UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-51397
Federal Home Loan Bank of New York
(Exact name of registrant as specified in its charter)
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| Federal | | 13-6400946 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
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| 101 Park Avenue | | |
| New York, New York | | 10178 |
| (Address of principal executive offices) | | (Zip code) |
(212) 681-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, putable, par value $100
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yeso Noþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filero | | Accelerated filero | | Non-accelerated filerþ | | Smaller reporting companyo |
| | | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ
Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2009, the aggregate par value of the common stock held by members of the registrant was approximately $5,370,279,100. At February 28, 2010, 49,148,524 shares of common stock were outstanding.
Federal Home Loan Bank of New York
2009 Annual Report on Form 10-K
Table of Contents
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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 generally receive dividends on their capital stock investment. The FHLBNY’s defined geographic district is New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. The FHLBNY provides a readily available, low-cost source of funds for its member institutions. The FHLBNY does not have any wholly or partially owned subsidiaries, nor does it have an equity position in any partnerships, corporations, or off-balance-sheet special purpose entities. The Bank does have two grantor trusts related to employee benefits programs, and these are more fully described in Note 16 — Employee Retirement Plans to the audited financial statements.
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. 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.
The FHLBNY combines private capital and public sponsorship as a GSE 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.
Members of the FHLBNY must purchase FHLBNY stock according to regulatory requirements. (For more information, see Note 11 — Mandatorily redeemable capital stock and Note 13 — Capital to the audited financial statements). The business of the cooperative is to provide liquidity for our members (primarily in the form of loans referred to as “advances”) and to provide a return on members’ investment in FHLBNY stock in the form of a dividend. Since the members are both stockholders and customers, the Bank operates such that there is a trade-off between providing value to them via low pricing for advances with a relatively lower dividend versus higher advances pricing with a relatively higher dividend. The FHLBNY is managed to deliver balanced value to members, rather than to maximize profitability or advance volume through low pricing.
All federally insured depository institutions, insured credit unions and insurance companies engaged in residential housing finance can apply for membership in the FHLBank in their district. All members are required to purchase capital stock in FHLBNY as a condition of membership. For the year ending December 31, 2009, community financial institutions are defined as FDIC-insured depository institutions having average total assets of $1.0 billion. Annually, the Federal Housing Finance Agency (“Finance Agency”), formerly 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. Because the Bank operates as a cooperative, the FHLBNY conducts business with related parties in the normal course of business and considers all members and non-member stockholders as related parties in addition to the other FHLBanks. (For more information, see Note 20 — Related party transactions to the audited financial statements. See also Item 13 — Certain Relationships and Related Transactions, and Director Independence in this Form 10-K).
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The FHLBNY’s primary business is making collateralized loans or advances to members 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.
As of July 2008, the FHLBNY is supervised and regulated by the Federal Housing Finance Agency (“Finance Agency”), which is an independent agency in the executive branch of the U.S. government. The Finance Agency’s mission statement is to provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and to support a stable and liquid mortgage market. However, while the Finance Agency establishes regulations governing the operations of the FHLBanks, the Bank functions as a separate entity with its own management, employees and board of directors.
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 331 and 311 members at December 31, 2009 and 2008.
The most recent market analysis performed in 2009 indicated that in the Bank’s district, there are 29 banks and thrifts and nearly 600 credit unions eligible for membership but have not joined. Of these, the FHLBNY considers approximately 75 as appropriate candidates for membership. An appropriate candidate for membership is an institution that is likely to do sufficient advance business with the FHLBNY within a reasonable period of time, so that the stock the potential member will likely to be required to purchase, under the provisions of membership, will not dilute the dividend on the existing members’ stock. Characteristics that identify attractive candidates include an asset base of $100 million or greater ($50 million for credit unions), an established practice of wholesale funding, a high loan-to-deposit ratio, strong asset growth, sufficient eligible collateral, and management that had experience with the FHLBanks during previous employment.
The FHLBNY actively markets membership through personal calling and promotional materials. The FHLBNY competes for business by offering competitively priced products and financial flexibility afforded by membership. Institutions join the FHLBNY primarily for access to a reliable source of liquidity.
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Advances are an attractive source of liquidity because they permit members to pledge relatively non-liquid assets, such as 1-4 family, multifamily and commercial real estate mortgages held in portfolio, to create liquidity for the member. 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.
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| | | Commercial | | | Thrift | | | Credit | | | Insurance | | | | |
| | | Banks | | | Institutions | | | Unions | | | Companies | | | Total | |
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| December 31, 2009 | | | 160 | | | | 112 | | | | 54 | | | | 5 | | | | 331 | |
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| December 31, 2008 | | | 151 | | | | 115 | | | | 40 | | | | 5 | | | | 311 | |
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. For more information, see Note 21 — Segment Information and concentration to the audited financial statements accompanying this report.
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 member has been acquired by a non-member and the former member decides to prepay advances, 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 6.0-8.0 basis points on average assets. Dividend capacity, which is a function of net income and the amount of stock outstanding, is largely unaffected by the prepayment, since future stock and future income are reduced more or less proportionately. We believe 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 members 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 for a fee. The total of income derived from such services was about $4.2 million for the year ended December 31, 2009, about $3.4 million in 2008 and $3.3 million in 2007. 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. For more information, see Acquired Member Assets Programs in this report. 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 $72.0 million for the year ended December 31, 2009 and $77.9 million and $78.9 million for the years ended December 31, 2008 and 2007. The revenues were not a significant source of Net interest income for the FHLBNY.
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The FHLBNY’s short-term investments certificates of deposits, Federal funds sold and interest-earning deposits placed with high-rated financial institutions provide immediate liquidity to satisfy members’ needs for funds. Investments in mortgage-backed securities, classified as held-to-maturity or available-for-sale, and housing finance agency bonds, classified as held-to-maturity, 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 investments aggregated $0.5 billion, $1.0 billion and $1.2 billion for the years ended December 31, 2009, 2008 and 2007 and represented 27.7%, 23.4% and 25.2% of total interest income for those years.
However, advances to members are the primary focus of the FHLBNY’s operations, and are also the principal factor that impacts the financial condition of the FHLBNY. Revenues from advances to members are 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 features (including option-embedded and amortizing advances).
Advances to members, including former members, constituted 82.4% and 79.4% of the FHLBNY’s Total assets of $114.5 billion and $137.5 billion at December 31, 2009 and 2008. In terms of revenues, interest income derived from advances was $1.3 billion, $3.0 billion, and $3.5 billion, representing 68.4%, 74.7% and 73.2% of total interest income for the years ended December 31, 2009, 2008 and 2007. These metrics have remained relatively stable over time. Most of the FHLBNY’s critical functions are directed at supporting the borrowing needs of the FHLBNY’s members, monitoring 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 borrowed by members 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 foregoing 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.
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Highlights of the Bank’s Advances offered to members are as follows (outstanding par amounts of Advances by product type are disclosed in a table in the MD&A section captioned Financial Condition: Assets, Liabilities, Capital, Commitments and Contingencies):
| | • | | 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. |
| | • | | 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. |
| | • | | 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, the Federal funds rate, or Prime. 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. |
| | • | | 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. |
| | • | | Putable Advances: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 with an advance product of their choice at the current market rates as established by the Bank. |
Letters of Credit
The FHLBNY may issue standby financial letters of credit (“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 to the FHLBNY or providing and paying for a supplemental mortgage insurance policy insuring the FHLBNY for some portion of the credit risk involved. This provides a double-A equivalent level of creditworthiness on the mortgages. The amount of this credit enhancement 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.
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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 Agency 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 Agency’s initial resolutions were specifically extended by the Acquired Member Assets Regulations.
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 granting 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.
On September 23, 2008, the FHLBank of Chicago announced the launch of the MPF Xtra product which provides participating FHLBanks and PFIs with an additional new balance sheet mortgage sale alternative. Loans sold to the FHLBank of Chicago through the MPF Xtra product will concurrently be sold to Fannie Mae, as a third party investor, and will not be held on the FHLBank of Chicago’s balance sheet. Unlike other MPF products, under the MPF Xtra product PFIs are not required to provide credit enhancement and would not receive credit enhancement fees. As of December 31, 2009, the FHLBNY has not participated in this product.
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 are purchased from other FHLBanks (collectively, “MPF” or “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 to 30 years or participations in such mortgage loans. MPF Loans that are Government loans, are collectively referred to as “MPF Government Loans.”
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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 this MPF Loan. This product is no longer offered by the Bank and the last asset acquired under this program was on July 27, 2009.
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 portfolios. Finance Agency regulations define the acquisition of Acquired Member Assets (“AMA”) as a core mission activity of the FHLBanks. In order for MPF Loans to meet the AMA requirements, the purchase and funding are structured so that the credit risk associated with MPF Loans is shared with PFIs.
The MPF Program enables other FHLBanks, including the FHLBNY, 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: Boston, Des Moines, New York, Pittsburgh, and Topeka.
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 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. The PFI’s CE Amount covers losses for MPF Loans under a master commitment in excess of the MPF Bank’s first loss account. 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 FHLBank of Chicago (“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.
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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:
| | • | | Mortgage characteristics.MPF Loans must be qualifying 5- to 30-year 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. Conventional loan size, which is established annually as required by Federal Housing Finance Agency regulations, may not exceed the loan limits permitted to be set except in areas designated by the Department of Housing and Urban Development (“HUD”) as High-Cost Areas where the permitted loan size is higher. 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). |
| | • | | 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. |
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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. |
| | • | | 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 a 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 we are not aware of any claim, action or proceeding asserting that the Bank may be liable under these laws. However, the Bank can not be 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 may be subject to a pair off fee if it exceeds the amount specified in the Delivery Commitment 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 deadline to deliver loans on a Delivery Commitment).
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 that includes 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.
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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 the 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 quality assurance reviews of MPF Government loans. The PFI is required to deliver an enforceable Government Agency insurance certificate or loan guaranty.
In addition, the PFI may purchase out of the pools of delinquent MPF Government Loans, which is customary in the industry. The repurchase price is equal to the current scheduled principal balance and accrued interest on the MPF Government Loan
Also, 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 where 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 six MPF products that PFIs may choose from: Original MPF, MPF 100, MPF 125, MPF Plus, MPF Government and MPF Xtra. 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 product and does not offer the MPF Xtra product to its members.
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MPF Product Comparison Table
| | | | | | | | | | | |
| | | | | PFI Credit | | | | | | Servicing |
| | | | | Enhancement | | Credit | | Credit | | Fee |
| | | MPF Bank | | Size | | Enhancement | | Enhancement | | retained |
| Product Name | | FLA1 | | Description | | Fee to PFI | | Fee Offset2 | | by PFI |
Original MPF | | 3 to 5 basis points/added each year based on the unpaid balance | | Equivalent to “AA” | | 9 to 11 basis points/year — paid monthly | | No | | 25 basis points/year |
MPF 100 | | 100 basis points fixed based on the size of the loan pool at closing | | After FLA to “AA” | | 7 to 10 basis points/year — paid monthly; performance based after 2 or 3 years | | Yes — After first 2 to 3 years | | 25 basis points/year |
MPF 125 | | 100 basis points fixed based on the size of the loan pool at closing | | After FLA to “AA” | | 7 to 10 basis points/year — paid monthly; performance based | | Yes | | 25 basis points/year |
MPF Xtra | | N/A | | N/A | | N/A | | N/A | | 25 basis points/year |
MPF Plus | | Sized to equal expected losses | | 0-20 bps after FLA and SMI to “AA” | | 6 to 7 basis points/year fixed plus 6 to 7 basis points/year; performance based (delayed for 1 year); all fees paid monthly | | Yes | | 25 basis points/year |
MPF Government | | N/A | | N/A (Unreimbursed Servicing
Expenses) | | N/A | | N/A | | 44 basis points/year
plus 2 basis
points/year3 |
| | | |
| 1 | | MPF Program Master Commitments participated in or held by the Bank as of December 31, 2009. |
| |
| 2 | | Future payouts of performance-based credit enhancement fees are reduced when losses are allocated to the FLA. |
| |
| 3 | | For Government Loan Master Commitments issued after February 1, 2007, only the customary 0.44% (44 basis points) per annum servicing fee is paid based on the outstanding aggregate principal balance of the MPF Government Loans. |
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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 purchased or sold any interest in MPF loans since July 2004. The Bank’s intent is to hold all MPF Loans for its portfolio.
The FHLBNY is responsible for evaluating, monitoring, and certifying to any participating 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 percent to be retained by the Bank to 100 percent 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. 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:
| | • | | 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; |
| | • | | 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; |
| | • | | each is responsible for its respective pro rata share of First Loss Account (“FLA”) exposure and losses incurred with respect to the Master Commitment based upon the overall risk sharing percentage for the Master Commitment; and |
| | • | | 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 percent 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 percent. 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 percent of the first $50 million and 50 percent of the second $50 million of MPF Loans delivered under a Master Commitment, the MPF Bank would share in 37.5 percent 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 percent interest and the others in which it may own a 50 percent interest.
Effective May 2004, the FHLBNY retains 100 percent of loans acquired from its PFIs for its own investment.
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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 and the Guides also provide for certain types of temporary modification 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 based on the Master Commitment and shared in accordance with the risk sharing structure for that particular Master Commitment. The servicer re-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.
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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” (“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 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 (“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:
| | • | | First,to the MPF Bank, up to an agreed upon amount, called a First Loss Account. |
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 intended 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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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 intended 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.
| | • | | 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 “Setting Credit Enhancement Levels,” below. |
| | • | | 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 the Bank’s 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.
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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 6-7 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 generally 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 guarantee 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 guarantee with respect to defaulted MPF Government Loans. Monthly, the PFI receives 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 February 1, 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.
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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 would be 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 Agency 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 the section “Assessments” in this Form 10-K, 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 regulatory defined 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 each AHP allocation 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 4:1 ratio, up to $7,500, to help with closing costs and/or down payment assistance. Households are also required to attend counseling seminars that address personal budgeting and home ownership skills training.
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Other Mission Related Activities.The Community Investment Program (“CIP”), Rural Development Advance, and Urban Development Advance 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. The 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 allocation of the FHLBNY’s income 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.
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. For more information, see Assessments in this report. 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 holding long-term investments classified as either held-to-maturity or as available-for-sale. These portfolios primarily consist of mortgage-backed securities issued by government-sponsored mortgage enterprises and U.S. government agencies. The FHLBNY’s securities portfolio also includes a smaller portfolio of privately issued mortgage-backed and residential asset-backed securities, which were primarily acquired prior to 2004. Investments in mortgage-backed securities must carry, at the time of acquisition, the highest credit ratings from Moody’s Investors Service (“Moody’s”) or Standard & Poor’s (“S&P”). The FHLBNY also has investments in housing-related obligations of state and local governments and their housing finance agencies, which 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. For more information about investments, see section Asset Quality and Concentration — Advances, Investment Securities, Mortgage Loans, and Counterparty Risks, in this MD&A.
The FHLBNY is prohibited from investing in certain types of securities, including:
| | • | | 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; |
| | • | | Instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks; and |
| | • | | Non-investment-grade debt instruments. Exceptions include certain investments targeted at low-income persons or communities and instruments that were downgraded after purchase. |
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The FHLBNY also limits the book value of the FHLBNY’s investments in mortgage-backed and residential asset-backed securities, collateralized mortgage obligations (“CMOs”), Real Estate Mortgage Investment Conduits “REMICs”), and other eligible asset-backed securities, collectively mortgage-backed securities or “MBS”, to not exceed 300 percent of the Bank’s previous month-end regulatory 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 S&P.
The FHLBNY is prohibited from purchasing:
| | • | | Interest-only or principal-only stripped mortgage-backed securities; |
| | • | | Residual-interest or interest-accrual classes of collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs); |
| | • | | 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 |
| | • | | 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. Consolidated obligations are currently rated Aaa/P-1 by Moody’s and AAA/ A-1+ by S&P. These are the highest ratings available for such debt from a Nationally Recognized Statistical Rating Organization (“NRSRO”). These ratings indicate that the FHLBanks have an extremely strong capacity to meet their commitments to pay principal and interest on consolidated obligations and that the consolidated obligations are judged to be of the highest quality with minimal credit risk. The ratings on the FHLBanks’ consolidated obligations also reflect the FHLBank System’s status as a government-sponsored enterprise (“GSE”). These ratings have not been affected by rating actions taken with respect to individual FHLBanks. The FHLBNY is also currently rated Aaa/P-1 by Moody’s and AAA/ A-1+ by S&P. Investors should note that a rating issued by an NRSRO is not a recommendation to buy, sell or hold securities and that the ratings may be revised or withdrawn by the NRSRO at any time. Investors should evaluate the rating of each NRSRO independently.
At December 31, 2009 and 2008, the par amounts of consolidated obligations outstanding, bonds and discount notes, for all 12 FHLBanks aggregated $0.9 trillion and $1.3 trillion. In comparison, the par amounts of the FHLBNY’s consolidated obligations outstanding at December 31, 2009 and 2008 aggregated $104.2 billion and $127.4 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 Agency, 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 Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations.
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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 Agency determines that the non-complying FHLBank is unable to make the payment, then the Finance Agency 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 Agency.
Finance Agency 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:
| | • | | Obligations of, or fully guaranteed by, the United States; |
| | • | | Mortgages that have a guaranty, insurance, or commitment from the United States or any agency of the United States; |
| | • | | Investments described in section 16(a) of the FHLBank Act, including securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and |
| | • | | Other securities that are rated Aaa by Moody’s or AAA by Standard & Poor’s. |
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 Agency’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.
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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. 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. These notes have maturities of up to one year and are offered daily through a dealer-selling group. The notes are sold at a discount from their face amount and mature at par.
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, and the trade settlement and maturity dates. If all terms of the request are the same except for the time of the request, then a 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 of 4, 9, 13, and 26 weeks be offered by the Office of Finance through a 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, a 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, member deposits are also a source of funding, but the FHLBNY does not rely on member deposits to meet its funding requirements. 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.
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Retained Earnings and Dividends
The FHLBNY’s Board of Directors adopted a Retained Earnings and Dividend 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 Retained Earnings and Dividend 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 dividend policy of the FHLBNY are subject to Finance Agency regulations and policies.
