ITEM 1. BUSINESS
General
The Federal Home Loan Bank of New York (“FHLBNY” or “the Bank”) is a federally chartered corporation, exempt from federal, state and local taxes except real property taxes. It is one of twelve district Federal Home Loan Banks (“FHLBanks”). The FHLBanks are U.S. government-sponsored enterprises (“GSEs”), organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”). Each FHLBank is a cooperative owned by member institutions located within a defined geographic district. The members purchase capital stock in the FHLBank and receive dividends on their capital stock investment. The FHLBNY’s defined geographic district includes New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. The FHLBNY provides a readily available, low-cost source of funds for its member institutions. The FHLBNY does not have any wholly or partially owned subsidiaries, nor does it have an equity position in any partnerships, corporations, or off-balance-sheet special purpose entities.
Members of the cooperative must purchase FHLBNY stock according to regulatory requirements. The business of the cooperative is to provide liquidity for our members (primarily in the form of advances) and to provide a return on their investment in FHLBNY stock in the form of a dividend. Since the members are both stockholders and customers, there is a trade-off between providing value to them via low pricing for advances with a relatively lower dividend versus higher advances pricing with a relatively higher dividend. This means that the FHLBNY is managed to deliver balanced value to members, rather than to maximize either advance volume through low pricing or profitability.
All federally insured depository institutions, insured credit unions and insurance companies engaged in residential housing finance can apply for membership in the FHLBank in their district, as can all community financial institutions. For the year ending December 31, 2006, community financial institutions are defined as FDIC-insured depository institutions having average total assets of $587 million. Annually, the Federal Housing Finance Board (“Finance Board”) will adjust the total assets “cap” to reflect any percentage increase in the preceding year’s Consumer Price Index.
A member of another FHLBank or a financial institution that is not a member of any FHLBank may also hold FHLBNY stock as a result of having acquired an FHLBNY member. As a result of the membership requirements, the FHLBNY conducts business with related parties in the normal course of business and considers all members and non-member stockholders as related parties in addition to the other FHLBanks.
The FHLBNY’s primary business is making collateralized loans, known as “advances,” to members, and is the primary focus of the Bank’s operations and also the principal factor that impacts the financial condition of the FHLBNY. The FHLBNY also serves the public through its mortgage programs, which enable FHLBNY members to liquefy certain mortgage loans by selling them to the Bank. The FHLBNY also provides members with such correspondent services as safekeeping, wire transfers, depository and settlement services. Non-members that have acquired members have access to these services up to the time that their advances outstanding have been prepaid or have matured.
The FHLBNY combines private capital and public sponsorship to provide its member financial institutions with a reliable flow of credit and other services for housing and community development. By supplying additional liquidity to its members, the FHLBNY enhances the availability of residential mortgages and community investment credit.
The FHLBNY is supervised and regulated by the Federal Housing Finance Board, which is an independent agency in the executive branch of the U.S. government. The Finance Board ensures that the FHLBNY carries out its housing and community development mission, remains adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner. However, while the Finance Board establishes regulations governing the operations of the FHLBanks, the Bank functions as a separate entity with its own management, employees and board of directors.
The FHLBNY obtains its funds from several sources. A primary source is the issuance of FHLBank debt instruments, called consolidated obligations, to the public. The issuance and servicing of consolidated obligations are performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Board. These debt instruments represent the joint and several obligations of all the FHLBanks. Additional sources of FHLBNY funding are member deposits, other borrowings, and the issuance of capital stock. Deposits are accepted from member financial institutions and federal instrumentalities.
The FHLBNY’s website is www.fhlbny.com. The FHLBNY has adopted, and posted on its website, a Code of Business Conduct and Ethics applicable to all of its employees and directors.
Market Area
The FHLBNY’s market area is the same as its membership district- New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. Institutions that are members of the FHLBNY must have their principal places of business within this market area but may also operate elsewhere. The FHLBNY had 293 and 297 members, respectively, at December 31, 2006 and 2005.
Based on present laws and regulations, the number of financial institutions eligible for membership in the market area is limited. The most recent market analysis performed in 2006 indicated that in the Bank’s district, there are 829 banks, thrifts and credit unions that are eligible for membership, but have not joined. Of these, the FHLBNY considers only a limited number as attractive candidates for membership. An attractive candidate for membership is an institution that is likely to do sufficient advances business with the FHLBNY within a reasonable period of time so that the stock it is required to purchase will not dilute the dividend on the existing members’ stock. Characteristics that identify attractive candidates include an established practice of wholesale funding, high loan to deposit ratios, strong asset growth, sufficient qualified collateral and a management that had experience with the FHLBNY’s advances during previous employment.
The FHLBNY actively markets membership to attractive candidates through personal calling and promotional materials. We estimate the number of candidates to be within a range of 30 to 50. We compete for their business by explaining the relative low interest rates that the FHLBNY charges to members for advances. Institutions join the FHLBNY primarily for access to a reliable source of liquidity. Advances are an attractive source of liquidity because they permit members to liquefy relatively non-liquid assets, such as 1-4 family, multifamily and commercial real estate mortgages held in portfolio. Advances are attractively priced because of the FHLBNY’s access to capital markets as a Government Sponsored Enterprise and the FHLBNY’s strategy of providing balanced value to members.
The following table summarizes the FHLBNY’s members by type of institution.
Business Segments
The FHLBNY manages and reports on its operations as a single business segment. Senior management and the FHLBNY’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. All of the FHLBNY’s revenues are derived from U.S. operations. A more detailed discussion of segment information is provided in the “Segment Information” section of Note 23 to audited Financial Statements.
The FHLBNY’s cooperative structure permits it to expand and contract with demand for advances and changes in membership. When advances are paid down, either because the member no longer needs the funds or because the members have been acquired by non-members, the stock associated with the advances is immediately redeemed. When advances are paid before maturity, the FHLBNY collects fees that make the FHLBNY financially indifferent to the prepayment. The FHLBNY’s operating expenses are very low, about 7 basis points on average assets. Dividend capacity, which is a function of net income and the amount of stock outstanding, is largely unaffected, since future stock and future income are reduced more or less proportionately. All of this means that the FHLBNY will be able to meet its financial obligations and continue to deliver balanced value to members even if demand for advances drops significantly or if members are lost to acquisitions.
Products and Services
The FHLBNY offers to its member financial institutions several correspondent banking services as well as safekeeping services. The fee income that is generated from these services is not significant. The FHLBNY also issues standby letters of credit on behalf of members at a fee. The total of income derived from such services was about $3 million for the year ended December 31, 2006 and about $4-$5 million for each of the two prior years. On an infrequent basis, the FHLBNY may act as an intermediary to purchase derivative instruments for members.
The FHLBNY provides the Mortgage Partnership Finance® program to its members as another service. However, the FHLBNY does not expect the program to become a significant factor in its operations. The interest revenues derived from this program and another inactive mortgage program aggregated $76.1 million and $69.3 million for the years ended December 31, 2006 and 2005, respectively. The revenues represented only 1.7% and 2.2% of total interest income for the years ended December 31, 2006 and 2005, respectively.
The FHLBNY’s short-term investments provide immediate liquidity to satisfy members’ needs. Investments in held-to-maturity securities, specifically mortgage-backed securities, provide additional earnings to enhance dividend potential for members. As a cooperative, the FHLBNY strives to provide its members a reasonable return on their investment in the FHLBNY’s capital stock. The interest income derived from all investments aggregated $1.0 billion and $876.8 million for the years ended December 31, 2006 and 2005, respectively and represented 23.3% and 28.1% of total interest income for those years.
However, advances to members are the primary focus of the FHLBNY’s operations, and is also the principal factor that impacts the financial condition of the FHLBNY. Revenue from advances to members was the largest and the most significant element in the FHLBNY’s operating results. Providing advances to members, supporting the products and associated collateral and credit operations, and funding and swapping the funds are the focus of the FHLBNY’s operations.
Advances
The FHLBNY offers a wide range of credit products to help members meet local credit needs, manage interest rate and liquidity risk, and serve their communities. The Bank’s primary business is making secured loans, called advances, to its members. These advances are available as short- and long-term loans with adjustable, variable and fixed-rate products (including option-embedded and amortizing advances).
Advances to members, including former members, constituted 72.2%, or $59.0 billion, of the FHLBNY’s $81.7 billion in total assets at December 31, 2006. In terms of revenues, interest income from advances was $3.3 billion representing 75.0% of total interest income for the year ended December 31, 2006. These metrics have remained relatively stable over time. Advances to members constituted 72.8%, or $61.9 billion, of the FHLBNY’s $85.0 billion in total assets at December 31, 2005. Interest income from advances constituted 69.7%, or $2.2 billion, of $3.1 billion in total interest income for the year ended December 31, 2005. At December 31, 2004, the percentage of advances to total assets was 77.5%; the percentage of interest income derived from advances to total interest income was 64.7%. Most of the FHLBNY’s critical functions are directed at supporting the borrowing needs of the FHLBNY’s members, managing the members’ associated collateral positions, and providing member support operations.
Members use advances as a source of funding to supplement their deposit-gathering activities. Advances have grown substantially in recent years because many members have not been able to increase their deposits in their local markets as quickly as they have increased their assets. To close this funding gap, members have preferred to obtain reasonably priced advances rather than increasing their deposits by offering higher rates or forgoing asset growth. Because of the wide range of advance types, terms, and structures available to them, members have also used advances to enhance their asset/liability management. As a cooperative, the FHLBNY prices advances at minimal net spreads above the cost of its funding in order to deliver more value to members.
The FHLBNY’s members are required by the FHLBank Act to pledge collateral to secure their advances. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) Treasury and U.S. government agency securities; (3) mortgage-backed securities; and (4) certain other collateral that is real estate-related, provided that such collateral has a readily ascertainable value and that the FHLBNY can perfect a security interest in that collateral. The FHLBNY also has a statutory lien priority with respect to certain member assets under the FHLBank Act as well as a claim on FHLBNY capital stock held by its members.
Highlights of the Bank’s Advances offered to members were as follows (outstanding par amounts by product type are disclosed in a table in the MD&A section captioned “Financial Condition: Key Assets, Liabilities, Capital, Commitments and Contingencies”):
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Overnight Line of Credit Program (“OLOC”) : The OLOC program gives members a short-term, flexible, readily accessible revolving line of credit for immediate liquidity needs. OLOC Advances mature on the next business day, at which time the advance is repaid. Interest is calculated on a 360-day basis, charged daily, and priced at a spread to the prevailing Federal funds rate.
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Fixed-Rate Advances: Fixed-Rate Advances are flexible funding tools that can be used by members to meet short- to long-term liquidity needs. Terms vary from 2 days to 30 years.
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Repurchase Agreement (“REPO”) Advances: REPO Advances are secured by eligible securities and can be structured to have fixed or variable interest rate, “bullet” or quarterly interest payments, and a put option, by which the FHLBNY receives an option to require payment after a predetermined lockout period. Members may use U.S Treasuries, Agency-issued debentures, and mortgage-backed securities as collateral.
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Adjustable-Rate Credit Advances (“ARC”): ARC advances are medium- and long-term loans that can be pegged to a variety of indices, such as 1-month LIBOR, 3-month LIBOR, or the Federal funds rate. Members use an ARC advance to manage interest rate and basis risks by efficiently matching the interest rate index and repricing characteristics of floating-rate assets and liabilities. The interest rate is set and reset (depending upon the maturity of the advance and the type of index) at a spread to that designated index. Principal is due at maturity and interest payments are due at every reset date, including the final payment.
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Amortizing Advances: Amortizing Advances are medium- or long-term, fixed-rate loans, with fixed amortizing schedules structured to match the payment characteristics of a mortgage loan or portfolio of mortgage loans held by the member. Terms offered are from one to 30 years, with constant principal and interest payments.
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Convertible Advances: Convertible Advances, also referred to as putable advances are medium- to long-term loans that are structured so the member sells the Bank an option or a strip of options. If the advance is put by the Bank at the end of the lockout period, the member has the option to pay off the advance or request replacement funding to an advance product of their choice at the current market rates as established by the Bank.
Letters of Credit
The FHLBNY may issue letters of credit (“Standby Letters of Credit”) on behalf of members to facilitate members’ residential and community lending, provide members with liquidity, or assist members with asset/liability management. Where permitted by law, members may utilize FHLBNY letters of credit to collateralize deposits made by units of state and local governments (“municipal deposits”). The FHLBNY’s underwriting and collateral requirements for securing Letters of Credit are the same as its requirements for securing advances.
Derivatives
To assist members in managing their interest rate and basis risks in both rising and falling interest-rate environments, the FHLBNY will act as an intermediary between the member and derivatives counterparty. The FHLBNY does not act as a dealer and views this as an additional service to its members. Amounts of such transactions have not been material. Participating members must comply with the FHLBNY’s documentation requirements and meet the Bank’s underwriting and collateral requirements.
Acquired Member Assets Programs
Utilizing a risk-sharing structure, the FHLBanks are permitted to acquire certain assets from or through their members. These initiatives are referred to as Acquired Member Assets (“AMA”) programs. At the FHLBNY, the Acquired Member Assets initiative is the Mortgage Partnership Finance (“MPF”)® Program, which provides members with an alternative to originating and selling long-term, fixed-rate mortgages in the secondary market. In the MPF Program, the FHLBNY purchases conforming fixed-rate mortgages originated or purchased by its members. Members are then paid a fee for assuming a portion of the credit risk of the mortgages acquired by the FHLBNY. Members assume credit risk by providing a credit enhancement guarantee to the FHLBNY. This guarantee provides a double-A equivalent level of creditworthiness on the mortgages. The amount of this guarantee is fully collateralized by the member. The FHLBNY assumes the remainder of the credit risk along with the interest rate risk of holding the mortgages in its portfolio.
In a typical MPF Program, the Participating Financial Institution (“PFI”) sells previously closed loans to the FHLBNY. In the past, the FHLBNY has also purchased loans on a flow basis (referred to as “table-funding,” which means that the PFI uses the FHLBNY’s funds to make the mortgage loan to the borrower). The PFI closes the loan “as agent” for the FHLBNY. Table funded loans are restricted to the Mortgage Partnership Finance 100 product (“MPF 100”). The Finance Board specifically authorized table funded loans in its Regulations authorizing the MPF Program and the only product initially offered for the first two years of the MPF Program was for table funded loans. The Finance Board’s initial Resolutions were specifically extended by the Acquired Member Assets Regulations (12 CFR Part 955).
The Acquired Member Assets Regulation does not specifically address the disposition of Acquired Member Assets. The main intent of that regulation is the purchase of assets for investment rather than for trading purposes. However, the FHLBanks have the legal authority to sell Mortgage Partnership Finance loans pursuant to the grant of incidental powers in Section 12 of the FHLBank Act. Section 12(a) of the FHLBank Act specifically provides that each FHLBank “shall have all such incidental powers, not inconsistent with the provisions of this chapter, as are customary and usual in corporations generally.” General corporate law principles permit the sale of investments.
The FHLBNY also holds participation interests in residential and community development mortgage loans through its Community Mortgage Asset (“CMA”) program. Acquisitions of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001.
Mortgage Partnership Finance Program
Introduction
The Bank invests 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 Participating Financial Institution members (“PFIs”) and purchase participations in pools of eligible mortgage loans from other FHLBs (collectively, “MPF Loans”). MPF Loans are conforming conventional and Government (i.e., insured or guaranteed by the Federal Housing Administration (“FHA”), the Department of Veterans Affairs (“VA”), the Rural Housing Service of the Department of Agriculture (“RHS”) or the Department of Housing and Urban Development (“HUD”)) fixed rate mortgage loans secured by one-to-four family residential properties with maturities ranging from 5 years to 30 years or participations in such mortgage loans. MPF Loans that are Government loans, collectively referred to as “MPF Government Loans.”
There are currently five MPF Loan products from which PFIs may choose. Four of these products (Original MPF, MPF 125, MPF Plus and MPF Government) are closed loan products in which the Bank purchases loans that have been acquired or have already been closed by the PFI with its own funds. However, under the MPF 100 product, the Bank “table funds” MPF Loans; that is, the Bank provides the funds through the PFI as the Bank’s agent to make the MPF Loan to the borrower. The PFI performs all the traditional retail loan origination functions under this and all other MPF products. With respect to the MPF 100 product, the Bank is considered the originator of the MPF Loan for accounting purposes since the PFI is acting as our agent when originating the MPF Loan.
The FHLBank of Chicago 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 portfolio. Finance Board regulations define the acquisition of acquired member assets (“AMA”) as a core mission activity of the FHLBs. 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.
The MPF Program enables other FHLBanks, including the FHLBNY, the ability to purchase and fund MPF Loans with their member PFIs. In addition, the FHLBank of Chicago (“MPF Provider”) provides programmatic and operational support to those FHLBanks that participate in the program (“MPF Banks”). The current MPF Banks are the Federal Home Loan Banks of: Atlanta, Boston, Chicago, Dallas, Des Moines, New York, Pittsburgh, San Francisco and Topeka. Since October 2006, the FHLB of San Francisco no longer offers new master commitments to purchase mortgage loans from its PFIs under the MPF Program although it is retaining its existing portfolio of mortgage loans. MPF Banks generally acquire whole loans from their respective PFIs but may also acquire them from a member PFI of another MPF Bank with permission of the PFI’s respective MPF Bank or may acquire participations from another MPF Bank. The FHLBNY has not purchased loans from another FHLBank since January 19, 2000.
The MPF Program is designed to allocate the risks of MPF Loans among the MPF Banks and PFIs and to take advantage of their respective strengths. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate MPF Loans, whether through retail or wholesale operations, and to retain or acquire servicing of MPF Loans, the MPF Program gives control of those functions that most impact credit quality to PFIs. The MPF Banks are responsible for managing the interest rate risk, prepayment risk and liquidity risk associated with owning MPF Loans.
For conventional MPF Loan products, PFIs assume or retain a portion of the credit risk on the MPF Loans they cause to be funded by or they sell to an MPF Bank by providing credit enhancement (“CE Amount”) either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage guaranty insurance (“SMI”). The PFI’s CE Amount covers losses for MPF Loans under a master commitment in excess of the MPF Bank’s first loss account (“FLA”). PFIs are paid a credit enhancement fee (“CE Fee”) for managing credit risk and in some instances all or a portion of the CE Fee may be performance based. See “Credit Enhancement Structure - MPF Loan Credit Risk” for a detailed discussion of the credit enhancement, risk sharing arrangements and loan product information for the MPF Program.
MPF Provider
The MPF Provider establishes the eligibility standards under which an MPF Bank member may become a PFI, the structure of MPF Loan products and the eligibility rules for MPF Loans. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF Loans and the back-office processing of MPF Loans in its role as master servicer and master custodian. The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF Program. The MPF Provider has also contracted with other custodians meeting MPF Program eligibility standards at the request of certain PFIs. These other custodians are typically affiliates of PFIs and in some cases a PFI acts as self-custodian.
The MPF Provider publishes and maintains the MPF Origination Guide and MPF Servicing Guide (together “MPF Guides”), which detail the requirements PFIs must follow in originating or selling and servicing MPF Loans. The MPF Provider maintains the infrastructure through which MPF Banks may fund or purchase MPF Loans through their PFIs. This infrastructure includes both a telephonic delivery system and a web-based delivery system accessed through the eMPF® website. In exchange for providing these services, the MPF Provider receives a fee from each of the MPF Banks.
PFI Eligibility
Members and eligible housing associates may apply to become a PFI of their respective MPF Bank. If a member is an affiliate of a holding company which has another affiliate that is an active PFI, the member is only eligible to become a PFI if it is a member of the same MPF Bank as the existing PFI. The MPF Bank reviews the general eligibility of the member, its servicing qualifications and ability to supply documents, data and reports required to be delivered by PFIs under the MPF Program. The member and its MPF Bank sign an MPF Program Participating Financial Institution Agreement (“PFI Agreement”) that provides the terms and conditions for the sale or funding of MPF Loans, including required credit enhancement, and establishes the terms and conditions for servicing MPF Loans. All of the PFI’s obligations under the PFI Agreement are secured in the same manner as the other obligations of the PFI under its regular advances agreement with the MPF Bank. The MPF Bank has the right under the advances agreement to request additional collateral to secure the PFI’s obligations.
Mortgage Standards
Mortgage loans delivered under the MPF Program must meet the underwriting and eligibility requirements in the MPF Guides, as amended by any waiver granted to a PFI exempting it from complying with specified provisions of the MPF Guides. PFIs may utilize an approved automated underwriting system or underwrite MPF Loans manually. The current underwriting and eligibility guidelines under the MPF Guides with respect to MPF Loans are broadly summarized as follows:
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Mortgage characteristics. MPF Loans must be qualifying 5- to 30-year conforming conventional or Government fixed-rate, fully amortizing mortgage loans, secured by first liens on owner-occupied one-to-four unit single-family residential properties and single unit second homes. Conforming loan size, which is established annually as required by Finance Board regulations, may not exceed the loan limits permitted to be set by the Office of Federal Housing Enterprise Oversight (“OFHEO”) each year. Condominium, planned unit development and manufactured homes are acceptable property types as are mortgages on leasehold estates (though manufactured homes must be on land owned in fee simple by the borrower).
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Loan-to-Value Ratio and Primary Mortgage Insurance. The maximum loan-to-value ratio (“LTV”) for conventional MPF Loans must not exceed 95%. AHP mortgage loans may have LTVs up to 100% (but may not exceed 105% total LTV, which compares the property value to the total amount of all mortgages outstanding against a property). Government MPF Loans may not exceed the LTV limits set by the applicable federal agency. Conventional MPF Loans with LTVs greater than 80% require certain amounts of mortgage guaranty insurance (“MI”), called primary MI, from an MI company rated at least “AA” or “Aa” and acceptable to S&P.
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Documentation and Compliance with Applicable Law. The mortgage documents and mortgage transaction must comply with all applicable laws and mortgage loans must be documented using standard Fannie Mae/Freddie Mac Uniform Instruments.
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Ineligible Mortgage Loans. The following types of mortgage loans are not eligible for delivery under the MPF Program: (1) mortgage loans that are not ratable by S&P; (2) mortgage loans not meeting the MPF Program eligibility requirements as set forth in the MPF Guides and agreements; and (3) mortgage loans that are classified as high cost, high rate, high risk, Home Ownership and Equity Protection Act (HOEPA) loans or loans in similar categories defined under predatory lending or abusive lending laws.
The MPF Guides also contain MPF Program policies which include anti-predatory lending policies, eligibility requirements for PFIs such as insurance requirements and annual certification requirements, loan documentation and custodian requirements, as well as detailing the PFI’s servicing duties and responsibilities for reporting, remittances, default management and disposition of properties acquired by foreclosure or deed in lieu of foreclosure.
A majority of the states, and some municipalities, have enacted laws against mortgage loans considered predatory or abusive. Some of these laws impose liability for violations not only on the originator, but also upon purchasers and assignees of mortgage loans. The FHLBNY takes measures that are considered reasonable and appropriate to reduce the Bank’s exposure to potential liability under these laws and are not aware of any claim, action or proceeding asserting that the Bank is liable under these laws. However, the Bank can not certain that it will never have any liability under predatory or abusive lending laws.
MPF Loan Deliveries
In order to deliver mortgage loans under the MPF Program, the PFI and MPF Bank will enter into a best efforts master commitment (“Master Commitment”) which provides the general terms under which the PFI will deliver mortgage loans to an MPF Bank, including a maximum loan delivery amount, maximum CE amount and expiration date. PFIs may then request to enter into one or more mandatory funding or purchase commitments (each, a “Delivery Commitment”), which is a mandatory commitment of the PFI to sell or originate eligible mortgage loans. Each MPF Loan delivered must conform to specified ranges of interest rates, maturity terms and business days for delivery (which may be extended for a fee) detailed in the Delivery Commitment or it will be rejected by the MPF Provider. Each MPF Loan under a Delivery Commitment is linked to a Master Commitment so that the cumulative credit enhancement level can be determined for each Master Commitment.
The sum of MPF Loans delivered by the PFI under a specific Delivery Commitment cannot exceed the amount specified in the Delivery Commitment without the assessment of a price adjustment fee. Delivery Commitments that are not fully funded by their expiration dates are subject to pair-off fees (fees charged to a PFI for failing to deliver the amount of loans specified in a Delivery Commitment) or extension fees (fees charged to a PFI for extending the time deadline to deliver loans on a Delivery Commitment), which protect the MPF Bank against changes in market prices.
In connection with each sale to or funding by an MPF Bank, the PFI makes customary representations and warranties in the PFI Agreement and under the MPF Guides and include eligibility and conformance of the MPF Loans with the requirements in the MPF Guides, compliance with predatory lending laws and the integrity of the data transmitted to the MPF Provider. Once an MPF Loan is funded or purchased, the PFI must deliver a qualifying promissory note and certain other required documents to the designated custodian, who reports to the MPF Provider whether the documentation package matches the funding information transmitted to the MPF Provider and otherwise meets MPF Program requirements.
In the role of the MPF Provider, the FHLBank of Chicago conducts an initial quality assurance review of a selected sample of MPF Loans from each PFI’s initial MPF Loan delivery. Thereafter, it performs periodic reviews of a sample of MPF Loans to determine whether the reviewed MPF Loans complied with the MPF Program requirements at the time of acquisition. Any exception that indicates a negative trend is discussed with the PFI and can result in the suspension or termination of a PFI’s ability to deliver new MPF Loans if the concern is not adequately addressed.
When a PFI fails to comply with the requirements of the PFI Agreement, MPF Guides, applicable law or terms of mortgage documents, the PFI may be required to provide an indemnification covering related losses or to repurchase the MPF Loans which are impacted by such failure if it cannot be cured. Reasons for which a PFI could be required to repurchase an MPF Loan may include but are not limited to MPF Loan ineligibility, breach of representation or warranty under the PFI Agreement or the MPF Guides, failure to deliver the required MPF Loan document package to an approved custodian, servicing breach or fraud.
The Bank does not currently conduct any quality assurance reviews of MPF Government Loans. However, the FHLBNY may allow PFIs to repurchase delinquent MPF Government Loans so that they may comply with loss mitigation requirements of the applicable government agency in order to preserve the insurance or guaranty coverage. The repurchase price is equal to the current scheduled principal balance and accrued interest on the MPF Government Loan. In addition, just as for conventional MPF Loans, if a PFI fails to comply with the requirements of the PFI Agreement, MPF Guides, applicable law or terms of mortgage documents, the PFI may be required to repurchase the MPF Government Loans which are impacted by such failure.
The FHLBNY has not experienced any losses related to a PFI’s failure to repurchase conventional MPF Loans or MPF Government Loans when PFIs were required to make repurchases under the terms of the MPF Guides.
MPF Products
A variety of MPF Loan products have been developed to meet the differing needs of PFIs. There are currently five MPF products that PFIs may choose from: Original MPF, MPF 100, MPF 125, MPF Plus and MPF Government. The products have different credit risk sharing characteristics based upon the different levels for the FLA and CE Amount and the types of CE Fees (performance based or fixed amount). The table below provides a comparison of the MPF products. The Bank does not offer new master commitments for the MPF 100 program.
MPF Product Comparison Table
MPF Program Master Commitments participated in or held by the Bank as of December 31, 2006.
Future payouts of performance-based credit enhancement fees are reduced when losses are allocated to the FLA.
Government loan fee.
MPF Loan Participations
While the FHLBNY may purchase participation interests in MPF Loans from other MPF Banks and may also sell participation interests to other MPF Banks at the time MPF Loans are acquired, the FHLBNY has not either purchased or sold any interest in MPF loans since July 2, 2004. The Bank’s intent is to hold all MPF Loans for investment.
The FHLBNY is responsible for evaluating, monitoring, and certifying to any participant MPF Bank the creditworthiness of each PFI initially, and at least annually thereafter. The FHLBNY is responsible for ensuring that adequate collateral is available from each of its PFIs to secure any direct obligation portion of the PFI’s CE Amount. The Bank is also responsible for enforcing the PFI’s obligations under its PFI Agreement.
Under the MPF Program, participation percentages for MPF Loans may range from 100% to be retained by the Bank to 100% participated to another MPF Bank. The participation percentages do not change during the period that a Master Commitment is open unless the MPF Banks contractually agree to change their respective shares or the Owner Bank exercises the right to require the MPF provider to acquire a 100% participation for delivery commitments for a particular day. If the specified participation percentage in a Master Commitment never changes, then the percentage for risk-sharing of losses will remain unchanged throughout the life of the Master Commitment.
The risk sharing and rights of the Owner Bank and participating MPF Bank(s) are as follows:
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each pays its respective pro rata share of each MPF Loan acquired under a Delivery Commitment and related Master Commitment based upon the participation percentage in effect at the time;
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each receives its respective pro rata share of principal and interest payments and is responsible for credit enhancement fees based upon its participation percentage for each MPF Loan under the related Delivery Commitment;
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each is responsible for its respective pro rata share of FLA exposure and losses incurred with respect to the Master Commitment based upon the overall risk sharing percentage for the Master Commitment; and
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each may economically hedge its share of the Delivery Commitments as they are issued during the open period.
The FLA and CE Amount apply to all the MPF Loans in a Master Commitment regardless of participation arrangements, so an MPF Bank’s share of credit losses is based on its respective participation interest in the entire Master Commitment. For example, assume a MPF Bank’s specified participation percentage was 25% under a $100 million Master Commitment and that no changes were made to the Master Commitment. The MPF Bank risk sharing percentage of credit losses would be 25%. In the case where an MPF Bank changes its initial percentage in the Master Commitment, the risk sharing percentage will also change. For example, if an MPF Bank were to acquire 25% of the first $50 million and 50% of the second $50 million of MPF Loans delivered under a Master Commitment, the MPF Bank would share in 37.5% of the credit losses in that $100 million Master Commitment, while it would receive principal and interest payments on the individual MPF Loans that remain outstanding in a given month, some in which it may own a 25% interest and the others in which it may own a 50% interest.
Effective May 27, 2004, the FHLBNY retained 100% of loans acquired from its PFIs for its own investment.
MPF Servicing
The PFI or its servicing affiliate generally retains the right and responsibility for servicing MPF Loans it delivers. The PFI is responsible for collecting the borrower’s monthly payments and otherwise dealing with the borrower with respect to the MPF Loan and the mortgaged property. Based on monthly reports the PFI is required to provide the master servicer, appropriate withdrawals are made from the PFI’s deposit account with the applicable MPF Bank. In some cases, the PFI has agreed to advance principal and interest payments on the scheduled remittance date when the borrower has failed to pay; provided that the collateral securing the MPF Loan is sufficient to reimburse the PFI for advanced amounts. The PFI recovers the advanced amounts either from future collections or upon the liquidation of the collateral securing the MPF Loans.
If an MPF Loan becomes delinquent, the PFI is required to contact the borrower to determine the cause of the delinquency and whether the borrower will be able to cure the default. The MPF Guides permit certain types of forbearance plans.
Upon any MPF Loan becoming 90 days or more delinquent, the master servicer monitors and reviews the PFI’s default management activities for that MPF Loan, including timeliness of notices to the mortgagor, forbearance proposals, property protection activities, and foreclosure referrals, all in accordance with the MPF Guides. Upon liquidation of any MPF Loan and submission of each realized loss calculation from the PFI, the master servicer reviews the realized loss calculation for conformity with the primary mortgage insurance requirements, if applicable, and conformity to the cost and timeliness standards of the MPF Guides. The master servicer disallows the reimbursement to the PFI of any servicing advances related to the PFI’s failure to perform in accordance with the MPF Guides. If there is a loss on a conventional MPF Loan, the loss is allocated to the Master Commitment and shared in accordance with the risk sharing structure for that particular Master Commitment. The servicer pays any gain on sale of real-estate owned property to the MPF Bank or, in the case of participation, to the MPF Banks based upon their respective interest in the MPF Loan. However, the amount of the gain is available to reduce subsequent losses incurred under the Master Commitment before such losses are allocated between the MPF Bank and the PFI.
The MPF Provider monitors the PFI’s compliance with MPF Program requirements throughout the servicing process, and will bring any material concerns to the attention of the MPF Bank. Minor lapses in servicing are charged to the PFI. Major lapses in servicing could result in a PFI’s servicing rights being terminated for cause and the servicing of the particular MPF Loans being transferred to a new, qualified servicing PFI. In addition, the MPF Guides require each PFI to maintain errors and omissions insurance and a fidelity bond and to provide an annual certification with respect to its insurance and its compliance with the MPF Program requirements.
Although PFIs or their servicing affiliates generally service the MPF Loans delivered by the PFI, certain PFIs choose to sell the servicing rights on a concurrent basis (servicing released) or in a bulk transfer to another PFI which is permitted with the consent of the MPF Banks involved. One PFI has been designated to acquire servicing under the MPF Program’s concurrent sale of servicing option. In addition, several PFIs have acquired servicing rights on a concurrent servicing released basis or bulk transfer basis without the direct support from the MPF Program. Two other PFIs have informed the MPF Provider that they are working to establish aggregation programs to acquire servicing rights under the MPF Program.
Credit Enhancement Structure
Overview
The MPF Bank and PFI share the risk of credit losses on MPF Loans by structuring potential losses on conventional MPF Loans into layers with respect to each Master Commitment. The first layer or portion of credit losses that an MPF Bank is potentially obligated to incur is determined based upon the MPF Product selected by the PFI and is referred to as the “First Loss Account” or “FLA”. The FLA functions as a tracking mechanism for determining the point after which the PFI, in its role as credit enhancer, would be required to cover losses. The FLA is not a cash collateral account, and does not give an MPF Bank any right or obligation to receive or pay cash or any other collateral. For MPF products with performance based credit enhancement fees (“CE Fees”), the MPF Bank may withhold CE Fees to recover losses at the FLA level essentially transferring a portion of the first layer risk of credit loss to the PFI.
The portion of credit losses that a PFI is potentially obligated to incur is referred to as its credit enhancement amount or “CE Amount”. The PFI’s CE Amount represents a direct liability to pay credit losses incurred with respect to a Master Commitment or the requirement of the PFI to obtain and pay for a supplemental mortgage guaranty insurance (“SMI”) policy insuring the MPF Bank for a portion of the credit losses arising from the Master Commitment. The PFI may procure SMI to cover losses equal to all or a portion of the CE Amount (except that losses generally classified as special hazard losses are covered by the PFI’s direct liability or the MPF Bank, not by SMI). The final CE Amount is determined once the Master Commitment is closed (i.e., when the maximum amount of MPF Loans are delivered or the expiration date has occurred). For a description of how the PFI’s CE Amount is determined, see “Credit Risk - MPF Program Credit Risk - Setting Credit Enhancement Levels.”
The PFI receives a CE Fee in exchange for providing the CE Amount which may be used to pay for SMI. CE Fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF Loans under the Master Commitment. The CE Fee and CE Amount may vary depending on the MPF product selected. CE Fees payable to a PFI as compensation for assuming credit risk are recorded as an offset to MPF Loan interest income when paid by the Bank. The Bank also pays performance CE Fees which are based on actual performance of the pool of MPF Loans in each Master Commitment. To the extent that losses in the current month exceed performance CE Fees accrued, the remaining losses may be recovered from withholding future performance CE Fees payable to the PFI.
Loss Allocation
Credit losses on conventional MPF Loans not absorbed by the borrower’s equity in the mortgaged property, property insurance or primary mortgage insurance are allocated between the MPF Bank and PFI as follows:
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First, to the MPF Bank, up to an agreed upon amount, called a “First Loss Account” or “FLA”.
Original MPF. The FLA starts out at zero on the day the first MPF Loan under a Master Commitment is purchased but increases monthly over the life of the Master Commitment at a rate that ranges from 0.03% to 0.05% (3 to 5 basis points) per annum based on the month end outstanding aggregate principal balance of the Master Commitment. The FLA is structured so that over time, it should cover expected losses on a Master Commitment, though losses early in the life of the Master Commitment could exceed the FLA and be charged in part to the PFI’s CE Amount.
MPF 100 and MPF 125. The FLA is equal to 1.00% (100 basis points) of the aggregate principal balance of the MPF Loans funded under the Master Commitment. Once the Master Commitment is fully funded, the FLA is expected to cover expected losses on that Master Commitment, although the MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance CE Fees payable to the PFI.
MPF Plus. The FLA is equal to an agreed upon number of basis points of the aggregate principal balance of the MPF Loans funded under the Master Commitment that is not less than the amount of expected losses on the Master Commitment. Once the Master Commitment is fully funded, the FLA is expected to cover expected losses on that Master Commitment, although the MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance CE Fees payable to the PFI.
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Second, to the PFI under its credit enhancement obligation, losses for each Master Commitment in excess of the FLA, if any, up to the CE Amount. The CE Amount may consist of a direct liability of the PFI to pay credit losses up to a specified amount, a contractual obligation of the PFI to provide SMI or a combination of both. For a description of the CE Amount calculation see “MPF Program - Setting Credit Enhancement Levels.”
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Third, any remaining unallocated losses are absorbed by the MPF Bank.
With respect to participation interests, MPF Loan losses allocable to the MPF Bank are allocated amongst the participating MPF Banks pro ratably based upon their respective participation interests in the related Master Commitment. For a description of the risk sharing by participant MPF Banks see “MPF Program - MPF Loan Participations.”
Setting Credit Enhancement Levels
Finance Board regulations require that MPF Loans be sufficiently credit enhanced so that our risk of loss is limited to the losses of an investor in an “AA” rated mortgage-backed security, unless the Bank maintains additional retained earnings in addition to a general allowance for losses. The MPF Provider also analyzes the risk characteristics of each MPF Loan (as provided by the PFI) using S&P’s LEVELS® model in order to determine the required CE Amount for a loan or group of loans to be funded or acquired by an MPF Bank (“MPF Program Methodology”). The PFI’s CE Amount (including the SMI policy for MPF Plus) is calculated using the MPF Program Methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage-backed security and our initial FLA exposure (which is zero for the Original MPF product). The FHLBNY determines the FLA exposure by taking the initial FLA and reducing it by the estimated value of any performance based CE Fees that would be payable to the PFI.
For MPF Plus, the PFI is required to provide an SMI policy covering the MPF Loans in the Master Commitment and having a deductible initially equal to the FLA. Depending upon the amount of the SMI policy (determined in part by the amount of the CE Fees paid to the PFI), the PFI may or may not have any direct liability on the CE Amount.
The Bank will recalculate the estimated credit rating of a Master Commitment if there is evidence of a decline in credit quality of the related MPF Loans.
Credit Enhancement Fees
The structure of the CE Fee payable to the PFI depends upon the product type selected. For Original MPF, the PFI is paid a monthly CE Fee between 0.09% and 0.11% (9 to 11 basis points) per annum and paid monthly based on the aggregate outstanding principal balance of the MPF Loans in the Master Commitment.
For MPF 100 and MPF 125, the PFI is paid a monthly CE Fee between 0.07% and 0.10% (7 and 10 basis points) per annum and paid monthly on the aggregate outstanding principal balance of the MPF Loans in the Master Commitment. The PFI’s monthly CE Fee is performance based in that it is reduced by losses charged to the FLA. For MPF 100, the CE Fee is fixed for the first two or three years of a Master Commitment and thereafter becomes performance based. For MPF 125, the CE Fee is performance based for the entire life of the Master Commitment.
