, and full implementation on December 31, 2019.  The FHLBNY is still evaluating the impact of the Liquidity Guidance AB; our initial assessment is that the fully phased-in Guidance will likely require us to hold additional amounts of liquid assets and could increase the Bank’s cost of funding.

 

Proposed Amendment to Rule Regarding Golden Parachute and Indemnification Payments. On August 28, 2018, the FHFA proposed amending its rule on golden parachute payments (“Golden Parachute Rule”) to better align the Golden Parachute Rule with areas of the FHFA’s concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards that the FHFA would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLBank or the Office of Finance to an entity-affiliated party when such entity is in troubled condition, in conservatorship or receivership, or insolvent.  The proposed amendments would:

 

·                  Focus these standards on payments to and agreements with executive officers, broad-based plans, such as severance plans, covering large numbers of employees, and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoings;

·                  Revise and clarify definitions, exemptions and procedures to implement the FHFA’s supervisory approach; and

·                  Align procedures and outcomes of review with requirements of the FHFA’s rule on executive compensation.

 

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Comments on the proposed rule were due by October 12, 2018.  Ten of the FHLBanks and the Office of Finance provided a joint comment letter on October 12 related to clarifying certain provisions of the proposed amendment. The Bank is currently assessing the effect of the proposed rule but does not anticipate that, if adopted, it would materially impact the Bank.

 

Final Rule on Indemnification Payments. On October 4, 2018, the FHFA published a final rule establishing standards for identifying when an indemnification payment by an FHLBank or the Office of Finance to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the FHFA is prohibited or permissible. The rule generally prohibits these payments except in the following circumstances:

 

·                  premiums for any commercial insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the FHFA or a civil money penalty imposed by the FHFA;

·                  expenses of defending an action, subject to the FHLBank or the Office of Finance’s board of directors conducting a due investigation and making a written determination that the affiliated party acted in good faith and in a manner that he or she reasonably believed to be in the best interest of the FHLBank or Office of Finance and such payments will not materially adversely affect the safety and soundness of the FHLBank or the Office of Finance (as the case may be) and the affiliated party agreeing to repay those expenses in certain instances; and

·                  amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016 (the date the rule was proposed).

 

The rule became effective November 5, 2018. The Bank does not expect that the rule will materially impact the Bank.

 

Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Farm Credit Administration, and FHFA Final Rule on Margin and Capital Requirements for Covered Swap Entities.  On October 10, 2018, the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration, and FHFA published final amendments to each agency’s final rule on Margin and Capital Requirements for Covered Swap Entities (Swap Margin Rules) to conform the definition of “eligible master netting agreement” in such rules to the OCC’s, FRB’s, and FDIC’s final qualified financial contract rules. The final rule also clarifies that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if it is amended solely to conform to the qualified financial contract rules. The qualified financial contract rules previously published by the OCC, FRB, and FDIC require their respective regulated entities to amend covered qualified financial contracts to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the regulated entity or its affiliate(s). The final rule will become effective on November 9, 2018.  The Bank does not expect this rule to materially affect our financial condition or results of operations.

 

Proposed Federal Home Loan Bank Housing Goals Amendment.  On November 2, 2018, the FHFA published in the Federal Register a notice of proposed rulemaking to amend existing Federal Home Loan Bank Housing Goal regulations applicable to the Bank’s Mortgage Purchase Finance and other Acquired Member Assets (AMA) programs. The FHFA is recommending the replacement of the existing four retrospective low-income housing goals with new goals as discussed below. The FHFA is also proposing to eliminate the existing $2.5 billion volume threshold that triggers the current application of the housing goals for each FHLBank.

 

As proposed, the FHFA would provide to each FHLBank a prospective annual goal of purchasing at least 20 percent of its annual AMA production from low- income families or from properties in low-income areas (subject to a sub-limit that no more than 25 percent of the loans purchased from low income areas can come from borrowers having incomes above 80 percent of the adjusted median area income).

 

Additionally, the proposal includes a small FHLBank member participation housing goal.  For each calendar year, the percentage of all AMA sellers that are AMA sellers with assets that do not exceed the community financial institution (CFI) asset cap of $1.173 billion must meet or exceed either:

 

(i)    50% of the AMA sellers;

(ii)   a percentage that is three percentage points greater than the percentage of the FHLBank’s AMA users with assets that do not exceed the preceding year’s CFI asset cap; or

(iii)  a specific housing goal requested by a FHLBank and approved by the FHFA.