To preserve the value of the members’ 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 reasonable dividend. 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 be available to supplement dividends when earnings are low or losses occur.
As of December 31, 2009, management had determined that the amount of retained earnings, net of losses in Accumulated other comprehensive income (loss) (“AOCI”), necessary to achieve the objectives based on the risk profile of the FHLBNY’s balance sheet was $358.1 million. Actual retained earnings as of December 31, 2009 were $688.9 million and losses in AOCI at December 31, 2009 were $144.5 million. The December 31, 2008 target was $212.2 million. Actual retained earnings at December 31, 2008 were $382.9 million and losses in AOCI at December 31, 2008 were $101.2 million. Management has not determined at this time its expected dividend payout ratios in 2010. Management is also in the process of re-evaluating the retained earnings target due to prevailing market conditions. The new methodology is likely to establish a higher retained earnings target.
The following table summarizes the impact of dividends on the FHLBNY’s retained earnings for the years ended December 31, 2009, 2008, and 2007 (in thousands):
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Retained earnings, beginning of year | | $ | 382,856 | | | $ | 418,295 | | | $ | 368,688 | |
| Net Income for the year | | | 570,755 | | | | 259,060 | | | | 323,105 | |
| | | | | | | | | | |
| | | | 953,611 | | | | 677,355 | | | | 691,793 | |
Dividend paid in the year1 | | | (264,737 | ) | | | (294,499 | ) | | | (273,498 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Retained earnings, end of year | | $ | 688,874 | | | $ | 382,856 | | | $ | 418,295 | |
| | | | | | | | | | |
| | | |
| 1 | | Dividends are not accrued at quarter end; they are declared and paid subsequent to the end of the quarter. |
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Competition
Demand for advances is affected by, among other things, the availability and cost to members of alternate sources of liquidity, including retail deposits, wholesale deposits, repurchase agreements, and various government lending programs. Because members generally grow their assets at a faster pace than they grow retail deposits and capital, the FHLBNY competes with other suppliers of wholesale funding, both secured and unsecured, to fill the members’ potential funding gaps. Such other suppliers of funding may include investment banking firms, commercial banks, regional broker-dealers, the U.S. Government and firms capitalizing on wholesale funding platforms (e.g. “CDARS” the Certificate of Deposit Account Registry Service). Certain members may have access to alternative wholesale funding sources such as through lines of credit, wholesale CD programs, brokered CD’s and sales of securities under agreements to repurchase. Large members may also have independent access to the national and global credit markets. Government programs created to stabilize the funding markets, including the Troubled Asset Relief Program (“TARP”), the Federal Reserve’s Term Auction Facility (“TAF”), and the Temporary Liquidity Guarantee Program (“TLGP”) have been a moderate source of competition for the FHLBNY. The availability of alternative funding sources can vary as a result of market conditions, member creditworthiness, availability of collateral and suppliers’ appetite for the business as well as other factors.
The FHLBNY competes for funds raised through the issuance of unsecured debt in the national and global debt markets. Competitors include Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corp. (“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 could reduce demand for Federal Home Loan Bank system debt. Although the available supply of funds has kept pace with the funding needs of the FHLBNY’s members, there can be no assurance that this will continue to be the case indefinitely.
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 liquidity of markets for callable debt and derivatives are 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 derivatives. There can be no assurance that the current breadth and depth of these markets will be sustained.
The FHLBNY competes for the purchase of mortgage loans held-for-portfolio. For single-family products, the FHLBNY competes primarily with Fannie Mae and Freddie Mac principally on the basis of price, products, structures, and services offered.
Competition among the twelve member banks of the Federal Home Loan Bank system (“FHLBanks”) is limited. A bank holding company with multiple banking charters may operate in more than one Federal Home Loan Bank district. If the member has a centralized treasury function, it is possible that there could be competition for advances. A limited number of FHLBNY member institutions are subsidiaries of financial holding companies with multiple charters and FHLBank memberships. The FHLBNY does not believe, however, that the amount of advances borrowed, or the amount of capital stock held, is material in the context of its competitive environment. Certain large member financial institutions, operating in the FHLBNY’s district, may borrow unsecured Federal funds from other FHLBanks. The FHLBNY is not prohibited by regulation from purchasing short-term investments from its members, but the current practice is not to permit members to borrow unsecured funds from the FHLBNY.
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An indirect but growing source of competition is the acquisition of a FHLBNY member bank by a member of another FHLBank. Under Finance Agency regulations, if the charter residing within our district is dissolved, the acquired institution 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 of the FHLBNY, who by virtue of being acquired attained non-member status, had advances borrowed and outstanding of $2.3 billion and $2.7 billion at December 31, 2009 and 2008, respectively. Such non-members also held capital stock, which was reported as mandatorily redeemable capital stock of $126.3 million and $143.1 million at December 31, 2009 and 2008, and classified as a liability in the Statements of Condition.
Oversight, Audits, and Examinations
The FHLBNY is supervised and regulated by the Federal Housing Finance Agency (“Finance Agency”), which was created on July 30, 2008, when the President signed into law the Housing and Economic Recovery Act of 2008. The Act created a regulator with all of the authorities necessary to oversee vital components of our country’s secondary mortgage markets — Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, this law combined the staffs of the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB), and the GSE mission office at the Department of Housing and Urban Development (“HUD”). The establishment of the Finance Agency will promote a stronger, safer U.S. housing finance system, affordable housing and community investment through safety and soundness oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
The FHLBNY carries out its statutory mission only through activities that comply with the rules, regulations, guidelines, and orders issued under the Federal Housing Enterprises Financial Safety and Soundness Act Housing Act and the FHLBank Act.
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 Agency’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. 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 Agency, 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: Statements of financial condition, operations, and 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 and internal controls over financial reporting.
The Comptroller General has authority under the FHLBank Act to audit or examine the Finance Agency and the FHLBanks, including the FHLBNY, and to decide the extent to which they fairly and effectively fulfill the purpose 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.
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Personnel
As of December 31, 2009 the FHLBNY had 259 full-time and 5 part-time employees. At December 31, 2008, there were 247 full-time and 4 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
The FHLBanks, including the FHLBNY, are exempt from ordinary federal, state, and local taxation except for local real estate tax.
Assessments
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.
The FHLBNY and each FHLBank is required to make payments to REFCORP (20% of annual GAAP net income after payment of AHP assessments) until the total amount of payments actually made by all twelve FHLBanks is equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030. The cash payments are generally made based on preliminary GAAP net income amounts due to the timing requirement of the payment. Any FHLBank with a net loss for a quarter is not required to pay the REFCORP assessment for that quarter. The Finance Agency will shorten or lengthen the period during which the FHLBanks must make payments to REFCORP depending on actual payments relative to the referenced annuity. In addition, the Finance Agency, in consultation with the U.S. Secretary of the Treasury, selects the appropriate discounting factors used in calculating the annuity.
As a result of the payments by all twelve FHLBanks through the fourth quarter of 2009, the overall period during which the FHLBanks must continue to make quarterly payments was April 15, 2012, effective December 31, 2009. This date assumes that the FHLBanks will pay exactly $300 million annually after December 31, 2009 until the annuity is fully satisfied. This compares to the outside date of April 15, 2013, effective at December 31, 2008, based on REFCORP payments made through 2008. 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 full year net income. If the FHLBNY had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBNY experienced a net loss for a full year, the FHLBNY would have no obligation to the REFCORP for the year.
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 AHP the greater of $100.0 million or 10 percent of regulatory defined net income. Regulatory defined net income is GAAP net income before interest expense related to mandatorily redeemable capital stock 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 Agency. The FHLBNY accrues the AHP expense monthly.
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The FHLBNY charges the amount set aside for Affordable Housing Program to income and recognizes the amounts set aside as a liability. The Bank relieves the AHP liability as members use subsidies. In periods where the FHLBNY’s regulatory defined net 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. 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 2009, 2008, or 2007.
ITEM 1A. RISK FACTORS
The following risk factors along with 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, its ability to support and continue operations could be adversely affected, which could negatively affect its 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.
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The FHLBNY relies upon derivative instrument transactions to reduce its interest-rate risk, and changes in its credit ratings may adversely affect its 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 or other financial instruments. 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 Agency, 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 Agency could have a negative effect on the FHLBanks’ ability to conduct business or its cost 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 and the 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 FHLBNY’s capital stock or take advantage of an FHLBNY’s products and services.
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 than 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.
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A loss or change of business activities with large members could adversely affect the FHLBNY’s results of operations and financial condition.Withdrawal of one or more large members from the FHLBNY’s membership could result in a reduction of the FHLBNY’s total 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 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; |
| |
| | • | | 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 its 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, 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, 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.
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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 the profitability of 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 its advance and hedging activities. Although the FHLBNY has implemented a business continuity plan, it may not be able to prevent, timely and adequately address, or mitigate the negative effects of any failure or interruption, which could adversely affect its member relations, risk management, and profitability and 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 deteriorate, 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.
The FHLBNY may become liable for all or a portion of the consolidated obligations of the FHLBanks, which could negatively impact the FHLBNY’s financial condition and results of operations.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 Agency 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 Agency 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 since the FHLB System was established in 1932.
31
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None
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. LEGAL PROCEEDINGS.
From time to time, the Federal Home Loan Bank of New York is involved in disputes or regulatory inquiries that arise in the ordinary course of business. At the present time, there are no material pending legal proceedings against the Bank that would significantly impact the Bank’s financial condition, results of operations or cash flows.
As previously disclosed in Part I, Item 3 of the FHLBNY’s 2008 Annual Report on Form 10-K filed on March 27, 2009, an event of default occurred on September 15, 2008 under outstanding derivative contracts with a notional amount of $16.5 billion between Lehman Brothers Special Financing Inc. (“LBSF”) and the Bank when credit support provider Lehman Brothers Holdings Inc. (“LBHI”) commenced a case under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). LBSF commenced a case under Chapter 11 of the Bankruptcy Code on October 3, 2008. The net amount that was due to the Bank after giving effect to obligations due to LBSF was approximately $65 million as of September 30, 2008. The Bank has fully reserved the LBSF receivables as the bankruptcies of LBSF and LBHI make the timing and the amount of the recovery uncertain.
As previously disclosed in Part II, Item 1 of the FHLBNY’s Quarterly Report on Form 10-Q filed on November 13, 2009, the FHLBNY filed a proof of claim of approximately $65 million as a creditor in connection with the bankruptcy proceedings. It is possible that, in the course of the bankruptcy proceedings, the FHLBNY may recover some amount in a future period. However, because the timing and the amount of such recovery remain uncertain, the Bank has not recorded an estimated recovery in its financial statements.
ITEM 4. (REMOVED AND RESERVED).
32
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
All of the stock of the FHLBNY is owned by its members. Stock may also be held by former members as a result of having acquired by a non-member institution. 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 as 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. At December 31, 2009 the FHLBNY had 331 members. Total capital stock held by members was 50,589,563 shares and 1,262,942 shares held by former members. Capital stock held by former members is classified as a liability, and deemed to be mandatorily redeemable under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. At December 31, 2008, the FHLBNY had 311 members and 55,857,000 shares of stock held by members, and 1,431,214 shares held by former members.
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 Agency. 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 subsequent to the end of that calendar quarter as summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | | | | | 2008 | | | 2007 | |
| Month Paid | | Amount | | | Dividend Rate | | | Month Paid | | | Amount | | | Dividend Rate | | | Amount | | | Dividend Rate | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| November | | $ | 75,139 | | | | 5.60 | % | | October | | | $ | 45,748 | | | | 3.50 | % | | $ | 78,810 | | | | 8.05 | % |
| August | | | 75,862 | | | | 5.60 | | | July | | | | 78,810 | | | | 6.50 | | | | 68,840 | | | | 7.50 | |
| May | | | 77,293 | | | | 5.60 | | | April | | | | 88,182 | | | | 7.80 | | | | 67,280 | | | | 7.50 | |
| January | | | 43,180 | | | | 3.00 | | | January | | | | 94,404 | | | | 8.40 | | | | 67,203 | | | | 7.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 271,474 | | | | | | | | | | | $ | 307,144 | | | | | | | $ | 282,133 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends accrued for non-members are classified as interest expense and are associated with mandatorily redeemable capital stock held by former members. In the table above, payments to former members are also included as dividends paid. Dividends accrued for former members were $7.5 million, $9.0 million, and $11.7 million for the years ended December 31, 2009, 2008 and 2007.
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 exempt from disclosure of securities repurchases by the issuer that otherwise would have been required under Item 703 of Regulation S-K.
33
ITEM 6. SELECTED FINANCIAL DATA.
| | | | | | | | | | | | | | | | | | | | | |
| Statements of Condition | | December 31, | |
| (dollars in millions) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | | | | | | | | |
| Investments (1) | | $ | 16,222 | | | $ | 14,195 | | | $ | 25,034 | | | $ | 20,503 | | | $ | 20,945 | |
| Interest bearing balance at FRB * | | | — | | | | 12,169 | | | | — | | | | — | | | | — | |
| Advances | | | 94,349 | | | | 109,153 | | | | 82,090 | | | | 59,012 | | | | 61,902 | |
| Mortgage loans held-for-portfolio, net of allowance for credit losses (2) | | | 1,318 | | | | 1,458 | | | | 1,492 | | | | 1,483 | | | | 1,467 | |
| Total assets | | | 114,461 | | | | 137,540 | | | | 109,245 | | | | 81,579 | | | | 84,761 | |
| Deposits and borrowings | | | 2,631 | | | | 1,452 | | | | 1,606 | | | | 2,266 | | | | 2,650 | |
| Consolidated obligations, net | | | | | | | | | | | | | | | | | | | | |
| Bonds | | | 74,008 | | | | 82,257 | | | | 66,326 | | | | 62,043 | | | | 56,769 | |
| Discount notes | | | 30,828 | | | | 46,330 | | | | 34,791 | | | | 12,191 | | | | 20,510 | |
| Total consolidated obligations | | | 104,836 | | | | 128,587 | | | | 101,117 | | | | 74,234 | | | | 77,279 | |
| Mandatorily redeemable capital stock | | | 126 | | | | 143 | | | | 239 | | | | 110 | | | | 18 | |
| AHP liability | | | 144 | | | | 122 | | | | 119 | | | | 102 | | | | 91 | |
| REFCORP liability | | | 24 | | | | 5 | | | | 24 | | | | 17 | | | | 14 | |
| Capital stock | | | 5,059 | | | | 5,585 | | | | 4,368 | | | | 3,546 | | | | 3,590 | |
| Retained earnings | | | 689 | | | | 383 | | | | 418 | | | | 369 | | | | 291 | |
| Accumulated other comprehensive income (loss) | | | (145 | ) | | | (101 | ) | | | (35 | ) | | | (11 | ) | | | 4 | |
| Total capital | | | 5,603 | | | | 5,867 | | | | 4,751 | | | | 3,904 | | | | 3,885 | |
| Equity to asset ratio (3) | | | 4.90 | % | | | 4.27 | % | | | 4.35 | % | | | 4.79 | % | | | 4.58 | % |
34
| | | | | | | | | | | | | | | | | | | | | |
| Statements of Condition | | Years ended December 31, | |
| Averages (dollars in millions) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | | | | | | | | |
| Investments (1) | | $ | 15,987 | | | $ | 22,253 | | | $ | 22,155 | | | $ | 19,431 | | | $ | 19,347 | |
| Interest bearing balance at FRB * | | | 6,046 | | | | 1,322 | | | | — | | | | — | | | | — | |
| Advances | | | 98,966 | | | | 92,617 | | | | 65,454 | | | | 64,658 | | | | 63,446 | |
| Mortgage loans | | | 1,386 | | | | 1,465 | | | | 1,502 | | | | 1,471 | | | | 1,360 | |
| Total assets | | | 125,461 | | | | 119,710 | | | | 89,961 | | | | 86,319 | | | | 85,254 | |
| Interest-bearing deposits and other borrowings | | | 2,095 | | | | 2,003 | | | | 2,202 | | | | 1,709 | | | | 2,100 | |
| Consolidated obligations, net | | | | | | | | | | | | | | | | | | | | |
| Bonds | | | 71,860 | | | | 81,342 | | | | 63,277 | | | | 60,932 | | | | 56,975 | |
| Discount notes | | | 41,496 | | | | 28,349 | | | | 18,956 | | | | 18,382 | | | | 20,654 | |
| Total consolidated obligations | | | 113,356 | | | | 109,691 | | | | 82,233 | | | | 79,314 | | | | 77,629 | |
| Mandatorily redeemable capital stock | | | 137 | | | | 166 | | | | 146 | | | | 51 | | | | 56 | |
| AHP liability | | | 135 | | | | 122 | | | | 108 | | | | 95 | | | | 84 | |
| REFCORP liability | | | 21 | | | | 6 | | | | 10 | | | | 9 | | | | 7 | |
| Capital stock | | | 5,244 | | | | 4,923 | | | | 3,771 | | | | 3,737 | | | | 3,604 | |
| Retained earnings | | | 558 | | | | 381 | | | | 362 | | | | 313 | | | | 247 | |
| Accumulated other comprehensive income (loss) | | | (106 | ) | | | (74 | ) | | | (17 | ) | | | 1 | | | | 4 | |
| Total capital | | | 5,696 | | | | 5,230 | | | | 4,116 | | | | 4,051 | | | | 3,855 | |
| | | | | | | | | | | | | | | | | | | | | |
Operating Results and other data | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | Years ended December 31, | |
| (except earnings and dividends per share) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net interest income (4) | | $ | 701 | | | $ | 694 | | | $ | 499 | | | $ | 470 | | | $ | 395 | |
| Net income | | | 571 | | | | 259 | | | | 323 | | | | 285 | | | | 230 | |
| Dividends paid in cash (7) | | | 265 | | | | 294 | | | | 273 | | | | 208 | | | | 162 | |
| AHP expense | | | 64 | | | | 30 | | | | 37 | | | | 32 | | | | 26 | |
| REFCORP expense | | | 143 | | | | 65 | | | | 81 | | | | 71 | | | | 58 | |
| Return on average equity (5) | | | 10.02 | % | | | 4.95 | % | | | 7.85 | % | | | 7.04 | % | | | 5.97 | % |
| Return on average assets | | | 0.45 | % | | | 0.22 | % | | | 0.36 | % | | | 0.33 | % | | | 0.27 | % |
| Other income (loss) | | $ | 164 | | | $ | (267 | ) | | $ | 14 | | | $ | (13 | ) | | $ | (18 | ) |
| Operating expenses | | | 76 | | | | 66 | | | | 67 | | | | 63 | | | | 59 | |
| Finance Agency and Office of Finance | | | 8 | | | | 7 | | | | 5 | | | | 5 | | | | 6 | |
| Total other expenses | | | 84 | | | | 73 | | | | 72 | | | | 68 | | | | 65 | |
| Operating expenses ratio (6) | | | 0.06 | % | | | 0.06 | % | | | 0.07 | % | | | 0.07 | % | | | 0.07 | % |
| Earnings per share | | $ | 10.88 | | | $ | 5.26 | | | $ | 8.57 | | | $ | 7.63 | | | $ | 6.36 | |
| Dividend per share | | $ | 4.95 | | | $ | 6.55 | | | $ | 7.51 | | | $ | 5.59 | | | $ | 4.50 | |
| Headcount (Full/part time) | | | 264 | | | | 251 | | | | 246 | | | | 232 | | | | 221 | |
| | | |
| (1) | | Investments include held-to-maturity securities, available for-sale securities, Federal funds, loans to other FHLBanks, and other interest bearing deposits. |
| |
| (2) | | Allowances for credit losses were $4.5 million, $1.4 million, $0.6 million, $0.6 million, and $0.6 million for the years ended December 31, 2009, 2008, 2007, 2006, and 2005. |
| |
| (3) | | Equity to asset ratio is capital stock plus retained earnings and Accumulated other comprehensive income (loss) as a percentage of total assets. |
| |
| (4) | | Net interest income is net interest income before the provision for credit losses on mortgage loans. |
| |
| (5) | | Return on average equity is net income as a percentage of average capital stock plus average retained earnings and average Accumulated other comprehensive income (loss). |
| |
| (6) | | Operating expenses as a percentage of total average assets. |
| |
| (7) | | Excludes dividends accrued to non-members classified as interest expense under the accounting standards for certain financial instruments with characteristics of both liabilities and equity. |
| |
| * | | FRB program commenced in October 2008. On July 2, 2009, the Bank was no longer eligible to collect interest on excess balances. The average balance is annualized YTD. |
35
Supplementary financial data for each quarter for the years ended December 31, 2009 and 2008 are presented below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2009 (unaudited) | |
| | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | |
| | | | | | | | | | | | | | | | | |
| Interest income | | $ | 307,742 | | | $ | 379,530 | | | $ | 504,256 | | | $ | 666,159 | |
| Interest expense | | | 192,627 | | | | 225,678 | | | | 303,997 | | | | 434,777 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net interest income | | | 115,115 | | | | 153,852 | | | | 200,259 | | | | 231,382 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Provision (Recovery) for credit losses | | | 1,142 | | | | 598 | | | | 925 | | | | 443 | |
| Other income (loss) | | | 41,419 | | | | 57,444 | | | | 74,654 | | | | (9,147 | ) |
| Other expenses and assessments | | | 59,423 | | | | 70,479 | | | | 87,560 | | | | 73,653 | |
| | | | | | | | | | | | | |
| | | | 19,146 | | | | 13,633 | | | | 13,831 | | | | 83,243 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income | | $ | 95,969 | | | $ | 140,219 | | | $ | 186,428 | | | $ | 148,139 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2008 (unaudited) | |
| | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | |
| | | | | | | | | | | | | | | | | |
| Interest income | | $ | 1,035,467 | | | $ | 936,938 | | | $ | 910,555 | | | $ | 1,175,919 | |
| Interest expense | | | 809,898 | | | | 779,265 | | | | 752,750 | | | | 1,022,468 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net interest income | | | 225,569 | | | | 157,673 | | | | 157,805 | | | | 153,451 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Provision (Recovery) for credit losses | | | 558 | | | | (31 | ) | | | 216 | | | | 30 | |
| Other income (loss) | | | (144,760 | ) | | | (85,430 | ) | | | (38,643 | ) | | | 1,374 | |
| Other expenses and assessments | | | 35,187 | | | | 32,484 | | | | 44,964 | | | | 54,571 | |
| | | | | | | | | | | | | |
| | | | 180,505 | | | | 117,883 | | | | 83,823 | | | | 53,227 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income | | $ | 45,064 | | | $ | 39,790 | | | $ | 73,982 | | | $ | 100,224 | |
| | | | | | | | | | | | | |
Interim period — Infrequently occurring items recognized.