For MPF Plus, the performance based portion of the CE Fee is typically between 0.06% and 0.07% (6 and 7 basis points) per annum and paid monthly on the aggregate outstanding balance of the MPF Loans in the Master Commitment. The performance based CE Fee is reduced by losses charged to the FLA and is paid one year after accrued based on monthly outstanding balances. The fixed portion of the CE Fee is typically 0.07% (7 basis points) per annum and paid monthly on the aggregate outstanding principal balance of the MPF Loans in the Master Commitment. The lower performance CE Fee is for Master Commitments without a direct PFI CE amount.
Only MPF Government Loans are eligible for sale under the MPF Government Product. The PFI provides and maintains insurance or a guaranty from the applicable federal agency (i.e., the FHA, VA, RHS or HUD) for MPF Government Loans and the PFI is responsible for compliance with all federal agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted MPF Government Loans. The PFI is paid a monthly government loan fee equal to 0.02% (2 basis points) per annum based on the month end outstanding aggregate principal balance of the Master Commitment in addition to the customary 0.44% (44 basis points) per annum servicing fee that is retained by the PFI on a monthly basis based on the outstanding aggregate principal balance of the MPF Loans. In addition, for Master Commitments issued prior to [January 22, 2007], the PFI is paid a monthly government loan fee equal to 0.02% (2 basis points) per annum based on the month end outstanding aggregate balance of the Master Commitment. Only PFIs that are licensed or qualified to originate and service Government loans by the applicable federal agency or agencies and that maintain a mortgage loan delinquency ratio that is acceptable to the Bank and that is comparable to the national average and/or regional delinquency rates as published by the Mortgage Bankers Association are eligible to sell and service MPF Government Loans under the MPF Program.
Credit Risk Exposure on MPF Loans
The Bank’s credit risk on MPF Loans is the potential for financial loss due to borrower default and depreciation in the value of the real estate collateral securing the MPF Loan, offset by the PFI’s credit enhancement protection. Under the MPF Program, the PFI’s credit enhancement protection (“CEP Amount”) may take the form of a contingent performance based CE Fee whereby such fees are reduced by losses up to a certain amount arising under the Master Commitment and the CE Amount (which represents a direct liability to pay credit losses incurred with respect to that Master Commitment or may require the PFI to obtain and pay for an SMI policy insuring the MPF Bank for a portion of the credit losses arising from the Master Commitment). Under the AMA Regulation, any portion of the CE Amount that is a PFI’s direct liability must be collateralized by the PFI in the same way that advances are collateralized. The PFI Agreement provides that the PFI’s obligations under the PFI Agreement are secured along with other obligations of the PFI under its regular advances agreement and further, that the FHLBNY may request additional collateral to secure the PFI’s obligations.
The Bank also faces credit risk of loss on MPF Loans to the extent such losses are not recoverable from the PFI either directly or indirectly through performance based CE Fees, or from an SMI insurer, as applicable. However, because the typical MPF Loan to value ratio is less than 100% and PMI covers loan to value ratios in excess of 80%, a significant decline in value of the underlying property would have to occur before the Bank is exposed to credit losses.
Correspondent Banking Services
The FHLBNY offers its members an array of correspondent banking services, including depository services, wire transfers, settlement services, and safekeeping services. Depository services include processing of customer transactions in “Overnight Investment Accounts”, the interest-bearing demand deposit account each customer has with the FHLBNY. All customer-related transactions (e.g., deposits, Federal Reserve Bank settlements, advances, securities transactions, and wires) are posted to these accounts each business day. Wire transfers include processing of incoming and outgoing domestic and foreign wire transfers, including third-party transfers. Settlement services include automated clearinghouse and other transactions received through the FHLBNY’s accounts at the Federal Reserve Bank as correspondent for its members and passed through to customers’ Overnight Investment Accounts at the FHLBNY. Through a third party, the FHLBNY offers customers a range of securities custodial services, such as settlement of book entry (electronically held) and physical securities. The FHLBNY encourages members to access these products through 1Linksm, an Internet-based delivery system developed as a proprietary service by the FHLBNY. Members access the 1Link system to obtain account activity information or process wire transfers, book transfers, security safekeeping and advance transactions.
Affordable Housing Program and Other Mission Related Programs
Federal Housing Finance Board regulation Part 952.5 (a) (Community Investment Cash Advance Programs) states in general that each FHLBank shall establish an Affordable Housing Program in accordance with part 951, and a Community Investment Program. As more fully discussed under “Tax Status”, annually, the 12 FHLBanks, including the FHLBNY, must set aside for the Affordable Housing Program the greater of $100 million or 10 percent of regulatory defined net income.
The FHLBank may also offer a Rural Development Advance program, an Urban Development Advance program, and other Community Investment Cash Advance programs.
Affordable Housing Program (“AHP”). The FHLBNY meets this requirement by allocating 10 percent of its previous year’s net income to its Affordable Housing Program each year. The Affordable Housing Program helps members of the FHLBNY meet their Community Reinvestment Act responsibilities. The program gives members access to cash grants and subsidized, low-cost funding to create affordable rental and home ownership opportunities, including first-time homebuyer programs. Within each year’s AHP allocation, the FHLBNY has established a set-aside program for first-time homebuyers called the First Home Clubsm. A total of 15% of the AHP allocation for 2006 has been set aside for this program. Household income qualifications for the First Home Club are the same as for the competitive AHP. Qualifying households can receive matched funds at a 3:1 ratio, up to $5,000, as closing cost and/or down payment assistance. Households are also required to attend counseling seminars that address personal budgeting and home ownership skills training.
Other Mission Related Activities. The Community Investment Program (“CIP”), Rural Development Advance (“RDA”), and Urban Development Advance (“UDA”) are community-lending programs that provide additional support to members in their affordable housing and economic development lending activities. These community-lending programs support affordable housing and economic development activity within low- and moderate-income neighborhoods and other activities that benefit low- and moderate-income households. Through the Community Investment Program, Rural Development Advance, and Urban Development Advance programs, the FHLBNY provides reduced-interest-rate advances to members for lending activity that meets the program requirements. The FHLBNY also provides letters of credit (“Letters of Credit”) in support of projects that meet the CIP, Rural Development Advance, and Urban Development Advance program requirements. These project-eligible Letters of Credit are offered at reduced fees. Providing community lending programs (Community Investment Project, Rural Development Advance, Urban Development Advance, and Letters of Credit) at advantaged pricing that is discounted from the FHLBNY’s market interest rates and fees represents an additional income allocation in support of affordable housing and community economic development efforts. In addition, overhead costs and administrative expenses associated with the implementation of the FHLBNY’s Affordable Housing and community lending programs are absorbed as general operating expenses and are not charged back to the AHP allocation. The foregone interest and fee income, as well as the administrative and operating costs are above and beyond the annual income contribution to the AHP Loans offered under these programs are accounted for on their contractual terms consistent with standard accounting practices and no separate benefits are recorded.
Investments
The FHLBNY maintains portfolios of investments to provide additional earnings and for liquidity purposes. Investment income also bolsters the FHLBNY’s capacity to fund Affordable Housing Program projects, to cover operating expenditures, and to satisfy the Resolution Funding Corporation (REFCORP) assessment. To help ensure the availability of funds to meet member credit needs, the FHLBNY maintains a portfolio of short-term investments issued by highly-rated financial institutions. The investments include overnight Federal funds, term Federal funds, interest-bearing deposits, and certificates of deposit. The FHLBNY further enhances interest income by maintaining a long-term investment portfolio. This portfolio may include: securities issued by the U.S. government and U.S. government agencies, as well as mortgage-backed and residential asset-backed securities issued by government-sponsored mortgage enterprises or those carrying the highest credit ratings from Moody’s Investors Service (“Moody’s”) or Standard & Poor’s. Investments in housing-related obligations of state and local governments and their housing finance agencies are required to carry ratings of AA or higher at time of acquisition. Housing-related obligations help to liquefy mortgages that finance low- and moderate-income housing. The long-term investment portfolio generally provides the FHLBNY with higher returns than those available in the short-term money markets.
The FHLBNY is prohibited from investing in certain types of securities, including:
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Instruments such as common stock that represent ownership in an entity. Exceptions include stock in small business investment companies and certain investments targeted at low-income persons or communities;
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Instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks; and
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Non-investment-grade debt instruments. Exceptions include certain investments targeted at low-income persons or communities and instruments that were downgraded after purchase.
The FHLBNY also limits the book-value of the FHLBNY’s investments in mortgage-backed and residential asset-backed securities, collateralized mortgage obligations, Real Estate Mortgage Investment Conduits, and other eligible asset-backed securities to not exceed 300% of the Bank’s previous month-end capital on the day it purchases the securities. At the time of purchase, all securities purchased must carry the highest rating assigned by Moody’s or Standard & Poor’s.
The FHLBNY is prohibited from purchasing:
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Interest-only or principal-only stripped mortgage-backed securities;
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Residual-interest or interest-accrual classes of collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”);
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Fixed-rate or floating-rate mortgage-backed securities that, on the trade date are at rates equal to their contractual caps and whose average lives vary by more than six years under an assumed instantaneous interest rate change of 300 basis points; and
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Non-U.S. dollar denominated securities.
Debt Financing - Consolidated Obligations
The primary source of funds for the FHLBNY is the sale of debt securities, known as consolidated obligations, in the U.S. and Global capital markets. Consolidated obligations are the joint and several obligations of the FHLBanks, backed only by the financial resources of the twelve FHLBanks. Consolidated obligations are not obligations of the United States, and the United States does not guarantee them. Moody’s has rated the consolidated obligations Aaa/P-1, and Standard & Poor’s has rated them AAA/A-1+.
At December 31, 2006 and 2005, the aggregate par amounts of consolidated obligations outstanding for all 12 FHLBanks were $951.9 billion and $937.5 billion. In comparison, the par amounts of the FHLBNY’s consolidated obligation bonds outstanding at December 31, 2006 and 2005 were $62.2 billion and $57.1 billion. Principal amounts of discount notes outstanding at December 31, 2006 and 2005 were $12.3 billion and $20.7 billion.
Although the FHLBNY is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the following rules apply: the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock from, any member or non-member stockholder until the Finance Board, the regulator of the FHLBanks, approves the FHLBNY’s consolidated obligation payment plan or other remedy and until the FHLBNY pays all the interest or principal currently due under all its consolidated obligations. The Finance Board, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations.
To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to make the payment, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis determined by the Finance Board.
Finance Board regulations 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 face amount of consolidated obligations outstanding:
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Mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States;
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Investments described in section 16(a) of the FHLBank Act, including securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and
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Other securities that are rated Aaa by Moody’s or AAA by Standard & Poor’s.
The FHLBanks issue consolidated obligations through the Office of Finance (“OF”, or the “Office of Finance”), which has authority to issue joint and several debt on behalf of the FHLBanks. Consolidated obligations are distributed through dealers selected by the OF, using various methods including competitive auction and negotiations with individual or syndicates of underwriters. Some debt issuance is in response to specific inquiries from underwriters. Many consolidated obligations are issued with the FHLBank concurrently entering into derivatives agreements, such as interest rate swaps. To facilitate issuance, the Office of Finance may coordinate communication between underwriters, individual FHLBanks, and financial institutions executing derivative agreements with the FHLBanks.
Issuance volume is not concentrated with any particular underwriter.
The Office of Finance may reject the FHLBNY’s request, and the requests of other FHLBanks, to raise funds through the issuance of consolidated obligations on particular terms and conditions if the Office of Finance determines that its action is consistent with its Finance Board’s mandated policies that require consolidated obligations to be issued efficiently and at the lowest all-in cost of funds over time. The FHLBNY has never been denied access under this policy for all periods reported.
The Office of Finance also services all outstanding debt; provides the FHLBanks with rating information received from Nationally Recognized Statistical Rating Organizations (“NRSROs”) for counterparties to which the FHLBanks have unsecured credit exposure; serves as a source of information for the FHLBanks on capital market developments; administers the Resolution Funding Corporation and the Financing Corporation; and manages the FHLBanks’ relationship with the rating agencies with respect to the consolidated obligations.
Consolidated obligation Bonds. Consolidated obligation bonds satisfy the FHLBNY’s long-term funding requirements. Typically, the maturity of these securities ranges from one to ten years, but the maturity is not subject to any statutory or regulatory limit. In 2006, the Office of Finance also issued 30-year bonds on behalf of certain FHLBanks. Consolidated obligation bonds can be fixed or adjustable rate and callable or non-callable. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with underwriters approved by the Office of Finance or members of a selling group.
The FHLBanks also conduct the TAP Issue Program for fixed-rate, non-callable bonds. This program combines bond issues with specific maturities by reopening these issues daily during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater secondary market liquidity.
The FHLBanks also participate in the “Global Issuances Program.” The Global Issuance Program commenced in 2002 through the Office of Finance with the objective of providing funding to FHLBanks at lower interest costs than consolidated bonds issued through the TAP program because issuances occur less frequently, are larger in size and are placed by dealers to investors via a syndication process.
Consolidated obligation Discount Notes. Consolidated obligation discount notes provide the FHLBNY with short-term funds for advances to members. These notes have maturities up to one year and are offered daily through a dealer-selling group. The notes are sold at a discount from their face amount and mature at par.
On a daily basis, FHLBanks may request that specific amounts of discount notes with specific maturity dates be offered by the Office of Finance for sale through the dealer-selling group. One or more other FHLBanks may also request that amounts of discount notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when dealers submit orders for the specific discount notes offered for sale. The FHLBanks receive funding based on the time of the request, the rate requested for issuance, the trade date, the settlement date and the maturity date. If all terms of the request are the same except for the time of the request, then the FHLBank may receive from zero to 100 percent of the proceeds of the sale of the discount notes issued depending on the time of the request, the maximum costs the FHLBank or other FHLBanks, if any, participating in the same issuance of discount notes are willing to pay for the discount notes, and the amount of orders for the discount notes submitted by dealers.
Twice weekly, FHLBanks may also request that specific amounts of discount notes with fixed maturity dates ranging from four to 26 weeks be offered by the Office of Finance through competitive auction conducted with securities dealers in the discount note selling group. One or more of the FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. The FHLBanks receive funding based on their requests at a weighted average rate of the winning bids from the dealers. If the bids submitted are less than the total of the FHLBanks’ requests, an FHLBank receives funding based on that FHLBank’s capital relative to the capital of other FHLBanks offering discount notes.
Regardless of the method of issuance, the Office of Finance can only issue consolidated obligations when an FHLBank provides a request for and agrees to accept the funds.
Deposits
The FHLBank Act allows the FHLBNY to accept deposits from its members, and other FHLBanks and government instrumentalities. For the FHLBNY, deposits are a source of funding. For members, deposits are a low-risk earning asset that may satisfy their regulatory liquidity requirements. The FHLBNY offers several types of deposit programs to its members, including demand and term deposits.
Retained Earnings and Dividends
The FHLBNY’s Board of Directors adopted the Retained Earnings and Dividend Policy (“Policy”) in order to: (1) establish a process to assess the adequacy of retained earnings in view of the Bank’s assessment of the financial, economic and business risks inherent in its operations; (2) establish the priority of contributions to retained earnings relative to other distributions of income; (3) establish a target level of retained earnings and a timeline to achieve the target; and (4) establish a process to ensure maintenance of appropriate levels of retained earnings. The objective of the Policy is to preserve the value of the members’ investment in the Bank.
The FHLBNY may pay dividends from retained earnings and current income. The FHLBNY’s Board of Directors may declare and pay dividends in either cash or capital stock. Dividends and the Policy of the FHLBNY are subject to Finance Board regulations and policies.
To preserve the value of the member’s investments, the level of retained earnings should be sufficient to: (1) protect the members’ paid in capital from losses related to market, credit, operational, and other risks (including legal and accounting) within a defined confidence level under normal operating conditions; and (2) provide members with a predictable dividend stream. The FHLBNY’s level of retained earnings should provide management with a high degree of confidence that reasonably foreseeable losses will not impair paid in capital thereby preserving the par value of the stock, and to supplement dividends when current earnings are low or losses occur.
As of December 31, 2006 and 2005, management determined that the amount of retained earnings necessary to achieve the objectives based on the risk profile of the FHLBNY’s balance sheet was $186.3 million and $202.4 million respectively. Actual unrestricted retained earnings as of December 31, 2006 and 2005 were $368.7 million and $291.4 million, respectively. Management expects future dividend payout ratios to range from 80% to 100% of net income.
The Policy establishes dividend payout after determining a retained earnings target amount, based on an assessment methodology approved by the Board of Directors, that reasonably identifies and quantifies all material risks faced by the FHLBNY. The final dividend payout is subject to Board approval and the applicable Finance Board regulations.
The following table summarizes the impact of dividends on the FHLBNY’s retained earnings for the years ended December 31, 2006, 2005, and 2004 (in thousands):
*Dividends are not accrued at quarter end; they are declared and paid in the month following the end of the quarter.
Competition
Demand for advances is affected by, among other things, the availability to members of other sources of liquidity, including deposits, and the cost of those other sources. Customer deposits are the preferred funding source for our members, with wholesale funding as a secondary source. The FHLBNY competes with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include investment banking firms and commercial banks. Smaller members may have access to alternative wholesale funding sources through lines of credit and wholesale CD programs, while larger members may have access to these alternatives in addition to sales of securities under agreements to repurchase. Large members may also have independent access to the national and global credit markets. The availability of alternative funding sources can vary as a result of market conditions, members’ creditworthiness, and availability of collateral and other factors. In aggregate, FHLBNY advances make up about 33% of the members’ wholesale funding. This indicative “market share” measure has fallen from over 50% in the last two years as the FHLBNY has increased its targeted spread on advances in order to enhance dividend capacity and speed the growth of retained earnings.
The FHLBNY also competes for funds raised through the issuance of unsecured debt in the national and global debt markets. Competitors include Fannie Mae, Freddie Mac and other Government Sponsored Enterprises, as well as corporate, sovereign, and supranational entities. Increases in the supply of competing debt products could, in the absence of increases in demand, result in higher debt costs or lesser amounts of debt issued at the same cost than otherwise would be the case. In addition, the availability and the cost of funds can be adversely affected by regulatory initiatives that tend to reduce certain depository institutions’ investments in debt instruments that have greater price volatility or interest-rate sensitivity than fixed-rate instruments of the same maturity. Although the available supply of funds has kept pace with the funding needs of the FHLBNY’s members as expressed through FHLBNY debt issuance, there can be no assurance that this will continue to be the case indefinitely.
The FHLBNY also competes for the purchase of mortgage loans held for investment. For single-family products, the FHLBNY competes primarily with the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The FHLBNY competes primarily on the basis of price, products, structures, and services offered.
In addition, the sale of callable debt and the simultaneous execution of callable derivatives that mirror the debt have been an important source of competitively priced funding for the FHLBNY. Therefore, the availability of markets for callable debt and derivatives may be an important determinant of the FHLBNY’s relative cost of funds. There is considerable competition among high-credit-quality issuers in the markets for callable debt and for derivatives. There can be no assurance that the current breadth and depth of these markets will be sustained.
Competition within the FHLBanks is limited. A holding company with multiple banking charters may operate in multiple Federal Home Loan Bank districts. If the member has a centralized treasury function, it is possible that there will be competition for advances. A limited number of financial institutions who are members of the FHLBNY may meet this description. In addition, a limited number of members of the FHLBNY are part of a bank holding company, and could therefore be affiliated to members of another FHLBank. The Bank does not believe that the amount of advances borrowed, or the amount of capital stock held is material in the context of its competitive environment. Certain large financial institutions, operating in the FHLBNY’s district, may borrow unsecured Federal funds from other Federal Home Loan Banks. The FHLBNY is not prohibited by regulation from purchasing short-term investments from its members. However, the FHLBNY’s current practice is not to permit members to borrow unsecured funds from the FHLBNY and in compliance with the current practice; the FHLBNY does not compete for member borrowing needs of unsecured Federal funds. An indirect source of competition is the acquisition of a member bank by a member of another FHLBank. Under Finance Board regulations, the acquired member is no longer a member of the FHLBNY and cannot borrow additional funds from the FHLBNY. In addition, the non-member may not renew advances when they mature. Former members, who by virtue of being acquired attained non-member status, had outstanding advances aggregating $1.8 billion and $401.9 million at December 31, 2006 and December 31, 2005, respectively. Such non-members held capital stock, which was reported as mandatorily redeemable capital stock (a liability), totaling $109.9 million and $18.1 million at December 31, 2006 and 2005, respectively.
Oversight, Audits, and Examinations
The FHLBNY is supervised and regulated by the Federal Housing Finance Board (“Finance Board”), which is an independent agency in the executive branch of the U.S. government. The Finance Board ensures that the FHLBNY carries out its housing and community development mission, remains adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner.
The Board of Directors of the Finance Board has five members. Four are appointed by the President of the United States, with the advice and consent of the Senate, to serve seven-year terms. The fifth member is the Secretary of the Department of Housing and Urban Development or the Secretary’s designee. The Finance Board is supported by assessments from the twelve FHLBanks, with no tax dollars or other appropriations supporting the operations of the Finance Board or the FHLBanks. To evaluate the safety and soundness of the FHLBNY, the Finance Board conducts annual and periodic on-site examinations of the Bank, as well as periodic off-site reviews. Additionally, the Finance Board requires each FHLBank to submit monthly financial information on their condition and results of operations.
The Government Corporation Control Act provides that, before a government corporation may issue and offer obligations to the public, the Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the way and time issued; and the selling price. The U.S. Department of the Treasury receives the Finance Board’s annual report to Congress, monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.
The FHLBNY has an internal audit department; the FHLBNY’s Board of Directors has an Audit Committee; and an independent registered public accounting firm audits the annual financial statements of the FHLBNY. The independent registered public accounting firm conducts these audits following auditing standards established by the Public Company Accounting Oversight Board (United States). The FHLBanks, the Finance Board, and Congress all receive the audit reports. The FHLBNY must also submit annual management reports to Congress, the President, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition; a statement of operations; a statement of cash flows; a statement of internal accounting and administrative control systems; and the report of the independent registered public accounting firm on the financial statements.
The Comptroller General has authority under the FHLBank Act to audit or examine the Finance Board and the FHLBanks, including the FHLBNY, and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the FHLBNY’s financial statements conducted by a registered independent public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget and the FHLBNY. The Comptroller General may also conduct his or her own audit of any financial statements of the FHLBNY.
Personnel
As of December 31, 2006 the FHLBNY had 225 full-time and 7 part-time employees. At December 31, 2005, there were 212 full-time and 9 part-time employees The employees are not represented by a collective bargaining unit, and the FHLBNY considers its relationship with its employees to be good.
Tax Status
Resolution Funding Corporation (“REFCORP”) Assessments. Although the FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax, it is required to make payments to REFCORP.
REFCORP was established by Act of Congress in 1989 to help facilitate the U.S. government’s bailout of failed financial institutions. The REFCORP assessments are used by the Treasury to pay a portion of the annual interest expense on long-term obligations issued to finance a portion of the cost of the bailout. Principal on those long-term obligations will be paid from a segregated account containing zero-coupon U.S. government obligations, which were purchased using funds that Congress directed the FHLBanks to provide for that purpose.
Each FHLBank is required to make payments to REFCORP until the total amount of payments actually made is equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030. REFCORP assessment is 20 percent of annual GAAP net income after payment of AHP assessments; see section immediately following this discussion that explains the impact of AHP assessment and interest payments due on mandatorily redeemable capital stock).
The maturity date of the REFCORP obligation may be extended beyond April 15, 2030 if such extension is necessary to ensure that the value of the aggregate amounts paid by the FHLBanks exactly equals a $300 million annual annuity. Any payment beyond April 15, 2030 will be paid to the Department of Treasury.
The REFCORP has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLBank provides their net income before AHP and REFCORP to the REFCORP, who then performs the calculations for each quarter end. The Finance Board, in consultation with the Secretary of the Treasury, selects the appropriate discounting factors to be used in this annuity calculation. The Finance Board will shorten or lengthen the period during which the FHLBanks must make payments to REFCORP depending on actual payments relative to the referenced annuity.
The REFCORP assessment of the FHLBanks was $647 million (cash payment $684) for the year 2006. As a result of the REFCORP payments of $684 million made by the FHLBanks in 2006, the REFCORP projects that the FHLBanks will continue to make quarterly payments through to July 15, 2015. This compares to a projected date of October 15, 2017, at December 31, 2005, based on REFCORP payments made through 2005.
Under Finance Board regulation, the amount by which the REFCORP payment for any quarter exceeds $75 million, the benchmark payment, the excess is used to “defease” all or a portion of the most-distant remaining quarterly benchmark payment. The REFCORP assessment paid for the fourth quarter of 2006 was $162 million (cash payment of $162 million), and exceeded the $75 million quarterly benchmark payment for the quarter by $87 million, which amount is used to defease future quarterly payments.
The amount defeased is the calculated value of a hypothetical investment of $87 million in zero-coupon Treasury bonds. Based on this calculation, future payments are projected to be defeased as follows: (1) $54 million portion of the $75 million benchmark payment due on January 15, 2016. (2) All of the $75 million due on October 15, 2015, and (3) $3 million of the $75 million due on July 15, 2015. The defeased benchmark payments (or portions thereof) can be reinstated if future actual REFCORP payments fall short of the $75 million benchmark in any quarter.
The cumulative amount to be paid to REFCORP by the FHLBNY is not determinable at this time because it depends on the future earnings of all FHLBanks and interest rates. If the FHLBNY experienced a net loss during a quarter, but still had net income for the year, the Bank’s obligation to the REFCORP would be calculated based on the Bank’s year-to-date net income. The FHLBNY would be entitled to a refund of amounts paid for the full year that were in excess of its calculated annual obligation. If the Bank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the REFCORP for the year.
Affordable Housing Program Assessments. Section 10(j) of the FHLBank Act requires each FHLBank to establish an Affordable Housing Program (or “AHP”). Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of regulatory net income. Regulatory net income is defined as GAAP net income before interest expense related to mandatorily redeemable capital stock under Statement of Financial Accounting Standard No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“SFAS 150”) and the assessment for AHP, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Board. The Affordable Housing Program and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBNY accrues this expense monthly based on its income.
The FHLBNY charges the amount set aside for Affordable Housing Program to income and recognizes it as a liability. In periods where the FHLBNY’s regulatory income before Affordable Housing Program and REFCORP is zero or less, the amount of AHP liability is equal to zero, barring application of the following. The Bank relieves the AHP liability as members use subsidies. If the result of the aggregate 10 percent calculation described above is less than $100 million for all 12 FHLBanks, then the Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before Affordable Housing Program and REFCORP to the sum of the income before Affordable Housing Program and REFCORP of the 12 FHLBanks. There was no shortfall in the years ended 2006, 2005 and 2004.
ITEM 1A.
ITEM 1A. RISK FACTORS
The following risk factors and all of the other information set forth in this Annual Report on Form 10-K, including the financial statements and accompanying notes should be considered. If any of the events or developments described in this section were to occur, the business, financial condition or results of operations could be adversely affected.
The FHLBNY’s funding depends on its ability to access the capital markets. The FHLBNY’s primary source of funds is the sale of consolidated obligations in the capital markets. The FHLBNY’s ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, which are beyond the FHLBNY’s control. Accordingly, the FHLBNY may not be able to obtain funding on acceptable terms, if at all. If the FHLBNY cannot access funding when needed on acceptable terms, their ability to support and continue their operations could be adversely affected, which could negatively affect their financial condition and results of operations.
Changes in the credit ratings on FHLBank System consolidated obligations may adversely affect the cost of consolidated obligations, which could adversely affect FHLBNY’s financial condition and results of operations. FHLBank System consolidated obligations have been assigned Aaa/P-1 and AAA/A-1+ ratings by Moody’s and S&P. Rating agencies may from time to time change a rating or issue negative reports, which may adversely affect the cost of funds of one or more FHLBanks, including the FHLBNY, and the ability to issue consolidated obligations on acceptable terms. A higher cost of funds or the impairment of the ability to issue consolidated obligations on acceptable terms could also adversely affect the FHLBNY’s financial condition and results of operations.
The FHLBNY relies upon derivative instrument transactions to reduce their interest-rate risk, and changes in their credit ratings may adversely affect their ability to enter into derivative instrument transactions on acceptable terms. The FHLBNY’s financial strategies are highly dependent on its ability to enter into derivative instrument transactions on acceptable terms to reduce its interest-rate risk. Rating agencies may from time to time change a rating or issue negative reports, which may adversely affect the FHLBNY’s ability to enter into derivative instrument transactions with acceptable parties on satisfactory terms in the quantities necessary to manage its interest-rate risk on consolidated obligations. This could negatively affect the FHLBNY’s financial condition and results of operations.
The FHLBanks are governed by federal laws and regulations, which could change or be applied in a manner detrimental to the FHLBNY’s operations. The FHLBanks are government-sponsored enterprises (GSEs), organized under the authority of the FHLBank Act, and, as such, are governed by federal laws and regulations of the Finance Board, an independent agency in the executive branch of the federal government. From time to time, Congress has amended the FHLBank Act in ways that have significantly affected the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the Finance Board could have a negative effect on the FHLBanks’ ability to conduct business or their costs of doing business.
Changes in regulatory or statutory requirements or in their application could result in, among other things, changes in the FHLBNY’s cost of funds, retained earnings requirements, debt issuance, dividend payment limits, form of dividend payments, capital redemption and repurchase limits, permissible business activities, the size, scope, or nature of the FHLBNY’s lending, investment, or mortgage purchase program activities, or increased compliance costs. Changes that restrict dividend payments, the growth of the FHLBNY’s current business, or the creation of new products or services could negatively affect the FHLBNY’s results of operations and financial condition. Further, the regulatory environment affecting members could be changed in a manner that would negatively affect their ability to acquire or own an FHLBNY’s capital stock or take advantage of an FHLBNY’s products and services.
Changes in the regulation of GSEs or the FHLBanks’ status as GSEs may adversely affect the FHLBNY’s business activities, future advance balances, and the cost of debt issuance. Many GSEs, such as Fannie Mae, Freddie Mac, and the FHLBank System, have grown significantly in recent years. As a result of this growth, these GSEs have actively issued debt securities to fund their operations. In addition, negative accounting and other announcements by Fannie Mae and Freddie Mac have created pressure on debt pricing, as investors have perceived their debt instruments as bearing increased risk. Restatements and related announcements by the FHLBanks may contribute to this pressure on FHLBank debt pricing.
As a result of these factors, the FHLBank System may have to pay a higher rate of interest on consolidated obligations to make them attractive to investors. If the FHLBNY maintains its existing pricing on advances, the resulting increase in the cost of issuing consolidated obligations could cause the FHLBNY’s advances to be less profitable and reduce their net interest margins (the difference between the interest rate received on advances and the interest rate paid on consolidated obligations). If, in response to this decrease in net interest margin, the FHLBNY changes the pricing of its advances, the advances may no longer be attractive to its members, and outstanding advances balances may decrease. In either case, the increased cost of issuing consolidated obligations could negatively affect the FHLBNY’s financial condition and results of operations.
Changes in interest rates could significantly affect the FHLBNY’s financial condition, and results of operations. The FHLBNY realizes income primarily from the spread between interest earned on its outstanding advances, investments and shareholders’ capital, and interest paid on its consolidated obligations and other liabilities. Although the FHLBNY uses various methods and procedures to monitor and manage its exposure to changes in interest rates, the FHLBNY may experience instances when either its interest-bearing liabilities will be more sensitive to changes in interest rates or its interest-earning assets, or vice versa. In either case, interest-rate movements contrary to the FHLBNY’s position could negatively affect its financial condition and results of operations. Moreover, the effect of changes in interest rates can be exacerbated by prepayment and extension risk, which is the risk that mortgage-related assets will be refinanced by the mortgagor in low interest-rate environments or will remain outstanding longer then expected at below-market yields when interest rates increase.
A loss or change of business activities with large members could adversely affect the FHLBNY’s results of operations and financial condition. Simultaneous withdrawal of large members from the FHLBNY’s membership could result in a reduction of the FHLBNY’s total combined assets, capital, and net income. If one or more of the FHLBNY’s large members were to prepay its advances or repay the advances as they came due, and no other advances were made to replace them, it could also result in a reduction of the FHLBNY’s total combined assets, capital, and net income. The timing and magnitude of the effect of a reduction in the amount of advances would depend on a number of factors, including:
•
- the amount and the period over which the advances were prepaid or repaid;
•
- the amount and timing of any corresponding decreases in activity-based capital;
•
- the profitability of the advances;
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- the size and profitability of the FHLBNY’s short- and long-term investments; and
•
- the extent to which consolidated obligations matured as the advances were prepaid or repaid.
The FHLBNY’s financial condition and results of operations could be adversely affected by FHLBNY’s exposure to credit risk. The FHLBNY’s has exposure to credit risk in that the market value of an obligation may decline as a result of deterioration in the creditworthiness of the obligor or the credit quality of a security instrument. In addition, the FHLBNY assumes secured and unsecured credit risk exposure associated with the risk that a borrower or counterparty could default and the FHLBNY could suffer a loss if it could not fully recover amounts owed to it on a timely basis. A credit loss, if material, could have an adverse effect on the FHLBNY’s financial condition and results of operations, and the value of FHLBank membership.
The FHLBNY may not be able to meet its obligations as they come due or meet the credit and liquidity needs of its members in a timely and cost-effective manner. The FHLBNY seeks to be in a position to meet their members’ credit and liquidity needs and pay their obligations without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. In addition, the FHLBNY maintains a contingency liquidity plan designed to enable it to meet its obligations and the liquidity needs of members in the event of operational disruptions or short-term disruptions in the capital markets. The FHLBNY’s ability to manage its liquidity position or its contingency liquidity plan may not enable it to meet its obligations and the credit and liquidity needs of its members, which could have an adverse effect on the FHLBNY’s financial condition and results of operations.
The FHLBNY faces competition for advances, loan purchases, and access to funding, which could adversely affect its businesses and the FHLBNY’s efforts to make advance pricing attractive to its members may affect earnings. The FHLBNY’s primary business is making advances to its members, and the Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks and, in certain circumstances, and other FHLBanks. The FHLBNY’s members have access to alternative funding sources, which may offer more favorable terms than the FHLBNY on its advances, including more flexible credit or collateral standards. The FHLBNY may make changes in policies, programs, and agreements affecting members from time to time, including, without limitation, policies, programs, and agreements affecting the availability of and conditions for access to advances and other credit products, the MPF Program, the AHP, and other programs, products, and services, could cause members to obtain financing from alternative sources. In addition, many competitors are not subject to the same regulations, which may enable those competitors to offer products and terms that the FHLBNY is not able to offer.
The availability to the FHLBNY’s members of alternative funding sources that are more attractive may significantly decrease the demand for the FHLBNY’s advances. Lowering the price of the advances to compete with these alternative funding sources may decrease profitability on advances. A decrease in the demand for the FHLBNY’s advances or a decrease in the FHLBNY’s profitability on advances could adversely affect the FHLBNY’s financial condition and results of operations.
Certain FHLBanks, including the FHLBNY, also compete, primarily with Fannie Mae and Freddie Mac, for the purchase of mortgage loans from members. Some FHLBanks may also compete with other FHLBanks with which their members have a relationship through affiliates. The FHLBNY offers the MPF Program to its members. Competition among FHLBanks for MPF program business may be affected by the requirement that a member and its affiliates can sell loans into the MPF Program through only one FHLBank relationship at a time. Increased competition can result in a reduction in the amount of mortgage loans the FHLBNY is able to purchase and, therefore, lower income from this part of their businesses.
The FHLBanks, including the FHLBNY, also compete with the U.S. Department of the Treasury, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities, for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lower amounts of debt issued at the same cost than otherwise would be the case. Increased competition could adversely affect the FHLBNY’s ability to have access to funding, reduce the amount of funding available to the FHLBNY, or increase the cost of funding available to the FHLBNY. Any of these effects could adversely affect the FHLBNY’s financial condition and results of operations.
The FHLBNY relies heavily on information systems and other technology. The FHLBNY relies heavily on its information systems and other technology to conduct and manage its business. If the FHLBNY experiences a failure or interruption in any of these systems or other technology, the FHLBNY may be unable to conduct and manage its business effectively, including, without limitation, its advance and hedging activities. Although the FHLBNY has implemented a business resumption plan, it may not be able to prevent, timely and adequately address, or mitigate the negative effects of any failure or interruption. Any failure or interruption could adversely affect its member relations, risk management, and profitability, which could negatively affect the FHLBNY’s financial condition and results of operations.
Economic downturns and changes in federal monetary policy could have an adverse effect on the FHLBNY’s business and its results of operations. The FHLBNY’s businesses and results of operations are sensitive to general business and economic conditions. These conditions include short- and long-term interest rates, inflation, money supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and the local economies in which the FHLBNY conducts its business. If any of these conditions worsen, the FHLBNY’s businesses and results of operations could be adversely affected. For example, a prolonged economic downturn could result in members becoming delinquent or defaulting on their advances. In addition, the FHLBNY’s business and results of operations are significantly affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities.
Joint and Several Liability for Consolidated Obligations. The FHLBNY is jointly and severally liable along with the other Federal Home Loan Banks for the consolidated obligations issued on behalf of the Federal Home Loan Banks through the Office of Finance. Dividends on, redemption of, or repurchase of shares of the FHLBNY’s capital stock can not occur unless the principal and interest due on all consolidated obligations have been paid in full. If another Federal Home Loan Bank were to default on its obligation to pay principal or interest on any consolidated obligations, the Finance Board may allocate the outstanding liability among one or more of the remaining Federal Home Loan Banks on a pro rata basis or on any other basis the Finance Board may determine. As a result, the FHLBNY’s ability to pay dividends on, to redeem, or to repurchase shares of capital stock could be affected by the financial condition of one or more of the other Federal Home Loan Banks. However, no Federal Home Loan Bank has ever defaulted on its debt obligations since the FHLB System was established in 1932.
Corporate Governance. On January 24, 2007, the Finance Board issued an interim final rule establishing new procedures for the selection of appointive directors to the boards of the FHLBanks. Under the new rule, the Board of Directors of the FHLBanks are responsible for identifying and submitting a list of potential appointive director nominees for consideration by the Finance Board. The Finance Board may then select appointive directors from among the list of nominees submitted by the FHLBank.
The FHLBNY currently has four appointive director vacancies. As a result of the new regulation, the FHLBNY’s Board is responsible for providing the Finance Board by March 31, 2007 with the names of persons who could potentially fill the open appointive director positions. The FHLBNY’s Board is currently in the process of compiling a list of candidates.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
The FHLBNY occupies approximately 41,000 square feet of leased office space at 101 Park Avenue, New York, New York. The FHLBNY also maintains 30,000 square feet of leased office space at 30 Montgomery Street, Jersey City, New Jersey, principally as an operations center and off-site back-up facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the FHLBNY is involved in disputes or regulatory inquiries that arise in the ordinary course of business. At the present time there are currently no material pending legal proceedings against the FHLBNY.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Under the FHLBank Act, the only matter that is submitted to shareholders for votes is the annual election of the FHLBNY’s elected directors. The majority of the FHLBNY’s directors are elected by and from the membership. The FHLBank Act requires that the FHLBNY’s regulator, the Federal Housing Finance Board appoint the remainder.