 

The CFI asset cap is subject to annual adjustment by the FHFA based on changes to the consumer price index.

 

The proposed rule contemplates a three year phase-in period.  It also allows an FHLBank to propose an alternate level of a housing goal upon its showing of infeasibility.

 

Public comments on the proposal are due to the FHFA by January 31, 2019. The Bank is beginning the process of studying the ramifications of this proposed rulemaking.

 

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Item 3.                                                         Quantitative and Qualitative Disclosures about Market Risk.

 

Market Risk Management.  Market risk or interest rate risk (“IRR”) is the risk of change to market value or future earnings due to a change in the interest rate environment.  IRR arises from the Banks operation due to maturity mismatches between interest rate sensitive cash-flows of assets and liabilities.  As the maturity mismatch increases so does the level of IRR.  The Bank has opted to retain a modest level of IRR which allows for the preservation of capital value while generating steady and predictable income.  Accordingly, 90% of the balance sheet consists of predominantly short-term and LIBOR-based assets and liabilities.  A conservative and limited maturity gap profile of asset and liability positions protect our capital from changes in value arising from interest and rate volatility environment.

 

The desired risk profile is primarily affected by the use of interest rate exchange agreements (“Swaps”).  All the LIBOR-based advances and long-term advances are swapped to 1- or 3-month LIBOR.  Advances with adjustable rates are tailored to reset to a LIBOR index while long-term consolidated obligations are swapped to 1- or 3-month LIBOR.  These features create a relatively steady income that changes in concert with prevailing interest rate changes to maintain a spread to short-term rates.

 

Although the Bank maintains a conservative IRR profile, income variability does arise from structural aspects in our portfolio.  These include: embedded prepayment rights, basis risk on asset and liability positions, yield curve risk, and liquidity and funding needs.  These varied risks are controlled by monitoring IRR measures including re-pricing gaps, duration of equity (“DOE”), value at risk (“VaR”), net interest income (“NII”) at risk, key rate durations (“KRD”) and forecasted dividend rates.

 

Risk Measurements.  Our Risk Management Policy assigns comprehensive risk limits which we calculate on a regular basis.  The risk limits are as follows:

 

·                  The option-adjusted DOE is limited to a range of +2.0 years to -3.5 years in the rates unchanged case, and to a range of +/-5.0 years in the +/-200bps shock cases.

 

·                  The one-year cumulative re-pricing gap is limited to 10 percent of total assets.

 

·                  The sensitivity of expected net interest income over a one-year period is limited to a -15 percent change under the +200bps shock compared to the rates in the unchanged case.  Although, we previously also had a limit at a -200bps shock, in the third quarter of 2018 an internal review was performed and at the recommendation of management, the -200bp shock was suspended by the Board of Directors on September 20, 2018 for the remainder of the year.

 

·                  The potential decline in the market value of equity is limited to a 10 percent change under the +/-200bps shocks.

 

·                  KRD exposure at any of nine term points (3-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 15-year, and 30-year) is limited to between +/-12 months through the 3-year term point and a cumulative limit of +/-30 months from the 5-year through 30-year term points.

 

Our portfolio, including derivatives, is tracked and the overall mismatch between assets and liabilities is summarized by using a DOE measure.  Our last five quarterly DOE results are shown in years in the table below (due to the on-going low interest rate environment, there was no down 200bps measurement presented between the third quarter of 2017 and the fourth quarter of 2017.  However, the Bank has presented a down 100bps measurement beginning in the fourth quarter of 2017 and a down 200bps in 2018):

 

 

 

Base Case DOE

 

-200bps DOE

 

-100bps DOE

 

+200bps DOE

 

September 30, 2018

 

0.10

 

-1.58

 

-0.46

 

0.43

 

June 30, 2018

 

0.00

 

-1.99

 

-0.62

 

0.44

 

March 31, 2018

 

-0.15

 

-1.75

 

-0.75

 

0.40

 

December 31, 2017

 

-0.37

 

N/A

 

-0.95

 

0.36

 

September 30, 2017

 

-0.38

 

N/A

 

N/A

 

0.54

 

 

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The DOE has remained within policy limits.  Duration indicates any cumulative re-pricing/maturity imbalance in the portfolio’s financial assets and liabilities.  A positive DOE indicates that, on average, the liabilities will re-price or mature sooner than the assets, while a negative DOE indicates that, on average, the assets will re-price or mature earlier than the liabilities.  We measure DOE using software that incorporates optionality within our portfolio using well-known and tested financial pricing theoretical models.