2009-There were no infrequently occurring items that were material in any interim period in 2009.
2008-In September 2008, Lehman Brothers Holding Inc. (“LBHI”) and Lehman Brothers Special Financing Inc., (“LBSF”) filed for protection under Chapter 11 of the U.S. Bankruptcy Code. LBSF, a, derivative counterparty to the FHLBNY defaulted on the contractual terms of its agreement with regard to $16.5 billion in notional amounts of interest rate swap and derivative contracts. The net amount that is due to the FHLBNY after giving effect to obligations that are due LBSF was approximately $64.5 million, and the FHLBNY has fully reserved the receivables as the bankruptcy of LBHI and LBSF make the timing and the amount of the recovery uncertain. The provision has been recorded as a charge to Other income (loss) in the third quarter of 2008. On an after-assessment basis, the provision reduced third quarter 2008 Net income by $47.4 million, or $0.91 per share of capital.
36
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Statements contained in this Annual Report onForm 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 are subject to a number of risks or uncertainties, including the Risk Factors set forth in Item 1A and the risks set forth below, and that actual results could differ materially from those expressed or implied in these forward-looking statements. As a result, you are cautioned not to place undue reliance on such statements. The Bank does not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Bank.
Forward-looking statements include, among others, the following:
| | • | | the Bank’s projections regarding income, retained earnings, and dividend payouts; |
| | • | | the Bank’s expectations relating to future balance sheet growth; |
| | • | | the Bank’s targets under the Bank’s retained earnings plan; and |
| | • | | the Bank’s expectations regarding the size of its mortgage-loan portfolio, particularly as compared to prior periods. |
Actual results may differ from forward-looking statements for many reasons, including but not limited to:
| | • | | changes in economic and market conditions; |
| | • | | changes in demand for Bank advances and other products resulting from changes in members’ deposit flows and credit demands or otherwise; |
| | • | | an increase in advance prepayments as a result of changes in interest rates or other factors; |
| | • | | the volatility of market prices, rates, and indices that could affect the value of collateral held by the Bank as security for obligations of Bank members and counterparties to interest-rate-exchange agreements and similar agreements; |
| | • | | political events, including legislative developments that affect the Bank, its members, counterparties, and/or investors in the COs of the FHLBanks; |
| | • | | competitive forces including, without limitation, other sources of funding available to Bank members, other entities borrowing funds in the capital markets, and the ability to attract and retain skilled employees; |
| | • | | the pace of technological change and the ability of the Bank to develop and support technology and information systems, including the internet, sufficient to manage the risks of the Bank’s business effectively; |
| | • | | changes in investor demand for COs and/or the terms of interest-rate-exchange-agreements and similar agreements; |
| | • | | timing and volume of market activity; |
| | • | | ability to introduce new or adequately adapt current Bank products and services and successfully manage the risks associated with those products and services, including new types of collateral used to secure advances; |
37
| | • | | risk of loss arising from litigation filed against one or more of the FHLBanks; |
| | • | | realization of losses arising from the Bank’s joint and several liability on COs; |
| | • | | risk of loss due to fluctuations in the housing market; |
| | • | | inflation or deflation; and |
| | • | | issues and events within the FHLBank System and in the political arena that may lead to regulatory, judicial, or other developments that may affect the marketability of the COs, the Bank’s financial obligations with respect to COs, and the Bank’s ability to access the capital markets. |
Risks and other factors could cause actual results of the Bank to differ materially from those implied by any forward-looking statements. These risk factors are not exhaustive. The Bank operates in a changing economic and regulatory environments, and new risk factors will emerge from time to time. Management cannot predict such new risk factors nor can it assess the impact, if any, of such new risk factors on the business of the Bank or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.
38
Organization of Management’s Discussion and Analysis (“MD&A”).
The FHLBNY’s MD&A is designed to provide information that will assist the readers in better understanding the FHLBNY’s financial statements, the changes in key items in the Bank’s financial statements from 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:
| | | | | |
| | | Page | |
| | | | | |
| Executive Overview | | | 41 | |
| 2009 Highlights | | | 42 | |
| 2010 Business Outlook | | | 45 | |
| Trends in the Financial Markets | | | 47 | |
| Recently Issued Accounting Standards and Interpretations | | | 48 | |
| Significant Accounting Policies and Estimates | | | 48 | |
| Legislative and Regulatory Developments | | | 58 | |
| Financial Condition — Assets, Liabilities, Capital, Commitments and Contingencies | | | 72 | |
| Advances | | | 74 | |
| Investments | | | 82 | |
| Mortgage Loans Held-for-Portfolio | | | 90 | |
| Deposit Liabilities | | | 91 | |
| Debt Financing Activity and Consolidated Obligations | | | 92 | |
| Rating Actions With Respect to the FHLBNY | | | 103 | |
| Mandatorily Redeemable Capital Stock | | | 103 | |
| Capital Resources | | | 104 | |
| Stockholders’ Capital and Dividend | | | 106 | |
| Derivative Instruments and Hedging Activities | | | 108 | |
| Liquidity | | | 116 | |
| Results of Operations | | | 121 | |
| Net Income | | | 121 | |
| Interest Income | | | 124 | |
| Interest Expense | | | 126 | |
| Net Interest Income | | | 127 | |
| Earnings Impact of Derivatives and Hedging activities | | | 138 | |
| Operating Expenses | | | 143 | |
| Asset Quality and Concentration - | | | | |
| Advances, Investment Securities, Mortgage Loans, and Counterparty Risks | | | 145 | |
| Commitments, Contingencies and Off-Balance Sheet Arrangements | | | 174 | |
| Quantitative and Qualitative Disclosures about Market Risk | | | 177 | |
39
MD&A TABLE REFERENCE
| | | | | | | | | |
| Table | | Description | | Page |
| | - | | | Selected Financial Data | | | 34 | |
| | 1 | | | Market Interest Rates | | | 47 | |
| | 2 | | | Statements of Condition — Year-Over-Year Comparison | | | 72 | |
| | 3 | | | Advances by Product Type | | | 75 | |
| | 4 | | | Advances Outstanding by Year of Maturity | | | 77 | |
| | 5 | | | Advances by Interest-Rate Payment Terms | | | 78 | |
| | 6 | | | Variable-Rate Advances | | | 78 | |
| | 7 | | | Advances by Call Date | | | 81 | |
| | 8 | | | Investments by Categories | | | 83 | |
| | 9 | | | Mortgage-Backed Securities — By Issuer | | | 84 | |
| | 10 | | | Available-for-Sale Securities Composition | | | 85 | |
| | 11 | | | External Rating of the Held-to-Maturity Portfolio | | | 86 | |
| | 12 | | | External Rating of the Available-for-Sale Portfolio | | | 86 | |
| | 13 | | | Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities | | | 87 | |
| | 14 | | | Mortgage Loans by Loan Type | | | 90 | |
| | 15 | | | Mortgage Loans — Conventional and Insured Loans | | | 91 | |
| | 16 | | | Mortgage Loans — Allowance for Credit Losses | | | 91 | |
| | 17 | | | Consolidated Obligation Bonds by Type | | | 95 | |
| | 18 | | | Consolidated Obligation Bonds — Maturity or Next Call Date | | | 101 | |
| | 19 | | | Discount Notes Outstanding | | | 102 | |
| | 20 | | | FHLBNY Ratings | | | 103 | |
| | 21 | | | Derivative Hedging Strategies | | | 109 | |
| | 22 | | | Derivative Financial Instruments by Hedge Designation | | | 110 | |
| | 23 | | | Derivative Financial Instruments by Product | | | 111 | |
| | 24 | | | Derivatives Counterparty Notional Balance by Credit Ratings | | | 113 | |
| | 25 | | | Deposit Liquidity | | | 118 | |
| | 26 | | | Operational Liquidity | | | 118 | |
| | 27 | | | Contingency Liquidity | | | 119 | |
| | 28 | | | Unpledged Asset | | | 120 | |
| | 29 | | | FHFA MBS Limits | | | 120 | |
| | 30 | | | Interest Income — Principal Sources | | | 124 | |
| | 31 | | | Impact of Interest Rate Swaps on Interest Income Earned from Advances | | | 124 | |
| | 32 | | | Interest Expenses — Principal Categories | | | 126 | |
| | 33 | | | Consolidated Obligations — Interest Expenses | | | 126 | |
| | 34 | | | Impact of Interest Rate Swaps on Consolidated Obligation Interest Expense | | | 127 | |
| | 35 | | | Components of Net Interest Income | | | 128 | |
| | 36 | | | Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps | | | 130 | |
| | 37 | | | GAAP Versus Economic Basis — Contrasting Net Interest Income, Net Income Spread and Return on Earning Assets | | | 131 | |
| | 38 | | | Spread and Yield Analysis | | | 132 | |
| | 39 | | | Rate and Volume Analysis | | | 133 | |
| | 40 | | | Other Income | | | 136 | |
| | 41 | | | Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type | | | 138 | |
| | 42 | | | Earnings Impact of Derivatives — By Hedge Type | | | 139 | |
| | 43 | | | Accumulated Other Comprehensive Income (Loss) to Current Period Income From Cash Flow Hedges | | | 142 | |
| | 44 | | | Other Expenses | | | 143 | |
| | 45 | | | Operating Expenses | | | 143 | |
| | 46 | | | Affordable Housing Program Liabilities | | | 144 | |
| | 47 | | | REFCORP | | | 144 | |
| | 48 | | | Advances and Mortgage Loan Portfolios | | | 145 | |
| | 49 | | | Collateral Supporting Advances to Members | | | 148 | |
| | 50 | | | Collateral Supporting Member Obligations Other Than Advances | | | 148 | |
| | 51 | | | Location of Collateral Held | | | 149 | |
| | 52 | | | Top Ten Advance Holders | | | 150 | |
| | 53 | | | Year-Over-Year Change in Investments | | | 151 | |
| | 54 | | | NRSRO Held-to-Maturity Securities | | | 152 | |
| | 55 | | | NRSRO Available-for-Sale Securities | | | 154 | |
| | 56 | | | Carrying Value Basis of Held-to-Maturity Mortgage-Backed Securities by Issuer | | | 156 | |
| | 57 | | | Non-Agency Private Label Mortgage — And Asset-Backed Securities | | | 157 | |
| | 58 | | | Monoline Insurance Protection on Credit Impaired PLMBS | | | 158 | |
| | 59 | | | PLMBS by Year of Securitization and External Rating | | | 159 | |
| | 60 | | | Weighted-Average Market Price of MBS | | | 161 | |
| | 61 | | | PLMBS Security Types Delinquencies | | | 163 | |
| | 62 | | | MPF by Loss Layers | | | 164 | |
| | 63 | | | Mortgage Loans — Past Due | | | 165 | |
| | 64 | | | Mortgage Loans — Interest Short-Fall | | | 166 | |
| | 65 | | | Mortgage Loans — Allowance for Credit Losses | | | 166 | |
| | 66 | | | Top Five Participating Financial Institutions — Concentration | | | 168 | |
| | 67 | | | Roll-Forward First Loss Account | | | 169 | |
| | 68 | | | Credit Exposure by Counterparty Credit Rating | | | 172 | |
| | 69 | | | Contractual Obligations and Other Commitments | | | 176 | |
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Executive Overview
This overview of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Form 10-K. For a more complete understanding of events, trends and uncertainties, as well as the liquidity, capital, credit and market risks, and critical accounting estimates, affecting the Federal Home Loan Bank of New York (“FHLBNY” or “Bank”), this Form 10-K should be read in its entirety.
Cooperative business model. As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission and its ability to provide adequate returns on the capital supplied by its members. The FHLBNY achieves this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and by paying a dividend on the members’ capital stock. Reflecting the FHLBNY’s cooperative nature, the FHLBNY’s financial strategies are designed to enable the FHLBNY to expand and contract in response to member credit needs. The FHLBNY invests its capital in high quality, short- and medium-term financial instruments. This strategy allows the FHLBNY to maintain sufficient liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. The dividends paid by FHLBNY are largely the result of the FHLBNY’s earnings on invested member capital, net earnings on advances to members, mortgage loans and investments, offset in part by the FHLBNY’s operating expenses and assessments. FHLBNY’s board of directors and management determine the pricing of member credit and dividend policies based on the needs of its members and the cooperative.
Historical Perspective. The fundamental business of the FHLBNY is to provide member institutions and housing associates with advances and other credit products in a wide range of maturities to meet their needs. Congress created the FHLBanks in 1932 to improve the availability of funds to support home ownership. Although the FHLBanks were initially capitalized with government funds, members have provided all of the FHLBanks’ capital for over 50 years.
To accomplish its public purpose, the FHLBanks, including the FHLBNY, offer a readily available, low-cost source of funds, called advances, to member institutions and certain housing associates. Congress originally granted access to advances only to those institutions with the potential to make and hold long-term, amortizing home mortgage loans. Such institutions were primarily federally and state chartered savings and loan associations, cooperative banks, and state-chartered savings banks (thrift institutions). FHLBanks and its member thrift institutions are an integral part of the home mortgage financing system in the United States.
However, a variety of factors, including a severe recession, record-high interest rates, and deregulation, resulted in significant financial losses for thrift institutions in the 1980s. In response to the significant cost borne by the American taxpayer to resolve the failed thrift institutions, Congress restructured the home mortgage financing system in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Through this legislation, Congress reaffirmed the housing finance mission of the FHLBanks and expanded membership eligibility in the FHLBanks to include commercial banks and credit unions with a commitment to housing finance.