The Director Election Process
Voting rights of shareholders with regard to the election of directors are set forth at 12 C.F.R. Section 915. Specifically, holders of stock that were members of the FHLBNY as of the record date (i.e., December 31 of the year immediately preceding an election) are entitled to participate in the election process. Eligible shareholders may nominate representatives from FHLBNY members in their states to serve three-year terms on the FHLBNY’s Board of Directors. After the slate of nominees is finalized, each shareholder is then eligible to vote for the number of open director seats in the state in which its principal place of business is located. Each shareholder is entitled to cast one vote for each share of stock that the shareholder was required to hold as of the record date; however, the number of votes that each shareholder may cast for each directorship can not exceed the average number of shares of stock that were required to be held by all members located in that state on the record date.
Consistent with the foregoing, the only matter submitted to a vote of shareholders in 2006 was the election of certain directors, which occurred in the last quarter of 2006. The FHLBNY conducted this election to fill all open elective directorships for 2007 designated by the Finance Board. The election was conducted in accordance with Finance Board regulations. Information about the results of the election is set forth below.
2006 Director Election Results
On November 3, 2006, the stockholders of the Bank elected Messrs. James W. Fulmer, John M. Scarchilli, and Ms. Katherine J. Liseno, as directors of the Bank to each serve for a three-year term commencing January 1, 2007. The following information summarizes the results of the election.
In New York, two directorships were open. James W. Fulmer received 2,349,751 votes and John M. Scarchilli received 2,338,359 votes, and were the winners. Two other nominees received 456,557 and 182,073 votes, respectively. 6,137,049 votes were not cast.
In New Jersey, one directorship was open. Katherine J. Liseno received 1,158,168 votes and was the winner. Two other nominees received 716,163 and 67,348 votes, respectively. 832,264 votes were not cast.
In addition, in Puerto Rico and the U.S. Virgin Islands, one directorship was open. However, due to a lack of other eligible nominees, in accordance with Federal Housing Finance Board regulations governing the election process located at 12 C.F.R. §915.8(b), nominee José R. González was deemed eligible to serve as a Director of the FHLBNY and, as such, the FHLBNY declared him re-elected to serve as a Director for a three-year term commencing January 1, 2007.
Each of the following elected directors’ terms as directors continued into 2007 after the foregoing vote: George L. Engelke, Jr., Joseph R. Ficalora, Carl A. Florio, Ronald E. Hermance, Jr., David W. Lindstrom, Kevin J. Lynch and George Strayton. (As of the date of this annual report on Form 10-K, the directors on the Board appointed by the Federal Housing Finance Board are Richard S. Mroz and Anne Evans Estabrook).
The FHLBNY is formally exempt from filing of information and proxy statements in accordance with correspondence from the Office of Chief Counsel of the Division of Corporate Finance of the U.S. Securities and Exchange Commission dated August 26, 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of the stock of the FHLBNY is owned by its members and by institutions holding the FHLBNY’s stock as a result of having acquired an FHLBNY member. The FHLBNY conducts its business in advances and mortgages exclusively with its stockholder members and housing associates. There is no established marketplace for FHLBNY stock. FHLBNY stock is not publicly traded. It may be redeemed at par value upon request, subject to regulatory limits. The par value of all FHLBNY stock is $100 per share. These shares of stock in the FHLBNY are registered under the Securities Exchange Act of 1934, as amended. As of December 31, 2006 the FHLBNY had 293 members and 36,562,026 shares of stock outstanding, including 1,099,496 shares of stock deemed mandatorily redeemable and classified as a liability. As of December 31, 2005, the FHLBNY had 297 members and 36,085,411 shares of stock outstanding, including 180,870 shares of stock considered as mandatorily redeemable and classified as a liability.
Recent FHLBNY quarterly cash dividends are outlined in the table below. No dividends were paid in the form of stock. Dividend payments and earnings retention are subject to modification by the FHLBNY’s Board of Directors, at its discretion, and within the regulatory framework promulgated by the Finance Board. The FHLBNY’s Retained Earnings and Dividends Policy outlined in the section titled “Retained Earnings and Dividends” under Part I, Item 1 of this Annual Report on Form 10-K provides additional information. Dividends from a calendar quarter’s earnings are paid in the month following the end of that calendar quarter.
The following amounts are in whole dollars:
Dividends associated with mandatorily redeemable stock of $1.5 million and $3.7 million for the years ended December 31, 2006 and 2005 are included in the table above as dividends paid.
Issuer Purchases of Equity Securities
In accordance with correspondence from the Office of Chief Counsel of the Division of Corporate Finance of the U.S. Securities and Exchange Commission dated August 26, 2005, the FHLBNY is exempt from disclosures of unregistered sales of common equity securities or securities issued through the Office of Finance that otherwise would have been required under item 701 of the SEC’s Regulation S-K. By the same no-action letter, the FHLBNY is also exempted from disclosure of securities repurchases by the issuer that otherwise would have been required under Item 703 of Regulation S-K.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
(1)
Investments include held-to-maturity securities, available-for-sale securities, interest-bearing deposits, Federal funds, and loans to other FHLBanks.
(2)
Equity to asset ratio is capital stock plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets.
(3)
Net interest income is net interest income before the provision for credit losses on mortgage loans.
Supplementary financial data for each quarter for the years ended December 31, 2006 and 2005 are presented below (in thousands):
Interim period - Infrequently occurring items recognized.
2006- In the second and third quarters, the Bank had retired debt with reported losses of $6.8 million. In the fourth quarter, significant debt retirements resulted in additional losses of $19.5 million. Advance prepayment activity initiated by the Bank’s members was significant during the fourth quarter and this is more fully discussed under “Results of Operations.”
2005- During the second quarter of 2005, the FHLBNY corrected its method of computing the fair value hedge basis adjustments of certain hedged advances resulting in a $3.5 million charge to earnings in that quarter. In the same quarter, the FHLBNY further corrected its methodology for estimating the fair value hedge basis adjustments of certain hedged bonds resulting in a charge to second quarter’s earnings of $3.9 million. Realized losses from early extinguishment of debt were $3.8 million, $1.5 million, $2.0 million, and $7.5 million for each of the quarters in 2005.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the Federal Home Loan Bank of New York (“FHLBNY” or “Bank”) may be “forward-looking statements.” 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. 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.
These forward-looking statements involve risks and uncertainties including, but not limited to, the following:
•
Demand for FHLBNY advances resulting from changes in FHLBNY members’ deposit flows and credit demands;
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Volatility of market prices, rates, and indices or other factors that could affect the value of investments or collateral held by the FHLBNY as security for the obligations of FHLBNY members and counterparties to derivatives and similar agreements, which could result from the effects of, and changes in, various monetary or fiscal policies and regulations, including those determined by the Federal Reserve Board and the Federal Deposit Insurance Corporation;
•
Political events, including legislative, regulatory, judicial, or other developments that affect the FHLBNY, its members, counterparties, and/or investors in the consolidated obligations of the FHLBanks, such as changes in the Federal Home Loan Bank Act or Finance Board regulations that affect FHLBNY’s operations and regulatory oversight;
•
Competitive forces, including other sources of funding available to FHLBNY members without limitation, other entities borrowing funds in the capital markets, the ability to attract and retain skilled individuals; and general economic and market conditions;
•
The pace of technological change and the ability to develop and support technology and information systems, including the Internet, sufficient to manage the risks of the FHLBNY’s business effectively;
•
Changes in investor demand for consolidated obligations and/or the terms of derivatives and similar agreements, including without limitation changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities;
•
Timing and volume of market activity;
•
Ability to introduce new products and services and to successfully manage the risks associated with those products and services, including new types of collateral used to secure advances;
•
Risk of loss arising from litigation filed against one or more of the FHLBanks;
•
Inflation/deflation; and
•
Merger and acquisition activities resulting in reduction of members in the FHLBNY’s district.
Organization of Management’s Discussion and Analysis (“MD&A”).
The FHLBNY’s MD&A is designed to provide information that will assist in better understanding the FHLBNY’s financial statements, the changes in key items in the Bank’s financial statements from year to year, 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:
Business Overview
Financial Performance. As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission and its ability to provide adequate returns on the capital supplied by its members. The FHLBNY achieves this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and by paying a dividend. Reflecting the FHLBNY’s cooperative nature, the FHLBNY’s financial strategies are designed to enable the FHLBNY to expand and contract in response to member credit needs. The FHLBNY invests its capital in high quality, short- and intermediate-term financial instruments. This strategy allows the FHLBNY to maintain liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. The dividends paid by FHLBNY are largely the result of the FHLBNY’s earnings on invested member capital, net earnings on member credit, mortgage loans and investments, offset in part by the FHLBNY’s operating expenses and assessments. The FHLBNY’s board of directors and management determine the pricing of member credit and dividend policies based on the needs of its members. The FHLBNY does not consider seasonality to be a factor in its business.
Historical Perspective. The fundamental business of the FHLBNY is to provide member institutions and housing associates with advances and other credit products in a wide range of maturities to meet their demand. Congress created the FHLBanks in 1932 to improve the availability of funds to support home ownership. Although the FHLBanks were initially capitalized with government funds, members have provided all of the FHLBanks’ capital for over 50 years.
To accomplish its public purpose, the FHLBanks, including the FHLBNY, offer a readily available, low-cost source of funds, called advances, to member institutions and certain housing associates. Congress originally granted access to advances only to those institutions with the potential to make and hold long-term, amortizing home mortgage loans. Such institutions were primarily federally and state-chartered savings and loan associations, cooperative banks, and state-chartered savings banks (thrift institutions). FHLBanks and its member thrift institutions have become an integral part of the home mortgage financing system in the United States.
However, a variety of factors, including a severe recession, record-high interest rates, and deregulation, resulted in significant losses for thrift institutions in the 1980s. In response to the very significant cost borne by the American taxpayer to resolve failed thrift institutions, Congress restructured the home mortgage financing system in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Through this legislation, Congress reaffirmed the housing finance mission of the FHLBanks and expanded membership eligibility in the FHLBanks to include commercial banks and credit unions with a commitment to housing finance.
Different FHLBank Business Strategies. Each FHLBank is operated as a separate entity with its own management, employees and board of directors. In addition, all FHLBanks operate under the Finance Board’s supervisory and regulatory framework. However, each FHLBank’s management and board of directors determine the best approach for meeting its business objectives and serving its members. As such, the management and board of directors of each FHLBank have developed different business strategies and initiatives to fulfill the FHLBank’s mission, and they re-evaluate these strategies and initiatives from time to time.
Executive Summary - Highlights of the Year ended December 31, 2006
The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations, and is the principal factor that impacts its operating results. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to Resolution Funding Corporation (“REFCORP”), and set aside a percentage of its income towards an Affordable Housing Program (“AHP”). Together they are referred to as assessments.
On September 21, 2006, S&P raised the long-term counterparty credit rating on the Federal Home Loan Bank of New York to “AAA” from “AA+”, and affirmed its “A-1+” short-term counterparty credit rating.
Net Income for the year ended December 31, 2006 increased by $55.0 million to $285.2 million, up from $230.2 million in 2005. Net earnings per share of capital for the year ended December 31, 2006 was $7.63, up from $6.36 for the year ended December 31, 2005. Return on average stockholders’ equity, defined as capital stock and retained earnings, increased to 7.04% for the year ended December 31, 2006, up from 5.97% for the year ended December 31, 2005. Return on average earning-assets increased to 54.9 basis points for the 12-months ended December 31, 2006, up from 46.6 basis points for the comparable period in 2005. Improved returns were directly attributable to the increase in net income in 2006 compared to 2005.
A cash dividend was paid to stockholders in each of the quarters in 2006, and totaled $5.59 per share of capital stock (par value $100), compared to $4.50 and $1.83 per share paid in 2005 and 2004.
Net interest income after the provision for credit losses, a key metric for the FHLBNY, was $470.1 million for the year ended December 31, 2006, up from $394.9 million in 2005. Net interest income represents the difference between income from interest-earning assets and interest expenses paid on interest-bearing liabilities. The difference, also referred to as the net interest spread, was 29.5 basis points in 2006, compared to 26.6 basis points in 2005. Net interest spread is defined as the difference between yields on interest-earning assets and yields on interest-bearing liabilities.
Three principal factors explain the improved net interest spread. First of all, the mix in demand for advances tilted towards relatively more profitable advance product in 2006. Member demand for short-term, fixed-rate advances increased and the spreads on these advances were relatively more profitable for the Bank compared to other advance products in 2006. In many instances, members chose to switch into the short-term borrowings to replace maturing medium- to longer-term borrowings. Second, increased earnings from the deployment of capital in a rising rate environment was also a significant factor. The third factor was continued favorable market conditions for the issuance of FHLB debt, also referred to as consolidated obligations. The Bank funds its assets largely by the issuance of consolidated obligations, and small improvements in debt execution have a significant impact on net interest income. Consequently, despite the general increase in interest rates, increase in investor demand for FHLBank debt through most of 2006 had a positive effect on the cost of debt issued, especially in coupons for longer-term debt. Also, the increased use of short-maturity, callable bonds in conjunction with swaps that effectively converted the bonds to LIBOR indexed cash flows, were executed at advantageous levels. This too contributed to relatively stable debt expenses. The three factors together - positive change in mix in the advance portfolio, increased earnings from shareholders’ equity in a rising rate environment, and a favorable debt issuance environment - made a strong contribution to net spread in 2006.
Results of operations for 2006 included $26.3 million in losses from early retirement of long-term consolidated obligation debt. The retired debt was mainly associated with the prepayment of advances and commercial mortgage-backed securities. Debt retirements in 2005 resulted in aggregate losses of $14.8 million.
Net realized and unrealized gain from hedging activities amounted to a gain of $9.7 million in 2006, which included realized gains of $4.5 million from termination of purchased options associated with variable-rate advances which were early-terminated (prepaid) by members. The overall gain in 2006 was in contrast to a loss of $9.5 million in 2005, of which $7.4 million of the loss was principally attributable to refinement of valuation methodology during 2005.
Other Expenses, principally Operating Expenses, were $68.3 million for the year ended December 31, 2006, up from $64.6 million in 2005. Significant increases in professional fees, and the ongoing efforts to implement internal control requirements under Sarbanes-Oxley were the main reasons for the large increase. The FHLBNY also added staff to enhance its accounting and risk-management functions in light of additional reporting requirements as a SEC registrant.
REFCORP assessments amounted to $71.3 million in 2006 compared to $57.5 million in 2005. AHP assessments were $32.0 million in 2006 compared to $25.9 million in 2005. Assessments are analogous to a tax on income and the increase reflected the increase in pre-assessment income for the year ended December 31, 2006.
Total assets at December 31, 2006 declined by $3.3 billion to $81.7 billion, compared to $85.0 billion at December 31, 2005. Lower balance sheet asset resulted from a decline in advances to members, and the Bank’s decision to lower the leverage ratio, defined as the ratio of capital to total assets.
Member borrowings of advances in 2006 exhibited uneven demand patterns. Demand increased gradually at first, grew sharply at the end of the second quarter, peaked at $70.0 billion in July 2006, and ultimately declined to $59.0 billion at December 31, 2006, down from $61.9 billion at December 31, 2005. The decline and the uneven pattern of advance volume began early in the year by a merger of a member into a non-member resulting in lost potential of at least $498.0 million of advances that were either prepaid or not renewed at maturity during the first quarter in 2006. In the third quarter, the merger of a large member was consummated, followed by the termination of its membership charter. This member’s borrowings had stood at $3.8 billion at August 31, 2006. Significant prepayment activity followed shortly after. Additionally, because of rules established by the FHLBank Act, the Bank was not permitted to extend additional advances or to replace maturing advances. At December 31, 2006, the former member’s borrowing balance with the Bank was $1.4 billion, a decline of $2.4 billion. Another large member, who had reached definitive agreement to be acquired by a non-member in 2007, prepaid $3.0 billion in the four months leading to December 31, 2006.
Held-to-maturity securities consisting mainly of mortgage-backed securities stood at $11.3 billion on December 31, 2006, up from $9.6 billion at December 31, 2005, as new acquisitions outpaced pay downs. Acquisitions during 2006 totaled $4.0 billion, up from $0.7 billion in 2005. Acquisitions, however, continued to be selective during 2006 and remained opportunistic. When market conditions met the Bank’s risk-reward preferences, acquisition was considered and pursued. By way of contrast, when market conditions in the fourth quarter of 2006 were perceived to be out of line with the Bank’s risk-reward preference, acquisitions were curtailed. All $4.0 billion in MBS acquired were triple-A rated securities, with heavy concentration in agency issued collateralized mortgage obligations (“CMOs”), which are supported by agency pass-through securities. Some prime private-label securities were also purchased. No securities classified as available-for-sale were outstanding at either December 31, 2006 or 2005. During 2005, the Bank had sold its entire portfolio of available-for-sale securities consisting entirely of variable-rate mortgage-backed securities.
At December 31, 2006, the Bank lowered its balance sheet leverage, defined here as total assets as a multiple of total stockholders’ equity (“equity”), to 20.9 times equity, slightly down from 21.9 times equity at December 31, 2005. To achieve the lower leverage target, the Bank decreased holdings of short-term investments. As a result, certificates of deposits outstanding were $5.6 billion at December 31, 2006, down from $8.7 billion at December 31, 2005, although the inventory of Federal funds sold at December 31, 2006 was up at $3.7 billion, compared to $2.9 billion at December 31, 2005. The Bank maintains liquid funds in overnight and short-term Federal funds to accommodate unexpected member borrowing demands particularly at quarter-end.
The Bank made tactical refinements to its funding practices during 2006 to better align its assets and liabilities in a changing market environment, including investor demand for its debt. The Bank chose to rely less on the issuances of discount notes to funds its assets. Discount notes outstanding at the beginning of 2006 made up 26.5% of all consolidated obligation debt. That percentage declined steadily to 21.5% at September 30, 2006, and sharply to a lower ratio of 16.4% at December 31, 2006. The Bank increased its issuance of floating rate bonds during the third quarter of 2006, raising the outstanding balance of floating rate debt to $4.1 billion at December 31, 2006, compared to $0.9 billion at December 31, 2005. The use of callable, step-up bonds has steadily declined and the balance at December 31, 2006 was $3.7 billion, compared to $6.4 billion at December 31, 2005.
Average stockholders’ equity increased during 2006 to $4.1 billion, up from an average of $3.9 billion in 2005, principally from the increase in retained earnings. Capital stock, a component of equity, was down slightly to $3.5 billion at December 31, 2006 from $3.6 billion at December 31, 2005, mainly because the Bank has continued its program to redeem stock in excess of the amount necessary to support advance activity. Members are required to purchase stock as a pre-requisite to membership, and the amount is also determined by a percentage of advances borrowed from the FHLBNY. Under the FHLBNY’s present practice of repurchasing excess stock, the amount of capital stock outstanding varies in line with members’ outstanding borrowings. Advance activity during the fourth quarter of 2006 was characterized by prepayment activity of a few members which drove down advance balances at December 31, 2006, compared to last year-end, creating stock in excess of requirement, and resulting in repurchase of the excess and a decline in capital stock.
Trends in the Financial Markets
Conditions in Financial Markets. The primary external factors that affect net interest income are market interest rates and the general state of the economy.
The following table presents changes in key rates over the course of 2006 and 2005 (rates in percent):
Impact of general level of interest rates to the FHLBNY. The level of interest rates during a reporting period impacts the FHLBNY’s profitability, due primarily to the relatively shorter-term structure of earning assets and the impact of interest rates on invested capital. As of December 31, 2006 and December 31, 2005, investments, excluding mortgage-backed securities and state and local housing agency obligations had stated maturities of less than one year. The FHLBNY had also used derivatives to effectively change the repricing characteristics of a significant proportion of its advances and debt - consolidated obligation bonds - to match shorter-term LIBOR rates that repriced at three-month intervals or less. Consequently, the current level of short-term interest rates, as represented by the overnight Federal funds target rate and the 3-month LIBOR rate, has an impact on the FHLBNY’s profitability.
The level of interest rates also directly affects the FHLBNY’s earnings on invested capital. Compared to other banking institutions, the FHLBNY operates at comparatively low net spreads between the yield it earns on assets and its cost of liabilities. Therefore, the FHLBNY generates a relatively higher proportion of its income from the investment of member-supplied capital at the average asset yield. As a result, changes in asset yields tend to have a greater effect on FHLBNY’s profitability than they do on the profitability of other banking institutions.
In summary, the FHLBNY’s average asset yields and the returns on capital invested in these assets largely reflect the short-term interest rate environment because the maturities of FHLBNY assets are generally short-term in nature, have rate resets that reference short-term rates, or have been hedged with derivatives in which a short-term rate is received.
Changes in rates paid on consolidated obligation debt and the spread of these rates relative to LIBOR and U.S. Treasury securities may also impact FHLBNY’s profitability. The rate and price at which the FHLBNY is able to issue consolidated obligations, and their relationship to other products such as Treasury securities and LIBOR, change frequently, and are affected by a multitude of factors including overall economic conditions; volatility of market prices, rates, and indices; the level of interest rates and shape of the Treasury curve; the level of asset swap rates and shape of the swap curve; supply from other issuers (including Government Sponsored Enterprises such as Fannie Mae and Freddie Mac, supra/sovereigns, and other highly-rated borrowers); the rate and price of other products in the market such as mortgage-backed securities, repurchase agreements, and commercial paper; investor preferences; the total volume, timing, and characteristics of issuance by the FHLBanks; the amount and type of advance demand from the FHLBNY’s members; political events, including legislation and regulatory action; press interpretations of market conditions and issuer news; the presence of inflation or deflation; actions by the Federal Reserve; and currency exchange rates.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the amounts of income and expenses during the report period. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
The FHLBNY has identified certain accounting policies that it believes are critical because they require management to make subjective judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios; and estimating fair values on certain assets and liabilities, including all derivatives and associated hedged items accounted for in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and the collateral that members pledge for advance borrowings. Policies, estimates, and assumptions are also described in Note 1 to the audited Financial Statements. Policies with respect to the valuation of derivatives and associated hedged items are also described in Notes 1, 19 and 20 to the audited Financial Statements.
Provision for Credit Losses
The provision for credit losses for advances and mortgage loans, including those acquired under the Mortgage Partnership Finance Program (“MPF”), represents management’s estimate of the probable credit losses inherent in these two portfolios. Determining the amount of the provision for credit losses is considered a critical accounting estimate because management’s evaluation of the adequacy of the provision is inherently subjective and requires significant estimates, including the amounts and timing of estimated future cash flows, estimated losses based on historical loss experience, and consideration of current economic trends, all of which are susceptible to change. The FHLBNY’s assumptions and judgments on its provision for credit losses are based on information available as of the date of the financial statements. Actual results could differ from these estimates.
Advances. The provision for credit losses on advances includes the following underlying assumptions that the FHLBNY uses for evaluating its exposure to credit loss: (i) management’s judgment on the creditworthiness of the members to which the FHLBNY lends funds, (ii) review and valuation of the collateral pledged by members, and (iii) evaluation of historical loss experience. The FHLBNY has policies and procedures in place to manage its credit risk effectively. These include:
•
Monitoring the creditworthiness and financial condition of the institutions to which it lends funds.
•
Reviewing the quality and value of collateral pledged by members to secure advances.
•
Estimating borrowing capacity based on collateral value and type for each member, including assessment of margin requirements based on factors such as cost to liquidate and inherent risk exposure based on collateral type.
•
Evaluating historical loss experience.
Significant changes to any of the factors described above could materially affect the FHLBNY’s provision for losses on advances. For example, the FHLBNY’s current assumptions about the financial strength of any member may change due to various circumstances, such as new information becoming available regarding the member’s financial strength or future changes in the national or regional economy. New information may require the FHLBNY to place a member on credit watch and require collateral to be delivered, adjust its current margin requirement, or provide for losses on advances.
The FHLBNY is required by Finance Board regulations to obtain sufficient collateral on advances to protect against losses, and to accept only certain collateral on its advances, such as U.S. government or government-agency securities, residential mortgage loans, deposits in the FHLBNY, and other real estate related assets. The FHLBNY has never experienced a credit loss on an advance. Based on the collateral held as security for advances, management’s credit analyses, and prior repayment history, no allowance for credit losses on advances was deemed necessary by management at December 31, 2006, 2005, or 2004.
At December 31, 2006, 2005 and 2004, the FHLBNY had rights to collateral, either loans or securities, on a member-by-member basis, with an estimated liquidation value in excess of outstanding advances.
Mortgage Loans - MPF Program. The provision for credit losses on mortgage loans includes the following assumptions used to evaluate the FHLBNY’s exposure to credit loss: (i) management’s judgment on the eligibility of members to participate in the program, (ii) evaluation of credit exposure on purchased loans, and (iii) valuation of loss exposure and historical loss experience.
The FHLBNY has policies and procedures in place to manage its credit risk effectively. These include:
•
Evaluation of members to ensure that they meet the eligibility standards for participation in the MPF Program.
•
Evaluation of the purchased and originated loans to ensure that they are qualifying conventional, conforming fixed-rate, first lien mortgage loans with fully amortizing loan terms of up to 30 years, secured by owner-occupied, single-family residential properties.
•
Estimation of loss exposure and historical loss experience to establish an adequate level of loss reserves.
The FHLBNY places a mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBNY records cash payments received on non-accrual loans as a reduction of principal.
Allowance for credit losses on MPF Program loans, which are classified either under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due, are separated from the aggregate pool. If adversely classified, or on non-accrual status, reserves for MPF loans, except Federal Housing Administration and Veterans Administration insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses greater than $1,000 are fully reserved. Federal Housing Administration and Veterans Administration insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicer defaulting on their obligations. Federal Housing Administration and Veterans Administration mortgage loans, if adversely classified, will have reserves established only in the event of a default of a Participating Financial Institution. Reserves are based on the estimated costs to recover any uninsured portion of the MPF loan.
Mortgage loans, other than those included in large groups of smaller-balance homogeneous 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.
Management of the FHLBNY identifies inherent losses through analysis of the conventional loans (loss analysis excludes Federal Housing Administration and Veterans Administration insured loans) that are not classified. In the absence of historical loss data, the practice is to look at loss histories of pools of loans at other financial institutions with similar characteristics to determine a reasonable basis for loan loss allowance. Management continues to evaluate this practice for appropriateness.
When a mortgage loan is foreclosed, the FHLBNY will charge to the loan loss reserve account any excess of the carrying value of the loan over the net realizable value of the foreclosed loan.
The FHLBNY also holds participation interest in residential and community development mortgage loans through its Community Mortgage Asset (“CMA”) program. Acquisitions of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001, and the outstanding balance of Community Mortgage Asset loans was down to $4.9 million at December 31, 2006 from $9.7 million at December 31, 2005. If adversely classified, Community Mortgage Asset loans would require additional loan loss reserves based on the shortfall of the liquidation value of collateral to cover the remaining balance of the loan.
Fair Values
As of December 31, 2006 and 2005, certain of the FHLBNY’s assets and liabilities are presented in the statements of condition at their estimated fair values. Many of these financial instruments and substantially all of the collateral that members pledge for advance borrowings lack an available liquid trading market as characterized by frequent transactions between a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant assumptions and various valuation techniques have been used by the FHLBNY for the purpose of determining estimated fair values. Changes in these assumptions, calculations and techniques could significantly affect FHLBNY’s financial position and results of operations. Thus, the fair values may not represent the actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future. Although the FHLBNY uses its judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. The FHLBNY continually refines its assumptions, valuation techniques and methodologies to better reflect market indications.
Because valuation is a significant element of the FHLBNY’s financial results of operations, changes in the fair values of certain assets and liabilities could have a disproportionate effect on the financial condition of the FHLBNY. Accordingly, the FHLBNY places significant emphasis on the measurement process, and continues to monitor and refine these estimates.
The Bank has not concluded its evaluation of two new fair value related standards, SFAS 157 “Fair Value Measurements,” and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” issued as pronouncements by the FASB. These standards address both the measurement, accounting, and disclosure aspects of fair value, and are discussed in the MD&A section “Recently Issued Accounting Standards and Interpretations.”
For each major category of assets and liabilities measured at fair value at December 31, 2006 and 2005, the FHLBNY has segregated fair value amounts into four disclosure groups:
1. Fair value amounts determined using quoted prices for identical assets and liabilities in active markets.
•
Approximately 5 percent of investments (Investments in “State or local housing agency obligations”, certain variable rate mortgage-backed securities, and certain mortgage-backed securities backed by manufactured homes) are valued using market pricing and a combination of dealer, market maker, or other external pricing source.
2. Fair value amounts determined using quoted prices for similar assets and liabilities in active markets, adjusted for differences between assets and liabilities being measured and other similar assets or liabilities.
•
The fair values derived from such estimates are not material.
3. Fair value amounts determined by the use of multiple valuation techniques and other available market inputs.
•
All of the FHLBNY’s investment securities are marketable and can, theoretically, be priced using open market quotes. However, they generally do not have enough liquidity and would require special quotes from market makers. The fair values of about 95% of mortgage-backed securities are priced using pricing services provided by specialist securities pricing services. The loans acquired and originated under the MPF and CMA programs are priced using market information (pricing and spreads) as input to standard option valuation models.
•
The fair values of all derivatives are valued using market information, including forward rates and expected volatilities, as input to standard option valuation models.
•
With regard to the FHLBNY’s liabilities, the consolidated obligations do have a secondary market but there are limits to its liquidity and the FHLBNY’s ability to obtain timely quotes, particularly with regard to option-embedded issues that are seldom traded. Therefore, FHLBNY prices its bonds off of the current consolidated obligations market curve, which has a daily active market. The fair values of consolidated obligation debt (bonds and discount notes) are computed using standard option valuation models using market data: (1) consolidated obligation debt curve that is available to the public and published by the Office of Finance, and (2) LIBOR curve and volatilities.
•
Variable rate advances are valued with market spreads, volatilities and using standard option valuation models.
4. Fair value amounts determined by the use of entity inputs that represent an entity’s own internal estimates and assumptions as a practical expedient where market inputs are not available.
•
Fixed-rate advances with or without put options are all valued with internal assumptions and using standard valuation models.
Accounting for Derivatives
The Bank records and reports hedging activities in accordance with the standards under SFAS 133. In compliance with those standards, the Bank’s accounting for derivatives includes the following assumptions and estimates by the FHLBNY: (i) assessing whether the hedging relationship qualifies for hedge accounting under SFAS 133 (ii) assessing whether an embedded derivative should be bifurcated under SFAS 133 (iii) calculating the estimated effectiveness of the hedging relationship, (iv) evaluating exposure associated with counterparty credit risk, and (v) estimating the fair value of the derivatives. The FHLBNY’s assumptions and judgments include subjective estimates based on information available as of the date of the financial statements and could be materially different based on different assumptions, calculations, and estimates.
The FHLBNY specifically identifies the hedged asset or liability and the associated hedging strategy. Prior to execution of each transaction, the FHLBNY documents the following items:
•
Hedging strategy
•
Identification of the item being hedged
•
Determination of the accounting designation under SFAS 133
•
Determination of method used to assess the effectiveness of the hedge relationship
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Assessment that the hedge is expected to be effective in the future if designated as a hedge under SFAS 133
All derivatives are recorded on the statements of condition at their fair value and designated as either fair value or cash flow hedges for SFAS 133-qualifying hedges or as non-SFAS 133-qualifying hedges (economic hedges, or customer intermediations). In an economic hedge, the Bank retains or executes derivative contracts, which are economically effective in reducing risk, either because a SFAS 133-qualifying hedge was not available or because the cost of a qualifying hedge was not economical.
Any changes in the fair value of a derivative are recorded in current period earnings or other comprehensive income, depending on the type of hedge designation.
In addition, the FHLBNY evaluates all transactions to determine whether an embedded derivative exists based on the guidance of SFAS 133. The evaluation includes reviewing the terms of the instrument to identify whether some or all of the cash flows or the value of other exchanges required by the instrument are similar to a derivative and should be bifurcated from the host contract. If it is determined that an embedded derivative should be bifurcated, the FHLBNY measures the fair value of the embedded derivative separately from the host contract and records the changes in fair value in earnings.
Assessment of Effectiveness. Highly effective hedging relationships that use interest rate swaps as the hedging instrument to hedge a recognized asset or liability and that meet criteria under paragraph 68 of SFAS 133 qualify for an assumption of no ineffectiveness (also referred to as the “short-cut” method). The short-cut method allows the FHLBNY to assume that the change in fair value of the hedged item attributable to interest rates equals the change in fair value of the derivative during the life of the hedge.
For a hedging relationship that does not qualify for the short-cut method, the FHLBNY measures its effectiveness by recording and assessing the change in fair value of the hedged item attributable to the risk being hedged separately from the change in fair value of the derivative. This method for measuring effectiveness is also referred to as the “long-haul” method. The FHLBNY designs effectiveness testing criteria based on its knowledge of the hedged item and hedging instrument that were employed to create the hedging relationship. The FHLBNY uses regression analyses or other statistical analyses to evaluate effectiveness results, which must fall within established tolerances. Effectiveness testing is performed at inception, and on at least a quarterly basis for both prospective considerations and retrospective evaluations.
Hedge Discontinuance. When a hedging relationship fails the effectiveness test, the FHLBNY immediately discontinues hedge accounting. In addition, the FHLBNY discontinues hedge accounting when it is no longer probable that a forecasted transaction will occur in the original expected time period and when a hedged firm commitment no longer meets the required criteria of a firm commitment. The FHLBNY treats modifications of hedged items (e.g., reduction in par amounts, change in maturity date, and change in strike rates) as a termination of a hedge relationship. The FHLBNY records the effect of discontinuance of hedges to earnings in “Net realized and unrealized gain (loss) on derivatives and hedging activities”, in Other income (loss).
Accounting for Hedge Ineffectiveness. The FHLBNY quantifies and records in Other income (loss) the ineffective portion of its hedging relationships. Ineffectiveness for fair value hedging relationships is calculated as the difference in the change in fair value of the hedging instrument and the change in fair value of the hedged item that is attributable to the risk being hedged, which has been designated by the Bank as LIBOR. Ineffectiveness for anticipatory hedge relationships is recorded when the change in the fair value of the hedging instrument differs from the related change in the present value of the cash flows from the anticipated hedged item.
Credit Risk for Counterparties. The FHLBNY is subject to credit risk as a result of nonperformance by counterparties to the derivative agreements. All extensions of credit to counterparties that are members of the FHLBNY are fully secured by eligible collateral. The FHLBNY also enters into master netting arrangements and bilateral security agreements with all active non-members derivative counterparties, which provide for delivery of collateral at specified levels to limit the FHLBNY’s net unsecured credit exposure to these counterparties. The FHLBNY makes judgments on each counterparty’s creditworthiness and estimates of collateral values in analyzing its credit risk for nonperformance by counterparties.
Recording of Derivatives and Hedged items. The FHLBNY records derivatives on trade date, but records the associated hedged consolidated obligations and advances on settlement date. Hedge accounting commences on trade date, at which time subsequent changes to the derivative’s fair value are recorded along with the offsetting changes in the fair value of the hedged item. On settlement date, the adjustments to the hedge items carrying amount are combined with the proceeds and become part of its total carrying amount.
The FHLBNY has defined its market settlement conventions for hedged items to be five business days or less for advances and thirty calendar days or less, using a next business day convention, for consolidated obligation bonds and discount notes. These market settlement conventions are the shortest period possible for each type of advance and consolidated obligation from the time the instruments are committed to the time they settle.
The FHLBNY considers hedges of committed advances and consolidated obligations bonds eligible for the short-cut accounting, under paragraph 68 of FAS 133, as long as settlement of the committed asset or liability occurs within the shortest period possible for that type of instrument. The FHLBNY also believes the conditions of paragraph 68 (b) of FAS 133 are met if the fair value of the swap is zero on the date the FHLBNY commits itself to issue the consolidated obligation bond.
Accounting Adjustments
In 2005, the FHLBNY corrected the manner in which it measured ineffectiveness for certain highly-effective consolidated obligation and advance hedging relationships. The FHLBNY believes the corrected methodology is closely in compliance with the valuation methodology prescribed under SFAS 133.
Under the FHLBNY’s prior approach in use since June 2004, the FHLBNY had appropriately adjusted the basis adjustment of the hedged consolidated bonds in the first period of the hedging relationship to ensure that only changes in value attributable to changes in interest rates were included in the basis adjustment. However, the FHLBNY had not continued to make adjustments to the changes in fair value of the hedged instruments to eliminate changes in value attributable to the passage of time from the calculated basis adjustments. In the second quarter of 2005, the FHLBNY retroactively computed the appropriate adjustments and recorded a charge to earnings of $3.9 million with an offsetting increase in the basis of the hedged consolidated obligation bonds.
In the second quarter of 2005, the FHLBNY also corrected its valuation methodology with respect to the hedged advances accounted for under the long-haul method. The FHLBNY had previously measured the ineffectiveness of hedged advances by discounting the future cash flows of the hedged advances by LIBOR, the FHLBNY’s adopted benchmark interest rate. However, the initial present value of cash flows was assumed to be the par value of the advance and a beginning model value was not calculated for comparison with end of period valuations. This resulted in an inappropriate gain being recorded in the first hedge period, and the reversing effects of the inappropriate gain being reflected over the remaining hedge period. Under the corrected methodology, the FHLBNY has discounted the future cash flows of the hedged advance by adding a spread to the benchmark swap curve to adjust for the credit spread between the FHLBNY’s advance and the swap curve. This methodology eliminated the initial present value differences between par and the present value of future cash flows at hedge inception, and is in compliance with SFAS 133. As a result of the inappropriate use of its previous methodology, the FHLBNY made the change in its second quarter 2005 financial statements to implement the refined methodology, resulting in a $3.5 million charge to earnings.
Changes in Accounting Principle
Amortization and accretion on premiums and discounts on mortgage loans have been computed by the contractual method in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,”, beginning in the quarter ended March 31, 2005. Previously, amortization and accretion of premiums and discounts was computed using the retrospective method with estimated life, which requires a retrospective adjustment each time the FHLBNY changes the estimated remaining life of the mortgage loans. The retrospective method was intended to adjust prior period reported amounts as if the new estimate had been known since the original acquisition date of the mortgage loans. While both methods are acceptable under GAAP, the FHLBNY believes that the contractual method is preferable because under the contractual method, the income effect is reflective of the actual behavior of the mortgage loans during the period in which the behavior occurs without regard to changes in estimates based on assumptions about future borrower behavior. As a result of the change in accounting principle, income of $1.1 million, before assessments, was recorded on January 1, 2005 as a cumulative effect of change in accounting principle.
Recently Issued Accounting Standards and Interpretations
SFAS 155 - In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) SFAS 155 “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133 and 140 and permits fair value measurement of any structured note that contains an embedded derivative that would require bifurcation under SFAS 133. This fair value measurement is permitted on an instrument-by-instrument basis. The Bank will apply the guidance under SFAS 155 commencing with the first quarter of 2007. The Bank has evaluated the guidance and does not expect implementation will have a material impact on its results of operations or financial condition.
SFAS 156 - In March 2006, the FASB issued 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately-recognized servicing assets and liabilities. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value measurement basis.