 

We do not solely rely on the DOE measure as a mismatch measure between assets and liabilities.  We analyze open key rate duration exposure across maturity buckets while also performing a more traditional gap measure that subtracts re-pricing/maturing liabilities from re-pricing/maturing assets over time.  We observe the differences over various horizons, but have set a 10 percent of assets limit on cumulative re-pricings at the one-year point.  This quarterly observation of the one-year cumulative re-pricing gap is provided in the table below and all values are below 10 percent of assets, well within the limit:

 

 

 

One Year
Re-pricing Gap

 

September 30, 2018

 

$

6.363 Billion

 

June 30, 2018

 

$

6.527 Billion

 

March 31, 2018

 

$

6.738 Billion

 

December 31, 2017

 

$

7.592 Billion

 

September 30, 2017

 

$

6.496 Billion

 

 

Our review of potential interest rate risk issues also includes the effect of changes in interest rates on expected net income.  We project asset and liability volumes and spreads over a one-year horizon and then simulate expected income and expenses from those volumes and other inputs.  The effects of changes in interest rates are measured to test whether the portfolio has too much exposure in its net interest income over the coming 12-month period.  To measure the effect, the change to the spread in the shocks is calculated and compared against the base case and subjected to a -15 percent limit.  Due to the ongoing low interest rate environment, the down 200bps measurement was not presented between the third quarter of 2017 to the third quarter of 2018; however, the Bank has presented a down 100bps measurement beginning in the fourth quarter of 2017.

 

With respect to the Bank’s Net Interest Income (NII) Sensitivity to a -200bps parallel yield shift, this Board limit contained in this model was originally constructed to measure income variability from mortgage prepayment risk.  However, the model’s measurement did not account for either outlier results in near zero interest rate environments or expected management actions.  An internal review was performed and, at the recommendation of management, this limit was suspended by the Board of Directors on September 20, 2018 for the remainder of the year.  The limit may be refined and reported on in future filings.

 

 

 

Sensitivity in
the -200bps
Shock

 

Sensitivity in
the -100bps
Shock

 

Sensitivity in
the +200bps
Shock

 

September 30, 2018

 

N/A

 

-6.56

%

13.14

%

June 30, 2018

 

N/A

 

-3.16

%

5.53

%

March 31, 2018

 

N/A

 

-2.69

%

3.98

%

December 31, 2017

 

N/A

 

-3.14

%

7.02

%

September 30, 2017

 

N/A

 

N/A

 

3.19

%

 

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Aside from net interest income, the other significant impact on changes in the interest rate environment is the potential impact on the value of the portfolio.  These calculated and quoted market values are estimated based upon their financial attributes (including optionality) and then re-estimated under the assumption that interest rates suddenly rise or fall by 200bps.  The worst effect, whether it is the up or the down shock, is compared to the internal limit of 10 percent.  The quarterly potential maximum decline in the market value of equity under these 200bps shocks is provided below (due to the ongoing low interest rate environment, the down 200bps measurement was not presented between the third quarter of 2017 to the fourth quarter of 2017; however, the Bank has presented a down 100bps measurement beginning the fourth quarter of 2017 and a down 200bps in 2018):

 

 

 

-200bps Change
in MVE

 

-100bps Change
in MVE

 

+200bps Change
in MVE

 

September 30, 2018

 

-1.12

%

-0.20

%

-0.58

%

June 30, 2018

 

-1.13

%

-0.24

%

-0.57

%

March 31, 2018

 

-1.69

%

-0.52

%

-0.40

%

December 31, 2017

 

N/A

 

-0.81

%

-0.20

%

September 30, 2017

 

N/A

 

N/A

 

-0.39

%

 

As noted, the potential declines under these shocks are within our limits of a maximum 10 percent.