Different FHLBank Business Strategies. Each FHLBank is operated as a separate entity with its own management, employees and board of directors. In addition, all FHLBanks operate under the Finance Agency’s supervisory and regulatory framework. However, each FHLBank’s management and board of directors determine the best approach for meeting its business objectives and serving its members. As such, the management and board of directors of each FHLBank have developed different business strategies and initiatives to fulfill that FHLBank’s mission, and they re-evaluate these strategies and initiatives from time to time.
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Business segment.The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations and the principal factor that impacts its operating results. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to Resolution Funding Corporation (“REFCORP”), and set aside a percentage of its income towards an Affordable Housing Program (“AHP”). Together they are referred to as assessments.
Explanation of the use of certain non-GAAP measures of Interest Income and Expense, Net Interest income and margin.The FHLBNY has presented its results of operations in accordance with U.S. generally accepted accounting principles. The FHLBNY has also presented certain information regarding its Interest Income and Expense, Net Interest income and Net Interest spread that combines interest expense on debt with net interest paid on interest rate swaps associated with debt that were hedged on an economic basis. These are non-GAAP financial measures used by management that the FHLBNY believes are useful to investors and members of the FHLBNY in understanding the Bank’s operational performance and business and performance trends. Although the FHLBNY believes these non-GAAP financial measures enhance investor and members’ understanding of the Bank’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. When discussing non-GAAP measures, the Bank has provided GAAP measures in parallel.
2009 Highlights
The FHLBNY reported 2009 Net income of $570.8 million, or $10.88 per share compared with 2008 Net income of $259.1 million or $5.26 per share. The return on average equity, which is Net income divided by average Capital stock, Retained earnings, and Accumulated other comprehensive income (loss) (“AOCI”), was 10.02% in 2009, compared with 4.95% in 2008.
Net income in 2009 benefited from net gains of $164.7 million from derivatives and hedging activities in contrast to a net loss of $199.3 million in 2008. The derivatives and hedging gains in 2009 were principally from favorable fair value changes of (1) Interest rate swaps designated in economic hedges of consolidated obligation bonds, and (2) Interest rate caps designated in economic hedges of certain GSE issued capped floating-rate MBS. The principal components of the gains and losses from derivatives and hedging activities in 2009 were:
Net fair value gains of $86.8 million were due to the (1) reversal of almost all fair value losses recorded at December 31, 2008 on $25.0 billion of basis swaps designated as economic hedges of floating-rate debt, and (2) fair value gains of interest rate swaps executed in 2009 and also designated as economic hedges of debt.
| | • | | Changes in the fair values of the basis swaps and other derivatives designated as economic hedges were marked to fair value through earnings with no offsetting changes in fair values of the hedged financial instruments. The FHLBNY had issued floating-rate debt primarily in 2008 that were either indexed to 1-month LIBOR, or the prime and the daily Federal funds rate, and the swaps were executed to synthetically convert the cash flows to 3-month LIBOR rates. In 2009, $23.0 billion of basis swaps matured and almost all previously recorded fair value losses reversed. When interest rate swaps are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are unrealized will generally reverse over time, and fair value changes will sum to zero. The fair value basis of the remaining $2.0 billion of such swaps was not significant as the bonds were nearing maturity. |
| | • | | Additional fair value gains were recorded in 2009 on $19.1 billion of new swaps executed in 2009 ($13.1 billion fixed-for-floating rate swaps, and $6.0 billion of basis swaps) and designated as economic hedges of short-term non-callable bonds. In an upward sloping yield curve environment, the pay fixed-rate, receive LIBOR-indexed swaps were in an unrealized fair value gain positions at December 31, 2009. The swaps will mature in 2010 and unrealized gains will reverse. |
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Changes in fair values of purchased interest rate caps in 2009 contributed $63.3 million fair value gains. Fair value of interest rate caps are impacted by the level of interest rate, volatility (variability of interest rates), and term to maturity. Long-term rates have been rising and in this interest rate environment, purchased caps will show favorable fair value gains. Such gains are unrealized and will also reverse if the caps are held to their contractual maturities.
Net interest income in 2009 was $700.6 million, slightly higher than $694.5 million in 2008. Net interest income is the primary contributor to Net income for the FHLBNY. Two opposing factors were at play in 2009. The interest spread between yields from interest-earning assets and the cost of debt widened favorably by 8 basis points. Gains were partly offset by a significant decline in earnings from member capital in the very low interest yielding environment for short-term investment. Through most of 2009 the Bank funded a significant percentage of its balance sheet assets by issuing discount notes and short-term debt at advantageous spreads. Discount notes have maturities ranging from overnight to 365 days.
Net interest spread, which is the difference between yields on interest-earning assets and yields on interest-costing liabilities, improved by 8 basis points in 2009 primarily as a result of tactical funding adjustments made by the FHLBNY in reaction to the very fluid and changing demand for the FHLBank bonds and discount notes in 2009. The improved margin was almost entirely offset by significant decline in interest income earned from the deployment of members’ capital and net non-interest bearing liabilities (“deployed capital”) to fund interest-earning assets in the very low interest rate environment in 2009 for short-term investments. The average deployed capital of $9.1 billion in 2009 could potentially have earned 149 basis points, the aggregate yield on earning assets. In 2008, average members’ capital was $6.7 billion but potentially earned 342 basis points. Deployed capital is typically utilized to fund short-term, liquid investments, and the yields from such assets declined even more steeply in 2009.
With credit markets gradually returning to normalcy, investor demand for FHLBanks’ consolidated obligation bonds has been strong and provided the opportunity for increase in new issues specifically in the fourth quarter of 2009. Discount notes remained in demand and spreads were sufficiently attractive for the FHLBNY to shift its funding mix to higher utilization of discount notes. Early in the third quarter of 2009, the pricing of discount notes deteriorated and the FHLBNY shifted its funding mix again and maturing discount notes were replaced by the issuances of short-term bonds. With 3-month LIBOR yielding less than 30 basis points, discount notes spreads to LIBOR contracted making issuances of short-term bullets and short lockouts more attractive funding vehicles for the FHLBNY. Also as a result of the steepening of the yield curve, investors are showing increasing interest in callable step-up bonds. Diversity of investor interest in FHLBank debt products is also a positive indicator.
Nonetheless, investor appetite for longer-term debt continued to be lukewarm, and investor concerns ranged from investing in housing-related investments to the fact that spreads were not at attractive levels. Such sentiments and market conditions have generally made it uneconomical for the FHLBanks to issue longer-term debt. Further, the yields demanded by investors for longer-term FHLBank debt and spreads between 3-month LIBOR and FHLBank long-term debt yield have remained at levels that make it too expensive for the FHLBNY to issue term debt and offer longer-term advances to members even if there was sufficient investor demand for such debt.
In 2009, the FHLBNY identified credit impairment on 17 of its private-label mortgage-backed securities. Cash flow assessments of the expected credit performance identified future losses in its private-label mortgage-backed securities for other-than-temporary impairment (“OTTI”) at each interim quarterly period in 2009 and at December 31, 2009. In assessing the expected credit performance of these securities, the Bank determined it was likely it would not fully recover the amortized cost basis of 17 private-label held-to-maturity mortgage-backed securities, and the securities were deemed to be OTTI. Cumulative OTTI of $20.8 million in credit impairment were charged to earnings in 2009.
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The charges represented the credit loss component of OTTI. The amount of non-credit OTTI at December 31, 2009 was a cumulative loss of $110.6 million in AOCI, a component of stockholders’ equity. Although 14 of the 17 securities that have been credit impaired in 2009 are insured by bond insurers, Ambac and MBIA, the Bank’s analysis of the two bond insurers concluded that for the 14 insured securities, future credit losses due to projected collateral shortfalls would not be fully supported by the two bond insurers. See Note 1 — Significant Accounting Policies and Estimates and Note 4 — Held-to-maturity securities to the audited financial statements accompanying this report for more information about impairment methodology and bond insurer analysis.
Operating Expenses of the FHLBNY were $76.1 million in 2009, up from $66.3 million in 2008. The FHLBNY was also assessed for its share of the operating expenses for the Finance Agency and the Office of Finance, and those totaled $8.1 million in 2009, up from $6.4 million in 2008.
REFCORP assessment payments totaled $142.7 million in 2009, up from $64.8 million in 2008. Affordable Housing Program (“AHP”) assessments set aside from income totaled $64.3 million in 2009, up from $29.8 million in 2008. Assessments are calculated on Net income before assessments and the increases were due to the significant increase in 2009 Net income as compared to 2008. For more information about REFCORP and AHP assessments see the section Assessments in this Form 10-K.
Cash dividends were paid to stockholders in each of the quarters of 2009 and averaged $4.95 per share of capital stock (par value $100) for the full year. In 2008, they averaged $6.55 per share. Dividend payouts in 2009 were reduced to increase retained earnings.
Advances borrowed by members stood at $94.3 billion at December 31, 2009, a decline of $14.8 billion from the outstanding balance at December 31, 2008. Member demand for short-term fixed-rate advances, adjustable-rate advances, and overnight borrowings declined and maturing advances were not replaced.
Shareholders’ equity, the sum of Capital stock, Retained earnings, and AOCI was $5.6 billion at December 31, 2009, a decline of $264.1 million from December 31, 2008, primarily as a result of decline in members’ Capital stock. Capital stock at December 31, 2009 was $5.1 billion, a decline of $526.7 million as compared to December 31, 2008. The decrease in Capital stock was consistent with decrease in advances borrowed by members since members are required to purchase stock as a prerequisite to membership and to hold FHLBNY stock as a percentage of advances borrowed from the FHLBNY. The Bank’s current practice is to redeem stock in excess of the amount necessary to support advance activity on a daily basis. As a result, the amount of capital stock outstanding varies in line with members’ outstanding advance borrowings. Retained earning was $688.9 million, up by $306.0 million from December 31, 2008. Dividends paid out of retained earnings amounted to $264.7 million in 2009, compared to $294.5 million in 2008. AOCI was a loss of $144.5 million at December 31, 2009 compared to a loss of $101.2 million at December 31, 2008 and was comprised of net unrealized losses from recording the non-credit component of OTTI on held-to-maturity securities, unrecognized losses from cash flow hedging activities, additional liabilities on employee pension plans, and net unrealized fair value losses on available-for-sale securities.
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2010 Business Outlook
The following forward-looking statements are based upon the current beliefs and expectations of the FHLBNY’s management and are subject to risks and uncertainties which could cause the FHLBNY’s actual results to differ materially from those set forth in such forward-looking statements.
The FHLBNY expects its earnings to decline in 2010 to levels more typical of the years before 2009, primarily as a result of lower net interest margins on the Bank’s earnings from core assets, primarily advances and investments in mortgage-backed securities, as the Bank does not expect the funding advantages experienced in 2009 to continue in 2010.
Advances— Management is unable to predict the timing and extent of the expected recovery in the U.S. economy, particularly the recovery in the housing market, or an expectation of continued stability in the financial markets. Against that backdrop, the management of the Bank believes it is also difficult to predict member demand for advances, which is the primary focus of the FHLBNY’s operations and the principal factor that impacts its operating results.
Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and long-term funding driven by economic factors such as availability to the Bank’s members of alternative funding sources that are more attractive, the interest rate environment, and the outlook for the economy. Members may choose to prepay advances, which may require prepayment fees, based on their expectations of interest rate changes and demand for liquidity. Demand for advances may also be influenced by the dividend payout rate to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership stock and activity-based stock, which a member is required to purchase in order to borrow advances. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or a non-member, they no longer qualify for membership in the FHLBNY, which cannot renew outstanding advances or provide new advances to non-members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight advance lending if the former member borrowed such advances.
Earnings— In 2010, existing high-yielding fixed-rate MBS and some intermediate-term advances will pay down or mature, and it is unlikely they will be replaced by equivalent high yielding assets, and this will tend lower the overall yield on total assets. The FHLBNY expects general advance demand from members to likely to decline, and specifically, the Bank expects limited demand for large intermediate-term advances because many members have previously filled their needs with the FHLBNY, and other members have significant amounts of intermediate-term advances that were borrowed from the FHLBNY several years ago. The FHLBNY anticipates that such members are probably considering prepaying those borrowings, or to not replacing them at maturity. Members that have expressed interest in intermediate-term borrowing have not been significant borrowers in the past. Other members may be hesitant to act early in 2010 or until evidence is stronger that market interest rates are set to rise. Without the ability to make funding decisions early in the 2010, the FHLBNY may lose the potential opportunities to profitably fund these advance types early in the year when funding spreads are still relatively reasonable for the FHLBNY. As result of these factors, the FHLBNY expects demand for advance borrowing by members to decline and at the same time, expects the net margins from new advances to narrow.
The FHLBNY earns income from investing its members’ capital and non-interest bearing liabilities, together referred to as deployed capital, to fund interest-earning assets. The two principal factors that impact earnings from deployed capital are the average amount of capital outstanding in a period and the interest rate environment in the period, which in turn impacts yields on earning assets. These factors determine the potential earnings from deployed capital, and both factors are subject to change. The Bank cannot predict with certainty the level of earnings from capital. In a lower interest rate environment, deployed capital, which consists of capital stock, retained earnings, and net non-interest bearing liabilities, will provide relatively lower income. On the other hand, if member borrowings grow, capital will grow and provide a higher potential for earnings.
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Demand for FHLBank debt— The FHLBNY’s primary source of funds is the sale of consolidated obligations in the capital markets, and its ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, which are beyond the FHLBNY’s control. The FHLBNY may not be able to obtain funding on acceptable terms, if at all given the extraordinary market conditions and structural changes in the debt market. If the FHLBNY cannot access funding when needed on acceptable terms, its ability to support and continue operations could be adversely affected, which could negatively affect its financial condition and results of operations. The pricing of the FHLBanks’ longer-term debt remains at levels that are still sub-optimal, relative to LIBOR. To the extent the FHLBanks receive sub-optimal funding, the Bank’s member institutions may, in turn, experience higher costs for advance borrowings. To the extent the FHLBanks may not be able to issue long-term debt at economical spreads relative to the 3-month LIBOR rate; the Bank’s member institutions’ borrowing choices may also be limited.
A significant amount of FHLBank bonds matured in 2009 and were refinanced successfully. In 2010, the refunding needs to replace maturing FHLBank bonds will be significant. If the bond market cannot support the refunding volumes, it will put greater pressure on the FHLBank bonds and investors may demand higher yields. Alternatively, the FHLBanks may resort to the issuance of discount notes, which have maturities of up to a year only, to fill any refunding gap. Discount notes may themselves face increased challenges as competition increases from Treasury bills as the Treasury funds the multiple programs implemented for the current crises, or if demand for discount notes declines. The impact of the recession may reduce member demand for liquidity and may reduce pressure on the FHLBanks to refinance maturing bonds in 2010.
Credit Impairment of Mortgage-backed securities— Cumulative other-than-temporary credit impairment charges of $20.8 million were recorded for the FHLBNY’s MBS portfolios in 2009. However, without recovery in the near term such that liquidity returns to the mortgage-backed securities market, or if the credit losses of the underlying collateral within the mortgage-backed securities perform worse than expected, or if the ability of monoline insurers to support the insured securities that are dependent on insurance is negatively impacted by their future financial performance, additional OTTI would have to be recognized, which would negatively impact the FHLBNY’s Net income.
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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 2009 and 2008 (rates in percent):
Table 1: Market Interest Rates
| | | | | | | | | | | | | | | | | |
| | | Year-to-date December 31, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | Average | | | Average | | | Ending Rate | | | Ending Rate | |
| Federal Funds Rate | | | 0.25 | % | | | 2.08 | % | | | 0.25 | % | | | 0.25 | % |
| 3-month LIBOR | | | 0.69 | | | | 2.93 | | | | 0.25 | | | | 1.43 | |
| 2-year U.S. Treasury | | | 0.94 | | | | 2.00 | | | | 1.14 | | | | 0.77 | |
| 5-year Treasury | | | 2.18 | | | | 2.79 | | | | 2.68 | | | | 1.55 | |
| 10-year Treasury | | | 3.24 | | | | 3.64 | | | | 3.84 | | | | 2.21 | |
| 15-year residential mortgage note rate | | | 4.59 | | | | 5.88 | | | | 4.57 | | | | 5.11 | |
| 30-year residential mortgage note rate | | | 5.03 | % | | | 6.24 | % | | | 5.08 | % | | | 5.28 | % |
Impact of general level of interest rates on 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, 2009 and 2008, investments, excluding mortgage-backed securities and state and local housing agency obligations, had stated maturities of less than one year. The FHLBNY also used derivatives to effectively change the repricing characteristics of a significant proportion of its advances and consolidated obligation debt to match shorter-term LIBOR rates that repriced at three-month or less intervals. 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 obligations 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 GSEs 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.
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Recently Issued Accounting Standards and Interpretations, and Significant Accounting Policies and Estimates.
Recently issued Accounting Standards and Interpretations
For a discussion of recently issued accounting standards and interpretations, see the audited financial statements accompanying this report (specifically, Note 1 — Recently issued Accounting Standards and Interpretations).
Significant Accounting Policies and Estimates
The FHLBNY has identified certain accounting policies that it believes are significant because they require management to make subjective judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or by using different assumptions. These policies include estimating the liabilities for pension, and estimating fair values of certain assets and liabilities, evaluating the impairment of the Bank’s securities portfolios, estimating the allowance for credit losses on the advance and mortgage loan portfolios, accounting for derivatives and hedging activities, and amortization of premiums and accretion of discounts. The Bank has discussed each of these significant accounting policies, the related estimates and its judgment with the Audit Committee of the Board of Directors. For additional discussion regarding the application of these and other accounting policies, see Note 1 to the Bank’s audited financial statements included in this report.
Fair Value Measurements and Disclosures
The accounting standards on fair value measurements and disclosures discuss how entities should measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources or those that can be directly corroborated to market sources, while unobservable inputs reflect the FHLBNY’s market assumptions. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal or most advantageous market for the asset or liability between market participants at the measurement date. This definition is based on an exit price rather than transaction or entry price.
Valuation Techniques— Three valuation techniques are prescribed under the fair value measurement standards — Market approach, Income approach and Cost approach. Valuation techniques for which sufficient data is available and that are appropriate under the circumstances should be used.