The new standard provides some relief for servicers that use derivatives to economically hedge fluctuations in the fair value of their servicing rights. In a rising interest rate environment, losses on derivatives used for hedging must be recognized. However, corresponding increases in the fair value of the related servicing rights previously could not be recognized since SFAS 140 mandated that servicing rights be carried at the lower of cost or market. This situation generates income volatility.
SFAS 156 also changes how gains and losses are computed in transfers or securitizations that qualify for “sale treatment” in which the transferor retains the right to service the transferred financial assets. Under SFAS 156, servicing assets must be initially recorded at fair value and treated as part of the proceeds received by the transferor, thus affecting the gain/loss calculations.
The Bank will apply the provisions of SFAS 156 as of January 1, 2007. The Bank has evaluated the impact of adopting SFAS 156 and does not expect it to have a material impact on its results of operations or financial condition.
SFAS 157 - In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosure about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 nullifies the guidance in EITF 02-3, which precluded the recognition of a trading profit at the inception of a derivative contract, unless the fair value of such derivative is obtained from a quoted market price, or other valuation technique incorporating observable market data. SFAS 157 also precludes the use of a liquidity or block discount when measuring instruments traded in an active market at fair value. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. SFAS 157 must be applied prospectively as of the beginning of the fiscal year in which it is initially adopted, except that the provisions related to block discounts and the guidance in EITF 02-3 are to be applied as a one time cumulative effect adjustment to opening retained earnings in the first interim period for the fiscal year in which SFAS 157 is initially applied. The Bank is evaluating the provisions of SFAS 157 and its potential effect on its financial statements.
SFAS 158 - In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS 158 requires recognition in the statements of financial condition of the over or underfunded status of postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. For pension plans, the benefit obligation is the projected benefit obligation; for other postretirement plans, the benefit obligation is the accumulated postretirement benefit obligation. For an employer without publicly traded equity securities, SFAS 158 is effective for fiscal years ending after June 15, 2007, with certain disclosure requirements effective for a fiscal year ending after December 15, 2006, but before June 16, 2007. The FHLBNY considers itself a non-publicly traded enterprise for the purposes of the standard.
The Bank adopted SFAS 158 as of December 31, 2006, and in compliance with the provisions under SFAS 158, recognized $6.1 million of previously unrecognized actuarial gains and losses and service costs within accumulated other comprehensive income (a component of stockholders’ equity).
DIG Issue G26 - In December 2006, the FASB issued Derivatives Implementation Group (“DIG”). DIG Issue No. G26, “Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate.”(“DIG Issue G26”). DIG Issue G26 clarifies when the hedge of a designated risk related to variable-rate financial assets or liabilities qualifies as a cash flow hedge. DIG Issue G26 becomes effective with the first fiscal quarter beginning after January 8, 2007 (April 1, 2007 for the Bank). The Bank does not expect DIG Issue G26 to have a material impact on its results of operations or financial condition.
DIG Issue B40 - In December 2006, the FASB issued DIG No. B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets” (“DIG Issue B40”). DIG Issue B40 clarifies when a securitized interest in prepayable financial assets is subject to the conditions in paragraph 13(b) of SFAS 133. DIG Issue B40 becomes effective upon initial adoption of SFAS 155 (January 1, 2007 for the Bank). The Bank does do not expect DIG Issue B40 to have a material impact on its results of operations or financial condition.
SFAS 159 - In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 creates a fair value option allowing an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 also requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. Lastly, SFAS 159 requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Bank), with early adoption permitted. The Bank is continuing to evaluate SFAS 159 and to assess the impact on its results of operations and financial condition if an election is made to adopt the standard.
Legislative and Regulatory Developments
Registration of the FHLBanks under the Securities Exchange Act of 1934
On June 29, 2004, the Finance Board published its final rule requiring each of the FHLBanks to register a class of equity securities with the Securities and Exchange Commission (“SEC”) under Section 12(g)(1) of the Securities Exchange Act of 1934 (“1934 Act”). Such registration of equity securities requires the FHLBanks to comply with the disclosure and reporting requirements of the 1934 Act and to file annual, quarterly, and current reports with the SEC, as well as meet other requirements. The final rule required the FHLBanks to file their registration statements with the SEC no later than June 30, 2005, with registration to be effective no later than August 29, 2005.
The FHLBNY’s registration of its equity securities with the SEC became effective on August 29, 2005. As of August 8, 2006, all twelve FHLBanks completed the process of registering with the SEC. While registration with the SEC may result in increased regulatory compliance costs to the FHLBNY, it is uncertain what effect, if any, such registration ultimately will have on the cost of FHLBank System debt or other aspects of the FHLBNY’s operations.
Finance Board and FHLBank Agreements
The FHLBNY’s access to funds in the capital markets may be affected by a variety of factors, including issues affecting the other FHLBanks as a result of the joint and several liability that each of the FHLBanks, has for the consolidated obligations issued through the Office of Finance. During 2004, two FHLBanks entered into supervisory agreements with the Finance Board, as described in more detail below.
On June 30, 2004, the Finance Board entered into an agreement with the Board of Directors of the FHLBank of Chicago which required the FHLBank of Chicago to, among other things, adopt a revised business plan, maintain a specified regulatory capital level and, unless otherwise restricted by the Finance Board, restrict the annual growth of its Acquired Member Assets program to 10%. The agreement has been subsequently amended to adjust the FHLBank of Chicago’s minimum regulatory capital requirements. On June 13, 2006, as approved by the Finance Board, the FHLBank of Chicago issued $1.0 billion of 10-year subordinated notes. These notes are the sole obligation of the FHLBank of Chicago and were issued as part of a plan to facilitate an orderly redemption by the FHLBank of Chicago of excess stock held by its member institutions.
Separately, on December 10, 2004, the Finance Board entered into an agreement with the Board of Directors of the FHLBank of Seattle to address governance, risk management, and financial performance in addition to enhancing business planning and capital management. The agreement called for the FHLBank of Seattle to submit a three-year business plan and capital plan and monthly progress reports to the Finance Board. The agreement was terminated by the Finance Board on January 11, 2007.
The FHLBanks and other housing Government Sponsored Enterprises (“GSE”) have faced negative publicity, which from time to time has adversely temporarily affected the cost of funds. However, we believe that other factors, such as supply of and demand for GSE debt obligations and other market conditions have had a much greater impact on the cost of funds. Investors have recognized the inherent strength of the FHLBanks’ joint and several obligations to pay the principal of and interest on consolidated obligations, and the combined strength of the FHLBanks has lessened investor reaction to the recent adverse publicity surrounding certain individual FHLBanks. However, there can be no assurance that future adverse financial or regulatory developments with respect to the FHLBanks will not adversely affect the cost of funds or the ability of the FHLBanks to issue consolidated obligations.
Publication of FHLBanks’ Combined Financial Reports; Restatement of Prior Period Statements
The Office of Finance published the 2005 Combined Financial Report (“CFR”) of the Federal Home Loan Bank System on November 8, 2006. The CFR includes audited combined financial statements of the 12 FHLBanks, including the restated combined financial statements for the years ended December 31, 2003, 2002, and 2001.
The restatements of the combined financial data resulted from the restatements of financial reports by seven of the twelve FHLBanks. These restatements were primarily due to technical misapplications and interpretations of derivative accounting rules, and arose from the rigorous accounting reviews undertaken throughout the SEC registration process. Additional information regarding the restatements and their net cumulative effect on the FHLBank System financial reports is available in the 2005 CFR (located at www.fhlb-of.gov). It is expected that scheduled combined financial reporting will resume with the publication of the 2006 CFR by March 31, 2007, and continue with subsequent quarterly reports for 2007.
Limitations on Issuance of Excess Stock
On December 28, 2006, the Finance Board issued a final rule prohibiting any FHLBank with excess stock greater than 1% of total assets from paying any dividends in the form of additional shares of FHLBank stock or otherwise issuing any excess stock. The rule also prohibits an FHLBank from issuing excess stock, as a dividend or otherwise, if, after the issuance, the outstanding excess stock at the FHLBank would be greater than 1% of total assets.
Excess stock, defined as capital stock in excess of the amounts required to support advance activity, is managed carefully at the FHLBNY, and, as of December 31, 2006, the Bank had no excess stock. Membership stock, a smaller component of capital stock, is measured annually and stock in excess of the level required for membership is repurchased annually by the Bank from its members. In addition, the FHLBNY has never paid any stock dividends and has no plans to do so in the future. Thus, while the new rule may affect the dividend and capital management practices at certain FHLBanks, it is not expected to materially affect the FHLBNY.
In the rulemaking, the Finance Board also indicated its intention to consider changes to its risk-based capital regulations to reflect advances in identifying and managing the risks of the FHLBanks. It is impossible to predict whether or when any such changes will be proposed and, if proposed, what their impact would be on the FHLBanks.
Procedures for the Selection of Appointive Directors
On January 24, 2007, the Finance Board issued an interim final rule establishing new procedures for the selection of appointive directors to the boards of the FHLBanks. Under the new rule, the Boards of Directors of the FHLBanks are responsible for identifying and submitting a list of potential appointive director nominees for consideration by the Finance Board. The Finance Board may then select appointive directors from among the list of nominees submitted by the FHLBank.
The FHLBNY currently has four appointive director vacancies. As a result of the new regulation, the FHLBNY’s Board is responsible for providing the Finance Board by March 31, 2007 with the names of persons who could potentially fill the open appointive director positions. The FHLBNY’s Board is currently in the process of compiling a list of candidates.
Proposed Changes to Regulation of Government Sponsored Enterprises
In recent years, legislation has been considered by Congress that would, if enacted, establish a new regulator for the housing-related Government Sponsored Enterprises (i.e., the FHLBanks, Fannie Mae, and Freddie Mac) and address other Government Sponsored Enterprise reform issues. Such legislation has been reintroduced in the current session of Congress. It is uncertain at this time whether legislation affecting the FHLBanks, the other housing-related Government Sponsored Enterprises, and/or their regulators will be enacted into law.
Financial Condition: Assets, Liabilities, Capital, Commitments and Contingencies
Total assets at December 31, 2006 stood at $81.7 billion, down from $85.0 billion at December 31, 2005, in line with the Bank’s decision to lower balance sheet leverage to 20.9 times equity, slightly down from 21.9 times equity at December 31, 2005. The decrease in assets was principally driven by a decline in the advance balance of $2.9 billion to $59.0 billion at December 31, 2006 from $61.9 billion at December 31, 2005. The leverage ratio is also driven by stockholders’ capital, which increases and decreases with members’ advance borrowings. As capital declined in line with lower volumes of advances, the Bank adjusted its balance sheet assets to achieve the lower leverage by decreased holdings of short-term investments in certificates of deposits; the Bank, however, maintained its inventory of Federal funds sold to accommodate unexpected member needs for liquidity.
Investments classified as held-to-maturity, principally mortgage-backed securities, were up by $1.7 billion to $11.3 billion at December 31, 2006 compared to $9.6 billion at December 31, 2005.
The primary source of funds for the FHLBNY continued to be through issuance of consolidated obligation bonds and discount notes. Discount notes are consolidated obligations with maturities up to one year, and consolidated bonds have maturities of one year or longer. Reported consolidated obligations bonds and discount notes, outstanding at December 31, 2006 and 2005 were $74.2 billion and $77.3 billion, and funded 90.8% and 90.9% of total assets at those dates. Par amounts of consolidated obligation bonds outstanding at December 31, 2006 increased to $62.2 billion from $57.1 billion at December 31, 2005 to replace declining usage of discount notes. Consolidated obligation discount notes, the principal short-term funding source for the FHLBNY, declined to $12.2 billion at December 31, 2006 from $20.5 billion at December 31, 2005, as the Bank shifted to issuances of medium and long term bonds that were callable within a short horizon. Additionally, the Bank began to issue short-term callable bonds with call exercise dates within a 30 to 60 day time horizon. The very short lock-out periods created a possibility of call exercise within a short period after issuance, effectively creating short-term funding vehicle.
Member deposits totaled $2.4 billion at December 31, 2006, down from $2.7 billion at December 31, 2005. Changes in deposit balances reflect member preference for liquidity and availability of alternative investment vehicles. The FHLBNY does not rely on member deposits to meet its funding needs.
Retained earnings grew to $368.7 million at December 31, 2006, up from $291.4 million at December 31, 2005.
Advances
The FHLBNY’s primary business is making collateralized loans, known as “advances”, to members.
The growth or decline in advances reflects demand by members for both short-term liquidity and term funding driven by economic factors, such as availability to the Bank’s members of alternative funding sources that is more attractive, or by the interest rate environment and the outlook for the economy. Members may choose to prepay advances, which may incur prepayment penalty fees, based on their expectations of interest rate changes and economic demand for liquidity.
Demand may also be influenced by the FHLBNY’s dividend payout rate to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership stock and activity stock. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or another non-member, they no longer qualify for membership in the FHLBNY, and the FHLBNY may not offer advances to non-members. Consequently upon merger, maturing advances may not be replaced, and has an immediate impact on short-term and overnight lending.
Advances - Product Types
The following table summarizes par values of advances by product types (dollar in thousands):
Reported advances during 2006 exhibited uneven patterns. Demand increased gradually at first, grew sharply at the end of the second quarter, peaked at $70.0 billion in July 2006, and ultimately declined to $59.0 billion at December 31, 2006, down from $61.9 billion at December 31, 2005. The mid-year sharp increase was concentrated among a very small number of members that substantially increased their demand for short-term fixed, convertible borrowings and floating rate borrowings. Some of these borrowings were ultimately paid down in the last two quarters in 2006.
Impact of mergers and prepayments
Merger activity was an important factor contributing to the uneven pattern in advance balances during 2006. Typically, merger activity results in the loss of new business as the FHLBank Act does not permit new advances to former members or advances to replace maturing advances. Advances held by members who are acquired by non-members remain outstanding until their contractual maturities. In 2006, several mergers were followed by former members’ decisions to prepay advances rather than to wait for advances to run-down at their contractual maturity dates.
As a result, while merger activity was significant in 2006, the amount of advances held by former members at December 31, 2006 was not significantly higher than at December 31, 2005 - par amount of advances outstanding at December 31, 2006 associated with non-members aggregated $1.8 billion, up only $1.4 billion from $401.9 million at December 31, 2005.
In 2006, the first acquisition of a large member by a non-member was consummated in February 2006. That member’s borrowed advances had stood at $0.5 billion at December 31, 2005. In compliance with Finance Board regulations, the Bank was not permitted to advance new funds to the former member, nor was the Bank permitted to replace maturing advances. Either as a result of prepayment and or maturing advances not being replaced because of Finance Board’s restrictions, the former member had no outstanding balances at December 31, 2006. Acquisition of another large member by a non-member was consummated in September 2006. That member had total borrowed advances of $3.1 billion at December 31, 2005, and borrowings had grown to $3.8 billion at August 31, 2006. Again, as result of prepayments and or maturing advances not being replaced at maturity because of restrictions, the former member’s borrowed advance balance was down to $1.4 billion at December 31, 2006.
In addition to prepayments resulting because of mergers that had already been consummated in 2006, one large member, which had reached definitive agreement to be acquired by a non-member in 2007, decided to prepay, which also contributed to significant run-off during 2006. This member had outstanding borrowed advances of over $7.7 billion in August 2006. In anticipation of the merger in 2007, that member did not renew about $4.0 billion in maturing advances as would be customarily expected. In addition, the member prepaid $3.0 billion in the four months leading to December 31, 2006. The balance in borrowed advances that remained outstanding at December 31, 2006, was $0.5 billion.
North Fork and Capital One Financial Corporation (“Capital One”) announced a definitive agreement on March 12, 2006, under which Capital One will acquire North Fork. Capital One is a holding company of certain financial institutions that are members of other FHLBanks. North Fork is a member of the FHLBNY. Under Finance Board rules, when North Fork is acquired by Capital One and the charter dissolved, North Fork will be considered a non-member for the purpose of being eligible for additional borrowings, and the FHLBNY may not advance additional funds to North Fork, but may allow existing advances to mature or be liquidated in an orderly manner. Under that scenario, the accounting provisions of SFAS 150 will require the FHLBNY to reclassify to a liability stock held by North Fork. North Fork’s outstanding borrowings amounted to $500.0 million in short-term advances at December 31, 2006. Interest income from advances derived from North Fork amounted to $293.7 million and $261.8 million for the years 2006 and 2005. Capital stock held by North Fork at September 30, 2006 aggregated $7.9 million, and comprised entirely of membership stock.
In summary, advances prepaid in 2006 totaled $5.3 billion, of which $3.5 billion occurred in the fourth quarter of 2006.
The Bank has maintained pricing discipline on all advance transactions, rather than compete for volume by lowering prices, consistent with management’s view that decline in demand for advances were partly driven by merger activity and partly by the action of a few large members, and an adjustment to advance pricing was not necessary. Additionally, the Bank’s strategy is designed to trade off volume for profitability and to enhance retained earnings. The management of the FHLBNY believes it was successful in the implementation of the strategy.
The Bank’s success in diversifying its customer base has minimized the prepayment actions of a few large members. The Bank has been successful in diversifying its source of advances amongst its smaller members and by reaching out to certain larger members who have been less active in borrowing from the FHLBNY. Concentration of advances among the largest borrowers at the FHLBNY is relatively low. This diversification of advances has been a significant achievement, and sustaining this progress is an important goal for the FHLBNY in the future.
Impact of the interest rate environment
The interest rate environment was another factor in contributing to declining advance demand. As interest rates began to rise during the second half of 2006, the level of refinancing activity declined, and the strength of member demand for borrowings in the second quarter did not continue in the remaining two quarters in 2006. Instead, demand declined. Advance borrowers appeared also to be reluctant to add longer-term assets on their own books in the face of a flat-to-inverted interest rate environment, and this too was a factor in explaining weakening appetite for longer- term advances.
In a rising interest rate environment, the frequency of puts exercised on convertible (putable), hedged advances increased. The Bank had hedged much of the putable advances with callable pay-fixed, receive-LIBOR indexed interest rate swaps. In a rising rate environment, derivative counterparties, who own the call option on the swaps, were more likely to exercise their right to call. During 2006, the Bank exercised its option to put back $7.5 billion in hedged putable advances in parallel with the call on the associated swap exercised by derivative counterparties.
Member demand for advances
Fixed-Rate Advances are flexible funding tools that can be used by members to meet short- to long-term liquidity needs. Terms vary from 2 days to 30 years. Fixed-rate advances were the largest category of advances.
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Demand for Fixed-rate advances was strong during first three quarters of 2006 and the outstanding amounts steadily increased from $25.7 billion at December 31, 2005 to $30.0 billion at September 30, 2006. Prepayment activity in the fourth quarter of 2006 drove down the balance to $29.9 billion at December 31, 2006, although still up from last year-end by $4.2 billion. Within this category, the largest increase was in member demand for fixed-rate putable advances.
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Fixed-rate, putable advances are competitively priced where the FHLBNY has purchased the option from the member to put the advance back to borrowers (members) at predetermined exercise dates. This feature lowers the member’s cost of the advance. These advances are known as “convertible” or “putable” advances. On the date of the put, the existing advance is matured. The member may request an advance of any type or term within the available suite of advance products that is offered to all members on that day. In order to qualify for an advance, regardless of whether or not the advance is replacement funding, a member must meet the Bank’s credit and collateral criteria. Growth in putable advances was largely attributable to the borrowing preference of a small number of members that were experiencing strong asset growth.
REPO Advances are secured by eligible securities and can be structured to have fixed or variable interest rate, “bullet” or quarterly interest payments, and a put option, by which the FHLBNY receives an option to require payment after a predetermined lockout period. Members may use U.S Treasuries, Agency-issued debentures, and mortgage-backed securities as collateral. Repurchase (“REPO Advances”) agreement advances were once the second largest category of advances.
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Over the years demand has declined primarily due to changes in pricing. Demand for REPO Advances and short-term fixed-rate advances have fluctuated with members’ needs for short-term funding, and the availability of collateral and competitive pricing. REPO Advances are collateralized by eligible securities, which are typically mortgage-backed securities, Agency-issued debentures, and U.S. Treasury securities. REPO Advances may be structured as “bullets” or with a put option by which the FHLBNY may put the advance to the member after a predetermined lockout period.
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During the quarter ended September 30, 2006, demand declined further as one borrower reduced its inventory of eligible securities for collateralization of the REPO Advances, and replaced maturing REPO Advances with the FHLBNY’s short-term, fixed-rate advances. Borrowing members collateralized these replacement borrowings with residential mortgages. The declining trend continued in the fourth quarter of 2006, when another $1.3 billion matured and was not replaced. The largest component of the decline in the REPO Advance category was REPO convertible with the put feature as members chose not to replace advances that were put or matured with new REPO convertible funding.
ARC Advances are medium- and long-term loans that can be pegged to a variety of indices, such as 1-month LIBOR, 3-month LIBOR, or the Federal funds rate. Members use an ARC Advance to manage interest rate and basis risks by efficiently matching the interest rate index and repricing characteristics of floating-rate assets and liabilities. The interest rate is set and reset (depending upon the maturity of the advance and the type of index) at a spread to that designated index. Principal is due at maturity and interest payments are due at every reset date, including the final payment. Adjustable-Rate Credit Advances (“ARC Advances”) have continued to be a significant category of advances.
Member demand for short-term, fixed rate advances was very uneven in 2006. During most of the first two quarters of 2006, demand was below the aggregate balance of $4.2 billion at the beginning of 2006. Since then the borrowing activities of a few borrowers explain the substantial run-up in this category in early September 2006 when outstanding balances peaked at $9.3 billion. One member replaced a substantial amount of REPO borrowings with short-term advances. In a flat yield curve environment, most members appeared to prefer shorter-term assets funded with short-term advances. Demand in the third quarter retreated mainly because of the run-offs from merger activity in September 2006 and the outstanding balance in this category declined to $7.6 billion at September 30, 2006. Since then, significant prepayments and lackluster demand drove down the balance to $1.8 billion at December 31, 2006, down by $2.4 billion from December 31, 2005.
The OLOC program gives members a short-term, flexible, readily accessible revolving line of credit for immediate liquidity needs. OLOC Advances mature on the next business day, at which time the advance is repaid. Interest is calculated on a 360-day basis, charged daily, and priced at a spread to the prevailing Federal funds rate.
Advances - Maturities and coupons
The FHLBNY’s advances outstanding are summarized below by year of maturity (dollar amounts in thousands):
*Discounts on AHP advances were amortized to interest income using the level-yield method and were not significant for all periods reported. Amortization of fair value basis adjustments for terminated hedges was a charge to interest income and amounted to ($0.4) million, ($0.5) million, and ($0.4) million for the years ended December 31, 2006, 2005 and 2004. All other amortization charged to interest income aggregated ($0.6) million, ($0.7) million, and ($0.7) million for the years ended December 31, 2006, 2005 and 2004. Interest rates on AHP advances ranged from 1.25% to 8.29% in 2006 and 2005.
The weighted average yield is the weighted average coupon rates for advances, unadjusted for swaps.
Par amount of approximately $24.7 billion, or 41.9%, of the total $58.9 billion in par value of all advances at December 31, 2006 had a remaining maturity less than two years, compared to $24.5 billion, or 39.7% at December 31, 2005.
Impact of hedging
The Bank hedged certain advances under the provisions of SFAS 133 by the use of both callable and non-callable interest rate swaps in fair value hedges. Certain LIBOR-indexed advances have “capped” coupons. These caps were offset by purchased options (caps) with mirror image terms. Fair value changes of caps due to changes in the benchmark rate were recorded through “Realized and unrealized gains losses on derivative activities.”
The most significant elements that impacted balance sheet reporting included the recording of fair value basis adjustments. Also, when advances were hedged by callable swaps, the possibility of exercise of the swaps and the associated advances shortened the effective maturities of the advances. The impact on the Bank’s income from hedging advances is discussed in “Results of Operations” elsewhere in the MD&A. Its impact as a risk management tool is discussed in Item 7A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management. Market risk, or interest rate risk, is the risk of loss in market value or future earnings that may result from changes in interest rates or market volatility. The FHLBNY’s tolerances for market risk are defined by the Risk Management Policy approved by its Board of Directors. The Risk Management Policy requires that the Bank maintain its duration of equity, or interest rate sensitivity, within a range of +/- five years. The FHLBNY uses option adjusted duration measurements to detail the sensitivity of equity market value and includes all financial instruments, including hedges. The policy also requires that, in simulated environments where market interest rates are increased or decreased by 200 basis points relative to current market rates, the FHLBNY’s duration of equity must remain within a range of +/- seven years. Management actively monitors and evaluates the effects of interest rate and market risk on earnings and on the market value of equity. The shock levels are chosen in accordance with internal policy and regulatory requirements to estimate the effects of significant interest rate changes on the FHLBNY’s market value.
The key elements of the FHLBNY’s strategy for interest rate risk management include (1) matching the cash flow patterns of assets and liabilities through time and under different interest rate scenarios; and (2) actively measuring and managing the balance sheet’s exposure to changes in interest rate levels (and associated spreads) and market volatilities.
Over the one-year period from December 31, 2005 to December 31, 2006, duration of equity increased from 0.98 years to 1.10 years, indicating higher sensitivity to changes in interest rates. The Bank’s risk level remained within the limits of +/- five years. As of December 31, 2006, the cumulative one-year gap between assets and liabilities was $2.8 billion, up $271 million from December 2005 and down $709 million from September 30, 2006.
During the period December 31, 2005 to December 31, 2006, the FHLBNY’s market risk profile changed as summarized in Duration of Equity tables in subsequent sections of “Market Risk Management”. They illustrate that the FHLBNY has remained within its policy and regulatory requirements during the period.
The FHLBNY’s funding consists of a combination of short- and long-term debt instruments which do not necessarily have matching interest rate sensitivities with the FHLBNY’s investments. To more closely match the sensitivity, the FHLBNY uses derivative instruments to adjust the effective maturities, repricing frequencies, or option characteristics of the debt in a way that is consistent with the overall risk management objectives of match funding.
The FHLBNY typically enters into interest rate swaps, swaptions and cap and floor agreements (collectively referred to as derivatives). The FHLBNY uses such derivatives in three ways: (1) as fair value or cash flow hedges of an underlying financial instrument or a forecasted transaction; (2) as economic hedges to offset derivative positions (e.g., caps) sold to members; and (3) as tools of asset/liability management. In the context of its asset/liability management strategy, the FHLBNY uses derivatives to adjust the interest rate sensitivity of consolidated obligations to more closely approximate the interest rate sensitivity of assets. For instance, the FHLBNY may use a swap to effectively convert a fixed-rate consolidated obligation into a floating-rate obligation with repricing characteristics close to those of the investment being funded.
Because a significant portion (about 14.8%) of the FHLBNY’s balance sheet as of December 31, 2006 consists of mortgage-backed securities and other mortgage-related assets, the FHLBNY is exposed to mortgage prepayment risk. The FHLBNY is exposed to a degree of interest rate risk because the cash flows of the mortgage assets and the associated liabilities that fund them are not perfectly matched through time and across all possible interest rate scenarios. The cash flows from mortgage assets are highly sensitive to changes in interest rates because of the borrowers’ prepayment option. As interest rates decrease, borrowers are more likely to refinance fixed-rate mortgages, resulting in increased prepayments and mortgage cash flows that are received earlier than would otherwise occur. Replacing the higher-rate loans that are prepaid with lower-rate loans has the potential to reduce the FHLBNY’s interest spread unless the Bank can also reduce its debt cost. Conversely, an increase in interest rates may result in slower prepayments and mortgage cash flows being received later than would otherwise occur. In this case, the FHLBNY runs the risk that the debt may re-price faster than the mortgage assets and at a higher cost. This could also reduce the interest spread.
When purchasing mortgage assets, the FHLBNY attempts to issue liabilities with similar cash flows in order to achieve a stable net interest spread. The FHLBNY issues a mix of debt securities across a broad spectrum of final maturities to achieve the desired liability characteristics. Because the estimated lives of mortgage assets change as interest rates change, the FHLBNY issues callable debt or uses derivatives to alter the estimated life of liabilities and offset the expected change in cash flows of our mortgage assets.
Risk measurement at the FHLBNY takes two major forms: (1) ongoing business risk measures and analyses; and, (2) stress test scenarios. These two categories of measures help the FHLBNY in its day-to-day risk management decisions. Stress test scenarios identify and quantify the FHLBNY’s exposure to extreme but improbable events.
Ongoing business risk measures and analyses seek to quantify the level of net interest income at risk (i.e., how much income the FHLBNY could lose as a result of various types of arbitrarily large interest rate shocks). These calculations essentially amount to studying the impact of stressful interest rate shocks on projected net interest income. The projections start from a “snapshot” of the current balance sheet and simulate its evolution, over a one-year horizon, taking into account business projections of the likely behavior of advances and assumptions about the net spread earned on each asset category. The result is a one-year projection of net interest income. Changes to that initial forecast by stressful interest rate scenarios then give the FHLBNY a measure of how much income it could gain or lose under each scenario. Experience has shown that such analyses, even though they rely heavily on assumptions, provide a reasonable measure of the risks that the FHLBNY incurs as a going concern, regardless of the interest rate environment. As defined by the FHLBNY, net interest income at risk measures the percentage change in projected net interest income from the spread between asset yields and liability costs resulting from an instantaneous, parallel +/- 200 basis-point rate shock. This risk measure is reported to the Board of Directors in accordance with the Risk Management Policy. To manage its interest rate risk, the FHLBNY keeps close watch on the difference between the interest rate sensitivity (duration) of its assets and the duration of its liabilities. This difference between the estimated durations of portfolio assets and liabilities is called the duration gap. The duration gap represents the extent to which estimated cash flows for assets and liabilities are matched, on average, over time and across interest rate scenarios. A positive duration gap signals a greater exposure to rising interest rates because it indicates that the duration of assets exceeds the duration of liabilities. A negative duration gap signals a greater exposure to declining interest rates because the duration of assets is less than the duration of liabilities.
A stress test aims at capturing the impact of extreme (but rare) market rate changes on the market value of equity and net interest income. The FHLBNY has developed a technique to identify the interest rate and volatility scenario that can cause the most severe loss in the market value of equity, given current market and balance sheet conditions. Every month, this scenario is applied to the FHLBNY’s balance sheet and the resulting loss in the market value of equity is evaluated. Besides providing a measure of the potential loss under the extreme scenario, this technique enables the FHLBNY to identify the nature of the changes in market risk factors to which it is the most sensitive, allowing FHLBNY to take appropriate action to address those risk factors. The FHLBNY views such additional tests as an integral part of its risk management strategy.
The FHLBNY monitors the balance sheet and adjusts it as necessary to contain interest rate risk within the Bank’s policy limits on the sensitivity of net interest income from spread, the size of periodic repricing gaps, and equity duration.
Net Interest Income at Risk. During the one-year period, there were no substantive changes to the FHLBNY’s modeling processes. As of December 31, 2006, the FHLBNY’s one-year net interest income from spread at risk measures were -1.96% and -2.23% compared to 1.28% and -13.65% on September 30, 2006 and 4.29% and -2.93% on December 31, 2005 under the 200 basis-point up and down shocks. These figures are calculated from the perspective of an ongoing business and are, therefore, based on certain assumptions regarding the probable evolution of the FHLBNY’s main line of business, advances, and its cost of funds. The FHLBNY’s limit on net interest income from spread at risk is -15%. The Bank was, therefore, within its limit for net interest income sensitivity at December 31, 2006 and at December 31, 2005. The FHLBNY monitors its repricing gaps primarily to limit the variability of net interest income.
Sensitivity of Duration of Equity
The following table summarizes the sensitivity of the duration of equity as of December 31, 2006, 2005, and 2004 (in years):
The following tables track the behavior of the FHLBNY’s duration of equity at the end of the following months during 2006, 2005 and 2004:
Note: Numbers may not add due to rounding.
Note: Numbers may not add due to rounding.
Note: Numbers may not add due to rounding.
The following table displays the FHLBNY’s maturity/repricing gaps as of December 31, 2006 (in millions):
Note: Numbers may not add due to rounding.
The following table displays the FHLBNY’s maturity/repricing gaps as of December 31, 2005 (in millions):
Note: Numbers may not add due to rounding.
Operational Risk Management
Operational risk is the risk of loss resulting from the failures or inadequacies of internal processes, people, and systems, or resulting from external events. Operational risks include those arising from fraud, human error, computer system failures and a wide range of external events - from adverse weather to terrorist attacks. The management of these risks is the responsibility of the senior managers at the operating level. To assist them in discharging this responsibility and to ensure that operational risk is managed consistently throughout the organization, the FHLBNY has developed an operational risk management framework, which continues to evolve. The FHLBNY’s Operational Risk Management framework defines the core governing principles for operational risk management and provides the framework to identify, control, monitor, measure, and report operational risks in a consistent manner across the FHLBNY.
Risk and Control Self-Assessment
FHLBNY’s Risk and Control Self-Assessment incorporates standards for risk and control self-assessment which standards apply to all businesses and establish Risk and Control Self-Assessment as the process for identifying the risks inherent in a business’ activities and for evaluating and monitoring the effectiveness of the controls over those risks. It is the policy of the FHLBNY to require businesses and staff functions to perform a Risk and Control Self-Assessment on a periodic basis. The Risk and Control Self-Assessment must include documentation of the control environment as well as policies for assessing risks and controls, testing commensurate with risk level and tracking corrective action for control breakdowns or deficiencies. The Risk and Control Self-Assessment also must require periodic reporting to senior management and to the Board’s Audit and Risk Management Committee.
Information Security and Continuity of Business
A particular area of focus in recent years has been business continuity planning and disaster recovery preparedness. The Bank’s operations and recovery data centers are connected by diverse, high-speed telecommunications links, allowing real-time replication of critical data.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Supplementary Data
Supplementary financial data for each full quarter within the two years ended December 31, 2006, are included in Item 6. SELECTED FINANCIAL DATA (unaudited).
Management’s Assessment of Internal Control over Financial Reporting
The management of the Federal Home Loan Bank of New York (the “Bank”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Bank’s internal control over financial reporting is designed by, or under the supervision of, the Principal Executive Officer and the Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Bank’s management assessed the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, management of the Bank determined that as of December 31, 2006, the Bank’s internal control over financial reporting was effective based on those criteria.
PricewaterhouseCoopers LLP, the Bank’s independent registered public accounting firm that audited the accompanying Financial Statements has also issued an audit report on our assessment of the Bank’s internal control over financial reporting. Their report, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2006, appears on the following page.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
the Federal Home Loan Bank of New York:
We have completed an integrated audit of the Federal Home Loan Bank of New York (the “Bank”)’s 2006 financial statements and of its internal control over financial reporting as of December 31, 2006 and audits of its 2005 and 2004 financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Financial statements
In our opinion, the accompanying statements of condition and the related statements of income, capital and cash flows, present fairly, in all material respects, the financial position of the Bank at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Bank changed its method of accounting for mandatorily redeemable capital stock on January 1, 2004. As discussed in Note 2, the Bank changed its method of accounting for amortization and accretion of premiums and discounts on mortgage loans on January 1, 2005. Also, as discussed in Note 2, the Bank changed its method of accounting for defined benefit pensions and other postretirement benefits on December 31, 2006.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting, that the Bank maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Bank’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Bank’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 28, 2007
Federal Home Loan Bank of New York
Statements of Condition (in thousands, except par value)
As of December 31, 2006 and 2005
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of New York
Statements of Income (in thousands, except per share data)
Years Ended December 31, 2006, 2005, and 2004
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of New York
Statements of Capital (in thousands, except per share data)
Years Ended December 31, 2006, 2005, and 2004
*
Putable stock
**
Shares reclassified to Mandatorily Redemable Capital
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of New York
Statements of Cash Flows - (in thousands)
Years Ended December 31, 2006, 2005, and 2004
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of New York
Statements of Cash Flows - (in thousands)
Years Ended December 31, 2006, 2005, and 2004
*
Does not include payments to holders of mandatorily redeemable capital stock.
**
AHP payments = (beginning accrual - ending accrual) + AHP assessment for the year; payments represent funds released to the Affordable Housing Program.
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of New York
Notes to Financial Statements
Background
The Federal Home Loan Bank of New York (“FHLBNY” or “the Bank”) is a federally chartered corporation, exempt from federal, state and local taxes except real property taxes. It is one of twelve district Federal Home Loan Banks (“FHLBanks”). The FHLBanks are U.S. government-sponsored enterprises (“GSEs”), organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”). Each FHLBank is a cooperative owned by member institutions located within a defined geographic district. The members purchase capital stock in the FHLBank and receive dividends on their capital stock investment. The FHLBNY’s defined geographic district is New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. The FHLBNY provides a readily available, low-cost source of funds for its member institutions. The FHLBNY does not have any wholly or partially owned subsidiaries, nor does it have an equity position in any partnerships, corporations, or off-balance-sheet special purpose entities.
Members of the cooperative must purchase FHLBNY stock according to regulatory requirements. The business of the cooperative is to provide liquidity for the members (primarily in the form of loans) and to provide a return on members’ investment in FHLBNY stock in the form of a dividend. Since the members are both stockholders and customers, there is a trade-off between providing value to them via low pricing for advances with a relatively lower dividend versus higher advances pricing with a relatively higher dividend. The FHLBNY is managed to deliver balanced value to members, rather than to maximize profitability or advance volume through low pricing.
All federally insured depository institutions, insured credit unions and insurance companies engaged in residential housing finance can apply for membership in the FHLBank in their district. All members are required to purchase capital stock in the FHLBNY as a condition of membership. A member of another FHLBank or a financial institution that is not a member of any FHLBank may also hold FHLBNY stock as a result of having acquired an FHLBNY member. As a result of the membership requirements, the FHLBNY conducts business with related parties in the normal course of business and considers all members and non-member stockholders as related parties in addition to the other FHLBanks.
The FHLBNY’s primary business is making collateralized loans, known as “advances,” to members. This is the primary focus of the Bank’s operations and also the principal factor that impacts the financial condition of the FHLBNY.
The FHLBNY is supervised and regulated by the Federal Housing Finance Board (“Finance Board”), which is an independent agency in the executive branch of the U.S. government. The Finance Board ensures that the FHLBNY carries out its housing and community development mission, remains adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner. However, while the Finance Board establishes regulations governing the operations of the FHLBanks, the Bank functions as a separate entity with its own management, employees and board of directors.
The FHLBNY obtains its funds from several sources. A primary source is the sale of FHLBank debt instruments, called consolidated obligations, to the public. The issuance and servicing of consolidated obligations are performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Board. These debt instruments represent the joint and several obligations of all the FHLBanks. Additional sources of FHLBNY funding are member deposits, other borrowings, and the issuance of capital stock. Deposits may be accepted from member financial institutions and federal instrumentalities.
Federal Home Loan Bank of New York
Notes to Financial Statements
The Code of Business Conduct and Ethics is posted in the Corporate Governance Section of the FHLBNY’s website at www.fhlbny.com
Tax Status
Resolution Funding Corporation (“REFCORP”) Assessments. Although the FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax, it is required to make payments to REFCORP.