 

The following tables display the portfolio’s maturity/re-pricing gaps as of September 30, 2018 and December 31, 2017 (in millions):

 

 

 

Interest Rate Sensitivity

 

 

 

September 30, 2018

 

 

 

 

 

More Than

 

More Than

 

More Than

 

 

 

 

 

Six Months

 

Six Months to

 

One Year to

 

Three Years to

 

More Than

 

 

 

or Less

 

One Year

 

Three Years

 

Five Years

 

Five Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

Non-MBS investments

 

$

20,340

 

$

137

 

$

494

 

$

426

 

$

2,012

 

MBS investments

 

8,906

 

274

 

2,458

 

1,703

 

3,808

 

Adjustable-rate loans and advances

 

23,566

 

 

 

 

 

Net unswapped

 

52,812

 

411

 

2,952

 

2,129

 

5,820

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity trading portfolio

 

2,330

 

1,079

 

1,236

 

3

 

 

Swaps hedging investments

 

2,340

 

(1,090

)

(1,250

)

 

 

Net liquidity trading portfolio

 

4,670

 

(11

)

(14

)

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate loans and advances

 

36,833

 

10,124

 

19,570

 

5,603

 

5,095

 

Swaps hedging advances

 

37,978

 

(9,446

)

(18,217

)

(5,253

)

(5,062

)

Net fixed-rate loans and advances

 

74,811

 

678

 

1,353

 

350

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

$

132,293

 

$

1,078

 

$

4,291

 

$

2,482

 

$

5,853

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

905

 

$

13

 

$

 

$

 

$

 

Discount notes

 

50,704

 

118

 

 

 

 

Swapped discount notes

 

(2,634

)

 

858

 

198

 

1,578

 

Net discount notes

 

48,070

 

118

 

858

 

198

 

1,578

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Obligation Bonds

 

 

 

 

 

 

 

 

 

 

 

FHLBank bonds

 

62,966

 

6,706

 

9,483

 

2,922

 

3,689

 

Swaps hedging bonds

 

14,086

 

(5,856

)

(6,572

)

(908

)

(750

)

Net FHLBank bonds

 

77,052

 

850

 

2,911

 

2,014

 

2,939

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

$

126,027

 

$

981

 

$

3,769

 

$

2,212

 

$

4,517

 

Post hedge gaps (a):

 

 

 

 

 

 

 

 

 

 

 

Periodic gap

 

$

6,266

 

$

97

 

$

522

 

$

270

 

$

1,336

 

Cumulative gaps

 

$

6,266

 

$

6,363

 

$

6,885

 

$

7,155

 

$

8,491

 

 

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Table of Contents

 

 

 

Interest Rate Sensitivity

 

 

 

December 31, 2017

 

 

 

 

 

More Than

 

More Than

 

More Than

 

 

 

 

 

Six Months

 

Six Months to

 

One Year to

 

Three Years to

 

More Than

 

 

 

or Less

 

One Year

 

Three Years

 

Five Years

 

Five Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

Non-MBS investments

 

$

14,238

 

$

159

 

$

545

 

$

442

 

$

1,771

 

MBS investments

 

9,291

 

855

 

2,059

 

1,979

 

3,055

 

Adjustable-rate loans and advances

 

37,120

 

 

 

 

 

Net unswapped

 

60,649

 

1,014

 

2,604

 

2,421

 

4,826

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity trading portfolio

 

239

 

1,256

 

147

 

 

 

Swaps hedging investments

 

1,408

 

(1,261

)

(147

)

 

 

Net liquidity trading portfolio

 

1,647

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate loans and advances

 

43,147

 

11,835

 

21,227

 

7,438

 

1,940

 

Swaps hedging advances

 

39,629

 

(10,719

)

(19,886

)

(7,127

)

(1,897

)

Net fixed-rate loans and advances

 

82,776

 

1,116

 

1,341

 

311

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

$

145,072

 

$

2,125

 

$

3,945

 

$

2,732

 

$

4,869

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,166

 

$

12

 

$

 

$

 

$

 

Discount notes

 

49,424

 

189

 

 

 

 

Swapped discount notes

 

(2,349

)

 

525

 

531

 