In determining fair value, FHLBNY uses various valuation methods, including both the market and income approaches.
| | • | | Market approach — This technique uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. |
| | • | | Income approach — This technique uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted), based on assumptions used by market participants. The present value technique used to measure fair value depends on the facts and circumstances specific to the asset or liability being measured and the availability of data. |
| | • | | Cost approach — This approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost). |
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The accounting guidance on fair value measurements and disclosures establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, and would be based on market data obtained from sources independent of FHLBNY. Unobservable inputs are inputs that reflect FHLBNY’s assumptions about the parameters market participants would use in pricing the asset or liability, and would be based on the best information available in the circumstances.
The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1— Quoted prices for identical instruments in active markets.
Level 2— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuations in which all significant inputs and significant parameters are observable in active markets.
Level 3— Valuations based upon valuation techniques in which significant inputs and significant parameters are unobservable.
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors including, for example, the characteristics peculiar to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by FHLBNY in determining fair value is greatest for instruments categorized as Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purpose the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
At December 31, 2009 and 2008, the FHLBNY measured and recorded fair values using the above guidance for derivatives, available-for-sale securities, consolidated obligation bonds that were designated and recorded at fair value using the fair value option (“FVO”). At December 31, 2009 and 2008, the Bank had designated consolidated obligation debt of $6.0 billion and $983.0 million under the FVO accounting. Held-to-maturity securities determined to be credit impaired or OTTI at December 31, 2009 were also measured at fair value on a non-recurring basis. Recorded fair values of OTTI securities were $42.9 million at December 31, 2009. No fair values were recorded on a non-recurring basis at December 31, 2008.
Fair values of all derivatives were computed and recorded in the Statements of Condition using quantitative models and employed multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors. These multiple market inputs were predominantly actively quoted and verifiable through external sources, including brokers and market transactions.
Fair values of mortgage-backed securities (classified as held-to-maturity or available-for-sale), were computed consistent with the guidance from the MBS Pricing Committee (“Pricing Committee”) (See Pricing of mortgage-backed securities in Note 1 — Significant Accounting Polices and Estimates to the audited financial statements accompanying this report), and the FHLBNY updated its pricing methodology used to estimate the fair value of mortgage-backed securities starting in the interim periods ended September 30, 2009 and at December 31, 2009. Under the approved methodology, the FHLBNY requested prices for all mortgage-backed securities from four specific third-party vendors. Prior to the change, the FHLBNY used three of the four vendors specified by the Pricing Committee. Depending on the number of prices received from the four vendors for each security, the FHLBNY selects a median or average price as defined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review by the FHLBNY. In certain limited instances (i.e., prices are outside of variance thresholds or the third-party services do not provide a price), the FHLBNY will obtain a price from securities dealers that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. The incorporation of the Pricing Committee guidelines did not have a significant impact in the FHLBNY’s estimate of the fair values of its investment securities at implementation of the methodologies as of September 30, 2009.
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In addition to the instruments carried at fair value as described above, a significant percentage of fixed-rate advances and consolidated obligation bonds were hedged to mitigate the risk of fair value changes that are attributable solely to changes in LIBOR, the designated benchmark interest rate for the FHLBNY, and accounted under hedge accounting rules in a fair value hedging relationship. To the extent the FHLBNY’s valuation model is used to calculate changes in the benchmark fair values of hedged items, the inputs have a significant effect on the reported carrying values of assets and liabilities and the related income and expense; the use of different inputs could result in materially different net income and reported carrying values. When the FHLBNY deems that a hedge relationship is either not operationally practical or considers the hedge may not be highly effective as defined under hedge accounting standards, the FHLBNY may designate certain derivatives as economic hedges of advances and consolidated obligation bonds and discount notes.
In addition to those items that are carried at fair value, the Bank estimates fair values for its other financial instruments for disclosure purposes. The Bank’s fair value measurement methodologies for assets and liabilities that are carried at fair value are more fully described in Note 1 — Significant Accounting Policies and Estimates, and Note 18 — Fair Values of Financial Instruments to the audited financial statements accompanying this report.
The FHLBNY’s pricing models are subject to annual validation and the Bank periodically reviews and refines, as appropriate, its assumptions and valuation methodologies to reflect market indications as closely as possible. The Bank believes it has the appropriate personnel, technology, and policies and procedures in place to enable it to value its financial instruments in a reasonable and consistent manner and in accordance with established accounting policies.
Other-than-temporary impairment — Accounting and Governance Policies, Impairment analysis, Pricing of mortgage-backed securities, and Bond insurer methodology.
The FHLBNY evaluates its investments on a quarterly basis for impairment and determines if unrealized losses are temporary based in part on the creditworthiness of the issuers and the underlying collateral. A security is considered impaired if its fair value is less than its amortized cost basis. Amortized cost basis includes adjustments made to the cost of an investment for accretion, amortization, collection of cash, previous OTTI recognized in earnings and fair value hedge accounting adjustments. If management has made a decision to sell such an “impaired” security, OTTI is considered to have occurred. If a decision to sell the impaired investment has not been made, but management concludes that it is more likely than not that it will be required to sell such a security before recovery of the amortized cost basis of the security, an OTTI is also considered to have occurred.
Even if management does not intend to sell such an impaired security, an OTTI has occurred if analysis determines that a credit loss exists. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is a credit loss. To determine if a credit loss exists, management compares the present value of the cash flows expected to be collected to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the security’s amortized cost, an OTTI exists, irrespective of whether management will be required to sell such a security. The Bank’s methodology to calculate the present value of expected cash flows is to discount the expected cash flows (principal and interest) of a fixed-rate security that is deemed as OTTI by using its effective interest rate as of the date it was acquired. For a variable-rate security that is evaluated for OTTI, the expected cash flows are computed using a forward-rate curve, which are then discounted using the forward rates.
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However, if management determines that OTTI exists only because of a credit loss (even if it does not intend to sell or it will not be required to sell such a security), the amount of impairment related to credit loss is recorded in earnings and the amount of loss related to factors other than credit loss is recognized as a component of AOCI.
If the FHLBNY determines that OTTI has occurred, it accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment. The investment security is written down to fair value, which becomes its new amortized cost basis. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.
For securities designated as available-for-sale, subsequent unrealized changes to the fair values (other than OTTI) are recorded in AOCI. For securities designated as held-to-maturity, the amount of OTTI recorded in AOCI for the non-credit component of OTTI is amortized prospectively over the remaining life of the securities based on the timing and amounts of estimated future cash flows. Amortization out of AOCI is offset by an increase in the carrying value of securities until the securities are repaid or are sold or subsequent OTTI is recognized in earnings.
If subsequent evaluation indicates a significant increase in cash flows greater than previously expected to be collected or if actual cash flows are significantly greater than previously expected, the increases are accounted for as a prospective adjustment to the accretable yield through interest income. In subsequent periods, if the fair value of the investment security has further declined below its then-current carrying value and there has been a decrease in the estimated cash flows the FHLBNY expects to collect, the FHLBNY will recognize additional OTTI.
OTTI Governance Committee— During the first quarter of 2009, the Finance Agency required the FHLBanks to develop and utilize FHLBank System-wide modeling assumptions for purposes of producing cash flow analyses used in the OTTI assessment for private label residential MBS. During the second quarter of 2009, the FHLBanks enhanced the overall OTTI process by creating an OTTI Governance Committee (“OTTI Committee”). The OTTI Committee provides a formal process by which the FHLBanks can provide input on and approve assumptions. The OTTI Committee is responsible for reviewing and approving the key assumptions including interest rate and housing prices along with related modeling inputs and methodologies to be used to generate cash flow projections. The OTTI Committee requires the FHLBanks to run the OTTI analysis on a common platform, and to perform OTTI analysis on sample securities to ensure that the OTTI analysis produces consistent results, among the FHLBanks. The FHLBNY has utilized the FHLBank of San Francisco to run its OTTI analysis of its private label residential MBS classified as prime and the FHLBank of Chicago to run its private label residential MBS classified as subprime. For about 50 percent of the FHLBNY’s private label MBS where sufficient underlying loan level collateral data was not available to the specific loan performance models used by the two FHLBanks in order to determine the assumptions under the OTTI Committee’s approach, the two FHLBanks were not able to generate cash flow projections at December 31, 2009. Beginning with the quarter ended September 30, 2009, and at December 31, 2009, the FHLBNY performed its OTTI analysis by cash flow testing 100 percent of it private-label MBS, and utilized the results of the OTTI analysis performed by the two FHLBanks to benchmark the results of its own OTTI testing, and concluded that results were consistent. At December 31, 2008, and at the two interim quarters ended June 30, 2009, the FHLBNY’ methodology was to analyze all its private-label MBS to isolate securities that were considered to be at risk of OTTI and to perform cash flow analysis on securities at risk of OTTI.
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The FHLBNY performed its OTTI analysis on monoline insurers (bond insurers) in a manner consistent with the methodology approved by the OTTI Committee. In the third quarter of 2009 the FHLBanks also formed the MBS Pricing Governance Committee, which was responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. Consistent with the guidance from the Pricing Committee, the FHLBNY updated its methodology used to estimate the fair value of mortgage-backed securities starting with the interim period ended September 30, 2009 and at December 31, 2009. Under the approved methodology, the FHLBNY requests prices for all mortgage-backed securities from four specific third-party vendors. Prior to the change, the FHLBNY used three of the four vendors specified by the Pricing Committee. Depending on the number of prices received from the four vendors for each security, the FHLBNY selects a median or average price as defined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review by the FHLBNY. In certain limited instances (i.e., prices are outside of variance thresholds or the third-party services do not provide a price), the FHLBNY will obtain a price from securities dealers that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. The incorporation of the Pricing Committee guidelines did not have a significant impact in the FHLBNY’s estimate of the fair values of its investment securities as of September 30, 2009, the implementation date, or subsequently. For more information about the OTTI Governance Committee, see Significant Accounting Policies and Estimates in Note 1 to the audited financial statements accompanying this report.
Bond Insurer analysis— Certain held-to-maturity private-label MBS owned by the FHLBNY are insured by third-party bond insurers (“monoline insurers”). The bond insurance on these investments guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool. The FHLBNY performs cash flow credit impairment tests on all of its private-label insured securities, and the analysis of the MBS protected by such third-party insurance looks first to the performance of the underlying security, and considers its embedded credit enhancements in the form of excess spread, overcollateralization, and credit subordination, to determine the collectability of all amounts due. If the embedded credit enhancement protections are deemed insufficient to make timely payment of all amounts due, then the FHLBNY considers the capacity of the third-party bond insurer to cover any shortfalls. Certain monoline insurers have been subject to adverse ratings, and weakening financial performance measures. In estimating the insurers’ capacity to provide credit protection in the future to cover any shortfall in cash flows expected to be collected for securities deemed to be OTTI, the FHLBNY has developed a methodology to assess the ability of the monoline insurers to meet future insurance obligations. The methodology establishes boundaries that can be used on a consistent basis, and includes both quantitative and qualitative factors. The methodology calculates the length of time a monoline is expected to remain financially viable to pay claims for securities insured. It employs for the most part, publicly available information to identify cash flows used up by a monoline for insurance claims. Based on the monoline’s existing insurance reserves, the methodology attempts to predict the length of time over which the monoline’s claims-paying resources could sustain bond insurance losses. The methodology provides an indicator of a point in time in the future when the monoline’s claim-paying resources are estimated to be exhausted. For more information about monoline insurer assessment methodology, see Note 1 — Significant Accounting Policies and Estimates to the audited financial statements accompanying this report.
GSE issued securities— The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac or a government agency by considering the creditworthiness and performance of the debt securities and the strength of the GSE’s guarantees of the securities. Based on the Bank’s analysis, GSE and agency issued securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their abilities to support the secondary mortgage market. The FHLBNY believes that it will fully recover its investments in GSE and agency issued securities given the current levels of collateral and credit enhancements and guarantees that exist to protect the investments.
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Provision for Credit Losses
The provision for credit losses for advances (none) 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 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 losses could differ from these estimates.
Advances —No provisions for credit losses were required. The FHLBNY has policies and procedures in place to manage its credit risk effectively. Outlined below are the underlying assumptions that the FHLBNY uses for evaluating its exposure to credit loss.
| | • | | Monitoring the creditworthiness and financial condition of the institutions to which it lends funds. |
| | • | | Reviewing the quality and value of collateral pledged by members. |
| | • | | 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 Agency regulations to obtain sufficient collateral on advances to protect against losses, and to accept only certain kinds of 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, 2009, 2008, and 2007.
At December 31, 2009, 2008 and 2007, 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 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. |
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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 segregated from the aggregate pool. If adversely classified, or on non-accrual status, 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 adversely classified or past due. Reserves are based on the estimated costs to recover any portion of the MPF loans that are not FHA and VA insured.
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 interests in residential and community development mortgage loans through its Community Mortgage Asset (“CMA”) program. Acquisition of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001, and the outstanding balance of Community Mortgage Asset loans was $3.9 million and $4.0 million at December 31, 2009 and 2008. 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.
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Accounting for Derivatives
The Bank records and reports hedging activities under accounting standards for derivatives and hedging. In compliance with the standards, the accounting for derivatives requires the FHLBNY to make the following assumptions and estimates: (i) assessing whether the hedging relationship qualifies for hedge accounting, (ii) assessing whether an embedded derivative should be bifurcated, (iii) calculating the 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:
| | • | | Identification of the item being hedged |
| | • | | Determination of the accounting designation |
| | • | | Determination of method used to assess the effectiveness of the hedge relationship |
| | • | | Assessment that the hedge is expected to be effective in the future if designated as a qualifying hedge accounting standards for derivatives and hedging. |
All derivatives are recorded on the Statements of Condition at their fair value and designated as either fair value or cash flow hedges for qualifying hedges or as non-qualifying hedges (economic hedges, or customer intermediations) under the accounting standards for derivatives and hedging. In an economic hedge, the Bank executes derivative contracts, which are economically effective in reducing risk, either because a qualifying hedge is not available or because the cost of a qualifying hedge is not economical.
Changes in the fair values of a derivative that qualifies as a fair value hedge are recorded in current period earnings or in AOCI if the derivative qualifies as a cash flow hedge.
In addition, the FHLBNY evaluates the products offered to its members and debt issued to investors to determine whether an embedded derivative exists under the accounting standards for derivatives and hedging. 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. The FHLBNY did not have to bifurcate any embedded derivative in any period reported.
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 certain specific criteria under the accounting standards for derivatives and hedging 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 the benchmark interest rates (LIBOR for the Bank) 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 assessing and recording 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 to evaluate effectiveness results, which must fall within established tolerances. Effectiveness testing is performed at hedge inception, and on at least a quarterly basis for both prospective considerations and retrospective evaluations.
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Hedge Discontinuance.When a hedging relationship fails the effectiveness test, the FHLBNY immediately discontinues hedge accounting. In addition, the FHLBNY discontinues hedge accounting for a cash flow hedge when it is no longer probable that a forecasted transaction will occur in the original expected time period, or when the fair value hedge of a 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) that are other than minor as a termination of a hedge relationship. The FHLBNY records the effect of discontinuance of hedges to earnings as a Net realized and unrealized gain (loss) on derivatives and hedging activities in “Other income (loss)” in the Statements of income.
Accounting for Hedge Ineffectiveness.The FHLBNY quantifies and records the ineffectiveness portion of a hedging relationship as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of income. 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 from Counterparties.The FHLBNY is subject to credit risk as a result of nonperformance by counterparties to the derivative agreements. The FHLBNY enters into master netting arrangements and bilateral security agreements with all active non-member 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. Bilateral agreements consider the credit risks and the agreement specifies thresholds that change with changes in credit ratings. Typically, collateral is exchanged when fair values of derivative positions exceed the predetermined thresholds. To the extent that the fair values do not equal the collateral posted as a result of the thresholds in place, the FHLBNY or the derivative counterparty is exposed to credit risk in the event of a default. Also, to the extent that the posted collateral does not equal the replacement fair values of open derivative positions in a scenario such as a default, the FHLBNY or the derivative counterparty is exposed to credit risk. All extensions of credit, including those associated with the purchase or sale of derivatives to members of the FHLBNY, are fully secured by eligible collateral.
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.
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The FHLBNY considers hedges of committed advances and consolidated obligations bonds eligible for the short-cut accounting, (hedges must meet certain specific criteria under the accounting standards for derivatives and hedging to qualify for an assumption of no ineffectiveness), 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 no ineffectiveness are met if the fair value of the swap is zero on the date the FHLBNY commits itself to issue the consolidated obligation bond.
Amortization of Premiums and Accretion of Discounts
The FHLBNY estimates prepayments for purposes of amortizing premiums and accreting discounts associated with certain investment securities in accordance with accounting guidance for investments in debt and equity securities, which requires premiums and discounts to be recognized in income at a constant effective yield over the life of the instrument. Because actual prepayments often deviate from the estimates, the FHLBNY periodically recalculates the effective yield to reflect actual prepayments to date.
| | • | | Adjustments of the effective yields for mortgage-backed securities are recorded on a retrospective basis, meaning as if the new estimated life of the security had been known at its original acquisition date. Changes in interest rates have a direct impact on prepayment speeds and estimated life, which will result in yield adjustments and can be a source of income volatility. Reductions in interest rates generally accelerate prepayments, which accelerate the amortization of premiums and reduce current earnings. Typically, declining interest rates also accelerate the accretion of discounts, thereby increasing current earnings. On the other hand, in a rising interest rate environment, prepayments will generally extend over a longer period, shifting some of the premium amortization and discount accretion to future periods. |
| | • | | The Bank uses the contractual method to amortize premiums and accrete discounts on mortgage loans held-for-portfolio. The contractual method recognizes the income effects of premiums and discounts in a manner that is reflective of the actual behavior of the mortgage loans during the period in which the behavior occurs while also reflecting the contractual terms of the assets without regard to changes in estimated prepayments based upon assumptions about future borrower behavior. |
For more information about amortization and accretion recorded in the Statements of Income see Note 4 — Held-to-maturity securities, Note 5 — Available-for-sale securities, and Note 7 — Mortgage loans held-for-portfolio to the audited financial statements accompanying this report.