REFCORP was established by an Act of Congress in 1989 to help facilitate the U.S. government’s bailout of failed financial institutions. The REFCORP assessments are used by the Treasury to pay a portion of the annual interest expense on long-term obligations issued to finance a portion of the cost of the bailout. Principal of those long-term obligations is paid from a segregated account containing zero-coupon U.S. government obligations, which were purchased using funds that Congress directed the FHLBanks to provide for that purpose.
Each FHLBank is required to pay 20 percent of income calculated in accordance with accounting principles generally accepted in the U.S. (“GAAP”) after the assessment for Affordable Housing Program, but before the assessment for the REFCORP. The Affordable Housing Program and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBNY accrues its REFCORP assessment on a monthly basis.
The Resolution Funding Corporation has been designated as the calculation agent for the Affordable Housing Program and REFCORP assessments. Each FHLBank provides the amount of quarterly net income before Affordable Housing Program and REFCORP to the Resolution Funding Corporation, which then performs the calculations for each quarter end.
Affordable Housing Program (“AHP” or “Affordable Housing Program”) Assessments. Section 10(j) of the FHLBank Act requires each FHLBank to establish an Affordable Housing Program. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the Affordable Housing Program the greater of $100 million or 10 percent of regulatory net income. Regulatory net income is defined as GAAP net income before interest expense related to mandatorily redeemable capital stock under Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”), and the assessment for Affordable Housing Program, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Board. The FHLBNY accrues the AHP expense monthly.
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 1. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make assumptions and estimates. These assumptions and estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of income and expense. Actual results could differ from these estimates.
Federal Funds Sold
Federal funds sold represents short-term, unsecured lending to major banks and financial institutions. The amount of unsecured credit risk that may be extended to individual counterparties is commensurate with the counterparty’s credit quality, which is determined by credit ratings of counterparty’s debt securities or deposits as reported by Nationally Recognized Statistical Rating Organizations. Federal funds sold are recorded at cost on settlement date and interest is accrued using contractual rates.
Interest-bearing Deposits
The Bank invests in certificates of deposits with maturities not exceeding one year issued by major financial institutions. Certificates of deposits are recorded at amortized cost and reported as interest-bearing deposits in the statements of condition.
Investments
The FHLBNY carries investments for which it has both the ability and intent to hold to maturity at cost, adjusted for the amortization of premiums and accretion of discounts using the level-yield method.
Under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), changes in circumstances may cause the FHLBNY to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness or changes in regulatory requirements, is not considered inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the FHLBNY that could not have been reasonably anticipated may cause the FHLBNY to sell or transfer a held-to-maturity security without necessarily calling into question its intent to hold other debt securities to maturity.
In addition, in accordance with SFAS 115, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (1) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value, or (2) the sale of a security occurs after the FHLBNY has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.
The FHLBNY classifies investments that it may sell before maturity as available-for-sale and carries them at fair value. The change in fair value of the available-for-sale securities not being hedged by derivative instruments is recorded in other comprehensive income as a net unrealized gain or loss on available-for-sale securities. For available-for-sale securities that have been hedged (none at December 31, 2006 or 2005) under a qualifying fair value hedge, the FHLBNY records the portion of the change in value related to the risk being hedged in Other income (loss) as “Net realized and unrealized (loss) gain on derivatives and hedging activities” together with the related change in the fair value of the derivative, and records the remainder of the change in other comprehensive income as “Net unrealized gain (loss) on available-for-sale securities.” For available-for-sale securities that have been hedged under a qualifying cash flow hedge, the FHLBNY records the effective portion of the change in value of the derivative related to the risk being hedged in other comprehensive income as a “Net unrealized (loss) gain on hedging activities.” The ineffective portion is recorded in Other income (loss) and presented as “Net realized and unrealized (loss) gain on derivatives and hedging activities.”
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY computes the amortization and accretion of premiums and discounts on mortgage-backed securities using the level-yield method over the estimated lives of the securities. The estimated life method requires a retrospective adjustment of the effective yield each time the FHLBNY changes the estimated life as if the new estimate had been known since the original acquisition date of the asset.
The FHLBNY computes the amortization and accretion of premiums and discounts on mortgage loans and other investments using the level-yield method to the contractual maturities of the loans and investments. The FHLBNY computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in Other income (loss). The FHLBNY treats securities purchased under agreements to resell as collateralized financings because the counterparty retains control of the securities.
The FHLBNY regularly evaluates its investments for impairment and determines if unrealized losses are temporary based in part on the creditworthiness of the issuers and the underlying collateral as well as a determination of the FHLBNY’s intent to hold such securities through to recovery of the unrealized losses. If there is an other-than-temporary impairment in value of an investment, the decline in value is recognized as a loss and presented in the statements of income as a loss on securities. The FHLBNY did not experience any other-than-temporary impairment in value of investments during 2006, 2005 or 2004.
Advances
The FHLBNY reports advances, net of unearned commitment fees and discounts on advances for the Affordable Housing Program (“AHP”), at amortized cost. The FHLBNY credits interest on advances to income as earned using the level-yield method. Following the requirements of the Federal Home Loan Bank Act of 1932, (“FHLBank Act”), as amended, the FHLBNY obtains sufficient collateral on advances to protect it from losses. The FHLBank Act limits eligible collateral to certain investment securities, residential mortgage loans, cash or deposits with the FHLBNY, and other eligible real estate related assets. As Note 7 more fully describes, community financial institutions (FDIC-insured institutions with assets of $587 million or less during 2006) are subject to more expanded statutory collateral rules for small business and agricultural loans. The FHLBNY has not incurred any credit losses on advances since its inception. Based upon the collateral held as security on the advances and repayment history, management of the FHLBNY believes that an allowance for credit losses on advances is unnecessary.
Mortgage Loans Held-for-portfolio
The FHLBNY participates in the MPF program by purchasing and originating conventional mortgage loans from its participating members, herein after referred to as Participating Financial Institutions (“PFI”). Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) insured loans purchased were not a significant total of the remaining outstanding mortgage loans held-for-investment at December 31, 2006. The FHLBNY manages the liquidity, interest rate and prepayment option risk of the MPF loans, while the PFIs retain servicing activities. The FHLBNY and the PFI share the credit risks of the uninsured MPF loans by structuring potential credit losses into layers. Collectibility of the loans is first supported by liens on the real estate securing the loan. For conventional mortgage loans, additional loss protection is provided by private mortgage insurance required for MPF loans with a loan-to-value ratio of more than 80% at origination, which is paid for by the borrower. Credit losses are absorbed by the FHLBNY to the extent of the First Loss Account (“FLA”), for which the maximum exposure is estimated to be $12.2 million and $11.3 million at December 31, 2006 and 2005. The aggregate amount of FLA is memorialized and tracked but is neither recorded nor reported as a loan loss reserve in the FHLBNY’s financial statements. If “second losses” beyond this layer are incurred, they are absorbed through a credit enhancement provided by the PFI. The credit enhancement held by PFIs ensures that the lender retains a credit stake in the loans it sells to the FHLBNY and/or originates as an agent for the FHLBNY (only relates to MPF 100 product). For managing this risk, PFIs receive monthly “credit enhancement fees” from the FHLBNY.
Federal Home Loan Bank of New York
Notes to Financial Statements
The amount of the credit enhancement is computed with the use of a Standard & Poor’s model to determine the amount of credit enhancement necessary to bring a pool of uninsured loans to “AA” credit risk. The credit enhancement becomes an obligation of the PFI. For certain MPF products, the credit enhancement fee is accrued and paid each month. For other MPF products, the credit enhancement fee is accrued monthly and is paid monthly after the FHLBNY has accrued 12 months of credit enhancement fees.
Delivery commitment fees are charged to a PFI for extending the scheduled delivery period of the loans. Pair-off fees may be assessed and charged to PFI when the settlement of the delivery commitment (1) fails to occur, or (2) the principal amount of the loan purchased by the FHLBNY under a delivery commitment is not equal to the contract amount beyond established limits. The related amounts are not significant for all periods reported. Extension fees are received when a member requests to extend the period of the delivery commitment beyond the original stated maturity.
The FHLBNY records credit enhancement fees as a reduction to mortgage loan interest income. The FHLBNY records other non-origination fees, such as delivery commitment extension fees and pair-off-fees as derivative income over the life of the commitment. All such fees were inconsequential for all periods reported. Mortgage loans are recorded at fair value on settlement date.
The FHLBNY defers and amortizes premiums, costs and discounts as interest income using the contractual method. The FHLBNY classifies mortgage loans as held-for-investment and, accordingly, reports them at their principal amount outstanding, net of premiums, costs and discounts.
The FHLBNY places a mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBNY records cash payments received on non-accrual loans as a reduction of principal.
Allowance for credit losses. The Bank performs periodic reviews of its portfolio to identify the losses inherent within the portfolio and to determine the likelihood of collection of the portfolio. Mortgage loans, that are either classified under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due, are separated from the aggregate pool, and evaluated separately for impairment.
The FHLBNY had established an allowance for credit losses in the amount of $593 thousand and $582 thousand as of December 31, 2006 and 2005.
The Bank identifies inherent losses through analysis of the conventional loans (not FHA and VA insured loans) that are not adversely classified or past due. In the absence of historical loss data, the practice is to look at loss histories of pools of loans at other financial institutions with similar characteristics to determine a reasonable basis for a loan loss allowance. Management continues to evaluate this practice for appropriateness. When a loan is foreclosed, the Bank will charge to the loan loss reserve account any excess of the carrying value of the loan over the net realizable value of the foreclosed loan.
Federal Home Loan Bank of New York
Notes to Financial Statements
If adversely classified, or on non-accrual status, reserves for mortgage loans, except FHA and VA insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses greater than $1,000 are fully reserved. FHA and VA insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicers defaulting on their obligations. FHA and VA mortgage loans, if adversely classified, will have reserves established only in the event of a default of a PFI. Reserves are based on the estimated costs to recover any uninsured portion of the MPF loan.
The FHLBNY also holds participation interests in residential and community development mortgage loans through its Community Mortgage Asset (“CMA”) program. Acquisition of participations under the CMA program was suspended indefinitely in November 2001, and outstanding balances were down to $4.9 million at December 31, 2006 compared to $9.7 million at December 31, 2005. If adversely classified, CMA loans will have additional reserves established based on the shortfall of the underlying estimated liquidation value of collateral to cover the remaining balance of the CMA loan. Reserve values are calculated by subtracting the estimated liquidation value of the collateral (after sale value) from the current remaining balance of the CMA loan.
Affordable Housing Program
The FHLBank Act requires each FHLBank to establish and fund an AHP (see Note 8). The FHLBNY charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The FHLBNY also issues AHP advances at interest rates below the customary interest rate for non-subsidized advances. When the FHLBNY makes an AHP advance, the present value of the variation in the cash flow caused by the difference between the AHP advance interest rate and the Bank’s related cost of funds for comparable maturity funding is charged against the AHP liability. It is then recorded as a discount on the AHP advance. The amount of such discounts recognized was inconsequential for all years reported. As an alternative, the FHLBNY has the authority to make the AHP subsidy available to members as a grant.
AHP Assessment is based on a fixed percentage of annual net income before assessments and before adjustment for dividends associated with mandatorily redeemable capital stock reported as an expense under SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” If the FHLBNY incurs a loss for the entire year, no assessment or assessment credit is due or accrued, as explained more fully in Note 8.
Prepayment Fees
The FHLBNY charges a member a prepayment fee when the member prepays certain advances before the original maturity. The FHLBNY records prepayment fees net of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” basis adjustments included in the book basis of the advance as interest income from advances. In cases in which the FHLBNY funds a new advance concurrent with the prepayment of an existing advance, the FHLBNY evaluates whether the new advance meets the accounting criteria to qualify as a modification of an existing advance or as a new advance in accordance with EITF Issue No. 01-7, “Creditor’s Accounting for a Modification or Exchange of Debt Instruments,” and SFAS No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.”(“SFAS 91”).
If the new advance qualifies as a modification of the existing hedged advance, the hedging fair value adjustments and the net prepayment fee on the prepaid advance are recorded in the carrying value of the modified advance and amortized over the life of the modified advance in interest income from advances.
Federal Home Loan Bank of New York
Notes to Financial Statements
For advances that are hedged and meet the hedge accounting requirements of SFAS 133, the FHLBNY terminates the hedging relationship upon prepayment and records the associated fair value gains and losses, adjusted for the prepayment fees, in interest income. If the FHLBNY funds a new advance to a member concurrent with after the prepayment of a previous advance to that member, the FHLBNY evaluates whether the new advance qualifies as a modification of the original hedged advance, including analysis of (i) whether the effective yield on the new advance is at least equal to the effective yield for a comparable advance to a similar member that is not refinancing or restructuring and (ii) whether the modification of the original advance is more than minor. If the new advance qualifies as a modification of the original hedged advance, the fair value gains or losses of the advance and the prepayment fees are included in the carrying amount of the modified advance, and gains or losses and prepayment fees are amortized to interest income over the life of the modified advance using a method that closely approximates the level-yield method. If the modified advance is also hedged and the hedge meets the hedging criteria in accordance with SFAS 133, basis adjustments continue to be made after the modification, and subsequent value changes attributable to hedged risks are recorded in Other income (loss). The basis adjustment amortization amounted to a net decrease to net interest income of $2.1 million, $3.6 million and $3.8 million for the years ended December 31, 2006, 2005 and 2004, and a corresponding increase to net realized and unrealized gains and losses on derivatives and hedging activities.
If the FHLBNY determines that the transaction does not qualify as a modification of an existing advance, it is treated as an advance termination with subsequent funding of a new advance and the net prepayment fees are recorded in interest income from advances.
Commitment Fees
The FHLBNY records the present value of fees receivable from standby letters of credit as an asset and an offsetting liability for the obligation. Fees, which are generally received for one year in advance, are recorded as unrecognized standby commitment fees (deferred credit) and amortized monthly over the commitment period. The FHLBNY amortizes fees received to income using the level-yield method. The amount of fees was not significant for all periods reported.
Derivatives
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans outstanding at December 31, 2006, and purchased caps and floors if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.
The FHLBNY records derivatives on trade date, but records the associated hedged consolidated obligations and advances on settlement date. Hedge accounting commences on trade date, at which time subsequent changes to the derivative’s fair value are recorded along with the offsetting changes in the fair value of the hedged item attributable to the risk being hedged. On settlement date, the adjustments to the hedged item’s carrying amount are combined with the proceeds and become part of its total carrying amount.
The FHLBNY has defined its market settlement conventions for hedged items to be five business days or less for advances and thirty calendar days or less, using a next business day convention, for consolidated obligations bonds and discount notes. These market settlement conventions are the shortest period possible for each type of advance and consolidated obligation from the time the instruments are committed to the time they settle.
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY considers hedges of committed advances and consolidated obligation bonds eligible for the “short cut"1 provisions, under paragraph 68 of SFAS 133, as long as settlement of the committed asset or liability occurs within the market settlement conventions for that type of instrument. The FHLBNY also believes the conditions of paragraph 68(b) of SFAS 133 are met if the fair value of the swap is zero on the date the FHLBNY commits itself to issue the consolidated obligation bond.
Accounting for derivatives is addressed in Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (collectively “SFAS 133”). All derivatives are recognized on the balance sheet at their fair values. Each derivative is designated as one of the following:
(1)
a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a “fair value” hedge);
(2)
a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge);
(3)
a hedge of the foreign currency component of a hedged item in a fair value or cash flow hedge;
(4)
a non-qualifying hedge of an asset or liability (“economic hedge”) for asset-liability management purposes; or
(5)
a non-qualifying hedge of another derivative (an “intermediation” hedge) that is offered as a product to members or used to offset other derivatives with non-member counterparties.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current-period’s earnings in other income (loss) as “Net realized and unrealized gain (loss) on derivatives and hedging activities.”
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are reported in other comprehensive income, a component of capital, until earnings are affected by the variability of the cash flows of the hedged transaction (i.e., until the recognition of interest on a variable rate asset or liability is recorded in earnings).
The FHLBNY had no foreign currency assets, liabilities or hedges during 2006, 2005 or 2004.
For both fair value and cash flow hedges, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction) is recorded in current-period’s earnings in other income (loss) as “Net realized and unrealized gain (loss) on derivatives and hedging activities.”
Changes in the fair value of a derivative not qualifying as a hedge are recorded in current period earnings with no fair value adjustment to an asset or liability. Both the net interest on the derivative and the fair value adjustments are recorded in Other income (loss) as “Net realized and unrealized gain (loss) on derivatives and hedging activities.”
Highly effective hedging relationships that use an interest rate swap as the hedging instrument to hedge a recognized asset or liability and that meet the criteria under paragraph 68 of SFAS 133 to qualify for an assumption of no ineffectiveness.
Federal Home Loan Bank of New York
Notes to Financial Statements
The differentials between accruals of interest receivables and payables on derivatives designated as fair value or cash flow hedges are recognized as adjustments to the interest income or expense of the designated underlying investment securities, advances, consolidated obligations or other financial instruments. The differentials between accruals of interest receivables and payables on intermediated derivatives for members and other economic hedges are recognized as other income (loss) as “Net gain (loss) on derivatives and hedging activities.”
Changes in the fair value of an economic or intermediary hedge are recorded in current-period earnings with no fair value adjustment to an asset or liability. The differentials between accruals of interest receivables and payables on intermediated derivatives for members and other economic hedges are recognized as other income. Therefore, both the net interest on the stand-alone derivative and the fair value changes are recorded in other income as “Net gain (loss) on derivatives and hedging activities.” Cash flows associated with stand-alone derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows.
The FHLBNY routinely issues debt and makes advances in which a derivative instrument is “embedded.” Upon execution of these transactions, the FHLBNY assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance or debt (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. If the FHLBNY determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative would be separated from the host contract and carried at fair value. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current earnings (such as an investment security classified as “trading” under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”), or if the FHLBNY cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the balance sheet at fair value and no portion of the contract is designated as a hedging instrument.
When hedge accounting is discontinued because the FHLBNY determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBNY continues to carry the derivative on the balance sheet at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield methodology.
When hedge accounting is discontinued because the FHLBNY determines that the derivative no longer qualifies as an effective cash flow hedge of an existing hedged item, the FHLBNY continues to carry the derivative on the balance sheet at its fair value and reclassifies the cumulative other comprehensive income adjustment to earnings when earnings are affected by the existing hedge item, which is the original forecasted transaction.
Under limited circumstances, when the FHLBNY discontinues cash flow hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period plus the following two months, but it is probable the transaction will still occur in the future, the gain or loss on the derivative remains in accumulated other comprehensive income and is recognized into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within two months after that, the gains and losses that were accumulated in other comprehensive income are recognized immediately in earnings.
Federal Home Loan Bank of New York
Notes to Financial Statements
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the FHLBNY continues to carry the derivative on the balance sheet at its fair value, removing from the balance sheet any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
During the second quarter of 2004, the FHLBNY changed its manner of assessing effectiveness for certain highly-effective hedging relationship transactions used since the adoption of SFAS 133 on January 1, 2001. See Note 2 under Accounting Adjustments for more information.
Cash Collateral on Derivative Contracts
The Bank reports derivative assets and derivative liabilities in its statements of condition after giving effect to legally enforceable master netting agreements with derivative counterparties, which include interest receivable and payable on derivative contracts and the fair values of derivative contracts. The Bank recognizes cash collateral received and paid associated with derivative contracts as assets and liabilities in the statements of condition. Cash collateral pledged by the Bank is reported as an asset and included in interest-bearing deposits. Cash collateral received from derivative counterparties is reported as a liability and included in interest-bearing deposit liabilities. Cash collateral is not offset against derivative fair values; no securities were either pledged or received as collateral at December 31, 2006 or 2005.
Mandatorily Redeemable Capital Stock
The FHLBNY adopted SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150") on January 1, 2004 (Note 14). Generally, the FHLBNY’s capital stock is redeemable at the option of both the member and the FHLBNY subject to certain conditions. Under cuurent practice, dividends related to capital stock classified as mandatorily redeemable are accrued at an estimated dividend rate and reported as interest expense in the statements of income.
Mandatorily redeemable stock at December 31, 2006 and December 31, 2005 represents stock held by former members who are no longer members by virtue of being acquired by members of another FHLBank. Such stock will be repurchased when the stock is no longer required to support outstanding transactions with the FHLBNY.
Redemption rights of members under the old capital structure (Superseded on December 1, 2005 by the new Capital Plan)
A member may request the redemption of excess stock at any time in accordance with Finance Board regulations, and the request is revocable by the member. Such request is subject to the discretion of the Board of Directors of the FHLBNY and is not mandatory. However, redemption requests by members for excess stock are typically honored by the next business day. The FHLBNY may repurchase excess stock in its discretion at any time in accordance with Finance Board regulations.
Under the FHLBNY’s old capital structure, a member who wishes to withdraw from membership must provide a withdrawal notice in writing six months prior to the withdrawal date. However, the member had the right to rescind the withdrawal notice without penalty at any time before the end of the six-month period.
Federal Home Loan Bank of New York
Notes to Financial Statements
Accounting considerations under old capital structure
The three triggering events that could cause the FHLBNY to repurchase capital stock were:
•
a member requests redemption of excess stock;
•
a member delivers notice of its intent to withdraw from membership; or
•
a member attains non-member status (through merger into or acquisition by a non-member, or involuntary termination from membership).
Prior to the adoption of SFAS 150 on January 1, 2004, the FHLBNY repurchased excess stock upon the receipt of a request for redemption of such stock from a member, and the member was typically paid by the next business day. Subsequent to the adoption of SFAS 150, there has been no change in the payment policy and no change in the accounting.
When a member delivers a notification of its intent to withdraw from membership, the reclassification from equity to a liability occurs after the six-month waiting period has elapsed. At such time, the notification becomes irrevocable. Based on the fact that the FHLBNY considers the member’s notification of its intent to withdraw from membership to be substantive in nature and therefore reclassification to a liability will occur at the time the notice is delivered. As a result of a dissolution, one member requested withdrawal from membership in May 2005, and the FHLBNY redeemed 917 shares in June 2005. There were no other requests for withdrawal from membership during 2006 or 2005.
Subsequent to the adoption of SFAS 150, the FHLBNY reclassifies stock from equity to a liability once a member attains non-member status (through merger into or acquisition by a non-member, or involuntary termination from membership).
Redemption rights under the new Capital Plan
Under the new Capital Plan, no provision is available for the member to request the redemption of stock in excess of the stock required to support the member’s business transactions with the FHLBNY. This type of stock is referred to as “Activity-Based Stock” in the Capital Plan. However, the FHLBNY may at its discretion repurchase excess Activity-Based Stock. Separately, the member may request the redemption of Membership Stock (the capital stock representing the member’s basic investment in the FHLBNY) in excess of the member’s Membership Stock purchase requirement, and the FHLBNY may also in its discretion repurchase such excess stock.
Under the FHLBNY’s new Capital Plan, which became effective on December 1, 2005, a notice of intent to withdraw from membership must be provided to the FHLBNY five years prior to the withdrawal date. At the end of such five-year period, the FHLBNY will redeem such stock unless it is needed to meet any applicable minimum stock investment requirements that may be established in the Capital Plan (e.g., to help secure any remaining advances) or if other limitations apply as specified in the Capital Plan.
The redemption notice may be cancelled by giving written notice to the FHLBNY at any time prior to the expiration of the five-year period. Also, the notice will be automatically cancelled if, within five business days of the expiration of the five-year period, the member would be unable to meet its minimum stock investment requirements (as may be established in the Capital Plan) following such redemption. However, in contrast to current practice, if the member rescinds the redemption notice during the five-year period (or if the notice is automatically cancelled), the FHLBNY may charge a $500 cancellation fee, which may be waived only if the FHLBNY’s Board of Directors determines that the requesting member has a bona fide business reason to do so and the waiver is consistent with Section 7(j) of the FHLBank Act. Section 7(j) requires that the FHLBNY’s Board of Directors administer the affairs of the FHLBNY fairly and impartially and without discrimination in favor of or against any member.
Federal Home Loan Bank of New York
Notes to Financial Statements
Accounting considerations under the new Capital Plan
The three triggering events that could cause the FHLBNY to repurchase capital stock are:
•
a member requests redemption of excess stock;
•
a member delivers notice of its intent to withdraw from membership; or
•
a member attains non-member status (through merger into or acquisition by a non-member, or involuntary termination from membership).
The member’s request to redeem excess Membership Stock will be considered to be revocable until the stock is repaid. Based on the fact that the member’s request to redeem excess Membership Stock can be withdrawn by the member without penalty, the FHLBNY considers the member’s intent regarding such request to not be substantive in nature and therefore no reclassification to a liability will be necessary at the time the request is delivered.
Under the new Capital Plan, when a member delivers a notification of its intent to withdraw from membership, the reclassification from equity to a liability will become effective upon receipt of the notification. The FHLBNY considers the member’s intent regarding such notification to be substantive in nature and, therefore, reclassification to a liability will be necessary at the time the notification of the intent to withdraw is delivered. There were no requests for voluntary withdrawal from membership during 2006 or 2005.
In compliance with SFAS 150, the FHLBNY reclassifies stock subject to mandatory redemption from equity to a liability once a member 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. Shares of capital stock meeting this definition are reclassified to a liability at fair value. Unpaid dividends related to capital stock classified as a liability are accrued at an estimated dividend rate and reported as interest expense in the statements of income. The repayment of these mandatorily redeemable financial instruments is reflected as a cash outflow in the financing activities section of the statements of cash flows.
The Bank reports capital stock subject to mandatory redemption at the redemption value of the stock, which is par plus accrued estimated dividends. The FHLBanks have a unique cooperative structure. Stocks can only be acquired by members at par value and redeemed at par value. Stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.
Premises and Equipment
The Bank recorded book value of premises and equipment amounted to $11.1 million and $11.3 million as of December 31, 2006, and 2005. Depreciation and amortization expense was $3.9 million, $3.6 million, and $4.0 million for the years ended December 31, 2006, 2005 and 2004. The Bank computes depreciation using the straight-line method over the estimated useful lives of assets ranging from three to seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful lives or the terms of the underlying leases, which range up to 11 years. The Bank capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. The Bank includes gains and losses on disposal of premises and equipment in Other income (loss). The net realized gain (loss) on disposal of premises and equipment was not significant in 2006, 2005 and 2004.
Federal Home Loan Bank of New York
Notes to Financial Statements
Concessions on Consolidated Obligations
The FHLBNY defers and amortizes concessions over the contractual maturity of the bonds, using the level-yield method. Concessions are paid to dealers in connection with the sale of consolidated obligation bonds. The Office of Finance prorates the amount of the concession to the FHLBNY based upon the percentage of the debt issued that is assumed by the FHLBNY. Unamortized concessions were $17.9 million and $20.3 million as of December 31, 2006, and 2005 and were included in Other assets. Amortization of such concessions, included in consolidated obligation interest expense, totaled $15.0 million, $15.0 million, and $16.7 million for the years ended December 31, 2006, 2005 and 2004. The FHLBNY charges to expense as incurred the concessions applicable to the sale of consolidated obligation discount notes because of their short maturities. These amounts are also recorded in consolidated obligations interest expense. For the years ended December 31, 2006, 2005 and 2004, concession expenses on discount notes were $1.7 million, $2.3 million, and $2.2 million.
Discounts and Premiums on Consolidated Obligations
The FHLBNY expenses the discounts on consolidated obligation discount notes, using the level-yield method, over the term of the related notes and amortizes the discounts and premiums on callable and non-callable consolidated bonds, also using the level-yield method, over the term to maturity of the consolidated obligation bonds.
Resolution Funding Corporation (“REFCORP”) Assessments
Although the FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax, it is required to make payments to REFCORP. Each FHLBank is required to pay 20% of net earnings after AHP assessments to REFCORP. The FHLBank will expense this amount until the aggregate amounts actually paid by all twelve FHLBanks are equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. The Finance Board, in consultation with the Secretary of the Treasury, selects the appropriate discounting factors to be used in this annuity calculation.
The FHLBanks’ payments through 2006 defease all future benchmark payments through to July 15, 2015, $54 million of the $75 million benchmark payment due on January 15, 2016, all of the $75 million due on October 15, 2015, and $3 million of $75 million due on July 15, 2015. The defeased benchmark payments (or portions thereof) can be reinstated if future actual REFCORP payments fall short of the $75 million benchmark in any quarter.
Because the assessment is based on net income at all the FHLBanks, which cannot be forecasted with reasonable certainty, the timing of the satisfaction of the REFCORP assessment cannot be predicted.
REFCORP assessment, as discussed above, is based on a fixed percentage of net income after AHP assessment. If a full-year loss is incurred, no assessment or assessment credit is due or accrued.
Finance Board and Office of Finance Expenses
The FHLBNY is assessed for its proportionate share of the costs of operating the Finance Board and the Office of Finance. The Finance Board is authorized to impose assessments on the FHLBanks including FHLBNY, in amounts sufficient to pay the Finance Board’s annual operating expenses. Each FHLBank is assessed a prorated amount based on each FHLBank’s capital stock outstanding as a percentage of total capital stock of all 12 FHLBanks.
The Office of Finance is also authorized to impose assessments on the FHLBanks, including the FHLBNY, in amounts sufficient to pay the Office of Finance’s annual operating and capital expenditures. Each FHLBank is assessed a prorated amount based on the amount of capital stock outstanding, the volume of consolidated obligations issued, and the amount of consolidated obligations outstanding as a percentage of the total of the items for all 12 FHLBanks.
Federal Home Loan Bank of New York
Notes to Financial Statements
Estimated Fair Values
Many of the Bank’s financial instruments lack an available trading market, characterized by transactions between a willing buyer and a willing seller engaging in an exchange transaction. Therefore, the Bank uses significant estimates and present-value calculations when estimating the fair value of hedged assets and liabilities and associated derivatives, under the provisions of SFAS 133. Similar estimates and judgments are required in disclosing estimated fair values of the Bank’s financial instruments. See Note 20 “Estimated Fair Values” for more information. The Bank has not early-adopted SFAS 157, “Fair Value Measurements.”
Earnings per Common Share
SFAS 128, “Earnings per Share,” addresses the presentation of basic and diluted earnings per share (“EPS”) in the income statement. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if convertible securities or other contracts to issue common stock were converted or exercised into common stock. Capital stock classified as mandatorily redeemable capital stock is excluded from this calculation. Basic and diluted earnings per share are the same, as the Bank has no additional potential common shares that may be dilutive.
Cash Flows
In the statements of cash flows, the FHLBNY considers Cash and due from banks to be Cash and cash equivalents. Federal funds sold are not treated as cash equivalents for purposes of the statements of cash flows, but are instead treated as short-term investments and are reflected in the investing activities section of the statements of cash flows. Certificate of deposits and cash collateral pledged or received by the Bank are also not treated as cash equivalents and are reported as either investing or financing activities.
Cash flows from a derivative instrument that is accounted for as a fair value hedge or cash flow hedge are generally classified in the same category as the cash flows from the items being hedged provided that the derivative instrument does not include an other-than-insignificant financing element at inception. Cash flows associated derivatives classified as stand-alone or as an economic hedge are reflected as cash flows from operating activities in the statements of cash flows.
The Bank treats gains and losses on debt extinguishments as an operating activity and reports the cash payments from the early retirement of debt net of these amounts under financing activity in the statements of cash flows.
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 2. Accounting Adjustments, Changes in Accounting Principles, and Recently Issued Accounting Standards & Interpretations
Accounting Adjustments
During the second quarter of 2005, the FHLBNY corrected the manner in which it measured ineffectiveness for certain highly-effective consolidated obligation and advance hedging relationships. The FHLBNY believes the refined methodology is closely in compliance with the valuation methodology prescribed under SFAS 133. The FHLBNY does not believe retroactive application to prior periods would have had a material impact on its prior period results of operations or financial condition.
Under the FHBLNY’s prior approach in use since June 2004, the FHLBNY had appropriately adjusted the basis adjustment of the hedged consolidated bonds in the first period of the hedging relationship to ensure that only changes in value attributable to changes in interest rates were included in the basis adjustment. However, the FHLBNY had not continued to make adjustments to the changes in fair value of the hedged instruments to eliminate changes in value attributable to the passage of time from the calculated basis adjustments. In the second quarter of 2005, the FHLBNY retroactively computed the appropriate adjustments and recorded a charge to earnings of $3.9 million with an offsetting increase in the basis of the hedged consolidated obligation bonds.
The FHLBNY had previously measured the ineffectiveness of hedged advances by discounting the future cash flows of the hedged advances by LIBOR, the FHLBNY’s adopted benchmark interest rate. However, the initial present value of cash flows was assumed to be the par value of the advance and a beginning model value was not calculated for comparison with end of period valuations. This resulted in an inappropriate gain being recorded in the first hedge period, and the reversing effects of the inappropriate gain being reflected over the remaining hedge period.
Under the corrected methodology, the FHLBNY has discounted the future cash flows of the hedged advance by adding a spread to the benchmark swap curve to adjust for the credit spread between the FHLBNY’s advance and the swap curve. This methodology eliminates the initial present value differences between par and the present value of future cash flows at hedge inception, and is in compliance with SFAS 133. As a result of the inappropriate use of its previous methodology, the FHLBNY made cumulative change for prior periods in its second quarter of 2005 financial statements to implement the refined methodology, resulting in a $3.5 million charge to earnings. The impact of the correction in earlier periods was not material to the financial condition or results of operations.
Change in Accounting Principle for Amortization and Accretion of Premiums and Discounts on Mortgage Loans
Amortization and accretion on premiums and discounts on mortgage loans have been computed by the contractual method in accordance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (“FAS 91”), effective January 1, 2005. Previously, amortization and accretion of premiums and discounts was computed using the retrospective method with estimated life, which requires a retrospective adjustment each time the FHLBNY changes the estimated remaining life of the mortgage loans. The retrospective method is intended to adjust the carrying value for the effects of all past cash flows and estimated future cash flows. The FHLBNY believes that the contractual method is preferable because under the contractual method, the income effects of premiums and discounts are recognized in a manner that is reflective of the actual behavior of the mortgage loans during the period in which the behavior occurs without regard to changes in estimates based on assumptions about future borrower behavior. As a result of the change in accounting principle, income of $1.1 million, before assessments, was recorded on January 1, 2005 as a cumulative effect of change in accounting principle. The Bank considered the pro forma effects of retroactive application of the change in accounting principle under guidelines provided by APB Opinion No. 20, “Accounting Changes,” and concluded that the amounts were de minimis for the years ended December 31, 2005 and 2004.
Federal Home Loan Bank of New York
Notes to Financial Statements
SFAS 155 - In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) SFAS 155 “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133 and 140 and permits fair value measurement of any structured note that contains an embedded derivative that would require bifurcation under SFAS 133. This fair value measurement is permitted on an instrument-by-instrument basis. The Bank will apply the guidance under SFAS 155 commencing with the first quarter of 2007. The Bank has evaluated the guidance and does not expect implementation will have a material impact on its results of operations or financial condition.
SFAS 156 - In March 2006, the FASB issued 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately-recognized servicing assets and liabilities. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value measurement basis.
The new standard provides some relief for servicers that use derivatives to economically hedge fluctuations in the fair value of their servicing rights. In a rising interest rate environment, losses on derivatives used for hedging must be recognized. However, corresponding increases in the fair value of the related servicing rights previously could not be recognized since SFAS 140 mandated that servicing rights be carried at the lower of cost or market. This situation generates income volatility.
SFAS 156 also changes how gains and losses are computed in transfers or securitizations that qualify for “sale treatment” in which the transferor retains the right to service the transferred financial assets. Under SFAS 156, servicing assets must be initially recorded at fair value and treated as part of the proceeds received by the transferor, thus affecting the gain/loss calculations.
The Bank will apply the provisions of SFAS 156 as of January 1, 2007. The Bank has evaluated the impact of adopting SFAS 156 and does not expect it to have a material impact on its results of operations of financial condition.
SFAS 157 - In September 2005, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosure about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 nullifies the guidance in EITF 02-3, which precluded the recognition of a trading profit at the inception of a derivative contract, unless the fair value of such derivative is obtained from a quoted market price, or other valuation technique incorporating observable market data. SFAS 157 also precludes the use of a liquidity or block discount when measuring instruments traded in an active market at fair value. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. SFAS 157 must be applied prospectively as of the beginning of the fiscal year in which it is initially adopted, except that the provisions related to block discounts and the guidance in EITF 02-3 are to be applied as a one time cumulative effect adjustment to opening retained earnings in the first interim period for the fiscal year in which SFAS 157 is initially applied. The Bank is evaluating the provisions of SFAS 157 and its potential effect on its financial statements.
Federal Home Loan Bank of New York
Notes to Financial Statements
SFAS 158 - In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”. SFAS 158 requires recognition in the statements of financial condition of the over or underfunded status of postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. For pension plans, the benefit obligation is the projected benefit obligation; for other postretirement plans, the benefit obligation is the accumulated postretirement benefit obligation. For an employer without publicly traded equity securities, SFAS 158 is effective for fiscal year ending after June 15, 2007, with certain disclosure requirements effective for a fiscal year ending after December 15, 2006, but before June 16, 2007. The FHLBNY considers itself a non-publicly traded enterprise for the purposes of the standard. Early adoption is permitted.
The Bank adopted SFAS 158 as of December 31, 2006, and in compliance with the provisions under SFAS 158, recognized $6.1 million of previously unrecognized actuarial gains and losses and service costs within accumulated other comprehensive income (a component of stockholders’ equity). See Note 18.
DIG Issue G26 - On December 13, 2006, the FASB issued Derivatives Implementation Group (“DIG”) DIG No. G26, “Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate.”(“DIG Issue G26”). DIG Issue G26 clarifies when the hedge of a designated risk related to variable-rate financial assets or liabilities qualifies as a cash flow hedge. DIG Issue G26 becomes effective with the first fiscal quarter beginning after January 8, 2007 (April 1, 2007 for the Bank). The Bank does not expect DIG Issue G26 to have a material impact on its results of operations or financial condition.
DIG Issue B40 - On December 20, 2006, the FASB issued DIG No. B40, “Application of Paragraph 13(b) to Securitized Interest in Prepayable Financial Assets” (“DIG Issue B40”). DIG Issue B40 clarifies when a securitized interest in prepayable financial assets is subject to the conditions in paragraph 13(b) of SFAS 133. DIG Issue B40 becomes effective upon initial adoption of SFAS 155 (January 1, 2007 for the Bank). The Bank does do not expect DIG Issue B40 to have a material impact on its results of operations or financial condition.
SFAS 159 - On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 creates a fair value option allowing an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 also requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. Lastly, SFAS 159 requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. SFAS159 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Bank), with early adoption permitted. The Bank is continuing to evaluate SFAS 159 and to assess the impact on its results of operations or financial condition if an election was made to adopt the standard.
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 3. Cash and due from banks
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Banks are included in cash and due from banks.
Compensating balances
The Bank maintained average required clearing balances with various Federal Reserve Banks of approximately $1.0 million for the years ended December 31, 2006 and 2005. The Bank uses earnings credits on these balances to pay for services received from the Federal Reserve Banks.
Pass-through deposit reserves
The Bank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. Pass-through reserves deposited with Federal Reserve Banks were $43.3 million and $47.5 million as of December 31, 2006 and 2005. The Bank includes member reserve balances in other liabilities in the statements of condition.