1,293

 

Net discount notes

 

47,075

 

189

 

525

 

531

 

1,293

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Obligation Bonds

 

 

 

 

 

 

 

 

 

 

 

FHLBank bonds

 

65,519

 

18,199

 

9,250

 

2,545

 

3,509

 

Swaps hedging bonds

 

24,199

 

(16,754

)

(6,057

)

(638

)

(750

)

Net FHLBank bonds

 

89,718

 

1,445

 

3,193

 

1,907

 

2,759

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

$

137,959

 

$

1,646

 

$

3,718

 

$

2,438

 

$

4,052

 

Post hedge gaps (a):

 

 

 

 

 

 

 

 

 

 

 

Periodic gap

 

$

7,113

 

$

479

 

$

227

 

$

294

 

$

817

 

Cumulative gaps

 

$

7,113

 

$

7,592

 

$

7,819

 

$

8,113

 

$

8,930

 

 


(a)         Re-pricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments.  For callable instruments, the re-pricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity.

 

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ITEM 4.                                                CONTROLS AND PROCEDURES.

 

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, José R. González, and Senior Vice President and Chief Financial Officer, Kevin M. Neylan, as of September 30, 2018.  Based on this evaluation, they concluded that as of September 30, 2018, 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.

 

Changes in Internal Control Over Financial Reporting: There were no changes in the Bank’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the Bank’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

 

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Table of Contents

 

Part II.                                    Other Information.

 

Item 1.  Legal Proceedings

 

The Bank is not aware of any legal proceedings that are expected to have a material effect on its financial condition or results of operations or that are otherwise material to the Bank.

 

Item 1A.  Risk Factors

 

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of the FHLBNY’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, except as follows:

 

Possible replacement of the LIBOR benchmark interest rate may have an impact on the FHLBNY’s business, financial condition or results of operations.  On July 27, 2017, the Financial Conduct Authority (FCA), a regulator of financial services firms in the United Kingdom, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate (SOFR) as its recommended alternative to LIBOR and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. During the third quarter of 2018, certain market participants began moving more aggressively towards the utilization of SOFR with the issuance of debt securities indexed to SOFR. As noted throughout this report, many of the FHLBNY’s assets and liabilities are indexed to LIBOR. The FHLBNY is evaluating and preparing for the potential impact of the eventual replacement of the LIBOR benchmark interest rate, including the use of SOFR as the dominant replacement. The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated, including, for example, the development of a term structure, credit adjustments and option structures for SOFR based instruments.  If existing Libor instruments are transferred to a SOFR basis, it is possible that large amounts of value could be gained or lost in the transfer.  Introduction of an alternative rate also may introduce additional basis risk for market participants, including the FHLBNY, as an alternative index is utilized along with LIBOR. There can be no guarantee that SOFR will become widely used and that alternatives may or may not be developed with additional complications. The FHLBNY is not able to predict whether LIBOR will cease to be available after 2021, whether SOFR will become a widely accepted benchmark in place of LIBOR, or what the impact of a possible transition to SOFR or an alternate replacement will have on the FHLBNY’s business, financial condition, or results of operations.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3.  Defaults upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

There were no material changes to the disclosures relating to Rule 2-01(c)(1)(ii)(A) of Regulation S-X included in Part II, Item 9B of the FHLBNY’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed on March 22, 2018.

 

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Item 6.                                      Exhibits

 

No.

 

Exhibit
Description

 

Filed with this
Form 10-Q

 

Form

 

Date Filed

 

 

 

 

 

 

 

 

 

10.01

 

Federal Home Loan Bank of New York 2019 Director Compensation Policy, effective as of January 1, 2019 (a)

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.01

 

Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.02

 

Certification of the Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.01

 

Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.02

 

Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

X

 

 

 

 

 


(a)         This exhibit includes a management contract, compensatory plan or arrangement required to be noted herein.

 

120


Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Federal Home Loan Bank of New York

 

(Registrant)

 

 

 

 

 

/s/ Kevin M. Neylan

 

Kevin M. Neylan

 

Senior Vice President and Chief Financial Officer

 

Federal Home Loan Bank of New York (on behalf of the Registrant and as the Principal Financial Officer)

 

 

Date: November 8, 2018

 

 

121