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Legislative and Regulatory Developments
Housing and Economic Recovery Act
On July 30, 2008, the President of the United States signed into law the Housing and Economic Recovery Act of 2008 (“HERA”). As more fully discussed below, among other things, this legislation:
| | • | | established the Finance Agency effective on the date of enactment of HERA to regulate (i) Fannie Mae and Freddie Mac (collectively, the “Enterprises”), (ii) the FHLBanks (together with the Enterprises, the “Regulated Entities”) and (iii) the Office of Finance; |
| | • | | eliminated the Office of Federal Housing Enterprise Oversight (“OFHEO”) and the Finance Board no later than one year after enactment and restricted their activities during such period to those necessary to wind up their affairs (on October 27, 2008, the Finance Agency announced that the formal integration of OFHEO and the Finance Board into the Finance Agency had been completed); |
| | • | | established a director (“Director”) of the Finance Agency with broad authority over the Regulated Entities; |
| | • | | amended certain aspects of the FHLBanks’ corporate governance; |
| | • | | authorizes voluntary mergers of FHLBanks with the approval of the Director and permits the Director to liquidate a FHLBank; |
| | • | | made, or requires the Director to study and report on, other changes regarding the membership and activities of the FHLBanks; |
| | • | | provides that all regulations, orders, directives and determinations issued by the Finance Board and OFHEO prior to enactment of HERA immediately transfer to the Finance Agency and remain in force unless modified, terminated, or set aside by the Director; and |
| | • | | granted the Secretary of the Treasury the temporary authority (through December 31, 2009 and subject to certain conditions) to purchase obligations and other securities issued by Fannie Mae, Freddie Mac, and the FHLBanks. |
HERA requires the Finance Agency to issue a number of regulations, orders and reports. Since the enactment of HERA, the Finance Agency has issued certain of these regulations, orders and reports. Some of the more significant provisions of HERA, and the status of any actions required to be taken by the Finance Agency with respect thereto are summarized below. The full effect of this legislation on the Bank and its activities will become known only after all of the required regulations, orders, and reports are issued and finalized.
Structure of the Finance Agency
The Director of the Finance Agency is appointed by the President of the United States and confirmed by the Senate, and serves a five-year term. He or she may be removed only for cause. HERA provided that the Director of OFHEO at the time of enactment would serve as the Director of the Finance Agency until a permanent Director was appointed and confirmed. James Lockhart, the Director of OFHEO at the time of enactment of HERA, served as Director of the Finance Agency until his resignation in August 2009. Currently, Edward DeMarco, formerly Chief Operating Officer and Senior Deputy Director for Housing Mission and Goals for the Finance Agency, is serving as the Acting Director. At the date of this report, a permanent Director has not yet been appointed and confirmed.
HERA provides for three Deputy Directors of the Finance Agency. The Deputy Director of the Division of Enterprise Regulation is responsible for the safety and soundness regulation of Fannie Mae and Freddie Mac. The Deputy Director of the Division of FHLBank Regulation is responsible for the safety and soundness regulation of the FHLBanks. Finally, the Deputy Director for Housing Mission and Goals oversees the housing mission and goals of the Enterprises and the community and economic development mission of the FHLBanks.
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The Director of the Finance Agency, the Secretary of the Treasury, the Secretary of the Department of Housing and Urban Development, and the Chairman of the SEC constitute the Federal Housing Finance Oversight Board, and the Director serves as the chair of and consults with this board, which has no executive authority.
Finance Agency Assessments
The Finance Agency is funded entirely by assessments from the Regulated Entities. On September 30, 2008, the Finance Agency adopted a final rule establishing policy and procedures for the Finance Agency to impose assessments on the Regulated Entities (the “Assessments Rule”). Pursuant to the Assessments Rule, the Director allocates the annual assessment between the Enterprises and the FHLBanks, with the FHLBanks paying proportional shares of the assessment sufficient to provide for payment of the costs and expenses relating to the FHLBanks, as determined by the Director. Each FHLBank is required to pay a pro rata share of the annual assessment allocated to the FHLBanks based on the ratio between the FHLBank’s minimum required regulatory capital and the aggregate minimum required regulatory capital of all FHLBanks. A FHLBank’s minimum required regulatory capital is the highest amount of capital necessary for a FHLBank to comply with any of the capital requirements established by the Director and applicable to the FHLBank.
The Director may, at his or her discretion, increase the amount of a Regulated Entity’s assessment (i) if the Regulated Entity is not classified as adequately capitalized (to pay additional estimated costs of regulation of that Regulated Entity) or (ii) to cover costs of enforcement activities related to that Regulated Entity. The Director may also, at any time, collect an additional assessment from a Regulated Entity to otherwise cover the estimated amount of any deficiency as a result of increased costs of regulation of a Regulated Entity. The Director may require the Regulated Entity to pay such additional assessment immediately, rather than through an increase of the Regulated Entity’s next required payment. The Director may assess interest and penalties on any delinquent assessment payment and may enforce an assessment payment through a cease-and-desist proceeding or through civil money penalties.
Authority of the Finance Agency Director
The Director has broad authority to regulate the Regulated Entities, including the authority to set capital requirements, seek prompt corrective action, bring enforcement actions, put a Regulated Entity into receivership, and levy fines against the Regulated Entities and entity-affiliated parties. The HER Act defines an “entity-affiliated party” to include (i) officers, directors, employees, agents, and controlling shareholders of a Regulated Entity; (ii) any shareholder, affiliate, consultant, joint venture partner, and any other person that the Director determines participates in the conduct of the Regulated Entity’s affairs; (iii) any independent contractor of a Regulated Entity that knowingly or recklessly participates in any violation of law or regulation, any breach of fiduciary duty, or any unsafe or unsound practice; (iv) any not-for-profit corporation that receives its principal funding, on an ongoing basis, from any Regulated Entity; and (v) the Office of Finance.
In connection with this authority, on January 30, 2009, the Finance Agency adopted an interim final rule establishing capital classifications and critical capital levels for the FHLBanks (the “Capital Regulation”). On August 4, 2009, the Finance Agency adopted the interim final rule as a final regulation, subject to amendments meant to clarify certain provisions. On February 8, 2010, the Finance Agency issued a proposed rule with request for comment setting forth standards and procedures that the Director would apply in determining whether to impose a temporary increase in the minimum capital level of a FHLBank. Comments on the proposed rule may be submitted to the Finance Agency through April 9, 2010. For additional information regarding the Capital Regulation and the Bank’s capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements.
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Executive Compensation
HERA requires the Director to prohibit a FHLBank from providing compensation to its executive officers that is not reasonable and comparable with compensation for employees in similar businesses involving similar duties and responsibilities. Further, pursuant to the Capital Regulation, if a FHLBank is undercapitalized, the Director may also restrict executive officer compensation. The Capital Regulation defines “executive officer” to include a FHLBank’s (i) named executive officers identified in the FHLBank’s Annual Report on Form 10-K, (ii) other executives who occupy certain positions or who are in charge of certain subject areas and (iii) any other individual, without regard to title, who is in charge of a principal business unit, division or function or who reports directly to the FHLBank’s chairman, vice chairman, president or chief operating officer.
On June 5, 2009, the Finance Agency issued a proposed rule to set forth requirements and processes with respect to compensation provided to executive officers by a FHLBank. Comments on the proposed rule could be submitted to the Finance Agency through August 4, 2009.
If adopted as proposed, the proposed rule would allow the Director to review the compensation arrangements for any executive officer of a FHLBank at any time. The proposed rule would define “executive officer” as the Capital Regulation does (as set forth above). The Director could prohibit the FHLBank, and the FHLBank would be prohibited, from providing compensation to any such executive officer that is not reasonable and comparable with compensation for employees in other similar businesses involving similar duties and responsibilities. In determining whether such compensation is reasonable and comparable, the Director could consider any factors the Director considered relevant (including any wrongdoing on the part of the executive officer). However, the Director would not be able to prescribe or set a specified level or range of compensation.
With respect to compensation under review by the Director, the Director’s prior approval would be required for (i) a written arrangement that provided an executive officer a term of employment of more than six months or that provided compensation in connection with termination of employment, (ii) annual compensation, bonuses and other incentive pay of a FHLBank’s president and (iii) compensation paid to an executive officer, if the Director provided notice that the compensation of such executive officer would be subject to a specific review by the Director.
Separately, on October 27, 2009, the Finance Agency issued Advisory Bulletin 2009-AB-02, “Principles for Executive Compensation at the Federal Home Loan Banks and the Office of Finance” (“AB 2009-02”). In AB 2009-02, the Finance Agency outlines several principles for sound incentive compensation practices to which the FHLBanks should adhere in setting executive compensation policies and practices. Those principles are (i) executive compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions, (ii) executive incentive compensation should be consistent with sound risk management and preservation of the par value of a FHLBank’s capital stock, (iii) a significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome-indicators, (iv) a significant percentage of an executive’s incentive-based compensation should be deferred and made contingent upon performance over several years and (v) the board of directors of each FHLBank and the Office of Finance should promote accountability and transparency in the process of setting compensation. In evaluating compensation at the FHLBanks, the Director will consider the extent to which an executive’s compensation is consistent with the above principles.
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Indemnification Payments and Golden Parachute Payments
The Director may also prohibit or limit, by regulation or order, any indemnification payment or golden parachute payment. In September 2008, the Finance Agency issued an interim final regulation relating to golden parachute payments (the “Golden Parachute Regulation”) and indicated it would publish a separate rulemaking relating to indemnification payments in the future. On January 29, 2009, the Finance Agency issued a final rule setting forth the factors to be considered by the Director in carrying out his or her authority to limit golden parachute payments to entity-affiliated parties (which factors are discussed below).
The Golden Parachute Regulation defines a “golden parachute payment” as any payment (or any agreement to make any payment) in the nature of compensation by any Regulated Entity for the benefit of any current entity-affiliated party that (i) is contingent on, or by its terms is payable on or after, the termination of such party’s primary employment or affiliation with the Regulated Entity and (ii) is received on or after the date on which one of the following events occurs (a “triggering event”): (a) the Regulated Entity became insolvent; (b) any conservator or receiver is appointed for the Regulated Entity; or (c) the Director determines that the Regulated Entity is in a troubled condition. Additionally, any payment that would be a golden parachute payment but for the fact that such payment was made before the date that a triggering event occurred will be treated as a golden parachute payment if the payment was made in contemplation of the triggering event.
The following types of payments are excluded from the definition of “golden parachute payment” under the Golden Parachute Regulation: (i) any payment made pursuant to a retirement plan that is qualified (or is intended within a reasonable period of time to be qualified) under section 401 of the Internal Revenue Code of 1986 or pursuant to a pension or other retirement plan that is governed by the laws of any foreign country; (ii) any payment made pursuant to a bona fide deferred compensation plan or arrangement that the Director determines, by regulation or order, to be permissible; or (iii) any payment made by reason of death or by reason of termination caused by the disability of an entity-affiliated party.
In determining whether to prohibit or limit a golden parachute payment, the Golden Parachute Regulation requires the Director to consider the following factors: (i) whether there is a reasonable basis to believe that an entity-affiliated party has committed any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the Regulated Entity that has had a material effect on the financial condition of the Regulated Entity; (ii) whether there is a reasonable basis to believe that the entity-affiliated party is substantially responsible for the insolvency of the Regulated Entity, or the troubled condition of the Regulated Entity; (iii) whether there is a reasonable basis to believe that the entity-affiliated party has materially violated any applicable provision of Federal or State law or regulation that has had a material effect on the financial condition of the Regulated Entity; (iv) whether the entity-affiliated party was in a position of managerial or fiduciary responsibility; (v) the length of time that the party was affiliated with the Regulated Entity, and the degree to which the payment reasonably reflects compensation earned over the period of employment and the compensation involved represents a reasonable payment for services rendered; and (vi) any other factor the Director determines is relevant to the facts and circumstances surrounding the golden parachute payment, including any fraudulent act or omission, breach of fiduciary duty, violation of law, rule, regulation, order or written agreement, and the level of willful misconduct, breach of fiduciary duty, and malfeasance on the part of an entity-affiliated party.
Separately, on November 14, 2008, the Finance Agency proposed to amend the Golden Parachute Regulation to include provisions addressing prohibited and permissible indemnification payments in the event the Finance Agency were to institute an administrative proceeding or civil action through issuance of a notice of charges under regulations issued by the Director. The Finance Agency accepted comments on these proposed amendments that were received on or before December 29, 2008.
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On June 29, 2009, the Finance Agency issued a proposed rule to amend further the Golden Parachute Regulation to address in more detail prohibited and permissible indemnification payments and golden parachute payments. Comments on the proposed rule could be submitted to the Finance Agency through July 29, 2009.
With respect to indemnification payments, the proposed rule essentially re-proposed the November 14, 2008 amendments to the Golden Parachute Regulation. The proposed rule would delete one provision contained in the earlier proposed amendments, which provided that claims for employee welfare benefits or other benefits that are contingent, even if otherwise vested, when a receiver is appointed for any Regulated Entity, including any contingency for termination of employment, would not be provable claims or actual, direct compensatory damage claims against such receiver.
In addition to the payments described above that are excluded from the definition of “golden parachute payment,” the proposed rule would specify that “golden parachute payment” also does not include (i) any payment made pursuant to a benefit plan as defined in the proposed rule (which includes employee welfare benefit plans as defined in section 3(1) of the Employee Retirement Income Security Act of 1974); (ii) any payment made pursuant to a nondiscriminatory severance pay plan or arrangement that provides for payment of severance benefits of generally no more than 12 months’ prior base compensation to all eligible employees upon involuntary termination other than for cause, voluntary resignation, or early retirement, subject to certain exceptions; (iii) any severance or similar payment that is required to be made pursuant to a state statute or foreign law that is applicable to all employers within the appropriate jurisdiction (with the exception of employers that may be exempt due to their small number of employees or other similar criteria); or (iv) any other payment that the Director determines to be permissible. The proposed rule would also define “bona fide deferred compensation plan or arrangement” to clarify when a payment made pursuant to a deferred compensation plan or arrangement would be excluded from the definition of “golden parachute payment.”
The proposed rule would extend the prohibition against certain golden parachute payments to former entity-affiliated parties. With respect to potentially prohibited golden parachute payments, a Regulated Entity could agree to make or could make a golden parachute payment if (i) the Director determined that such a payment or agreement was permissible; (ii) such an agreement was made in order to hire a person to become an entity-affiliated party when the Regulated Entity was insolvent, had a conservator or receiver appointed for it, or was in a troubled condition (or the person was being hired in an effort to prevent one of these conditions from occurring), and the Director consented in writing to the amount and terms of the golden parachute payment; or (iii) with the Director’s consent, such a payment was made pursuant to an agreement that provided for a reasonable severance payment, not to exceed 12 months’ salary, to an entity-affiliated party in the event of a change in control of the Regulated Entity.
Differences between the Enterprises and FHLBanks
HERA requires the Director, before issuing any new regulation or taking other agency action of general applicability and future effect relating to the FHLBanks, to take into account the differences between the Enterprises and the FHLBanks with respect to the FHLBanks’ (i) cooperative ownership structure, (ii) mission of providing liquidity to members, (iii) affordable housing and community development mission, (iv) capital structure and (v) joint and several liability, as well as any other differences that the Director considers appropriate.
Corporate Governance of the FHLBanks
Under HERA, each FHLBank is governed by a board of directors of 13 persons or so many persons as the Director may determine. HERA divides directors of FHLBanks into two classes. One class is comprised of “member” directors who are elected by the member institutions of each state in the FHLBank’s district to represent that state. The other class is comprised of “independent” directors who are nominated by a FHLBank’s board of directors, after consultation with its affordable housing Advisory Council, and elected by the FHLBank’s members at-large.
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On September 26, 2008, the Finance Agency issued an interim final rule with request for comments regarding the eligibility and election of individuals to serve on the boards of directors of the FHLBanks. On October 7, 2009, the Finance Agency issued a final rule, effective November 6, 2009, regarding the eligibility and election of FHLBank directors. For information regarding the eligibility and election of the Bank’s Board of Directors, see Item 9B — Other Information and Item 10 — Directors, Executive Officers and Corporate Governance.
FHLBank Directors’ Compensation and Expenses
HERA repealed the prior statutory limits on compensation of directors of FHLBanks. As a result, FHLBank director fees are to be determined at the discretion of a FHLBank’s board of directors, provided such fees are required to be reasonable.
On October 23, 2009, the Finance Agency published a notice of proposed rulemaking, with a request for comments, regarding payment by FHLBanks of their directors’ compensation and expenses. Comments on the proposed rule could be submitted to the Finance Agency through December 7, 2009.
If adopted, the proposed rule would specify that each FHLBank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, as determined by the FHLBank’s board of directors. The compensation paid by a FHLBank to a director would be required to reflect the amount of time the director spent on official FHLBank business, subject to reduction as necessary to reflect lesser attendance or performance at board or committee meetings during a given year.
Pursuant to the proposed rule, the Director would review compensation paid by a FHLBank to its directors. The Director could determine that the compensation and/or expenses to be paid to the directors are not reasonable. In such case, the Director could order the FHLBank to refrain from making any further payments; provided, however, that such order would only be applied prospectively and would not affect any compensation or expense payments made prior to the date of the Director’s determination and order. To assist the Director in reviewing the compensation and expenses of FHLBank directors, each FHLBank would be required to submit to the Director by specified deadlines (i) the compensation anticipated to be paid to its directors for the following calendar year, (ii) the amount of compensation and expenses paid to each director for the immediately preceding calendar year and (iii) a copy of the FHLBank’s written compensation policy, along with all studies or other supporting materials upon which the board of directors relied in determining the level of compensation and expenses to pay to its directors.
For information regarding the compensation of the Bank’s directors, see Item 11 — Executive Compensation.