Note 4. Interest-bearing deposits
Interest-bearing deposits consist of deposits at financial institutions and certificates of deposit issued by banks and other financial institutions. As of December 31, 2006 and 2005, interest-bearing deposits also included cash pledged by the Bank as collateral of $0 and $244.8 million to broker dealers and banks that have credit risk exposure related mainly to derivative contracts.
Note 5. Held-to-maturity securities
Held-to-maturity securities consist of mortgage- and asset-backed securities (collectively mortgage-backed securities or “MBS”), and state and local housing finance agency bonds.
During 2005, the FHLBNY sold two securities aggregating $9.0 million of held-to-maturity MBS for a gain of $145 thousand to “clean-up” the residual balances of the securities. The sales were considered “in-substance maturities”, in accordance with the provisions of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.”
Held-to-maturity securities included securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”). Neither Fannie Mae nor Freddie Mac are agencies of the U.S. Government nor are their securities guaranteed by the U.S. Government.
Federal Home Loan Bank of New York
Notes to Financial Statements
Major Security Types
The amortized cost, gross unrealized gains, losses, and the fair value of held-to-maturity securities, were as follows (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Temporary Impairment
The following tables summarize held-to-maturity securities with fair values below their amortized cost, i.e., in an unrealized loss position, as of December 31, 2006 and 2005. The fair values and unrealized losses are aggregated by major security type and rating, and by the length of time individual securities have been in a continuous unrealized loss position. Securities, to which different rating levels have been assigned by different rating agencies, i.e., split ratings, are assigned to the lower rating category.
The FHLBNY has both the intent and financial ability to hold the temporarily impaired securities to recovery of their value. In addition, the FHLBNY has reviewed the investment security holdings and determined, based on creditworthiness of the securities and including any underlying collateral and/or insurance provisions of the security, that unrealized losses in the analysis below represent temporary impairment at December 31, 2006 and 2005.
Temporary impairment at December 31, 2006 (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Temporary impairment at December 31, 2005 (in thousands):
Redemption terms
The amortized cost and estimated fair value of held-to-maturity securities, by contractual maturity, were as follows (in thousands). 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 of mortgage-backed securities classified as held-to-maturity includes net premiums of $5.2 million and $23.1 million as of December 31, 2006 and 2005. Amortization expense, net of accretion that was charged to interest income was $3.9 million, $1.2 million, and $12.3 million for the years ended December 31, 2006, 2005 and 2004.
Federal Home Loan Bank of New York
Notes to Financial Statements
Interest rate payment terms
The following table summarizes interest rate payment terms for securities classified as held-to-maturity (in thousands):
Note 6. Available-for-sale securities
There were no outstanding balances in the available-for-sale securities classification at December 31, 2006 or 2005. During the year ended December 31, 2005, the Bank realized a gain of $1.8 million from the sale of all available-for-sale securities and the amount was reclassified from accumulated other comprehensive income to earnings. Proceeds from sales during 2005 amounted to $1.6 billion.
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 7 . Advances
Redemption terms
Contractual redemption terms and yields of advances outstanding at December 31, 2006 and 2005 were as follows (dollars in thousands):
Prepayment fees charged to members when members prepay certain advances before original maturity are included in interest income from advances. Net prepayment fees reported in interest income were $19.2 million, $6.6 million, and $6.4 million for the years ended December 31, 2006, 2005, and 2004. Amortization of basis on modified advances was a charge to interest income and aggregated $2.1 million, $3.6 million, and $3.8 million for the years ended December 31, 2006, 2005, and 2004.
The Bank offers putable advances to members. With a putable advance, the Bank effectively purchases a put option from the member that allows the Bank to terminate the fixed-rate advance, which is normally exercised when interest rates have increased from those prevailing at the time the advance was made. When the Bank exercises the put option, it will offer to extend additional credit on new terms. As of December 31, 2006 and 2005, the Bank had putable advances outstanding totaling $28.9 billion and $26.1 billion.
Federal Home Loan Bank of New York
Notes to Financial Statements
The following table summarizes advances by year of maturity or next put date (in thousands):
Security Terms
The FHLBNY lends to financial institutions involved in housing finance within its district. The FHLBank Act requires the FHLBNY to obtain sufficient collateral on advances to protect against losses and to accept as collateral on such advances only certain U.S. government or government agency securities, residential mortgage loans, cash or deposits in the FHLBNY and other eligible real estate-related assets. In addition, the FHLBNY is permitted, but not required, to accept collateral in the form of small business or agricultural loans (“expanded collateral”) from Community Financial Institutions (“CFIs”). It is the FHLBNY’s policy not to accept such expanded collateral for advances. Borrowing members pledge their capital stock of the FHLBNY as additional collateral for advances. As of December 31, 2006 and 2005, the FHLBNY had rights to collateral with an estimated value greater than outstanding advances. Based upon the financial condition of the member, the FHLBNY:
(1)
Allows a member to retain possession of the collateral assigned to the FHLBNY, if the member executes a written security agreement and agrees to hold such collateral for the benefit of the FHLBNY; or
(2)
Requires the member specifically to assign or place physical possession of such collateral with the FHLBNY or its safekeeping agent.
Beyond these provisions, Section 10(e) of the FHLBank Act affords any security interest granted by a member to the FHLBNY priority over the claims or rights of any other party. The two exceptions are claims that would be entitled to priority under otherwise applicable law or perfected security interests.
All member obligations with the Bank were fully collateralized throughout their entire term.
The total of collateral pledged to the Bank includes excess collateral pledged above the Bank’s minimum collateral requirements. These minimum requirements range from 103% to 125% of outstanding advances, based on the collateral type. It is not uncommon for members to maintain excess collateral positions with the Bank for future liquidity needs. Based on several factors (e.g. advance type, collateral type or member financial condition) members are required to comply with specified collateral requirements, including but not limited to, a detailed listing of pledged mortgage collateral and/or delivery of pledged collateral to the Bank or its designated collateral custodian(s). For example, all pledged securities collateral must be delivered to the Bank’s nominee name at Citibank, N.A., and its securities safekeeping custodian. Mortgage collateral that is required to be in the Bank’s possession is typically delivered to the Bank’s Jersey City, New Jersey facility. However, in certain instances, delivery to a Bank approved custodian may be allowed.
Federal Home Loan Bank of New York
Notes to Financial Statements
As of December 31, 2006, members pledged a total of $146.2 billion in collateral to the Bank. At minimum, each member pledged sufficient collateral to adequately secure their outstanding obligations with the Bank. In addition, most members maintain an excess amount of pledged collateral with the FHLBNY to secure future liquidity needs. Of the total collateral securing all outstanding member obligations, $20.3 billion was in the Bank’s physical possession or that of its safekeeping agent(s); $125.9 billion was specifically listed.
Credit Risk
The FHLBNY has never experienced a credit loss on an advance. The management of the Bank has policies and procedures in place to appropriately manage credit risk. There were no past due advances and all advances were current for each of the periods ended December 31, 2006 and 2005. Management does not anticipate any credit losses, and accordingly, the Bank has not provided an allowance for credit losses on advances.
The Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As a result of merger activities in 2006 and prior years, included in advances outstanding are advances to former members. As of December 31, 2006, the FHLBNY had advances of $103.5 million to Washington Mutual Bank, FA, a member of the FHLBank of San Francisco, representing 0.2% of total advances outstanding. These advances were acquired by Washington Mutual Bank, FA as a result of its acquisition of The Dime Savings Bank of New York, FSB. The FHLBNY had advances of $1.4 billion to Sovereign Bank, a member of the FHLBank of Pittsburgh, representing 2.3% of total advances outstanding. These advances were acquired by Sovereign Bank as a result of its acquisition of Independence Community Bank. The FHLBNY had advances of $287.2 million to Bank of America, NA, a member of the FHLBank of Boston, representing 0.5% of total advances outstanding. These advances were acquired by Bank of America, NA, as a result of its acquisition of Fleet Bank, also a member of the FHLBank of Boston, who had acquired Summit Bank, a former member of FHLBNY.
The FHLBNY also had advances of $27.7 billion outstanding to its top five borrowing member institutions, representing 46.9% of total advances outstanding at December 31, 2006. The FHLBNY held sufficient collateral to cover the advances to all of these institutions, and it does not expect to incur any credit losses.
Federal Home Loan Bank of New York
Notes to Financial Statements
Interest Rate Payment Terms
The following table summarizes interest rate payment terms for advances (dollars in thousands):
Variable-rate advances were mainly indexed to the Federal funds effective rate or LIBOR.
Note 8. Affordable Housing Program and REFCORP
Section 10(j) of the FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10% of the current year’s adjusted income after the assessment for REFCORP. The FHLBNY charges the amount set aside for AHP to income and recognizes it as a liability. The FHLBNY relieves the AHP liability as members use the subsidies. If the result of the aggregate 10% calculation described above is less than $100 million for all twelve FHLBanks, then the FHLBank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before AHP and REFCORP to the sum of the income before AHP and REFCORP of the twelve FHLBanks. There was no shortfall in either 2006 or 2005. The FHLBNY had outstanding principal in AHP-related advances of $6.6 million and $6.9 million as of December 31, 2006 and 2005.
The following provides roll-forward analysis of the Affordable Housing Program (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 9. Mortgage loans held-for-portfolio
Mortgage Partnership Finance Program loans (“MPF”) constitute the majority of the mortgage loans held-for-portfolio. The MPF program involves investment by the FHLBNY in mortgage loans that are purchased from or originated through its participating financial institutions (“PFIs”). Included in outstanding balances were $45.7 million and $48.7 million at December 31, 2006 and 2005 with respect to loans originated by the FHLBNY. The members retain servicing rights and may credit-enhance the portion of the loans participated to the FHLBNY. No intermediary trust is involved.
Also included in mortgage loans were loans in the Community Mortgage Asset program (“CMA”), which has been inactive since 2001. In the CMA program, FHLBNY participated in residential, multi-family and community economic development mortgage loans originated by its members. Outstanding balances of CMA loans were $4.9 million and $9.7 million at December 31, 2006 and 2005.
The following table presents information on mortgage loans held-for-portfolio (in thousands):
The par value of mortgage loans held-for-portfolio outstanding as of December 31, 2006 and 2005 included Federal Housing Administration and Veteran Administration insured loans totaling $10.6 million and $14.3 million. Conventional mortgages and loans in the CMA program constituted the remaining balance of mortgage loans held-for-portfolio.
Amortization expense, net of accretion, that was reported as a charge to interest income was $1.6 million, $0.9 million, and $1.9 million for the years ended December 31, 2006, 2005 and 2004. Amortization of the basis adjustment was insignificant for all periods reported.
As also discussed in Note 1, “Summary of Significant Accounting Policies” - Mortgage loans held-for-portfolio, the FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers. The first layer is typically 100 basis points but varies with the particular MPF program. The amount of the first layer, or First Loss Account or “FLA”, was estimated as $12.2 million and $11.3 million at December 31, 2006 and 2005. The FLA is not recorded or reported as a reserve for loan losses as it serves as a memorandum information account. The FHLBNY is responsible for absorbing the first layer. The second layer is that amount of credit obligations that the Participating Financial Institution (“PFI”) has taken on which will equate the loan to a double-A rating. The FHLBNY pays a Credit Enhancement fee to the PFI for taking on this obligation. The FHLBNY assumes all residual risk. Credit Enhancement fees accrued aggregated $1.7 million, $1.5 million, and $0.9 million for the years ended December 31, 2006, 2005 and 2004, and were reported as a reduction to mortgage loan interest income.
Federal Home Loan Bank of New York
Notes to Financial Statements
The amounts of charge-offs and recoveries in all periods reported were insignificant.
The following provides roll-forward analysis of the allowance for credit losses (in thousands):
As of December 31, 2006 and 2005, the FHLBNY had $2.1 million and $0.8 million of non-accrual loans. The estimated fair value of the mortgage loans as of December 31, 2006 and 2005 is reported in Note 20. Mortgage loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements. As of December 31, 2006 and 2005, the FHLBNY had no investment in impaired mortgage loans, other than the non-accrual loans.
The following table summarizes mortgage loans held-for-portfolio, all Veterans Administrations insured loans, past due 90 days or more and still accruing interest (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 10. Related party transactions
The FHLBNY is a cooperative and the members own almost all of the stock of the Bank. Stock that is not owned by members is held by former members. The majority of the members of the Board of Directors of the FHLBNY are elected by and from the membership. The FHLBNY conducts its advances business almost exclusively with members. The Bank considers its transactions with its members and non-member stockholders as related party transactions, in addition to transactions with other FHLBanks, the Office of Finance, and the Finance Board. Therefore, in the normal course of business, the FHLBNY extends credit to members whose officers may serve as directors of the FHLBNY, and to non-members on market terms that are no more favorable to them than comparable transactions with other members. Capital stock ownership is a prerequisite to transacting any business with the FHLBNY.
The FHLBNY may from time to time borrow or sell overnight and term Federal funds at market rates to members.
Debt Transfers
During 2006, the Bank transferred $755.0 million of par amounts of consolidated obligation bonds to other FHLBanks in exchange for a cash price that represented the negotiated fair market values of the bonds. The transfers resulted in losses of $25.4 million. In 2005, the Bank transferred par amounts of $220.0 million, and recorded losses of $7.2 million. No bonds were transferred to another FHLBank in 2004. No bonds were transferred to the Bank from another FHLBank during 2006. In 2005 and 2004, consolidated obligation bonds of $6.0 million and $207.3 million were transferred to the Bank from other FHLBanks. At trade date, the transferring bank notifies the Office of Finance of a change in primary obligor for the transferred debt.
MPF Program
In the MPF program, the FHLBNY may participate out certain portions of its purchases of mortgage loans from its members. Transactions are at market rates. The FHLBank of Chicago, the MPF provider’s cumulative share of interest in the MPF loans originated by members of the FHLBNY was $531.7 million from inception of the program through mid-2004. Since then, the FHLBNY has not shared its purchases. Fees paid to the FHLBank of Chicago were $515 thousand, $416 thousand and $147 thousand for the years ended December 31, 2006, 2005 and 2004.
Mortgage-backed Securities.
No mortgage-backed securities were acquired from other FHLBanks.
Intermediation
Notional amounts of $50.0 million and $130.0 million were outstanding at December 31, 2006 and 2005 in which the FHLBNY acted as an intermediary to sell derivatives to members. These were offset by identical transactions with unrelated derivatives counterparties. Fair values of these transactions at December 31, 2006 and 2005 were not material. The intermediated derivative transactions were fully collateralized.
Loans to other Federal Home Loan Banks
There were no outstanding uncollateralized loans to other FHLBanks as of December 31, 2006 and 2005. Such uncollateralized loans averaged $685 thousand, $274 thousand, and $6.7 million for the years ended December 31, 2006, 2005 and 2004. The maximum balance was $200.0 million and $100.0 million for the years ended December 31, 2006 and 2005. Interest income from such loans was $37 thousand, $9 thousand and $78 thousand for the years ended December 31, 2006, 2005 and 2004.
Federal Home Loan Bank of New York
Notes to Financial Statements
Borrowings from other Federal Home Loan Banks
The FHLBNY borrows from other FHLBanks, generally for a period of one day. Such borrowings averaged $2.9 million, $2.1 million and $9.5 million for the years ended December 31, 2006, 2005 and 2004. There were no borrowings outstanding as of December 31, 2006 and 2005. Interest expense for the years ended December 31, 2006, 2005 and 2004 was $144 thousand, $67 thousand, and $110 thousand, respectively.
The following tables summarize outstanding balances and transactions with related parties at December 31, 2006 and 2005 (in thousands):
Related Party: Outstanding Assets, Liabilities and Capital
*
Includes insignificant amounts of mortgage loans purchased from members of another FHLBank.
**
Includes insignificant amounts of miscellaneous assets that are considered related party.
***
Represents funds not yet disbursed to eligible programs.
****
Related column includes member pass-through reserves at the Federal Reserve Bank.
Federal Home Loan Bank of New York
Notes to Financial Statements
Related Party: Income and Expense transactions
*
Includes interest income from cash collateral pledged, and de minimis amounts of interest income from MPF service provider.
**
Includes de minimis amounts of mortgage interest income from loans purchased from members of another FHLBank.
Note 11. Deposits
The FHLBNY offers to members demand, overnight and term deposits. A member that services mortgage loans may deposit in the FHLBNY funds collected in connection with the mortgage loans, pending disbursement of such funds to the owners of the mortgage loans.
The following table summarizes term deposits (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 12. Borrowings
Securities sold under agreements to repurchase
The FHLBNY did not have any securities sold under agreement to repurchase as of December 31, 2006 and 2005. Terms, amounts and outstanding balances of borrowings from other Federal Home Loan Banks are described under Note 10, Related party transactions.
Note 13. Consolidated obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their fiscal agent. Consolidated bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. These notes sell at less than their face amount and are redeemed at par value when they mature.
The Finance Board, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. Although it has never occurred, to the extent that an FHLBank would make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine.
Based on management’s review, the FHLBNY has no reason to record actual or contingent liabilities with respect to the occurrence of events or circumstances that would require the FHLBNY to assume an obligation on behalf of other FHLBanks.
The par amounts of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations held by other FHLBanks, were approximately $951.9 billion and $937.4 billion as of December 31, 2006 and 2005.
Finance Board regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located.
The FHLBNY met the qualifying unpledged asset requirements in each of the years reported as follows:
Federal Home Loan Bank of New York
Notes to Financial Statements
To provide the holders of consolidated obligations issued before January 29, 1993 (prior bondholders) with the protection equivalent to that provided under the FHLBanks’ previous leverage limit of twelve times the FHLBanks’ capital stock, prior bondholders have a claim on the qualifying assets [Special Asset Account (SAA)] if capital stock is less than 8.33% of consolidated obligations. As of December 31, 2006 and 2005, the combined FHLBanks’ capital stock was 4.53% and 4.64% of the par value of consolidated obligations outstanding, and the SAA balance was approximately $26 thousand at December 31, 2006 and $110 thousand at December 31, 2006. Further, the regulations require each FHLBank to transfer qualifying assets in the amount of its allocated share of the FHLBanks’ SAA to a trust for the benefit of the prior bondholders, if its capital-to-assets ratio falls below 2.0%. No transfer has been made because the ratio has never been below 2.0%.
The FHLBank Act authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations of the FHLBanks aggregating not more than $4.0 billion. The terms, conditions, and interest rates are determined by the Secretary of the Treasury. There were no such purchases by the U.S. Treasury during the years ended December 31, 2006 and 2005.
General Terms
Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices include the London Interbank Offered Rate (“LIBOR”), Constant Maturity Treasury (“CMT”), 11th District Cost of Funds Index (“COFI”), and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate bonds may also contain certain features that may result in complex coupon payment terms and call options. When such consolidated obligations are issued, the FHLBNY may enter into derivatives containing offsetting features that effectively convert the terms of the bond to those of a simple variable- or fixed-rate bond.
These consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also include Optional Principal Redemption Bonds (callable bonds) that the FHLBNY may redeem in whole or in part at its discretion on predetermined call dates, according to the terms of the bond offerings.
With respect to interest payment terms, consolidated bonds may also have step-up terms. Step-up bonds generally pay interest at increasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the FHLBNY to call bonds at its option on the step-up dates.
Federal Home Loan Bank of New York
Notes to Financial Statements
Redemption Terms
The following is a summary of consolidated bonds outstanding by year of maturity (dollars in thousands):
Weighted average rate represents the weighted average coupons of bonds, unadjusted for swaps.
Amortization of bond premiums and discounts resulted in net reduction of interest expense of $17.4 million, $59.0 million, and $57.0 million for the years ended December 31, 2006, 2005 and 2004. Amortization of basis adjustments from terminated hedges were a net charge of $0.05 million, $1.4 million and $1.5 million for the years ended December 31, 2006, 2005 and 2004.
During the year ended December 31, 2006, the FHLBNY retired $770.0 million of consolidated bonds at a cost that exceeded book value by $26.3 million. The debt retired was associated with the prepayment of advances or commercial mortgage-backed securities (“CMBS”) for which prepayment fees were received. During 2005, the FHLBNY retired $359.5 million of consolidated bonds at a cost that exceeded book value by $14.8 million.
Federal Home Loan Bank of New York
Notes to Financial Statements
The following table summarizes consolidated bonds outstanding at December 31, 2006 and 2005 by year of maturity or next call date (in thousands):
The FHLBNY uses fixed-rate callable debt to finance callable advances and mortgage-backed securities. Simultaneous with such a debt issue, the FHLBNY may also enter an interest-rate swap (in which the FHLBNY pays variable and receives fixed) with a call feature that mirrors the option embedded in the debt (a sold callable swap). The combined sold callable swap and callable debt allows the Bank to provide members attractively priced, fixed-rate advances.
Interest rate payment terms
The following table summarizes interest rate payment terms for consolidated bonds at December 31, 2006 and 2005 (in thousands).
Interbank transfers of consolidated bonds
In order to meet the FHLBNY’s asset and liability management objectives, the Bank transfers consolidated bonds to and from other FHLBanks. See Note 10, Related party transactions for more information.
Federal Home Loan Bank of New York
Notes to Financial Statements
Discount notes
Consolidated discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to 360 days. These notes are issued at less than their face amount and redeemed at par when they mature. The FHLBNY’s outstanding in consolidated discount notes, all of which are due within one year, was as follows (dollars in thousands):
Note 14. Mandatorily redeemable capital stock
In 2004, the FHLBNY adopted SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Equity and Liabilities,” based on the characteristics of the FHLBNY’s stock, and within the SFAS 150’s definition of a nonpublic entity, and the definition of an SEC registrant in FASB Staff Position No. SFAS 150-3 (FSP 150-3). The FHLBNY is a cooperative whose member financial institutions own almost all of the FHLBNY’s capital stock. Member shares cannot be purchased or sold except between the FHLBank and its members at its $100 per share par value. Also, the FHLBNY does not have equity securities that trade in a public market. Future filings with the SEC will not be in anticipation of the sale of equity securities in a public market as the FHLBNY is prohibited by law from doing so, and the FHLBNY is not controlled by an entity that has equity securities traded or contemplated to be traded in a public market. Therefore, the FHLBNY is a nonpublic entity based on the definition of SFAS 150. In addition, although the FHLBNY is a nonpublic entity, the FHLBanks issue consolidated obligations that are traded in the public market. Based on this factor, the FHLBNY adopted SFAS 150 as of January 1, 2004, as a nonpublic SEC registrant.
In compliance with SFAS 150, the FHLBNY reclassifies the stock subject to redemption from equity to liability once a member: irrevocably exercises a written redemption right; gives notice of intent to withdraw from membership; or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership. Under such circumstances, the member shares will then meet the definition of a mandatorily redeemable financial instrument. Member shares meeting this definition are reclassified to a liability at fair value. Dividends on member shares classified as a liability in accordance with SFAS 150 are accrued at the estimated dividend rate and recorded as interest expense in the statement of income. The repayment of these mandatorily redeemable financial instruments will be reflected as financing cash outflows in the statement of cash flows once settled.
If a member cancels notice of withdrawal, the FHLBNY will reclassify mandatorily redeemable capital stock from a liability to equity in compliance with SFAS 150. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.
On January 1, 2004, the FHLBank reclassified $357.9 million of its outstanding capital stock to “mandatorily redeemable capital stock” in the liability section of the statements of condition. Upon adoption, the FHLBank also recorded estimated accrued dividends as a part of the carrying value of the mandatorily redeemable capital stock. The difference of $1.3 million between the prior carrying amount and the mandatorily redeemable capital stock was recorded as the cumulative effect of a change in accounting principle in the statement of income for the year ended December 31, 2004.
Federal Home Loan Bank of New York
Notes to Financial Statements
For the years ended December 31, 2006 and 2005, dividends on mandatorily redeemable capital stock in the amount of $3.1 million and $2.7 million were recorded as interest expense.
As of December 31, 2006, there were no members who had formally notified the Bank of their intent to voluntarily redeem their capital stock, either due to merger and acquisition, or withdrawal from membership. No member’s or non-members’ redemption request remained pending at December 31, 2006.
At December 31, 2006, the mandatorily redeemable capital stock totaled $109.9 million and was held by former members who had attained non-member status by virtue of being acquired by non-members.
Anticipated redemptions of mandatorily redeemable capital stock were as follows (in thousands):
Anticipated redemption assumes the Bank will follow its current practice of daily redemption of capital in excess of the amount required to support advances, and of redeeming excess membership stock annually.
Dividends related to capital stock classified as mandatorily redeemable were accrued at an estimated dividend rate and reported as interest expense in the statements of income. At December 31, 2006, the FHLBNY had estimated a 6.25% dividend payout due to holders of mandatorily redeemable capital stock averaging $115.8 million during the fourth quarter of 2006, and a liability of $1.8 million representing accrued dividend was recognized as an expense. The actual rate of dividend that was paid on January 31, 2007 was 7.00%.
The FHLBNY’s activity for mandatorily redeemable capital stock was as follows in 2006, 2005 and 2004 (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 15. Capital
The FHLBanks, including the FHLBNY, have a cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. The members’ stock requirement is generally based on its use of FHLBNY products, subject to a minimum membership requirement, as prescribed by the FHLBank Act. 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.
In November 1999, the FHLBank Act was significantly modified by the Federal Home Loan Bank System Modernization Act, which was enacted as Title VI of the Gramm-Leach-Bliley Act (“GLB Act”).
The GLB Act established voluntary membership for all members. Member may withdraw from membership and have its capital stock redeemed after providing to the FHLBNY the required notice.
The GLB Act resulted in a number of changes in the capital structure of the FHLBanks. The GLB Act also removed the provision that required a non-thrift member to purchase additional stock to borrow from the FHLBank if the non-thrift member’s mortgage-related assets were less than 65 percent of total assets. A member may, at the FHLBank’s discretion, redeem at par value any capital stock greater than its statutory requirement or sell it at par value to another member of that FHLBank. The final Finance Board capital rule was published on January 30, 2001, and required each FHLBank to submit a capital structure plan (“Capital Plan”) to the Finance Board by October 29, 2001 in accordance with the provisions of the GLB Act and final capital rule. The Finance Board approved the FHLBNY’s Capital Plan on July 18, 2002.
The FHLBNY converted to the new plan on December 1, 2005. Until then, the FHLBank Act required members to hold capital stock in the FHLBNY equal to the greater of:
•
5 % of the member’s total outstanding advances plus 5 percent of the FHLBNY’s interest in the aggregate unpaid principal balance of all loans sold by the members to the FHLBNY, or
•
1% of the member’s total unpaid principal balance of residential mortgage loans (usually as of the most recent year-end), or
•
$500.
Under the GLB Act, each FHLBank may offer two classes of stock. Members can redeem Class A stock by giving six months’ notice, and redeem Class B stock by giving 5 year’s notice. Only “permanent” capital, defined as retained earnings and Class B stock, satisfies the FHLBank risk based-capital requirement. In addition, the GLB Act specifies a 5 percent minimum leverage ratio based on total capital and a 4 percent minimum capital ratio that does not include the 1.5 weighting factor applicable to the permanent capital that is used in determining compliance with the 5 percent minimum leverage ratio.
On December 1, 2005, the FHLBNY implemented its new capital plan through the issuance of Class B stock. The conversion was considered a capital exchange and was accounted for at par value. Members’ capital stock held immediately prior to the conversion date was automatically exchanged for an equal amount of Class B Capital Stock, comprised of Membership Stock (referred to as “Subclass B1 Stock”) and Activity-Based Stock (referred to as “Subclass B2 Stock”).
Federal Home Loan Bank of New York
Notes to Financial Statements
Any member that withdraws from membership must wait 5 years from the divestiture date for all capital stock that is held as a condition of membership unless the institution has cancelled its notice of withdrawal prior to that date and before being readmitted to membership in any FHLBank.
With the implementation of the new capital plan on December 1, 2005, the FHLBNY is subject to risk-based capital rules. Specifically, the FHLBNY is subject to three capital requirements under the new capital structure plan. First, the FHLBNY must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with the FHLBNY policy and rules and regulations of the Finance Board. Only permanent capital, defined as Class B stock and retained earnings, satisfies this risk-based capital requirement. The Finance Board may require the FHLBNY to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements. In addition, the FHLBNY is required to maintain at least a 4% total capital-to-asset ratio and at least a 5% leverage ratio at all times. The leverage ratio is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 time divided by total assets. The FHLBNY was in compliance with the aforementioned capital rules and requirements.
The following table shows the risk-based capital ratios at December 31, 2006 and 2005 (dollars in thousands):
Actual “Risk-based capital” is capital stock and retained earnings, plus mandatorily redeemable capital stock. Section 932.2 of the Finance Board’s regulations also refers to this amount as “Permanent Capital.”
Actual “Total capital” is “Risk-based capital” plus allowance for credit losses.
Actual “Leverage capital” is “Risk-based capital” times 1.5.
*
Minimum required.
The Finance Board has confirmed that the SFAS 150 accounting treatment for certain shares of its capital stock will not affect the definition of total capital for purposes of determining the FHLBank’s compliance with its regulatory capital requirements, calculating its mortgage securities investment authority (300 percent of total capital), calculating its unsecured credit exposure to other GSEs (100 percent of total capital), or calculating its unsecured credit limits to other counterparties (various percentages of total capital depending on the rating of the counterparty).
The FHLBNY’s board of directors may declare and pay dividends in either cash or capital stock only from retained and current earnings.
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 16. Total comprehensive income
Total comprehensive income is comprised of net income and accumulated other comprehensive income (loss), which includes unrealized gains on available-for-sale securities, cash flow hedging activities and additional minimum liability on employee supplemental retirement plan prior to adoption of SFAS 158, and pursuant to SFAS 87. Adjustments to adopt SFAS 158 were included as components of accumulated other comprehensive income only. Changes in accumulated other comprehensive income (loss) and total comprehensive income were as follows for the three years ended December 31, 2006, 2005 and 2004 (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 17. Earnings per share of capital
The following table sets forth the computation of earnings per share (dollars in thousands except per share data):
Basic and diluted earnings per share of capital are the same. The FHLBNY has no dilutive potential common shares or other common stock equivalents.
Note 18. Employee retirement plans
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (“DB Plan”). The DB Plan is a tax-qualified multiple-employer defined benefit pension plan that covers substantially all officers and employees of the Bank. For accounting purposes, the DB Plan is a multi-employer plan and does not segregate its assets, liabilities, or costs by participating employer. As a result, disclosure of the accumulated benefit obligations, projected benefit obligations, plan assets, and the components of annual pension expense attributable to the Bank are not made.
The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The Bank’s contributions are a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations.
In addition, the Bank maintains a Benefit Equalization Plan (“BEP”) that restores defined benefits and contribution benefits to those employees who have had their qualified defined benefit and defined contribution benefits limited by IRS regulations. The thrift component of the BEP plan is a supplemental defined contribution plan. The plan’s liability consists of the accumulated compensation deferrals and accrued interest on the deferrals. The BEP is an unfunded plan.
The FHLBNY has a Postretirement Health Benefit Plan for retirees. The Postretirement Health Benefit Plan is an unfunded plan.
Federal Home Loan Bank of New York
Notes to Financial Statements
The Bank adopted the provisions of SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” as of December 31, 2006. The incremental impact of adoption was an increase of $6.1 million to pension liabilities and an offsetting decrease in accumulated other comprehensive income. Disclosures with respect to the adoption are outlined in subsequent sections of this note.
Retirement Plan Expenses - Summary
The following table presents employee retirement plan expenses for the years ended (in thousands):
Benefit Equalization Plan (BEP)
The plan’s liability consisted of the accumulated compensation deferrals and accrued interest on the deferrals. There were no plan assets that have been designated for the BEP.
The accrued pension costs for the Bank’s supplemental (BEP) retirement plan were as follows (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Components of the projected benefit obligation for the Bank’s supplemental (BEP) retirement plan were as follows (in thousands):
The measurement date used to determine current period benefit obligation for the supplemental (BEP) retirement plan was December 31, 2006.
Amounts recognized in the statements of condition for the Bank’s supplemental (BEP) retirement plan were as follows (in thousands):
Changes in the supplemental (BEP) retirement plan assets were as follows (in thousands):
Components of the net periodic pension cost for the Bank’s supplemental (BEP) retirement plan were as follows (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Key assumptions and other information for the actuarial calculations to determine current year’s benefit obligations for the FHLBNY’s supplemental (BEP) retirement plan were as follows (dollars in thousands):
Future supplemental (BEP) retirement plan benefits to be paid were estimated to be as follows (in thousands):
The net periodic benefit cost for 2007 is expected to be $1.2 million.
Federal Home Loan Bank of New York
Notes to Financial Statements
Postretirement Health Benefit Plan
The FHLBNY has a postretirement health benefit plan for retirees. Assumptions used in determining the accumulated postretirement benefit obligation (“APBO”) included a discount rate of 5.65%. The effect of a percentage point increase in the assumed healthcare trend rates would be an increase in postretirement benefit expense of $355 thousand and in APBO of $2.7 million. The effect of a percentage point decrease in the assumed healthcare trend rates would be a decrease in postretirement benefit expense of $280 thousand and in APBO of $2.2 million. Employees over the age of 55 are eligible provided they have completed ten years of service after age 45.
Components of the accumulated postretirement benefit obligation for the postretirement health benefits plan for the years ended December 31, 2006 and 2005 were (in thousands):
Minimum obligations for the plan were $14.6 million and $10.4 million for the years ended December 31, 2006 and 2005, representing accumulated postretirement benefit obligation on these dates.
Changes in postretirement health benefit plan assets were as follows (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Components of the net periodic benefit cost for the postretirement health benefit plan were as follows (in thousands):
The measurement date used to determine current year’s benefit obligation was December 31, 2006.
Key assumptions and other information to determine current year’s obligation for the FHLBNY’s postretirement health benefit plan were as follows:
The discount rate was based on the Citigroup Pension Liability Index at November 30, 2006, the most current information available before the closing date for the year ended December 31, 2006. Changes in the adopted rate through December 31, 2006 were not of a significant nature and the impact to the reported numbers was not material.
Future postretirement benefit plan expenses to be paid were estimated to be as follows (in thousands):
The Bank’s postretirement health benefit plan accrual for 2007 is expected to be $1.9 million.
Federal Home Loan Bank of New York
Notes to Financial Statements
Impact of Adoption of SFAS 158.
Change in amount recognized due to adoption of SFAS 158:
The amount of net transition asset or obligation recognized as an adjustment to accumulated other comprehensive income (“AOCI”) due to adoption of SFAS 158 was as follows:
Note 19. Derivatives
General - The FHLBNY may enter into interest-rate swaps, swaptions, and interest-rate cap and floor agreements (collectively, derivatives) to manage its exposure to changes in interest rates. The FHLBNY may adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The FHLBNY uses derivatives in three ways: by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset-liability management (i.e., an economic hedge). For example, the FHLBNY uses derivatives in its overall interest-rate risk management to adjust the interest-rate sensitivity of consolidated obligations to approximate more closely the interest-rate sensitivity of assets (both advances and investments), and/or to adjust the interest-rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest-rate sensitivity of liabilities. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, the FHLBNY also uses derivatives to manage embedded options in assets and liabilities; to hedge the market value of existing assets and liabilities and anticipated transactions; to hedge the duration risk of prepayable instruments; and to reduce funding costs.
Federal Home Loan Bank of New York
Notes to Financial Statements
An economic hedge is defined as a derivative that hedges specific or non-specific underlying assets, liabilities or firm commitments, but does not qualify for hedge accounting under the rules of SFAS 133 but is an acceptable hedging strategy under the FHLBNY’s risk management program. These strategies also comply with Finance Board’s regulatory requirements prohibiting speculative hedging transactions. An economic hedge, by definition, introduces the potential for earnings variability due to the changes in fair value recorded on the derivatives that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments.
The FHLBNY, consistent with Finance Board’s regulations, enters into derivatives only to reduce the market risk exposures inherent in otherwise unhedged assets and funding positions. The FHLBNY utilizes derivatives in the most cost-efficient manner and may enter into derivatives that do not necessarily qualify for hedge accounting under SFAS 133 accounting rules. As a result, when entering into such non-qualified hedges, the FHLBNY recognizes only the change in fair value of these derivatives in Other income (loss) as Net realized and unrealized (loss) gain on derivatives and hedging activities, with no offsetting fair value adjustments for the hedged asset, liability, or firm commitment.
Hedging activities
Consolidated Obligations - The FHLBNY manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation. In addition, the FHLBNY requires collateral agreements on all derivatives with non-members. While consolidated obligations are the joint and several obligations of the FHLBanks, one or more FHLBanks may individually serve as counterparties to derivative agreements associated with specific debt issues. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for one or more FHLBanks, and each of those FHLBanks simultaneously enters into a matching derivative in which the counterparty pays to the FHLBank fixed cash flows designed to mirror in timing and amount the cash outflows the FHLBank pays on the consolidated obligation. Such transactions are treated as fair value hedges under SFAS 133. In this typical transaction, the FHLBank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate advances. This intermediation between the capital and swap markets permits the FHLBNY to raise funds at a lower cost than would otherwise be available through the issuance of simple fixed- or floating-rate consolidated obligations in the capital markets. The FHLBNY does not issue consolidated obligations denominated in currencies other than U.S. dollars.
Advances - With the issuance of a putable advance, the FHLBNY may purchase from the member a put option that enables the FHLBNY to effectively convert an advance from fixed rate to floating rate if interest rates increase, or to terminate the advance and extend additional credit on new terms. The FHLBNY may hedge a convertible advance by entering into a cancelable derivative where the FHLBNY pays fixed and receives variable. This type of hedge is treated as a fair value hedge under SFAS 133. The swap counterparty can cancel the derivative on the put date, which would normally occur in a rising rate environment, and the FHLBNY can terminate the advance and extend additional credit on new terms.
The optionality embedded in certain financial instruments held by the FHLBNY can create interest-rate risk. When a member prepays an advance, the FHLBNY could suffer lower future income if the principal portion of the prepaid advance were reinvested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the FHLBNY generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. When the Bank offers advances (other than short-term advances) that members may prepay without a prepayment fee, it usually finances such advances with callable debt or otherwise hedges the options.
Federal Home Loan Bank of New York
Notes to Financial Statements
Mortgage Loans - The FHLBNY invests in mortgage assets. The prepayment options embedded in mortgage assets can result in extensions or reductions in the expected maturities of these investments, depending on changes in estimated prepayment speeds. Finance Board regulation limits this source of interest-rate risk by restricting the types of mortgage assets the Bank may own to those with limited average life changes under certain interest-rate shock scenarios and by establishing limitations on duration of equity and change in market value of equity. The FHLBNY may manage against prepayment and duration risk by funding some mortgage assets with consolidated obligations that have call features. In addition, the FHLBNY may use derivatives to manage the prepayment and duration variability of mortgage assets. Net income could be reduced if the FHLBNY replaces the mortgages with lower yielding assets and if the Bank’s higher funding costs are not reduced concomitantly.
The FHLBNY manages the interest-rate and prepayment risks associated with mortgages through debt issuance. The FHLBNY issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBNY analyzes the duration, convexity, and earnings risk of the mortgage portfolio on a regular basis under various rate scenarios.