Community Development Financial Institutions (“CDFIs”)
HERA makes CDFIs that are certified under the Community Development Banking and Financial Institutions Act of 1994 eligible for membership in a FHLBank. A certified CDFI is a person (other than an individual) that (i) has a primary mission of promoting community development, (ii) serves an investment area or targeted population, (iii) provides development services in connection with equity investment or loans, (iv) maintains, through representation on its governing board or otherwise, accountability to residents of its investment area or targeted population, and (v) is not an agency or instrumentality of the United States or of any state or political subdivision of a state.
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On May 15, 2009, the Finance Agency issued a proposed rule to amend its membership regulations to authorize non-federally insured, CDFI Fund-certified CDFIs to become members of a FHLBank. On January 5, 2010, the Finance Agency issued a final rule establishing the eligibility and procedural requirements for CDFIs that wish to become FHLBank members. The newly-eligible CDFIs include community development loan funds, venture capital funds and state-chartered credit unions without federal insurance.
The Bank has not yet determined the number of CDFIs in its district, how many of them might seek to become members of the Bank, or the effect on the Bank of their becoming members.
Housing Goals
HERA requires the Director to establish housing goals with respect to the purchase of mortgages, if any, by the FHLBanks and to report annually to the United States Congress (“Congress”) on the FHLBanks’ performance in meeting such goals. In establishing the housing goals, the Director is required to consider the unique mission and ownership structure of the FHLBanks. To facilitate an orderly transition, the Director is charged with establishing interim housing goals for each of the two calendar years following the date of enactment of HERA.
Sharing of Information Regarding the FHLBanks
The HERA requires the Director to promulgate regulations under which he or she will make available to each FHLBank information regarding the other FHLBanks in order to enable the FHLBanks to assess their risk under their joint and several liability with respect to consolidated obligations and to comply with their disclosure obligations under the Exchange Act. Exceptions to such disclosure are provided with respect to information that is proprietary.
Exemptions from Certain SEC Laws and Regulations
The HERA exempts the FHLBanks from certain requirements under the Federal securities laws, including the Exchange Act, and the SEC’s related regulations. These exemptions arise from the distinctive nature and the cooperative ownership structure of the FHLBanks and parallel relief granted by the SEC to the FHLBanks in no-action letters issued at the time the FHLBanks registered with the SEC under the Exchange Act. In issuing future regulations, the SEC is directed by HERA to take account of the distinctive characteristics of the FHLBanks when evaluating (i) the accounting treatment with respect to payments to the Resolution Funding Corporation, (ii) the role of the combined financial statements of the FHLBanks, (iii) the accounting classification of redeemable capital stock, and (iv) the accounting treatment related to the joint and several nature of the obligations of the FHLBanks.
Liquidations, Voluntary Mergers, and Reduction in the Number of FHLBank Districts
HERA permits any FHLBank to voluntarily merge with another FHLBank with the approval of the Director and the boards of directors of the FHLBanks involved. The Director is required to promulgate regulations establishing the conditions and procedures for the consideration and approval of any voluntary merger, including the procedures for FHLBank member approval.
The Director is authorized on 30 days’ prior notice to liquidate or reorganize any FHLBank. A FHLBank that the Director proposes to liquidate or reorganize is entitled to contest the Director’s determination in a hearing on the record in accordance with the provisions of the Administrative Procedures Act.
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The Director is authorized to reduce the number of FHLBank districts to fewer than eight as a result of the merger of FHLBanks or the Director’s decision to liquidate a FHLBank. Prior law required that there be no fewer than eight and no more than twelve FHLBanks.
Community Financial Institutions (“CFIs”)
CFIs are redefined by HERA as FDIC-insured institutions with average total assets over the three-year period preceding measurement of less than $1.0 billion (up from the statutory amount of $500 million, with such amount inflation adjusted to $625 million immediately prior to enactment of HERA). The $1.0 billion amount will continue to be adjusted annually by the FHFA based on any increase in the Consumer Price Index. For 2010, the amount has been set by the FHFA at $1,029 million.
Loans for community development activities were added to loans for small business, small farm, and small agri-business as permissible purposes for advances to CFIs (including long-term advances). On February 23, 2010, the Finance Agency issued a proposed rule with request for comments to define certain terms and provide guidance necessary to assist the FHLBanks in accepting this type of collateral. Comments on the proposed rule may be submitted to the Finance Agency through April 26, 2010. The Bank has not yet determined the effect on the Bank of the inclusion of loans for community development activities by CFIs as loans eligible to support advances.
Public Use Data Base and Reporting to Congress
HERA requires the FHLBanks to report to the Director census tract level data regarding mortgages they purchase, if any. Such data are to be reported in a form consistent with other Federal laws, including the Home Mortgage Disclosure Act, and any other requirements that the Director imposes. The Director is required to report such data to Congress and, except with respect to proprietary information and personally identifiable information, to make the data available to the public.
Study of Securitization of Home Mortgage Loans by the FHLBanks
Within one year of the enactment of HERA, the Director was to provide to Congress a report on a study of securitization of home mortgage loans purchased from member financial institutions under the AMA programs of the FHLBanks. In conducting this study, the Director was required to consider (i) the benefits and risks associated with securitization of AMA, (ii) the potential impact of securitization upon the liquidity in the mortgage and broader credit markets, (iii) the ability of the FHLBanks to manage the risks associated with securitization, (iv) the impact of such securitization on the existing activities of the FHLBanks, including their mortgage portfolios and advances, and (v) the joint and several liability of the FHLBanks and the cooperative structure of the FHLBank System. In conducting the study, the Director was required to consult with the FHLBanks, the Office of Finance, representatives of the mortgage lending industry, practitioners in the structured finance field, and other experts as needed.
On February 27, 2009, the Finance Agency published a Notice of Concept Release with request for comments to garner information from the public for use in its study. On July 30, 2009, the Director provided to Congress the results of the Finance Agency’s study, including policy recommendations based on the Finance Agency’s analysis of the feasibility of the FHLBanks’ issuing mortgage-backed securities and of the benefits and risks associated with such a program. Based on the Finance Agency’s study and findings regarding FHLBank securitization, the Director did not recommend permitting the FHLBanks to securitize mortgages at this time.
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Study of FHLBank Advances
Within one year of the enactment of HERA, the Director was required to conduct a study and submit a report to Congress regarding the extent to which loans and securities used as collateral to support FHLBank advances are consistent with theInteragency Guidance on Nontraditional Mortgage Product Risksdated October 4, 2006 and theStatement on Subprime Mortgage Lendingdated July 10, 2007 (collectively, the “Interagency Guidance”). The study was also required to consider and recommend any additional regulations, guidance, advisory bulletins or other administrative actions necessary to ensure that the FHLBanks are not supporting loans with predatory characteristics.
On August 4, 2009, the Finance Agency published the notice of study and recommendations required by HERA with respect to FHLBank collateral for advances and the Interagency Guidance. Comments on the notice of study and recommendations could be submitted to the Finance Agency through October 5, 2009.
AHP Funds to Support Refinancing of Certain Residential Mortgage Loans
For a period of two years following the enactment of HERA, FHLBanks are authorized to use a portion of their AHP funds to support the refinancing of residential mortgage loans owed by families with incomes at or below 80 percent of the median income for the areas in which they reside.
As required by HERA, on October 17, 2008, the Finance Agency issued an interim final rule with request for comments regarding the FHLBanks’ mortgage refinancing authority. This interim final rule amended the AHP regulation to allow a FHLBank to temporarily establish a homeownership set-aside program for the use of AHP grants by the FHLBank’s members to assist in the refinancing of a household’s mortgage loan under the HOPE for Homeowners Program of the Federal Housing Administration (“FHA”).
Based on the comments received on the interim final rule and the continuing adverse conditions of the mortgage market, on August 4, 2009, the Finance Agency issued a second interim final rule, with a request for comments, to broaden the scope of the FHLBanks’ mortgage refinancing authority and to allow the FHLBanks greater flexibility in implementing their mortgage refinancing authority. Comments on the second interim final rule could be submitted to the Finance Agency through October 5, 2009.
The second interim final rule amended the current AHP regulation to allow a FHLBank to temporarily establish a homeownership set-aside program for the use of AHP grants by the FHLBank’s members to assist in the refinancing of a household’s mortgage loan in order to prevent foreclosure. A loan is eligible to be refinanced with an AHP grant if the loan is secured by a first mortgage on the household’s primary residence, the loan is refinanced under a program offered by the United States Department of Agriculture, Fannie Mae, Freddie Mac, a state or local government, or a state or local housing finance agency (an “eligible targeted refinancing program”) and the loan meets certain other conditions.
The second interim final rule also authorizes a FHLBank, in its discretion, to set aside annually up to the greater of $4.5 million or 35 percent of the FHLBank’s annual required AHP contribution to provide funds to members participating in homeownership set-aside programs, including a mortgage refinancing set-aside program, provided that at least one-third of this set-aside amount is allocated to programs to assist first-time homebuyers. A FHLBank may accelerate to its current year’s AHP program (including its set-aside programs) from future annual required AHP contributions an amount up to the greater of $5 million or 20 percent of the FHLBank’s annual required AHP contribution for the current year. The FHLBank may credit the amount of the accelerated contribution against required AHP contributions over one or more of the subsequent five years.
The FHLBanks’ authority under the second interim final rule to establish and provide AHP grants under a mortgage refinancing homeownership set-aside program expires on July 30, 2010.
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Letters of Credit to Guarantee Bonds
The Bank’s credit services include letters of credit issued or confirmed on behalf of members for a variety of purposes, including as credit support for bonds or other debt instruments. Before enactment of HERA, the Bank did not generally issue or confirm letters of credit to support bonds or other debt instruments where the interest on such instruments was purportedly exempt from federal income taxes because such tax-exempt status was generally lost if the instruments were “federally guaranteed” under the Internal Revenue Code. The Bank’s letters of credit and confirmations were generally federal guarantees under the Internal Revenue Code, with an exception for guarantees in connection with debt issuances to support certain housing programs.
The HER Act authorizes FHLBanks, subject to certain conditions, to issue a letter of credit or confirmation in connection with the original issuance of tax-exempt bonds during the period from enactment of HERA to December 31, 2010, and to renew or extend any such letter of credit or confirmation, without the bonds potentially losing their tax-exempt status. A FHLBank may issue such letter of credit or confirmation without regard to the purpose of the issuance of the bonds (i.e., the bonds do not have to be issued solely to support certain housing programs).
Minorities, Women, and Diversity in the Workforce
HERA requires each Regulated Entity to establish or designate an Office of Minority and Women Inclusion that is responsible for carrying out all matters relating to diversity in management, employment, and business practices. On January 11, 2010, the Finance Agency issued a proposed rule to effect this provision of HERA. Comments on the proposed rule may be submitted to the Finance Agency through April 26, 2010.
Joint Offices
HERA repeals the provision in prior law that prohibited the FHLBanks from establishing any joint offices other than the Office of Finance. At the present time, the Bank does not plan to establish any joint office with one or more FHLBanks.
Temporary Authority of the Secretary of the Treasury
HERA granted the Secretary of the Treasury the temporary authority (through December 31, 2009) to purchase any obligations and other securities issued by the Regulated Entities, if he or she determined that such purchase was necessary to provide stability to financial markets, to prevent disruptions in the availability of mortgage finance, and to protect the taxpayers. For the FHLBanks, this temporary authorization supplemented the existing authority of the Secretary of the Treasury under the FHLB Act to purchase up to $4.0 billion of FHLBank obligations. Since 1977, the Treasury has not owned any of the FHLBanks’ consolidated obligations under this previous authority.
In connection with the Secretary of the Treasury’s authority under HERA, on September 9, 2008, the Bank entered into a Lending Agreement (the “Agreement”) with the Treasury. Each of the other 11 FHLBanks also entered into its own Lending Agreement with the Treasury that was identical to the Agreement entered into by the Bank (collectively, the “Agreements”). The FHLBanks entered into these Agreements in connection with the Treasury’s establishment of a Government Sponsored Enterprise Credit Facility that was designed to serve as a contingent source of liquidity for the Regulated Entities.
The Agreements terminated on December 31, 2009 when the temporary authority of the Secretary of the Treasury expired. None of the FHLBanks ever borrowed under the Agreements.
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Reporting of Fraudulent Financial Instruments
On June 17, 2009, the Finance Agency issued a proposed regulation to effect the provisions of HERA that require the FHLBanks to report to the Finance Agency any fraudulent loans or other financial instruments that they purchased or sold. On January 27, 2010, the Finance Agency issued a final regulation, effective February 26, 2010, regarding reporting by the FHLBanks of fraudulent financial instruments.
The final regulation requires a FHLBank to submit to the Director a timely written report upon discovery by the FHLBank that it has purchased or sold a fraudulent loan or financial instrument, or suspects a possible fraud relating to the purchase or sale of any loan or financial instrument. “Purchased or sold or relating to the purchase or sale” means any transaction involving a financial instrument including, but not limited to, any purchase, sale, other acquisition, or creation of a financial instrument by the member of a FHLBank to be pledged as collateral to the FHLBank to secure an advance by the FHLBank to that member, the pledging by a member to a FHLBank of such financial instrument to secure such an advance, the making of a grant by a FHLBank under its affordable housing program or community investment program, and the effecting of a wire transfer or other form of electronic payments transaction by the FHLBank. “Financial instrument” means any legally enforceable agreement, certificate, or other writing, in hardcopy or electronic form, having monetary value including, but not limited to, any agreement, certificate, or other writing evidencing an asset pledged as collateral to a FHLBank by a member to secure an advance by the FHLBank to that member. “Fraud” means a misstatement, misrepresentation or omission that cannot be corrected and that was relied upon by a FHLBank to purchase or sell a loan or financial instrument.
The final regulation requires each FHLBank to establish and maintain adequate and efficient internal controls, policies and procedures and an operational training program to discover and report fraud or possible fraud in connection with the purchase or sale of any loan or financial instrument. The FHFA is expected to provide additional guidance in the near future regarding the implementation of this regulation.
Other Regulatory Developments
Office of Finance
Effective with the enactment of HERA, the Finance Agency assumed responsibility from the Finance Board for supervising and regulating the Office of Finance. On August 4, 2009, the Finance Agency published a notice of proposed rulemaking, with a request for comments, regarding the Board of Directors of the Office of Finance. Initially, comments on the proposed rule could be submitted to the Finance Agency through October 5, 2009. On October 2, 2009, the Finance Agency extended the comment period until November 4, 2009.
The proposed rule would expand the Board of Directors of the Office of Finance to include all of the FHLBank presidents (currently, only two of the FHLBank presidents serve on the Office of Finance’s Board of Directors, including the Bank’s President and Chief Executive Officer). The Board of Directors of the Office of Finance would also include three to five independent directors (currently, the third director of the Office of Finance is required to be a private United States citizen with demonstrated expertise in financial markets). Each independent director would be required to be a United States citizen and the independent directors, as a group, would be required to have substantial experience in financial and accounting matters. An independent director could not (i) be an officer, director or employee of any FHLBank or any member of a FHLBank; (ii) be affiliated with any consolidated obligations selling or dealer group member under contract with the Office of Finance; (iii) hold shares or any financial interest in any FHLBank member or in any such dealer group member in an amount greater than the lesser of (A) $250,000 or (B) 0.01 percent of the market capitalization of the member or dealer (except that a holding company of a FHLBank member or a dealer group member will be deemed to be a member if the assets of the holding company’s member subsidiaries constitute 35 percent or more of the consolidated assets of the holding company). The Chair of the Board of Directors of the Office of Finance would be selected from among the independent directors.
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The independent directors of the Office of Finance would serve as the Audit Committee. Among other duties, the Audit Committee would be responsible for overseeing the audit function of the Office of Finance and the preparation and accuracy of the FHLBank System’s combined financial reports. For purposes of the combined financial reports, the Audit Committee would be responsible for ensuring that the FHLBanks adopt consistent accounting policies and procedures, such that the information submitted by the FHLBanks to the Office of Finance may be combined to create accurate and meaningful combined reports. The Audit Committee of the Office of Finance, in consultation with the Finance Agency, could establish common accounting policies and procedures for the information submitted by the FHLBanks to the Office of Finance for the combined financial reports where the Audit Committee determines such information provided by the FHLBanks is inconsistent and that consistent policies and procedures regarding that information are necessary to create accurate and meaningful combined financial reports. The Audit Committee would also have the exclusive authority to employ and contract for the services of an independent, external auditor for the FHLBanks’ annual and quarterly combined financial statements.
Currently, the FHLBanks are responsible for jointly funding the expenses of the Office of Finance, which are shared on a pro rata basis with one-third based on each FHLBank’s total outstanding capital stock (as of the prior month-end, excluding those amounts classified as mandatorily redeemable), one-third based on each FHLBank’s total debt issuance (during the current month), and one-third based on each FHLBank’s total consolidated obligations outstanding (as of the current month-end). The proposed rule would retain the FHLBanks’ responsibility for jointly funding the expenses of the Office of Finance, but each FHLBank’s respective pro rata share would be based on a reasonable formula approved by the Board of Directors of the Office of Finance, subject to review by the Finance Agency.
Temporary Liquidity Guarantee Program.
On October 23, 2009, the FDIC published in the Federal Register a final rule concerning the termination of the Debt Guarantee Program (“DGP”), a component of the Temporary Liquidity Guarantee Program (“TLGP”). For most insured depository institutions and other entities participating in this program, the DGP concluded on October 31, 2009, with the FDIC’s guarantee expiring no later than December 31, 2012. The final rule establishes a limited six-month emergency guarantee facility for entities that (following the termination of the DGP) become unable to issue non-guaranteed debt to replace maturing senior unsecured debt due to market disruptions or other circumstances beyond their control. This emergency guarantee facility is available to qualified entities on an application basis and is subject to such restrictions and conditions as the FDIC deems appropriate. If an entity’s application is approved, the FDIC will guarantee the applicant’s senior unsecured debt issued on or before April 20, 2010. The FDIC’s guarantee of such debt will extend through the earliest of the mandatory conversion date (for mandatory convertible debt), the stated maturity date or December 31, 2012. Debt guaranteed under the emergency guarantee facility will be subject to an annualized assessment rate equal to a minimum of 300 basis points.
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Statement of Policy on Qualifications for Failed Bank Acquisitions.