Firm Commitment Strategies - Prior to the fourth quarter of 2005, the FHLBNY designated the mortgage loan delivery commitment as a hedge of the firm commitment. Beginning with that quarter, the FHLBNY no longer applied hedge accounting to these delivery commitments. Instead, the FHLBNY records the fair value of the mortgage loan delivery commitment on the balance sheet with an offset to current period earnings.
The FHLBNY may also hedge a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be added to the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
Investments - The FHLBNY invests in mortgage and residential asset-backed securities, mortgage-backed securities and mortgage loans held for investment, U.S. agency securities and the taxable portion of state or local housing finance agency securities. The interest rate and prepayment risks associated with these investment securities are managed through debt issuance.
Forward Settlements - There were no forward settled securities to be recorded at December 31, 2006 or at December 31, 2005.
Anticipated Debt Issuance - The FHLBNY enters into interest-rate swaps on the anticipated issuance of debt to “lock in” a spread between the earning asset and the cost of funding. The swap is terminated upon issuance of the debt instrument, and amounts reported in accumulated other comprehensive income (loss) are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued.
Intermediation - To meet the hedging needs of its members, the FHLBNY acts as an intermediary between the members and the other counterparties. This intermediation allows smaller members access to the swap market. The derivatives used in intermediary activities do not qualify for SFAS 133 hedge accounting treatment and are separately marked-to-market through earnings. The net impact of the accounting for these derivatives does not significantly affect the operating results of the FHLBNY.
Federal Home Loan Bank of New York
Notes to Financial Statements
Derivative agreements in which the FHLBNY is an intermediary may arise when the FHLBNY: (1) enters into offsetting derivatives with members and other counterparties to meet the needs of its members, and (2) enters into derivatives to offset the economic effect of other derivative agreements that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of derivatives in which the FHLBNY was an intermediary was $50 million and $130 million as of December 31, 2006 and 2005. The notional principal of derivatives designated as economic hedges was $175 million and $5 million at December 31, 2006 and 2005. Fair values of derivatives designated as economic hedges or derivatives in which the Bank acted as an intermediary were not material at December 31, 2006 and 2005. Collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBNY, as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBNY.
The FHLBNY is not a derivative dealer and does not trade derivatives for short-term profit.
Credit Risk - The FHLBNY is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The FHLBNY transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. The degree of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The FHLBNY manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Board’s regulations.
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, but it does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.
The FHLBNY uses collateral agreements to mitigate counterparty credit risk in derivatives. When the FHLBNY has more than one derivative transaction outstanding with a counterparty, and a legally enforceable master netting agreement exists with the counterparty, the exposure, less collateral held, represents the appropriate measure of credit risk. Substantially all derivative contracts are subject to master netting agreements or other right of offset arrangements. At December 31, 2006 and 2005, the Bank’s maximum credit risk, as defined above, was approximately $224.8 million and $19.2 million without recognition of collateral held by the FHLBNY. These totals included $242.8 million and $26.4 million of net accrued interest receivable. In determining maximum credit risk, the FHLBNY considers accrued interest receivables and payables, and the legal right to offset assets and liabilities by counterparty. Exposure to counterparties with a double-A rating was $215.7 million, or 95.9% of aggregate exposure. The remaining exposure was to three counterparties with a single-A rating. The Bank held $124.0 million and $7.3 million in cash as collateral as of December 31, 2006 and 2005. Based on credit analyses and collateral requirements, the management of the FHLBNY does not anticipate any credit losses on its derivative agreements.
Federal Home Loan Bank of New York
Notes to Financial Statements
The following table represented outstanding notional balances and estimated fair values of the derivatives outstanding at December 31, 2006 and 2005 (in thousands):
Net realized and unrealized gains and losses on derivatives and hedging activities
As a result of SFAS 133, the FHLBNY recorded the following net gains and losses on derivatives and hedging activities (in thousands):
*
Economic hedges include intermediation and swaps not qualifying for hedge accounting under SFAS133.
Interest accruals associated with hedges are allocated by category in the table above to conform to current period classification to more precisely match gains and losses from hedging activities. This reclassification has no impact on the net gains (losses) on derivatives and hedging activities.
Federal Home Loan Bank of New York
Notes to Financial Statements
Gains and losses from hedging activity are reflected in Other income (loss). Ineffectiveness from hedges designated as cash flow hedges was inconsequential for all periods reported.
Amortization of basis resulting from modified advance hedges amounted to gains of $2.1 million, $3.6 million, and $3.8 million for the years ended December 31, 2006, 2005 and 2004.
Cash Flow hedges
There were no material amounts for the years ended December 31, 2006, 2005 and 2004 that were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. The balances in accumulated other comprehensive income from cash flow hedges represented net unrealized losses of $4.8 million at December 31, 2006 and net unrealized gains of $5.4 million at December 31, 2005. Over the next 12 months, it is expected that about $0.3 million in net gains recorded in accumulated other comprehensive income at December 31, 2006 will be recognized in earnings. The remaining amount, representing unrealized losses of $5.1 million, are expected to be recognized as losses over the next 10 years. No cash flow hedges were outstanding at December 31, 2006.
Note 20. Estimated fair values
The following estimated fair value amounts have been determined by the FHLBNY, using available market information and the FHLBNY’s judgment of appropriate valuation methods. These estimates were based on pertinent information available to the FHLBNY as of December 31, 2006 and 2005. Although the FHLBNY uses its judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, 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. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The Fair Value Summary Tables do not represent an estimate of the overall market value of the FHLBNY as a going concern, which would take into account future business opportunities.
The Bank has not early adopted SFAS 157, “Fair Value Measurements.”
Cash and due from banks
The estimated fair value approximates the recorded book balance.
Interest-bearing deposits and Federal funds sold
To estimate the fair values, the cash flows are discounted using the appropriate market rates for the applicable maturity.
Investment securities
The estimated fair value is derived from an external pricing service, excluding accrued interest, as of the last business day of the period. For a small number of securities where external pricing is not available, the FHLBNY computes fair values using a combination of market information (pricing and spreads) as inputs to standard option valuation models.
Federal Home Loan Bank of New York
Notes to Financial Statements
Advances and other loans
The FHLBNY determines the estimated fair value of advances with fixed rates and advances with complex floating rates by calculating the present value of expected future cash flows from the advances and excluding amounts for accrued interest receivable. The discount rates used in these calculations are the replacement advance rates for advances with similar terms. Following the Finance Board’s advances regulations, advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLBNY financially indifferent to the borrower’s decision to prepay the advances. Therefore, the estimated fair value of advances does not assume prepayment risk.
Mortgage loans
The estimated fair values for mortgage loans are determined based on quoted market prices of similar mortgage loans. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.
Accrued interest receivable and payable
The estimated fair value approximates the recorded book value.
Derivative assets and liabilities
The FHLBNY estimated fair values of derivatives based on the present value of expected cash flows. The fair values are netted by counterparty where the legal right of offset exists. If these netted amounts are positive, they are classified as an asset and if negative, a liability.
Deposits
The FHLBNY determines estimated fair values of deposits by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the current cost of deposits with similar terms.
Consolidated obligations
The FHLBNY estimates fair values based on the cost of raising comparable term debt and prices its bonds off of the current consolidated obligations market curve. Their fair values are computed using standard option valuation models using the market data. The estimated cost of issuing debt includes non-interest selling costs.
Mandatorily redeemable capital stock
The FHLBNY considers the fair value of capital subject to mandatory redemption, as the redemption value of the stock, which is generally par plus accrued estimated dividend. The FHLBank’s have a cooperative structure. Stock can only be acquired by members at par value and redeemed at par value. Stock is not traded publicly and no market mechanism exists for the exchange of stock outside the cooperative structure.
Federal Home Loan Bank of New York
Notes to Financial Statements
The carrying values and estimated fair values of the FHLBNY’s financial instruments as of December 31, 2006, were as follows (in thousands):
The carrying values and estimated fair values of the FHLBNY’s financial instruments as of December 31, 2005, were as follows (in thousands):
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 21. Commitments and contingencies
As described in Note 13, 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 Board. Neither the FHLBNY nor any other FHLBank has had to assume or pay the consolidated obligation of another FHLBank. The FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future. Under FASB interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), the Bank would have been required to recognize the fair value of the FHLBNY’s joint and several liability for all the consolidated obligations, as discussed above. However, the FHLBNY considers the joint and several liabilities as similar to a related party guarantee, which meets the scope exception in FIN 45. Accordingly, the FHLBNY has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at December 31, 2006 and 2005, respectively.
Commitments for additional advances totaled approximately $21.2 billion and $20.9 billion as of December 31, 2006 and 2005. Commitments are conditional, and were for periods of up to twelve months. Extension of credit under these commitments is subject to certain collateral requirements and other financial criteria at the time the commitment is drawn upon. Standby letters of credit are executed for a fee on behalf of members to facilitate residential housing, community lending, and members’ asset/liability management or to provide liquidity. A standby letter of credit is a financing arrangement between the FHLBNY and its member. Members assume an unconditional obligation to reimburse the FHLBNY for value given by the FHLBNY to the beneficiary under the terms of the standby letter of credit. The FHLBNY may, in its description, permit the member to finance repayment of their obligation by receiving a collateralized advance. Outstanding standby letters of credit were approximately $331.1 million and $238.3 million as of December 31, 2006 and 2005, respectively and had original terms of up to fifteen years, with a final expiration in 2019. Standby letters of credit are fully collateralized at the time of issuance. Unearned fees on standby letters of credit are recorded in other liabilities and were not significant as of December 31, 2006 and 2005. Based on management’s credit analyses and collateral requirements, the FHLBNY does not deem it necessary to have any provision for credit losses on these commitments and letters of credit.
Under the MPF program, the Bank was unconditionally obligated to purchase $9.5 million and $0.7 million in mortgage loans at December 31, 2006 and 2005. Commitments are generally for periods not to exceed 45 days. Under the provision of SFAS 149, “Amendment of Statements 133 on Derivatives Instruments and Hedging Activities,” such commitments entered into after June 30, 2003 were recorded as derivatives at their fair value. In addition, the FHLBNY had entered into conditional agreements under “Master Commitments” with its members in the MPF program to purchase mortgage loans in aggregate of $223.9 million and $379.8 million as of December 31, 2006 and 2005.
The FHLBNY generally executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. When counterparties are exposed, the Bank would typically pledge cash collateral to mitigate the counterparty’s credit exposure. As of December 31, 2006 and 2005, the Bank had pledged cash collateral of $0 and $244.8 million to derivative counterparties, and these amounts were reported in assets and included in interest-bearing deposits. At December 31, 2006 and 2005, the FHLBNY was exposed to credit risk associated with outstanding derivative transactions measured by the replacement cost of derivatives in a gain position. The Bank’s credit exposure was mitigated by cash collateral of $124.0 million and $7.3 million delivered by derivatives counterparties and held by the Bank as interest-bearing deposit liabilities at December 31 2006 and 2005.
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY charged to operating expenses net rental costs of approximately $3.1 million, $3.0 million, and $3.0 million for years ended December 31, 2006, 2005 and 2004. Lease agreements for FHLBNY premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBNY’s results of operations or financial condition.
The following table summarizes contractual obligations and other commitments as of December 31, 2006 (in thousands):
Mandatorily redeemable capital stock is categorized by the dates at which the corresponding advances outstanding mature. Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock, under which stock may not be redeemed until the later of five years from the date the member becomes a nonmember or the related advance matures.
The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses is required.
Note 22. Other developments
The FHLBNY is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, the FHLBNY does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the FHLBNY’s financial condition or results of operations.
Note 23. Segment information
The FHLBNY manages its operations as a single business segment. Management and the FHLBNY’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance.
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY has a unique cooperative structure and is owned by member institutions located within a defined geographic district. The Bank’s market is the same as its membership district which are New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. Institutions that are members of the FHLBNY must have their principal places of business within this market, but may also operate elsewhere. The FHLBNY’s primary business is making low-cost, collateralized loans, known as “advances,” to its members. Members use advances as a source of funding to supplement their deposit-gathering activities. As a cooperative, the FHLBNY prices advances at minimal net spreads above the cost of its funding to deliver maximum value to members. Advances to large members constitute a significant percentage of FHLBNY’s advance portfolio and its source of revenues.
The FHLBNY’s total assets and capital could significantly decrease if one or more large members were to withdraw from membership or decrease business with the Bank. Members might withdraw or reduce their business as a result of consolidating with an institution that was a member of another FHLBank, or for other reasons. The FHLBNY has considered the impact of losing one or more large members. In general, a withdrawing member would be required to repay all indebtedness prior to the redemption of its capital stock. Under current conditions, the FHLBNY does not expect the loss of a large member to impair its operations, since the FHLBank Act of 1999 does not allow the FHLBNY to redeem the capital of an existing member if the redemption would cause the FHLBNY to fall below its capital requirements. Consequently, the loss of a large member should not result in an inadequate capital position for the FHLBNY. However, such an event could reduce the amount of capital that the FHLBNY has available for continued growth. This could have various ramifications for the FHLBNY, including a possible reduction in net income and dividends, and a lower return on capital stock for remaining members.
The top five advance holders at December 31, 2006 and 2005, and associated interest income for the years then ended are summarized as follows (in thousands):
*
Officer of member bank also served on the Board of Directors of the FHLBNY.
**
Percentage calculated on par value of advances.
*
Officer of member bank also served on the Board of Directors of the FHLBNY.
**
Percentage calculated on par value of advances.
Federal Home Loan Bank of New York
Notes to Financial Statements
The following table summarizes advance interest income from the top five members and non-members for the year ended December 31, 2004 (in thousands):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures: An evaluation of the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”) was carried out under the supervision and with the participation of the Bank’s President and Chief Executive Officer, Alfred A. DelliBovi, and Senior Vice President and Chief Financial Officer Patrick A. Morgan, at December 31, 2006. Based on this evaluation, they concluded that as of December 31, 2006, the Bank’s disclosure controls and procedures were effective, at a reasonable level of assurance, in ensuring that the information required to be disclosed by the Bank in the reports it files or submits under the Act is (i) accumulated and communicated to the Bank’s management (including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b)
Changes in Internal Control Over Financial Reporting: There were no changes in the Bank’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the Bank’s fourth quarter that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth in Part II, Item 8 of the Annual Report on
Form 10-K and incorporated herein by reference.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The Federal Housing Board is responsible under the Federal Home Loan Bank Act for appointing six directors to the Board of Directors of the FHLBNY. The remaining eleven directors on the Board of Directors are elected by the FHLBNY’s membership. As of the date of this filing, four appointed Director seats remain unfilled by the FHFB.
The following table sets forth information regarding each of the directors of the FHLBNY as of the date of this annual Report on Form 10-K. With the exception of Mr. Mroz, each director has been engaged in the principal occupation described below for at least five years.
Mr. Engelke (Chair) is Chairman, President, and Chief Executive Officer of Astoria Financial Corporation and its subsidiary Astoria Federal Savings and Loan Association, having joined in 1971. He is a member of the Board of Trustees of Long Island University, past chair and current member of the Board of Directors of the Community Preservation Corporation, a member of the Advisory Board of Directors of Neighborhood Housing Services of New York City, Inc., and on the Federal Reserve Bank of New York’s Thrift Institutions Advisory Panel. Mr. Engelke is a member of the Board of Directors of the New York Bankers Association and a member of the Governmental Affairs Steering Committee and the Government Affairs Council of America’s Community Bankers. He previously served as a member of the Financial Accounting Standards Advisory Council.
Ms. Estabrook is owner of Elberon Development Co. in Cranford, NJ. It, together with affiliated companies, owns approximately two million square feet of rental property, primarily industrial. She is immediate past chairman of the New Jersey Chamber of Commerce and continues to serve on its executive committee and chairs its nominating committee. She previously served as a director on the boards of Summit Bank, United Jersey Bank, Constellation Bancorp, and the National State Bank of Elizabeth. Ms. Estabrook also served as a member of the Lay Board of the Delbarton School in Morristown for 15 years, including five years as chair. Ms. Estabrook currently is a member of the Board of Trustees of Catholic Charities and on the Board of Overseers of the Weill Cornell Medical School. She is also on the Board of Trustees at Monmouth Medical Center and serves on its Executive, Community Action, Finance, Strategic Planning, and Children’s Hospital Committees.
Mr. Ficalora is Chairman, President and Chief Executive Officer and a Director of New York Community Bancorp, Inc., having joined in 1965. Mr. Ficalora has also served as Chairman of New York Community Bancorp, Inc. and New York Community Bank. A graduate of Pace University with a degree in business and finance, Mr. Ficalora provides leadership to several professional banking organizations. In addition to serving as a member of the Executive Committee and as Chairman of the former Community Bankers Association of New York State, Mr. Ficalora is a Director of the New York State Bankers Association. He serves as a member of the Federal Reserve Bank Thrift Institutions Advisory Council and President and Director of the Asset Management Fund Large Cap Equity Institutional Fund. In addition, Mr. Ficalora serves on the Board of Directors of the RSI Retirement Trust. In recent years, Mr. Ficalora has also been Chairman of the Board of the New York Savings Bank Life Insurance Fund and President of the Metropolitan Division - Auditors & Comptrollers, and has served as a director of Computhrift Corporation. Mr. Ficalora is also an active participant in community affairs. A member of the Board of Directors of the Queens Chamber of Commerce since 1990 and has been a member of its Executive Committee since April 1992. In addition, Mr. Ficalora is President of the Queens Library Foundation Board, and serves on the Boards of Directors of the Queens Borough Public Library, the Queens College Foundation, the Queensborough Community College Fund, the New York Hall of Science, Flushing Cemetery, and Forest Park Trust and on the Advisory Council of the Queens Museum of Art.
Mr. Florio was appointed Counsel to the President & CEO of First Niagara Financial Group, Inc. in August 2006. He previously served as the Eastern New York Regional President of First Niagara Financial Group, Inc. from 2005 until August 2006. Mr. Florio was selected to be the President & CEO of Hudson River Bank & Trust Co. from 1996 and served in that capacity until the merger of Hudson River Bank & Trust Co. into First Niagara Financial Group, Inc. in 2005. From 1993 to 1996, he served as HRBT’s Chief Financial Officer. Mr. Florio’s earlier work experience included several years as a partner in the accounting firm of Pattison, Koskey, Rath & Florio, where he specialized in auditing commercial banks and savings institutions throughout the Hudson Valley. Mr. Florio has also been active in many professional and community service organizations. He is currently a board member of Hudson River Bank & Trust Company Foundation, State University of New York at Albany Foundation, Fuller Road Management, Columbia-Greene Community College Foundation, Columbia Children’s Center and AAA Hudson Valley. Mr. Florio is a Certified Public Accountant and holds a Bachelor of Science degree from the State University of New York at Albany.
Mr. Fulmer is Chairman, President and Chief Executive Officer of The Bank of Castile, and President of Tompkins Trustco, Inc., its parent company. He has served as a director of The Bank of Castile since 1988 and has been its Chairman since 1992 and is currently its President and Chief Executive Officer. Mr. Fulmer also has served as a director and President of Tompkins Trustco, Inc. since 2000. Before joining the Bank of Castile, Mr. Fulmer held various executive positions with Fleet Bank of New York (formerly known as Security New York State Corporation and Norstar Bank) for approximately 12 years. He is an active community leader, serving as a member of the Board of Directors of the Erie & Niagara Insurance Association, United Memorial Medical Center in Batavia and the Genesee County Economic Development Center. Mr. Fulmer currently serves on the Government Relations Committee of the American Bankers Association. He is a former director of the Monroe Title Corporation and the Catholic Heath System of Western New York. Mr. Fulmer is also a former president of the Independent Bankers Association of New York State and a former member of the Board of Directors of the New York Bankers Association.
Mr. González has been President and Chief Executive Officer of Santander BanCorp and Banco Santander Puerto Rico since October of 2002. He joined the Santander Group in August 1996 as President and Chief Executive Officer of Santander Securities Corporation. He later served as Executive Vice President and Chief Financial Officer of Santander BanCorp and in April 2002, he was named President and Chief Operating Officer. Mr. González is a trustee of the University of Puerto Rico and Chairman of its Finance Committee. He is a past President of the Puerto Rico Bankers Association and a past president of the Securities Industry Association of Puerto Rico. Mr. González was at Credit Suisse First Boston from 1983 to 1986 as Vice President of Investment Banking, and from 1989 to 1995 as President and Chief Executive Officer of the firm’s Puerto Rico subsidiary. From 1986 to 1989 Mr. González was President and Chief Executive Officer of Government Development Bank for Puerto Rico. From 1980 to 1983, he was in the private practice of law in San Juan, Puerto Rico with the law firm of O’Neill & Borges.
Mr. Hermance, Chairman, President and CEO of Hudson City Savings Bank, Paramus, New Jersey has 18 years of service with the Hudson City Savings Bank. He joined Hudson City as Senior Executive Vice President and Chief Operating Officer and was also named to the Board of Directors. In 1997, he was promoted to President, and on January 1, 2002, he became Chief Executive Officer. On January 1, 2005, Mr. Hermance assumed the title of Chairman in addition to President and Chief Executive Officer. Mr. Hermance carries similar titles in Hudson City Bancorp, the parent company, which trades on NASDAQ. Mr. Hermance serves on the Board of New Jersey League of Community Bankers and is Vice-Chairman of the Valley Hospital Board of Trustees.
Mr. Lindstrom (Vice Chair) is President, Chief Executive Officer, and Director of Franklin Savings Bank of Woodstown, NJ, which he joined in 1981. He has served on the New Jersey League’s Board of Governors and as its chair. He is currently a member of the New Jersey League’s Government Affairs Council, the Legislative and Regulatory Affairs Committee, and a director of the League’s subsidiary Banker’s Cooperative Group, Inc. Mr. Lindstrom is on America’s Community Bankers Government Affairs Committee and is a member of the Pentegra Services Group Defined Benefit Board of Directors. He has also served as Director and chair of the Pentegra Services Group Defined Contribution Board of Directors and serves as Chair of Pentegra Services Inc Board of Directors (PSI). In addition, he has served as a director and chairman of the Philadelphia Federal Reserve Thrift Council and serves as chair of America’s Community Bankers Directors Publication Advisory Group.
Ms. Liseno has been President and Chief Executive Officer of Metuchen Savings Bank since 1979, having begun her career with the bank in 1962. She is a SAPEC trustee, a member of the New Jersey League’s Legislative and Regulatory Affairs Committee and the Policy Review Task Force and is currently serving on the Board of the Thrift Institutions Community Investment Corp. (TICIC). She previously served on the New Jersey League’s Executive Committee, the Committee on Examination and Supervision, and the boards of the Thrift Institutions Community Investment Corporation and the League’s subsidiary Banker’s Cooperative Group. She is also past president of the Central Jersey Savings League. In addition, she previously served on the Board of Governors as the past chairman of the New Jersey League of Community Bankers.
Mr. Lynch is Chairman, President and Chief Executive Officer of Oritani Savings Bank headquartered in the Township of Washington, New Jersey. Mr. Lynch is a former Chairman of the New Jersey League of Community and Savings Bankers and served as a member of its Board of Governors for several years, and on the Board of Thrift Institutions Community Investment Corp. (TICIC), Mr. Lynch is a member of the Professional Development and Education Committees of America’s Community Bankers. He is a member of the Board of Directors of the Pentegra Financial Institutions Retirement Fund, a member of the American Bar Association and a former member of the Board of Directors of Bergen County Habitat for Humanity. Mr. Lynch is also a member of the Board of Directors of the Hackensack Main Street Business Alliance. Prior to appointment to his current position at Oritani Savings Bank in 1993, Mr. Lynch was Vice President and General Counsel of a leasing company and served as a director of Oritani Savings Bank. Mr. Lynch earned a Juris Doctor degree from Fordham University, an LLM degree from New York University, an MBA degree from Rutgers University and a BA in Economics from St. Anselm’s College.
Mr. Mroz, of Haddonfield, New Jersey, is a government and public affairs consultant and lawyer. Until December 31, 2006, Mr. Mroz was Of Counsel in the law firm of Stradley Ronon Stevens & Young, LLP. On January 1, 2007, he became president of Salmon Ventures, Ltd. He also maintains a private law practice. Mr. Mroz represents clients in the utility, real estate, insurance and banking industries for federal, state, and local regulatory, administrative, and legislative matters. He has a distinguished record of community and public service. Mr. Mroz is the former Chief Counsel to New Jersey Governor Christine Todd Whitman serving in that position in 1999 and 2000. Prior to that he served in various capacities in the Whitman Administration, including Special Counsel, Director of the Authorities, and member of the Governor’s Transition Team. He served as County Counsel for Camden County, New Jersey, from 1991 to 1994. Mr. Mroz is also active in community affairs, serving on the board of directors for the New Jersey Alliance for Action and Volunteers for America, Delaware Valley. In addition to serving on the Home Loan Bank Board of Directors, Mr. Mroz currently serves as counsel to the Atlantic City Hotel and Lodging Association and the New Jersey Conference of Mayors, and was former counsel to the Delaware River Bay Authority. He is also the solicitor for the Waterford Township, N.J., planning board. He is also a frequent commentator on Philadelphia radio and TV regarding election and political issues.
Mr. Scarchilli is President and CEO of Pioneer Savings Bank headquartered in Troy, New York and is a member of the Board of Trustees. Mr. Scarchilli is a graduate of Hudson Valley Community College in Troy and has a Bachelor’s Degree in Accounting from Siena College. Mr. Scarchilli also serves as President, CEO and Director of Pioneer Commercial Bank, a wholly owned subsidiary of Pioneer Savings Bank. He is also a Director of the New York Bankers Association (formerly the Community Bankers Association of New York State) as well as Vice Chairman of the Association in 2007. He is a Director of America’s Community Bankers, a national banking trade organization, and Chairman of their Professional Development/Education Committee. Mr. Scarchilli is also a member of the Banking Board of New York State. Mr. Scarchilli serves on numerous not-for-profit boards in the local community. He is a Director of The Business Development Center, a privately funded economic development entity in Rensselaer County, as well as the Center for Economic Growth (CEG) and the Albany-Colonie Regional Chamber of Commerce. He is Chairman of The Northeast Health Foundation Board and also serves on the Board of the parent company, Northeast Health, which consists of local hospitals and elder care facilities. Additionally he serves as a member of the Audit and Compliance Committee of Ordway Research Institute.
Mr. Strayton is President and Chief Executive Officer of Provident Bank, an independent full service community bank with $2.6 billion in assets, headquartered in Montebello, N.Y. Founded in 1888, Provident Bank provides a wide array of financial products and services to individuals and businesses. Mr. Strayton joined Provident Bank in 1982 and was named President and CEO in 1986. He joined Provident Bank after 18 years with Bankers Trust Company. Under Mr. Strayton’s leadership, the bank has grown from six branches with assets of $288 million to 33 branches and $2.6 billion in assets. The bank currently operates branches in Rockland, Orange, Sullivan, Ulster and Putnam Counties in New York and one office in Bergen County, New Jersey. The bank converted to a fully public company in 2004. Provident Bank’s dramatic growth has been fueled by a series of key strategic acquisitions, including The National Bank of Florida in 2002, and Ellenville National Bank and Warwick Community Bancorp, Inc., both in 2004. This rapid growth made Provident Bank the market leader in both Rockland and Orange Counties. In the fiscal year ending September 30, 2004, the bank raised $196 million in capital from a second-step stock conversion to a fully public company. The Warwick Community Bancorp, Inc. acquisition was the bank’s largest ever, securing approximately $300 million in loans, $500 million in deposits and another nine branches. For the past 23 years, Mr. Strayton has spearheaded an active community presence for Provident Bank. Mr. Strayton is currently a director of the New York Bankers Association and a board member of America’s Community Bankers. He also serves as a director of Orange & Rockland Utilities and the New York Business Development Corporation. Mr. Strayton’s career also includes six years as a director for the Federal Home Loan Bank of New York and chairmanships of the Community Bankers Association of New York State, Rockland Business Association, Rockland County Boy Scouts of America, and Rockland United Way among other local organizations. Mr. Strayton has served as a Trustee at St. Thomas Aquinas College and Nyack Hospital, Chairman of the Board for The United Way, and Chairman for the Boy Scouts of Rockland County. He has also served on the board of directors of Jawonio and the Historical Society of Rockland County.
In addition, three directors left the Board during 2006. Information about these Directors is below:
Kenneth J. Abt’s term as Director expired on December 31, 2006. Mr. Abt, 64, was an elected Director since 1998. He is Chairman, President, and Chief Executive Officer of First Federal Savings of Middletown, Orange County, NY. He joined the staff of First Federal in 1964 and became President in 1973. He has served as chair of the New York League of Savings Institutions, chair of First Monetary Mutual Limited, vice chair of the Federal Savings and Loan Advisory Council, and director of The Center for Financial Studies at Fairfield University. Mr. Abt is currently a director of the New York State Bankers Association, America’s Community Bankers, the College Council at SUNY New Paltz, and Smiley Bros, Inc. (Mohonk Mountain House).
Sanford A. Belden retired from the Board on July 31, 2006. Mr. Belden, 64, was an elected Director since 2004. He is a consultant to Community Bank System, Inc., a New York Stock Exchange listed, full service bank and financial services company headquartered in DeWitt, New York (a suburb of Syracuse), with 132 offices in New York and Pennsylvania and $4.4 billion in assets. Until July 31, 2006, Mr. Belden was President and Chief Executive Officer of Community Bank, N.A., DeWitt, New York. He holds B.S., M.S. and Ph.D. degrees from Purdue University. A few of his many present affiliations include the American Red Cross Board of Governors in Washington, Crouse Health Foundation, and New York Bankers Association.
Harry P. Doherty retired from the Board on May 31, 2006. Mr. Doherty, 64, was an elected Director since 2000. He was Chairman and Chief Executive Officer of SI Bank & Trust since 1990, joining with the bank in 1966. In 2004, SI Bank & Trust merged into Independence Community Bank (“ICB”), and in 2006, ICB merged into Sovereign Bank where he currently serves on Sovereign’s Regional Advisory Board. Mr. Doherty is also a Director of Savings Bank Life Insurance USA and Chair of the SI Bank & Trust Foundation. He is also past Chair and Director of America’s Community Bankers. Mr. Doherty has previously served as Chair of the Community Bankers Association of New York State, and has previously served as Chair of Institutional Investors Mutual Funds, Inc., and as a director of the MSB Fund.
Executive Officers
The following sets forth the executive officers of the FHLBNY at December 31, 2006 and as of the date of this report:
Alfred A. DelliBovi was elected President of the Federal Home Loan Bank of New York in November 1992. As President, he serves as the Chief Executive Officer and directs the Bank’s overall operations to facilitate the extension of credit products and services to 293 neighborhood-based lenders. Mr. DelliBovi is a member of the Pentegra Group Defined Contribution Plan Board of Directors. Previously, Mr. DelliBovi served as Deputy Secretary of the U.S. Department of Housing and Urban Development, from 1989 until 1992. In May 1992, President Bush appointed Mr. DelliBovi Co-Chairman of the Presidential Task Force on Recovery in Los Angeles. Mr. DelliBovi served as a senior official at the U.S. Department of Transportation in the Reagan Administration, was elected to four terms in the New York State Assembly, and earned a Master of Public Administration degree from Bernard M. Baruch College, City University of New York.
James A. Gilmore was appointed Head of Marketing and Sales in April 2004. He joined the Bank in 1984 after almost ten years with the Federal Reserve Bank of New York. During his 22 years at the FHLBNY, Mr. Gilmore has served in several positions, most recently as Head of Marketing and Sales and the senior officer in charge of correspondent banking and Business Risk Team.
Robert R. Hans was named Head of Technology and Support Services in April of 2004; in this role, he is responsible for Information Technology and Corporate Services. Mr. Hans has been with the FHLBNY for more than 30 years, primarily in management positions in bank operations and technology.
Peter S. Leung joined the Bank as Chief Risk Officer in January 2004. Mr. Leung has more than nineteen years experience in the Federal Home Loan Bank System. Prior to joining the Bank, Mr. Leung was the Chief Risk Officer of the Federal Home Loan Bank of Dallas since 2001. Prior to that, Mr. Leung was the Deputy Director of the Office of Supervision with the Federal Housing Finance Board for 11 years and an examiner with the Federal Home Loan Bank of Seattle and the Office of Thrift Supervision for 4 years in the 1980’s. Mr. Leung is a CPA and has an MBA from City University, Seattle, Washington.
Patrick A. Morgan was appointed the Chief Financial Officer in April 2004. Mr. Morgan joined the FHLBNY in 1999 after more than fifteen years in the financial services industry including working for one of the largest international banks in the US. Prior to that, Mr. Morgan was a senior audit manager with one of the Big Four public accounting firms. He is a CPA and a member of the New York State Society of CPAs and the American Institute of CPAs.
Paul B. Héroux was appointed Head of Member Services in April 2004 and oversees several functions including Credit and Collateral Services, Correspondent Services, and Community Investment and Affordable Housing Operations. Mr. Héroux joined the Bank in 1984 as a Human Resources generalist and served as the Director of Human Resources from 1988 to 1990. In his tenure with the Bank he has held other key positions including Director of Financial Operations and Chief Credit Officer. He is a graduate of St. Bonaventure University. Prior to joining the Bank, Mr. Héroux held positions at Merrill Lynch & Co. and EF Hutton & Co.
Kevin M. Neylan is Head of Strategy and Organizational Performance. Mr. Neylan joined the FHLBNY in April 2001 and is responsible for developing and overseeing execution of the Bank’s business strategy. He is also responsible for leading the Bank’s human resources and legal functions. Mr. Neylan had approximately twenty years experience in the financial services industry prior to joining the Bank. He was a partner in the financial service consulting group of one of the Big Four accounting firms and also holds an M.S. in corporate strategy from the MIT Sloan School of Management.
Craig E. Reynolds was appointed the Head of Asset and Liability Management in April 2004. Prior to this position, he was Treasurer of the Bank. Mr. Reynolds joined the FHLBNY in 1994 after more than 22 years in banking with almost half this time spent working abroad in international banking. He was the treasurer of a U.S. bank’s branch in Tokyo and later resided in Riyadh as the treasurer of a Saudi Arabian bank for over five years. He is a graduate of Manhattan College in the Bronx, New York.
Section 16 (a) Beneficial Ownership Reporting Compliance
In accordance with correspondence from the Office of Chief Counsel of the Division of Corporate Finance of the U.S. Securities and Exchange Commission dated August 26, 2005, Directors, officers and 10% stockholders of the Bank are exempted from Section 16 of the Securities Exchange Act of 1934 with respect to transactions in or ownership of Bank capital stock.
Audit Committee
The Audit Committee of the FHLBNY’s Board of Directors is primarily responsible for overseeing the services performed by the FHLBNY’s independent registered public accounting firm and internal audit department, evaluating the FHLBNY’s accounting policies and its system of internal controls and reviewing significant financial transactions. Current members of the Audit Committee are: Carl A. Florio (Chair), George L. Engelke, Jr., Anne Evans Estabrook, Joseph R. Ficalora, José R. González, Katherine J. Liseno and John M. Scarchilli.
Audit Committee Financial Expert
The FHLBNY’s Board of Directors has determined that José R González of the FHLBNY’s Audit Committee qualifies as an “audit committee financial expert” under Item 407 (d) of Regulation S-K but is not considered “independent” as the term is defined by Rule 10A-3(b)(1) promulgated under the Securities Exchange Act and the rules of the New York Stock Exchange.
Code of Ethics
It is the duty of the Board of Directors to oversee the Chief Executive Office and other senior management in the competent and ethical operation of the FHLBNY on a day-to-day basis and to assure that the long-term interests of the shareholders are being served. To satisfy this duty, the directors take a proactive, focused approach to their position, and set standards to ensure that the FHLBNY is committed to business success through maintenance of the highest standards of responsibility and ethics. In this regard, the Board has adopted a Code of Business Conduct and Ethics that applies to all employees as well as the Board. The Code of Business Conduct and Ethics is posted on the Corporate Governance Section of the FHLBNY’s website at http://www.fhlbny.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
The mission of the Federal Home Loan Bank of New York (“Bank”) is to advance housing opportunity and local community development by maximizing the capacity of our community-based member-lenders to serve their markets.
The Bank meets its mission by providing our members with access to economical wholesale credit and technical assistance through our credit products, mortgage finance programs, housing and community development programs and correspondent services intended to increase the availability of home finance to families of all incomes.
To achieve the foregoing, the Bank seeks to recruit and retain only competent and talented individuals to achieve the Bank’s mission, and to keep its work force to a small group. In this regard, the Bank was staffed by, as of December 31, 2006, 232 employees, a relatively small workforce for a New York City-based financial institution that had, as of that date, $81.7 billion in assets. Therefore, all employees, and particularly senior and middle management, are frequently required to perform in multiple areas using multiple skill sets.
In addition, the Bank operates in a very competitive market for financial talent. Without the ability to attract, motivate and retain this talent, the ability of the Bank to fulfill its mission would be in jeopardy. The Bank’s compensation strategy acknowledges its environment and addresses the fact that a substantial number of our competitors for talent offer highly attractive compensation and benefits packages that include elements which are not offered at the Bank, such as long-term incentive plans and stock options.
In response to the uniquely challenging environment that the Bank operates in, compensation and benefits at the Bank consist of three components: (a) cash compensation (i.e., base salary and a “variable” or “at risk” short-term incentive compensation plan); (b) retirement-related benefits (i.e., defined benefit and defined contribution plans) and (c) other benefits.
This Compensation Discussion and Analysis (“CD&A”) provides information related to the Bank’s compensation program provided to its named executive officers (or “NEOs”) for 2006 - that is, the Bank’s Principal Executive Officer (“PEO”), Principal Financial Officer (“PFO”) and the three most highly-compensated executive officers other than the PEO and PFO. The information includes, among other things, the objectives of the Bank’s compensation program and the elements of compensation the Bank provides to its NEOs (and other employees).
I. Objectives of the Bank’s compensation and benefits program
The Bank’s compensation and benefits program (“Program”) consists of base salary, a short-term incentive compensation plan, a defined benefit plan, a defined contribution plan, medical, life and other insurance coverage, and other incidental benefits.
The objectives of the Bank’s Program are:
•
to help motivate employees to achieve superior results for the Bank, and
•
to provide a strategy that allows the Bank to compete for, and retain, talent that otherwise might be lured away from the Bank.
The Program is, for the most part, applicable to all Bank employees, including NEOs. However, two major Program elements are available only to a subset of employees: 1) participation in the short-term incentive compensation plan is offered to all exempt (non-hourly) employees (here, it should be noted that exempt employees constituted 81% of all Bank employees as of year-end 2006); and 2) non-qualified defined contribution and defined benefit plans are offered to employees at the rank of Vice President and above who exceed income limitations established by the Internal Revenue Service (“IRS”) for three out of five consecutive years and who are also approved for inclusion by the Bank’s Benefit Equalization Plan Committee (“BEP Committee”).
Management’s role with respect to compensation issues is limited to administering Board-approved programs and providing proposals for the consideration of the Board’s Compensation and Human Resources Committee (“Committee”). No member of Bank management serves on the Board or any Board Committee. In turn, this Committee makes decisions or provides recommendations for the Bank’s Board to consider. Among the Committee’s main responsibilities are the responsibilities to:
1.
review and recommend to the Board changes regarding the Bank’s compensation and benefits programs for employees and retirees;
2.
review and approve individual performance ratings and related merit increases for the Bank’s Chief Executive Officer and for the other Management Committee members;
3.
review salary adjustments for Bank officers; and
4.
review and approve annually the Bank’s Incentive Compensation Plan (“Plan”), year-end Plan results and Plan award payouts.
The Committee has the sole authority to retain and replace, and approve fees and other retention terms for, (1) any compensation and benefits consultant to be used to assist in the evaluation of Chief Executive Officer’s compensation and (2) any other advisors that it shall deem necessary to assist it in fulfilling its duties. Bank management has used consultants in the past to help the Committee establish the Bank’s compensation and benefits policies and to set up some programs.
The Charter of the Committee is available on the Bank’s web site at www.fhlbny.com.
Policies pertaining to the Bank’s Benefit Equalization Plan (“BEP”) are approved by the Board. A separate committee, called the BEP Committee (a non-Board committee), administers various matters pertaining to the Bank’s BEP including, but not limited to, approving employees as participants of the BEP; approving the payment method of benefits; and the establishment of financing arrangements to pay the obligations of the BEP. The BEP Committee is chaired by the Chair of the Compensation and Human Resources Committee; other members include the Bank’s Chief Financial Officer, Director of Human Resources, and Executive Compensation and Benefits Officer. The BEP Committee reports its actions to the Compensation and Human Resources Committee by submitting its minutes to the Compensation and Human Resources Committee for review.
II. The compensation program is designed to reward for performance and employee longevity and to compete with compensation programs offered by the Bank’s competitors
The Bank’s Program is designed to reward employees based on Bank and individual performance, and to attract, retain and motivate well-performing employees.
All exempt employees are eligible to receive annual incentive awards through participation in the short-term incentive compensation plan. These awards are based on a combination of Bank performance results and individual performance results. The better the Bank and/or the employee perform, the higher the employee’s potential award is likely to be. In addition, the better the employee’s performance, the greater the employee’s annual salary increase is likely to be.
The Bank’s defined benefit and defined contribution plans are designed to reward employees for continued strong performance over their careers - the longer an employee works at the Bank, the greater the benefit amount the employee is likely to accumulate.
The Bank is prohibited by law from offering equity-based compensation, and the Bank does not offer long-term incentives. However, many competitors in our marketplace do offer these programs. As such, another objective of the Program is to take into account these realities by offering a benefit package which includes a defined benefit and defined contribution plan to help the Bank effectively compete for talent.
III. The elements of compensation
The compensation mix provided to Bank employees consists of three components: (a) cash compensation (i.e., base salary and a “variable” or “at risk” short-term incentive compensation plan); (b) retirement-related benefits (i.e., defined benefit and defined contribution plans) and (c) other benefits. The Summary Compensation Table included below provides information regarding reportable compensation for each of the Bank’s NEOs.
IV. Explanation of why the Bank chooses to pay each element of compensation
The following is an explanation of why the Bank chooses to pay each element of compensation as described above.
A. Cash Compensation
1. Base Salary
The goal of offering a competitive base salary is to make the Bank successful in attracting, motivating and retaining the talent needed to execute the Bank’s business strategies. Providing the appropriate amount of base salary is critical to achieving this objective.
To help in identifying the appropriate amount of base salary, the Bank generally retains an independent consulting firm annually to match approximately one-third of its officer (and certain non-officer) positions and salaries to positions and salaries at other comparable financial institutions. For most positions, the Bank’s practice has been to match compensation at the 50th percentile of the compensation data reported for comparable financial institutions by the outside consultant. These comparable financial institutions have included mortgage banks, regional commercial banks and thrift institutions. Where data is not available for certain positions from comparable financial institutions, the Bank’s practice has been to match compensation at the upper quartile (75th percentile) as compared with other Home Loan Banks. As a result of these “matches”, base salaries can be increased, held at the same level, or decreased.
In addition, a performance-based merit increase program exists for all employees that can have an impact on base salary. Generally speaking, employees receive merit increases on an annual basis. The amount of the merit increase is based upon the attainment of a performance rating of “Outstanding,” “Exceeds Requirements,” or “Meets Requirements” achieved on individual performance evaluations. Merit guidelines are determined each year and distributed to managers. These guidelines establish the maximum merit increase percentage permissible for that year. In 2006, merit-related officer salary increases ranged from 3.7% to 4.7%, depending on the employee’s performance rating.
2. Short-Term Incentive Plan (“Incentive Plan”)
The objective of the Bank’s Incentive Plan is to motivate exempt employees on an annual basis to perform at a high level and take actions that support the Bank’s strategies and lead to the attainment of the Bank’s business plan and fulfillment of its mission. It is also recognized that most, if not all, financial firms in the Bank’s labor market provide their employees with annual short-term incentives. For the Bank not to offer this element of compensation would put it at a distinct disadvantage with respect to its competitors for new talent as well as pose a challenge with respect to the retention of key employees.
Incentive Plan participants have two types of performance measures that impact on their Incentive Plan award. The first type involves Bankwide performance goals and the second type involves individual performance goals (which can include work performed as part of a group) as established and measured through the annual performance evaluation process.
The Bank’s Incentive Plan Bankwide goals for 2006, which were all approved at the Board level, were 1) Dividend Capacity from Income; 2) Enterprise Risk Management Structure; and 3) Housing and Community Development. A description of these goals is set forth below:
i) Dividend Capacity from Income: This measure is generally defined as net income divided by member-contributed capital stock. The weight of this goal, in proportion to all of the Bankwide goals, is 45%.
ii) Enterprise Risk Management: Risk is measured and quantified in the following four areas: (1) market risk, (2) credit risk, (3) derivative (FAS 133) risk, and (4) operations risk. The weight of this goal, in proportion to all of the Bankwide goals, is 45%. (The rationale for having the Dividend Capacity and Enterprise Risk Management goals weighted equally is to motivate management to take a balanced approach to managing risks and returns).
iii) Housing and Community Development: This goal has the purpose of ensuring the Bank’s achievement of mission-related activities having to do with community development. The weight of this goal is 10% of Bankwide goals.
The Bank believes that employees at higher ranks have a greater impact on the achievement of Bankwide goals than employees at lower ranks. Therefore, employees at higher ranks have a greater weighting placed on the Bankwide performance component of their Incentive Plan award opportunities as opposed to the individual performance component. For the Bank’s Chief Executive Officer and the other Management Committee members (a group that includes all of the NEOs), the overall incentive compensation opportunity is weighted 90% on Bankwide performance goals and 10% on individual performance goals.
The Incentive Plan is administered by the Chief Executive Officer subject to any requirements for review and approval by the Committee that it may establish. In all areas not specifically reserved by the Committee for its review and approval, decisions of the Chief Executive Officer or his designee concerning the Plan shall be binding on the Bank and on all Participants.
When officers are individually evaluated, they receive one of five performance ratings: “Outstanding”; “Exceeds Requirements”; “Meets Requirements”; “Needs Improvement” and “Unsatisfactory”. Incentive Plan participants that are rated as “Exceeds Requirements” or “Outstanding” on their individual performance evaluations receive an additional 3% or 6%, respectively, of their base salary added to their Incentive Plan award.
Incentive Plan awards are only paid to participants who have attained at least an overall performance rating of 3.0 (within the “Meets Requirements” category) on their individual performance evaluations. Participants will receive an individual Incentive Plan award payment even if Bankwide goal results are such that no payments are awarded for the Bankwide portion of the Incentive Plan.
B. Retirement-Related Benefits
The Bank’s qualified and non-qualified defined benefit and contribution plans are intended to help encourage the accumulation of wealth over a long period of time. These benefits are also part of the Bank’s strategy to compete for and retain talent that might otherwise be lured away from the Bank by competing financial enterprises who offer their employees long-term incentives and equity-sharing opportunities - forms of compensation that the Bank does not offer.
i) Qualified Defined Benefit Plan
The Pentegra Defined Benefit Plan for Financial Institutions (“DB Plan”), as adopted by the Bank, is an IRS-qualified defined benefit plan which covers all Bank employees who have achieved four months of service. The DB Plan is part of a multiple-employer defined benefit program administered by Pentegra Services.
The DB Plan provides a benefit of 2.50% of a participant’s highest consecutive 3-year average earnings, multiplied by the participant’s years of benefit service, not to exceed 30 years. Earnings are defined as base salary plus short-term incentives, and overtime, subject to an annual IRS limit.
The IRS limit on earnings for 2006 was $220,000. Annual benefits provided under the DB Plan also are subject to IRS limits, which vary by age and benefit payment option selected. The DB Plan pays monthly annuities, or a lump sum amount available at or after age 59 1/2 calculated on an actuarial basis, to vested participants or the beneficiaries of deceased vested participants. Employees are vested at 20% per year beginning with the second full year of service and become fully vested at the completion of the sixth year of service.
Early retirement is provided for at age 45 and after with an actuarial reduction in benefits. Any participant who retires early and elects to draw pension benefits prior to age 65, and who has a combined age and length of service of at least 70 years (commonly referred to as the “rule of 70”), will realize a reduction of 1.5% to his/her early retirement benefit for each year under age 65. Without the “rule of 70” in place, a participant who retires early and elects to draw pension benefits prior to age 65 would have a 3% reduction in benefit for each year under age 65.
ii) Nonqualified Defined Benefit Portion of the Benefit Equalization Plan
Employees at the rank of Vice President and above who exceed income limitations established by the IRS for three out of five consecutive years and who are also approved for inclusion by the Bank’s BEP Committee are eligible to participate in the BEP, commonly referred to as a “Supplemental Employee Retirement Plan,” a non-qualified retirement plan that in many respects mirrors the DB Plan.
The primary objective of the defined benefit portion of the BEP is to ensure that participants receive the full amount of benefits to which they would have been entitled under the DB Plan in the absence of limits on maximum benefits levels imposed by the IRS.
The defined benefit portion of the BEP utilizes the identical benefit formulas applicable to the Bank’s DB Plan. In the event that the benefits payable from the Bank’s DB Plan have been reduced or otherwise limited by government regulations, the employee’s “lost” benefits are payable under the terms of the defined benefit portion of the BEP.
iii) Qualified Defined Contribution Plan
Bank employees who have met the eligibility requirements contained in the Pentegra Defined Contribution Plan for Financial Institutions (“DC Plan”) can choose to contribute to the DC Plan, a retirement savings plan qualified under the Internal Revenue Code. Employees are eligible for membership in the DC Plan on the first day of the month coinciding with or next following the date the employee completes 3 full calendar months of employment.
The Bank matches the first 3% of employee contributions based on years of employment and the percentage of employee contribution. An employee may contribute 1% to 19% of base salary into the DC Plan, up to IRS limitations. The IRS limit for 2006 was $15,000 for employees under the age of 50. An additional “catch up” contribution of $5,000 is permitted under IRS rules for employees who attain age 50 before the end of the calendar year. The Bank matches up to 100% of the first 3% of the employee’s contribution through the third year of employment; 150% of the first 3% of contribution during the fourth and fifth years of employment; and 200% of the first 3% of contribution starting with the sixth year of employment.
iv) Nonqualified Defined Contribution Portion of the Benefit Equalization Plan
Employees at the rank of Vice President and above who exceed income limitations established by the IRS for three out of five consecutive years and who are also approved for inclusion by the Bank’s BEP Committee are eligible to participate in a supplemental non-qualified defined contribution plan (which is a separate portion of the aforementioned BEP) that in many respects mirrors the DC Plan by using the same actuarial assumptions as the qualified DC Plan. The defined contribution portion of the BEP ensures, among other things, that participants whose benefits under the DC Plan would otherwise be restricted under certain provisions of the Internal Revenue Code are able to make elective pre-tax deferrals and to receive the same Bank match relating to such deferrals as would have been received under the DC Plan.
C. Other Benefits
In addition to the foregoing, the Bank offers a comprehensive benefits package for all regular employees (including NEOs) which includes the following significant benefits:
Medical and Dental
Employees can choose preferred provider or managed care medical and dental plan coverage. Both types of coverage include prescription coverage. Employees contribute to the costs for this coverage.
Vision Care
Employees can choose from two types of coverage offered. Basic vision care is offered at no charge to employees. Employees contribute to the cost for the enhanced coverage.
Life Insurance
Group Term Life insurance providing a death benefit of twice an employee’s annual salary (including incentive compensation) is provided at no cost to the employee.
Business Travel Accident Insurance
Business Travel Accident insurance providing a death benefit is provided at no cost to the employee.
Short and Long Term Disability Insurance
Short and long term disability insurance is provided at no cost to the employee.
Flexible Spending Accounts
Flexible spending accounts in accordance with IRS rules are provided to employees to allow tax benefits for medical, dependent, transit and parking expenses. The administrative costs for these benefits are paid for by the Bank.
Employee Assistance Program
Employee assistance counseling is available at no cost to employees.
Educational Development Assistance
Educational Development Assistance, which provides tuition reimbursement, subject to the satisfaction of certain conditions, is available to all eligible employees.
Voluntary Life Insurance
Employees are afforded the opportunity to purchase additional life insurance for themselves and their eligible dependents.
Long Term Care
Employees are afforded the opportunity to purchase Long Term Care insurance for themselves and their eligible dependents.
Fitness Center Reimbursement
Fitness center reimbursement, up to $250 per year, is available to all employees.
V. Explanation of how the Bank determines the amount (and, where applicable, the formula) for each element of compensation
Please see subsection IV directly above for an explanation of the mechanisms used by the Bank to determine employee compensation.
VI. Explanation of how each element of compensation and the Bank’s decisions regarding that element fit into the Bank’s overall compensation objectives and affect decisions regarding other elements of compensation
The Bank believes it has developed a unified, coherent system of compensation. Each of the elements of compensation as discussed in this CD&A has been established with the Bank’s compensation objectives in mind.
As stated above, the Bank’s compensation strategy is made up of three elements - (a) cash compensation (i.e., base salary and a “variable” or “at risk” short-term incentive compensation plan); (b) retirement-related benefits (i.e., defined benefit and defined contribution plans) and (c) other benefits. As also stated above, the Bank’s overall compensation objective is to help motivate employees to achieve superior results for the Bank, and to provide a strategy that allows the Bank to compete for, and retain, talent that otherwise might be lured away from the Bank.
As the Bank makes changes to one element of the mix, the Committee considers the impact on the other elements of the mix. The Committee strives to maintain programs that keep the Bank within its agreed philosophy, as outlined above.
COMPENSATION COMMITTEE REPORT
The Compensation and Human Resources Committee (“Compensation Committee”) of the Board of Directors (“Board”) of the Federal Home Loan Bank of New York (“Bank”) has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Bank’s annual report on Form 10-K for the year 2006.
Executive Compensation
The table below summarizes the total compensation earned by each of the Named Executive Officers for the year ended December 31, 2006 (in whole dollars):
Summary Compensation Table
1 Change in Pension Value for the Pentegra Defined Benefit Plan for Financial Institutions:
A. DelliBovi - $109,000
P. Morgan -$78,000
P. Leung - $47,000
P. Héroux - $59,000
C. Reynolds - $82,000
2 Change in Pension Value for the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan:
A. DelliBovi - $185,000
P. Morgan - $133,000
P. Leung - not eligible to participate in the Nonqualified Benefit Portion of the Benefit Equalization Plan as of 12/31/06.
P. Héroux - $39,000
C. Reynolds - $18,000
3 For all Named Executive Officers, includes these items paid by the Bank for all employees: amount of funds matched by the Bank in connection with the Pentegra Defined Contribution Plan for Financial Institutions, payment of group term life insurance premium, payment of long term disability insurance premium, payment of health insurance premium, payment of aggregate and individual “stop loss” coverage (i.e., insurance to protect the Bank against significant insurance claims paid under its self-insured health insurance plan), payment of health and dental administrative charges (i.e., network medical utilization charges, network medical administrative charges, and dental indemnity administrative charges), payment of dental insurance premium, and payment of employee assistance program premium.
4 For A. DelliBovi, P. Héroux and C. Reynolds, includes these items paid by the Bank for all eligible officers: amount of funds matched by the Bank in connection with the nonqualified defined contribution portion of the Benefit Equalization Plan (amount of funds matched for A. DelliBovi was $19,600, for P. Héroux $3,894 and for C. Reynolds $8,637), and payment of term life insurance premium.
5 For A. DelliBovi, P. Leung, P. Morgan and C. Reynolds, includes this item paid by the Bank for all participating employees: payment of vision insurance premium.
6 For A. DelliBovi, includes value of leased automobile ($12,432).
7 For C. Reynolds, includes payment of this item paid by the Bank for all eligible officers: officer physical examination.
The following table sets forth information regarding all incentive plan awards made to Named Executive Officers (in whole dollars):
On this date, the Board of Directors’ Compensation and Human Resources Committee approved the 2007 Incentive Compensation Plan (“ICP”). Approval of the ICP does not mean a payout is guaranteed.
Figures represent an assumed rating of “Meets Requirements” for the Named Executive Officers with respect to their individual performance.
Employment Arrangements
The Bank is an “at will” employer and does not provide written employment agreements to any of its employees. However, employees, including Named Executive Officers (or “NEOs), receive (a) cash compensation (i.e., base salary and, for exempt employees, the ability to participate in a “variable” or “at-risk” short-term incentive compensation plan), (b) retirement related benefits (i.e., defined benefit and defined contribution plans) and (c) other benefits. Other benefits, which are available to all regular employees, include medical, dental, vision care, life, business travel accident, and short and long term disability insurance, flexible spending accounts, an employee assistance program, educational development assistance, voluntary life insurance, long term care insurance and fitness center reimbursement. An additional benefit offered to all officers, age 40 or greater, or who are at VP level or above, is a physical examination every 18 months. (Participation in non-qualified defined contribution and defined benefit plans are offered to employees at the rank of Vice President and above who exceed income limitations established by the Internal Revenue Service for three out of five consecutive years and who are also approved for inclusion by the Bank’s Benefit Equalization Plan Committee.)
The annual base salaries for the Named Executive Officers are as follows (whole dollars):
See the “Grant of Plan-Based Award” table for 2007 incentive compensation opportunity information.
Short-Term Incentive Compensation Plan
The objective of the Bank’s short-term incentive compensation plan (“Incentive Plan”) is to motivate exempt employees on an annual basis to perform at a high level and take actions that support the Bank’s strategies and lead to the attainment of the Bank’s business plan and fulfillment of its mission. It is also recognized that most, if not all, financial firms in the Bank’s labor market provide their employees with annual short-term incentives. For the Bank not to offer this element of compensation would put it at a distinct disadvantage with respect to its competitors for new talent as well as pose a challenge with respect to the retention of key employees.
Incentive Plan participants have two types of performance measures that impact on their Incentive Plan award. The first type involves Bankwide performance goals and the second type involves individual performance goals (which can include work performed as part of a group) as established and measured through the annual performance evaluation process.
The Bank’s Incentive Plan Bankwide goals for 2006, which were all approved at the Board level, were 1) Dividend Capacity from Income; 2) Enterprise Risk Management Structure; and 3) Housing and Community Development. A description of these goals is set forth below:
i) Dividend Capacity from Income: This measure is generally defined as net income divided by member-contributed capital stock. The weight of this goal, in proportion to all of the Bankwide goals, is 45%.
ii) Enterprise Risk Management: Risk is measured and quantified in the following four areas: (1) market risk, (2) credit risk, (3) derivative (FAS 133) risk, and (4) operations risk. The weight of this goal, in proportion to all of the Bankwide goals, is 45%. (The rationale for having the Dividend Capacity and Enterprise Risk Management goals weighted equally is to motivate management to take a balanced approach to managing risks and returns).
iii) Housing and Community Development: This goal has the purpose of ensuring the Bank’s achievement of mission-related activities having to do with community development. The weight of this goal is 10% of Bankwide goals.
The Bank believes that employees at higher ranks have a greater impact on the achievement of Bankwide goals than employees at lower ranks. Therefore, employees at higher ranks have a greater weighting placed on the Bankwide performance component of their incentive award opportunities as opposed to the individual performance component. For the Bank’s Chief Executive Officer and the other Management Committee members, the overall incentive compensation opportunity is weighted 90% on Bankwide performance goals and 10% on individual performance goals.
The Incentive Plan is administered by the Chief Executive Officer, subject to any requirements for review and approval by the Committee that it may establish. In all areas not specifically reserved by the Committee for its review and approval, decisions of the Chief Executive Officer or his designee concerning the Incentive Plan shall be binding on the Bank and on all Participants.
When officers are individually evaluated, they receive one of five performance ratings: “Outstanding”; “Exceeds Requirements”; “Meets Requirements”; “Needs Improvement” and “Unsatisfactory”. Incentive Plan participants that are rated as “Exceeds Requirements” or “Outstanding” on their individual performance evaluations receive an additional 3% or 6%, respectively, of their base salary added to their Incentive Plan award.
Incentive Plan awards are only paid to participants who have attained at least an overall performance rating of 3.0 (within the “Meets Requirements” category) on their individual performance evaluations. Participants will receive an individual award payment even if Bankwide goal results are such that no payments are awarded for the Bankwide portion of the Incentive Plan.
Qualified Defined Contribution Plan
Bank employees who have met the eligibility requirements contained in the Pentegra Defined Contribution Plan for Financial Institutions (“DC Plan”) can choose to contribute to the DC Plan, a retirement savings plan qualified under the Internal Revenue Code. Employees are eligible for membership in the DC Plan on the first day of the month coinciding with or next following the date the employee completes 3 full calendar months of employment.
The Bank matches the first 3% of employee contributions based on years of employment and the percentage of employee contribution. An employee may contribute 1% to 19% of base salary into the DC Plan, up to IRS limitations. The IRS limit for 2006 was $15,000 for employees under the age of 50. An additional “catch up” contribution of $5,000 is permitted under IRS rules for employees who attain age 50 before the end of the calendar year. The Bank matches up to 100% of the first 3% of the employee’s contribution through the third year of employment; 150% of the first 3% of contribution during the fourth and fifth years of employment; and 200% of the first 3% of contribution starting with the sixth year of employment.
Additional Information:
Additional information about compensation and benefits are provided in discussions immediately following pension and compensation tables.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
AND OPTION EXERCISES AND STOCK VESTED
The tables disclosing (i) outstanding option and stock awards and (ii) exercises of stock options and vesting of restricted stock for Named Executive Officers are omitted because all employees of Federal Home Loan Banks are prohibited by law from holding capital stock issued by a Federal Home Loan Bank. As such, these tables are not applicable.
PENSION BENEFITS
The table below shows the present value of accumulated benefits payable to each of the Named Executive Officers, the number of years of service credited to each such person, and payments during the last fiscal year (if any) to each such person, under the Pentegra Defined Benefit Plan for Financial Institutions and the nonqualified Defined Benefit Portion of the Benefit Equalization Plan (amounts in whole dollars):
1 Number of years of credited service pertains to eligibility/participation in the qualified plan. Years of credited service for the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan are the same as for the Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan. However, the dates of eligible enrollment for both the Qualified and Nonqualified Defined Benefit plans may differ because enrollment eligibility in the nonqualified plan is much more stringent than for the qualified plan.
2 As of 12/31/2006.
3Mr. Leung was not a participant in the nonqualified plan in 2006. Mr. Leung’s 9.5 years of credited service includes 3.6 years of credited service working for the Office of Thrift Supervision; 3.0 years of credited service working for the Federal Home Loan Bank of Dallas (including two months of severance) and 2.9 years of credited service working for the Federal Home Loan Bank of New York.
The following discussions provide more information with respect to the compensation and pension benefits tables in the preceding pages.
Qualified Defined Benefit Plan
The Pentegra Defined Benefit Plan for Financial Institutions (“DB Plan”), as adopted by the Bank, is an IRS-qualified defined benefit plan which covers all Bank employees who have achieved four months of service. The DB Plan is part of a multiple-employer defined benefit program administered by Pentegra Services.
The DB Plan provides a benefit of 2.50% of a participant’s highest consecutive 3-year average earnings, multiplied by the participant’s years of benefit service, not to exceed 30 years. Earnings are defined as base salary plus short-term incentives, and overtime, subject to an annual IRS limit.
The IRS limit on earnings for 2006 was $220,000. Annual benefits provided under the DB Plan also are subject to IRS limits, which vary by age and benefit payment option selected. The DB Plan pays monthly annuities, or a lump sum amount available at or after age 59 1/2 calculated on an actuarial basis, to vested participants or the beneficiaries of deceased vested participants. Employees are vested at 20% per year beginning with the second full year of service and become fully vested at the completion of the sixth year of service.
Early retirement is provided for at age 45 and after with an actuarial reduction in benefits. Any participant that retires early and elects to draw pension benefits prior to age 65, and who has a combined age and length of service of at least 70 years (commonly referred to as the “rule of 70”), will realize a reduction of 1.5% to his/her early retirement benefit for each year under age 65. Without the “rule of 70” in place, a participant that retires early and elects to draw pension benefits prior to age 65 would have a 3% reduction in benefit for each year under age 65.
Nonqualified Defined Benefit Portion of the Benefit Equalization Plan
Employees at the rank of Vice President and above who exceed income limitations established by the IRS for three out of five consecutive years and who are also approved for inclusion by the Bank’s BEP Committee are eligible to participate in the BEP, commonly referred to as a “Supplemental Employee Retirement Plan,” a non-qualified retirement plan that in many respects mirrors the DB Plan.
The primary objective of the defined benefit portion of the BEP is to ensure that participants receive the full amount of benefits to which they would have been entitled under the DB Plan in the absence of limits on maximum benefits levels imposed by the IRS.
The defined benefit portion of the BEP utilizes the identical benefit formulas applicable to the Bank’s DB Plan. In the event that the benefits payable from the Bank’s DB Plan have been reduced or otherwise limited by government regulations, the employee’s “lost” benefits are payable under the terms of the defined benefit portion of the BEP.
NONQUALIFIED DEFERRED COMPENSATION
The following table discloses contributions to nonqualified deferred compensation plans, each Named Executive Officer’s withdrawals (if any), aggregate earnings and year-end balances in such plans (whole dollars):
1.
These amounts are included in the “Salary” column of the Summary Compensation Table; these amounts would have been paid as salary but for deferral into the nonqualified deferred compensation Benefit Equalization Plan (BEP).
2.
These totals are also included in the “All Other Compensation” column of the Summary Compensation Table.
3.
Patrick Morgan has not met the eligibility requirements to participate in this benefit as of 12/31/06.
4.
Peter Leung has not met the eligibility requirements to participate in this benefit as of 12/31/06.
Nonqualified Defined Contribution portion of the Benefit Equalization Plan:
The nonqualified defined contribution portion of the Benefit Equalization Plan (“BEP”) ensures that participants whose benefits under the qualified defined contribution plan that would have been granted to them but for IRS limitations are made whole. BEP plan participants are able to make elective pre-tax deferrals that would have been made to the qualified plan but for the IRS limitation. As in the qualified defined contribution plan, the Bank matches up to the first 3% of employee contributions based on years of employment and the percentage of employee contribution. The Bank matches 100% of up to the first 3% of the employee’s contribution through the third year of employment; 150% of up to the first 3% of contribution during the fourth and fifth years of employment; and 200% of up to the first 3% of contribution starting with the sixth year of employment. Investment earnings and losses on employee contributions, as well as Bank matching contributions that would have been received under the qualified defined contribution plan, but for IRS limitations, are provided under the BEP in the same manner as would have been provided under the qualified defined contribution plan, which is based on participants’ individual elections. Participant investment elections may be changed daily. Withdrawals prior to termination of employment are not allowed. Upon termination of employment, the total balance will be paid to participant in a lump sum.
DISCLOSURE REGARDING TERMINATION AND CHANGE IN CONTROL PROVISIONS
Severance Plan
The Bank has a formal Board-approved Severance Plan (“Severance Plan”) available to all Bank employees who work twenty or more hours a week and have at least one year of employment.
Severance benefits are paid to employees who:
(i) are part of a reduction in force;
(ii) have resigned from the Bank following a reduction in salary grade, level, or rank;
(iii) refuse a transfer of fifty miles or more;
(iv) have their position eliminated; or
(v) are unable to perform his/her duties in a satisfactory manner and is warranted that the employee would not be discharged for cause.
The Severance Plan provides four weeks of salary for each year of employment up to thirty-six weeks of salary for all officers.
Payment of severance benefits under the Severance Plan is contingent on an employee executing a severance agreement which includes a release of any claim the employee may have against the Bank and any present and former director, officer and employee of the Bank.
In addition, employees receiving severance benefits also receive, if applicable, life insurance for the severance period and a reimbursement covering the difference between their Consolidated Omnibus Budget Reconciliation Act (“COBRA”) cost and what they would have paid for health insurance as employees.
Other Potential Post-Employment Payments
The Bank maintains no arrangements which contain “change in control” provisions.
DIRECTOR COMPENSATION
The following table summarizes the compensation paid by the Bank to its Directors for the year ended December 31, 2006 (whole dollars):
The Bank has established a formal Director Compensation Policy governing compensation and expense reimbursement provided to its directors. This policy, which is reviewed on an annual basis, has been established in accordance with the provisions of the Federal Home Loan Bank Act (“Bank Act”) and related Federal Housing Finance Board (“FHFB”) regulations. The Bank Act and FHFB regulations provide for strict annual limits (subject to adjustment by the FHFB on an annual basis) on the amount of compensation that can be paid to directors. The annual compensation limits for members of the Board of Directors of each Federal Home Loan Bank were as follows in 2006: for the Chair - $29,357; for the Vice-Chair - $23,486; and for any other member of the Board - $17,614. Under the Bank’s Director Compensation Policy, fees can only be paid for attendance at Board meetings, and can not exceed the foregoing limits.
The FHLBNY reimburses directors for necessary and reasonable travel, subsistence, and other related expenses incurred in connection with the performance of their official duties. For expense reimbursement purposes, directors’ official duties include:
•
Meetings of the Board and Board Committees,
•
Meetings requested by the Federal Housing Finance and Federal Home Loan Bank System committees,
•
Meetings of the Council of Federal Home Loan Banks and committees,
•
Attendance at other events on behalf of the Bank with prior approval of the Board of Directors.
The following table, which is included here pursuant to FHFB regulations, includes information about reimbursed expenses for 2006 (whole dollars):
Total expenses incurred by the FHLBNY for board expenses, including amounts reimbursed in cash to directors, totaled $137,000, $97,000, and $88,000 in 2006, 2005 and 2004.
Compensation Committee Interlocks and Insider Participation
As of the date of this annual report on Form 10-K, the members of the Board’s Compensation and Human Resources Committee are: David W. Lindstrom (Chair), Carl A. Florio, José R. González, Katherine J. Liseno and Kevin J. Lynch. No interlocking relationships exist between any member of the FHLBNY’s Board of Directors or the Compensation and Human Resources Committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. No member of the Compensation and Human Resources Committee is or was formerly an officer or an employee of the Bank.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
FHLBNY stock can only be held by member financial institutions. No person, including directors and executive officers of the FHLBNY, may own the Bank’s capital stock. As such, the FHLBNY does not offer any compensation plan to any individuals under which equity securities of the Bank are authorized for issuance.
The following tables provide information about those members who were beneficial owners of 5% or more of the FHLBNY’s outstanding capital stock (shares in thousands) as of:
February 28, 2007:
December 31, 2006:
*
An officer of this member bank also serves on the Board of Directors of the FHLBNY
The following table sets forth information with respect to capital stock outstanding to members whose officers or directors served as Directors of the FHLBNY as of December 31, 2006, the most practicable date for the information provided (shares in thousands):
All capital stock held by each member of the FHLBNY is by law automatically pledged to the FHLBNY as additional collateral for all indebtedness of each such member to the FHLBNY.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The FHLBNY is a cooperative and the members own all of the stock of the FHLBNY. Capital stock ownership is a prerequisite to the transaction by members of any business with the FHLBNY. The majority of the members of the Board of Directors of the FHLBNY are elected by and from the membership. The remaining Directors are appointed by the Finance Board. The FHLBNY conducts its advances business almost exclusively with members. Therefore, in the normal course of business, the FHLBNY extends credit to members, whose officers or directors may serve as directors of the FHLBNY. All loans extended by the FHLBNY to such members are on market terms that are no more favorable to them than the terms of comparable transactions with other members. In addition, the FHLBNY also extends credit to members who own more than 5% of the FHLBNY’s stock. All loans extended by the FHLBNY to these members are on market terms that are no more favorable to them than the terms of comparable transactions with other members. Under the provisions of Section 7(j) of the FHLBank Act (12 U.S.C. § 1427(j)), the Bank is required to conduct its business with its members without discrimination in favor or against any member.
The Bank has a Code of Business Conduct and Ethics (“Code”) which requires all directors, officers and employees to disclose any interests that could lead to a conflict of interest. The Code is a written document and is posted on the Corporate Governance Section of the FHLBNY’s website at http://www.fhlbny.com. The Code provides for Ethics Officers, who are the Bank’s Chief Audit Officer and Director of Human Resources, whose task is to help administer the Code. In the event of a conflict, appropriate action is taken, which could include recusal of a director from discussing and voting on a transaction in which the director has a related interest; removal of an employee from working on a project with a vendor; disqualification of a vendor from transacting business with the Bank; or requiring an employee to divest his or her ownership interest in a particular entity. Other than with respect to the activities and transactions described above in the first paragraph of this Item 13, all transactions required to be reported under paragraph Item 404(a) of Regulation S-K since the beginning of the last fiscal year of the FHLBNY required review and approval under the Code, and, with respect to all such transactions, the policies and procedures of the Code were followed.
Director Independence
In General
As of the date of this annual report on Form 10-K, the Bank has 13 directors, 11 of whom were elected by the Bank’s member institutions and two of whom were appointed by the Federal Housing Finance Board (“Finance Board”). All directors are independent of management from the standpoint that they are not Bank employees or officers. The Bank’s directors are prohibited from personally owning stock or stock options in the Bank. In addition, the Bank is required to determine whether its directors are independent under two distinct director independence standards. First, Finance Board regulations establish independence criteria for directors who serve as members of the Bank’s Audit Committee. Second, the Securities and Exchange Commission’s (the “SEC”) rules require that the Bank’s board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of its directors.
Finance Board Regulations Regarding Independence
The Finance Board director independence standards prohibit individuals from serving as members of the Bank’s Audit Committee if they have one or more disqualifying relationships with the Bank or its management that would interfere with the exercise of that individual’s independent judgment. Disqualifying relationships considered by the board are: employment with the Bank at any time during the last five years; acceptance of compensation from the Bank other than for service as a director; being a consultant, advisor, promoter, underwriter or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. The Board of Directors has assessed the independence of all directors under the Finance Board’s independence standards, regardless of whether they serve on the Audit Committee. As of the date of this Annual Report on Form 10-K, all of the Bank’s directors, including all members of the Audit Committee and the “Audit Committee financial expert” (discussed below), were independent under these criteria.
SEC Rules Regarding Independence
In addition, pursuant to SEC rules, the Board has adopted the independence standards of the New York Stock Exchange (the “NYSE”) to determine which of its directors are independent, which members of its Audit Committee are not independent, and whether the Bank’s designated Audit Committee financial expert is independent.
After applying the NYSE independence standards, the Board has determined that, as of the date of this annual report on Form 10-K, Anne Evans Estabrook and Richard Mroz, the Bank’s only appointed directors, are independent.
Separately, the Board was unable to affirmatively determine that there are no material relationships (as defined in the NYSE rules) between the Bank and its elected directors, and has therefore concluded that none of the Bank’s elected directors was independent under the NYSE independence standards.
In making this determination, the Board considered the cooperative relationship between the Bank and its members. Specifically, the Board considered the fact that each of the Bank’s elected directors are officers of a Bank member institution, and that each member institution has access to, and is encouraged to use, the Bank’s products and services.
Furthermore, the Board acknowledges that under NYSE rules, there are certain objective tests that, if not passed, would preclude a finding of independence. One such test pertains to the amount of business conducted with the Bank by the elected director’s institution. It is possible that an elected director could satisfy this test on a particular day. However, because the amount of business conducted by an elected director’s institution may change frequently, and because the Bank generally desires to increase the amount of business it conducts with each member, the directors deemed it inappropriate to draw distinctions among the elected directors based solely upon the amount of business conducted with the Bank by any director’s institution at a specific time.
The Board has a standing Audit Committee. For the reasons noted above, the Board determined that none of the current elected members of the Bank’s Audit Committee, who are Carl A. Florio (chair), George L. Engelke, Jr., Joseph R. Ficalora, José R. González, Katherine J. Liseno and John M. Scarchilli, are independent under the NYSE standards for audit committee members. The Board also determined that Anne Evans Estabrook, an appointed director who serves on the Audit Committee, is independent under the NYSE independence standards for audit committee members. The Board also determined that José R. González is an “Audit Committee financial expert” within the meaning of the SEC rules, and further determined that he is not independent under NYSE standards.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the fees paid to the FHLBNY’s independent registered public accounting firm, PricewaterhouseCoopers, LLP (“PwC”), during years ended December 31, 2006, 2005 and 2004 (in thousands):
Audit Fees
Audit fees relate to professional services rendered in connection with the audit of the FHLBNY’s annual financial statements, review of the Form 10-K and quarterly reports on Form 10-Q and consultation services provided in connection with the FHLBNY’s registration with the Securities and Exchange Commission and other regulatory filings.
Audit-Related Fees
Audit-related fees primarily relate to consultation services provided in connection with the implementation of the requirements under Section 404 of the Sarbanes-Oxley Act, and consultation with respect to certain accounting and reporting standards.
Tax Fees
Consulting services relate to services provided with respect to the FHLBNY’s payroll tax withholding process.
All Other Fees
These other fees relate to PwC’s attendance at FHLBanks Accounting Conferences, and access to PwC’s accounting research and reference tools.
Policy on Audit Committee Pre-approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm.
The FHLBNY has adopted an independence policy that prohibits its independent registered public accounting firm from performing non-financial consulting services, such as information technology consulting and internal audit services. This policy also mandates that the audit and non-audit services and related budget be approved by the Audit Committee in advance, and that the Audit Committee be provided with quarterly reporting on actual spending. In accordance with this policy, all services to be performed by PwC were pre-approved by the Audit Committee.
Subsequent to the enactment of the Sarbanes-Oxley Act of 2002 (the “Act”), the Audit Committee has met with PwC to further understand the provisions of that Act as it relates to independence. PwC will rotate the lead audit partner and other partners as appropriate in compliance with the Act. The Audit Committee will continue to monitor the activities undertaken by PwC to comply with the Act.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
The financial statements included as part of this Form 10-K are identified in the index to the Financial Statements appearing in Item 8 of this Form 10-K, which index is incorporated in this Item 15 by reference.
2.
Financial Statement Schedules
Financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes, under Item 8, “Financial Statement and Supplementary Data.”
(b) See the Exhibits listed under Item 15(a) (3) above.
(c) The financial statement schedules required by this item are listed under Item 15(a) (2) above.
* Confidential information is omitted and identified by asterisk symbol and filed separately with the Securities and Exchange Commission.
Note a: These exhibits include a management contract, compensatory plan or arrangement required to be noted herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below:
EXHIBIT INDEX
* Confidential information is omitted and identified by asterisk symbol and filed separately with the Securities and Exchange Commission.
Note a: These exhibits include a management contract, compensatory plan or arrangement required to be noted herein.