On September 2, 2009, the FDIC issued a final statement of policy, effective on August 26, 2009, providing guidance to private capital investors interested in acquiring or investing in failed insured depository institutions regarding the terms and conditions for such investments or acquisitions. This guidance applies to (1) private capital investors in certain companies that seek to assume deposit liabilities or both such deposit liabilities and assets from a failed insured depository institution and (2) private capital investors involved in applications for deposit insurance in conjunction withde novocharters issued in connection with the resolution of failed insured depository institutions. Additionally, this final statement of policy provides, among other measures, standards for capital support of an acquired depository institution; an agreement to a cross guarantee over substantially commonly-owned depository institutions; limits on transactions with affiliates; maintenance of continuity of ownership; and avoidance of secrecy law jurisdictions as investment channels, absent consolidated home country supervision.
Capital Classifications and Critical Capital Levels for the FHLBanks.
The Finance Agency issued a final rule, effective August 4, 2009, to implement certain provisions of the Housing Act that require the Director of the Finance Agency to establish criteria based on the amount and type of capital held by an FHLBank for each of the following capital classifications: adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. This regulation defines critical capital levels for the FHLBanks, establishes the criteria for each of the capital classifications identified in the Housing Act and implements the Finance Agency’s prompt correction action authority over the FHLBanks. The Finance Agency may, in its discretion, otherwise determine to classify an FHLBank as less-than-adequately capitalized. On July 20, 2009, the Finance Agency published Advisory Bulletin 2009-AB-01 which identified preliminary FHLBank capital classifications as a form of supervisory correspondence that should be treated by an FHLBank as unpublished information. Under this Advisory Bulletin, preliminary FHLBank capital classifications should be publicly disclosed only if the information is material to that FHLBank’s financial condition and business operations, provided that the disclosure is limited to a recital of the factual content of the unpublished information. For more information and compliance with the risk based capital rule, see Note 13 — Capital to audited financial statements accompanying this report.
Record Retention.
On August 4, 2009, the Finance Agency issued a proposed rule that would require Freddie Mac, Fannie Mae, the FHLBanks and the Office of Finance to establish and maintain record retention programs to ensure that records are readily accessible for examination and other supervisory purposes. This proposed regulation seeks to assure strong record maintenance and availability for the security of these entities and to facilitate effective supervision. Comments on this proposed rule were due to the Finance Agency by October 5, 2009.
Money Market Fund Reform.
On July 8, 2009, the Securities and Exchange Commission (“SEC”) published a proposed rule on money market fund reform. The proposed reforms include the imposition of new liquidity requirements for money market funds. As proposed, agency securities, including certain FHLBank securities, would not be considered liquid assets for purposes of meeting the proposed liquidity requirements. If these requirements were adopted as proposed, money market fund demand for FHLBank consolidated discount notes could decrease. Comments on this proposed rule were due to the SEC by September 8, 2009.
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Guidance for Determining Other-Than-Temporary Impairment.
On April 28, 2009 and May 7, 2009, the Finance Agency provided the FHLBanks with guidance on the process for determining OTTI with respect to the FHLBanks’ holdings of private-label MBS and the FHLBanks’ first quarter 2009 adoption of new U.S. GAAP regarding OTTI on investment securities. The goal of this guidance was to promote consistency among all FHLBanks for determining OTTI for private-label MBS, based on the understanding that investors in the FHLBanks’ consolidated obligations could better understand and utilize the information in the FHLBanks’ combined financial reports if it is prepared on a more consistent basis. In order to achieve this goal and move to a common analytical framework, and recognizing that several FHLBanks intended to early adopt the new U.S. GAAP regarding OTTI on investment securities, the Finance Agency guidance required all FHLBanks to early adopt this new accounting treatment effective January 1, 2009 and, for purposes of making OTTI determinations beginning with the first quarter of 2009 and thereafter, to use a consistent set of key modeling assumptions and specified third-party models. For a discussion of the FHLBNY’s implementation of this OTTI guidance, see Note 1 — Significant Accounting Polices and Estimates to the audited financial statements accompanying the report.
During the second quarter of 2009, the FHLBanks created an OTTI Governance Committee with responsibility for reviewing and approving the key modeling assumptions, inputs and methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS. The OTTI Governance Committee charter was approved on June 11, 2009 and provides a formal process by which the FHLBanks can provide input on and approve these key OTTI assumptions.
In accordance with the guidance provided by the OTTI Governance Committee, an FHLBank may engage another FHLBank to perform the cash flow analyses underlying its OTTI determinations. Each FHLBank is responsible for making its own determination of impairment and the reasonableness of assumptions, inputs and methodologies used, as well as performing the required present value calculations using appropriate historical cost bases and yields. FHLBanks that hold common private-label MBS are required to consult with one another to ensure that any decision that a commonly-held private-label MBS is other-than-temporarily impaired, including the determination of fair value and the credit loss component of the unrealized loss, is consistent among those FHLBanks.
In order to promote consistency in the application of the assumptions and implementation of the OTTI methodology, the FHLBanks have established control procedures whereby the FHLBanks that are performing cash flow analyses select a sample group of private-label MBS and each perform cash flow analyses on all such test MBS, using the assumptions approved by the OTTI Governance Committee. These FHLBanks exchange and discuss the results and make any adjustments necessary to achieve consistency among their respective cash flow models.
Finance Agency Releases Its First Strategic Plan.
On July 9, 2009, the Finance Agency released its first strategic plan since it was created. This strategic plan details the goals and objectives that will guide the Finance Agency over the next five years in its actions to restore the financial health of Fannie Mae and Freddie Mac, enhance the Federal Home Loan Bank System and contribute to the strength and stability of the United States’ housing finance market and affordable housing. This plan lists three goals of 1) safety and soundness, 2) housing mission and conservatorship, and 3) a resource management strategy which the Finance Agency will employ in fulfilling its mission to provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the FHLBanks to promote their safety and soundness, support housing finance and affordable housing and support a stable and liquid mortgage market.
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Financial Condition: Assets, Liabilities, Capital, Commitments and Contingencies (dollars in thousands):
Table 2: Statements of Condition — Year-Over-Year Comparison
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | | | | | Net change in | | | Net change in | |
| (Dollars in thousands) | | 2009 | | | 2008 | | | dollar amount | | | percentage | |
Assets | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 2,189,252 | | | $ | 18,899 | | | $ | 2,170,353 | | | NM | % |
| Interest-bearing deposits | | | — | | | | 12,169,096 | | | | (12,169,096 | ) | | | (100.00 | ) |
| Federal funds sold | | | 3,450,000 | | | | — | | | | 3,450,000 | | | | N/A | |
| Available-for-sale securities | | | 2,253,153 | | | | 2,861,869 | | | | (608,716 | ) | | | (21.27 | ) |
| Held-to-maturity securities | | | | | | | | | | | | | | | | |
| Long-term securities | | | 10,519,282 | | | | 10,130,543 | | | | 388,739 | | | | 3.84 | |
| Certificates of deposit | | | — | | | | 1,203,000 | | | | (1,203,000 | ) | | | (100.00 | ) |
| Advances | | | 94,348,751 | | | | 109,152,876 | | | | (14,804,125 | ) | | | (13.56 | ) |
| Mortgage loans held-for-portfolio | | | 1,317,547 | | | | 1,457,885 | | | | (140,338 | ) | | | (9.63 | ) |
| Accrued interest receivable | | | 340,510 | | | | 492,856 | | | | (152,346 | ) | | | (30.91 | ) |
| Premises, software, and equipment | | | 14,792 | | | | 13,793 | | | | 999 | | | | 7.24 | |
| Derivative assets | | | 8,280 | | | | 20,236 | | | | (11,956 | ) | | | (59.08 | ) |
| Other assets | | | 19,339 | | | | 18,838 | | | | 501 | | | | 2.66 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total assets | | $ | 114,460,906 | | | $ | 137,539,891 | | | $ | (23,078,985 | ) | | | (16.78 | )% |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | | |
| Interest-bearing demand | | $ | 2,616,812 | | | $ | 1,333,750 | | | $ | 1,283,062 | | | | 96.20 | % |
| Non-interest bearing demand | | | 6,499 | | | | 828 | | | | 5,671 | | | | 684.90 | |
| Term | | | 7,200 | | | | 117,400 | | | | (110,200 | ) | | | (93.87 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total deposits | | | 2,630,511 | | | | 1,451,978 | | | | 1,178,533 | | | | 81.17 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Consolidated obligations | | | | | | | | | | | | | | | | |
| Bonds | | | 74,007,978 | | | | 82,256,705 | | | | (8,248,727 | ) | | | (10.03 | ) |
| Discount notes | | | 30,827,639 | | | | 46,329,906 | | | | (15,502,267 | ) | | | (33.46 | ) |
| | | | | | | | | | | | | |
| Total consolidated obligations | | | 104,835,617 | | | | 128,586,611 | | | | (23,750,994 | ) | | | (18.47 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Mandatorily redeemable capital stock | | | 126,294 | | | | 143,121 | | | | (16,827 | ) | | | (11.76 | ) |
| | | | | | | | | | | | | | | | | |
| Accrued interest payable | | | 277,788 | | | | 426,144 | | | | (148,356 | ) | | | (34.81 | ) |
| Affordable Housing Program | | | 144,489 | | | | 122,449 | | | | 22,040 | | | | 18.00 | |
| Payable to REFCORP | | | 24,234 | | | | 4,780 | | | | 19,454 | | | | 406.99 | |
| Derivative liabilities | | | 746,176 | | | | 861,660 | | | | (115,484 | ) | | | (13.40 | ) |
| Other liabilities | | | 72,506 | | | | 75,753 | | | | (3,247 | ) | | | (4.29 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total liabilities | | | 108,857,615 | | | | 131,672,496 | | | | (22,814,881 | ) | | | (17.33 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Capital | | | 5,603,291 | | | | 5,867,395 | | | | (264,104 | ) | | | (4.50 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total liabilities and capital | | $ | 114,460,906 | | | $ | 137,539,891 | | | $ | (23,078,985 | ) | | | (16.78 | )% |
| | | | | | | | | | | | | |
Balance sheet overview
At December 31, 2009, the FHLBNY’s Total assets were $114.5 billion, a decrease of $23.1 billion, or 16.8 %, from December 31, 2008. The Bank’s balance sheet management strategy has been to keep balance sheet growth or decline in line with the changes in member demand for advances, which declined 13.6%.
Advances borrowed by members stood at $94.3 billion at December 31, 2009, a decline of $14.8 billion, or 13.6% from the outstanding balance at December 31, 2008. Member demand for advance borrowings has been concentrated in the longer-term fixed-rate advance products, and weaker demand for short-term fixed-rate and adjustable-rate borrowings. It appears that members are attempting to lock-in longer maturity borrowings at prevailing interest rates. Outstanding amounts of short-term fixed-rate advances, adjustable-rate advances, and overnight borrowings declined at December 31, 2009 compared to outstanding balances at December 31, 2008. Decline of $2.2 billion in the recorded fair value basis of hedged advances from the amounts recorded at December 31, 2008 was another factor in the decline in advances as reported in the Statements of Condition at December 31, 2009.
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At December 31, 2009, the FHLBNY also reduced its positions in short-term liquid investments as it deemed that member demand for additional liquidity had been met and market spreads from such investments would not meet the Bank’s risk reward leverage targets. At December 31, 2009, the Bank held for liquidity purposes, $2.2 billion in non-interest bearing cash deposits at the FRB, and $3.5 billion in Federal funds sold. In more volatile market conditions at December 31, 2008, the Bank had invested $12.2 billion in a temporary interest-bearing deposit program offered by the FRB (terminated effective July 1, 2009). An additional $1.2 billion was maintained in short-term certificates of deposit at December 31, 2008. Historically, the Bank has maintained a significant inventory of liquid Federal funds and short-term certificates deposits at highly rated financial institutions to ensure liquidity for its members’ borrowing needs, especially during volatile market conditions.
The FHLBNY made no acquisition for its available-for-sale portfolio in 2009, which consisted of GSE issued floating-rate MBS and an insignificant portfolio of bond and equity funds. Investments designated as available-for-sale are recorded at their fair values, with unrealized gains and losses recorded through AOCI, a component of equity. Market pricing of GSE issued MBS improved at December 31, 2009, and substantially all of the $64.4 million in net unrealized losses (temporary impairment) at December 31, 2008 were recovered. Available-for-sale securities (“AFS”) at fair value were $2.3 billion, net of unrealized losses of $3.4 million at December 31, 2009. At December 31, 2008, AFS at fair values were $2.9 billion, net of unrealized losses of $64.4 million. No securities designated as AFS were credit impaired at December 31, 2009 or 2008.
The FHLBNY’s held-to-maturity securities grew modestly in 2009. The FHLBNY acquired $3.5 billion of GSE issued MBS, ahead of pay downs of $2.8 billion. The Bank also acquired $25.0 million of a New York City Housing Development bond. Investments designated as held-to-maturity are recorded at carrying value. Carrying value is the amortized cost basis of the investment if a security is not determined to be OTTI. If a held-to-maturity security has been determined to be OTTI, amortized cost basis is adjusted to its fair value at the time of impairment and is the carrying value of the security. Carrying value is subsequently adjusted for accretion of non-credit portion of OTTI recorded in AOCI. Carrying value is not subsequently adjusted to fair value unless additional OTTI is recognized.
As a result of recognition of credit impairment during 2009, 17 held-to-maturity private-label securities were written down by $140.9 million, representing credit and non-credit losses (OTTI Losses). The cumulative credit impairment expenses recorded as a charge to earnings in 2009 was $20.8 million. The cumulative non-credit OTTI was recorded in AOCI, and the amount of non-credit OTTI remaining after accretion at December 31, 2009 was a net loss of $110.6 million. The carrying value of held-to-maturity MBS after recording the effects of OTTI was $9.8 billion (Amortized cost basis was $9.9 billion) at December 31, 2009. The Bank did not experience any OTTI during 2008, and the carrying value of held-to-maturity MBS at December 31, 2008, was $9.3 billion, equal to amortized cost in the absence of OTTI.
At December 31, 2009, balance sheet leverage of 20.4 times shareholders’ capital was lower than 23.4 times capital at December 31, 2008. The change in leverage reflects the Bank’s balance sheet management strategy of keeping the balance sheet change in line with the changes in member demand for advances. Increases or decreases in investments have a direct impact on leverage, but generally, growth in or shrinkage of advances does not significantly impact balance sheet leverage under existing capital stock management practices. This is because changes in shareholders’ capital are in line with changes in advances, and the ratio of assets to capital generally remains unchanged. Under existing capital management practices, members are required to purchase capital stock to support their borrowings from the Bank, and when capital stock is in excess of the amount that is required to support advance borrowings, the Bank redeems the excess capital stock immediately. Therefore, stockholders’ capital increases and decreases with members’ advance borrowings, and the capital to asset ratios remains relatively unchanged. As capital increases or declines in line with higher or lower volumes of advances, the Bank may also adjust its assets by increasing or decreasing holdings of short-term investments in certificates of deposit, and, to some extent, its positions in Federal funds sold, which it inventories to accommodate unexpected member needs for liquidity.
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In 2009 as in 2008, 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. The mix between the use of discount notes and bonds has fluctuated during the year, partly because of the market pricing of discount notes relative to the pricing of fixed-rate bonds with similar maturities and partly because of the price attractiveness of short-term callable and non-callable bonds that could be swapped back to 3 month LIBOR rates. In the current year first two quarters, the Bank increased its issuances of term discount notes mainly because of favorable investor demand and pricing relative to term funding. In the third quarter, discount note issuance was reduced. Issuance of floating-rate bonds declined in 2009 and maturing bonds were generally not replaced.
Advances
The FHLBNY’s primary business is making collateralized loans, known as “advances”, to members.
Reported book value of advances was $94.3 billion at December 31, 2009, compared to $109.2 billion at December 31, 2008. Advance book value included fair value basis adjustments of $3.6 billion at December 31, 2009, and it declined from $5.8 billion at December 31, 2008. Fair value basis adjustments of hedged advances were recorded under the hedge accounting provisions. When medium- and long-term interest rates rise, the fair values of fixed-rate advance move in the opposite direction.
Par amounts of advances outstanding have been steadily declining through the four quarters. Par amounts were $90.7 billion at December 31, 2009, $91.6 billion at September 30, 2009, $96.7 billion at mid-year, and $99.4 billion at March 31, 2009, down from $103.4 billion at December 31, 2008.
Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and term funding driven by economic factors, such as availability to the Bank’s members of alternative funding sources that are more attractive, or by the interest rate environment and the outlook for the economy. Members may choose to prepay advances (which may incur prepayment penalty fees) based on their expectations of interest rate changes and demand for liquidity. Demand may also be influenced by the dividend payout to members on their capital stock investment in the FHLBNY. Members are required to invest in FHLBNY’s capital stock in the form of membership and activity stock. Advance volume is also influenced by merger activity where members are either acquired by non-members or acquired by members of another FHLBank. When FHLBNY members are acquired by members of another FHLBank or a non-member, they no longer qualify for membership and the FHLBNY may not offer renewals or additional advances to non-members. Subsequent to the merger, maturing advances may not be replaced, which has an immediate impact on short-term and overnight lending if the former member borrowed short-term and overnight advances.
The FHLBNY’s readiness to be a reliable provider of well-priced funds to our members reflects the FHLBNY’s ability to raise funding in the marketplace through the issuance of consolidated obligation bonds and discount notes to domestic and global investors.
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Advances — Product Types
The following table summarizes par values of advances by product type (dollars in thousands):
Table 3: Advances by Product Type
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | Percentage | | | | | | | Percentage | |
| | | Amounts | | | of total | | | Amounts | | | of total | |
| | | | | | | | | | | | | | | | | |
| Adjustable Rate Credit — ARCs | | $ | 14,100,850 | | | | 15.54 | % | | $ | 20,205,850 | | | | 19.55 | % |
| Fixed Rate Advances | | | 71,943,468 | | | | 79.29 | | | | 71,860,685 | | | | 69.51 | |
| Short-Term Advances | | | 2,173,321 | | | | 2.39 | | | | 7,793,500 | | | | 7.54 | |
| Mortgage Matched Advances | | | 606,883 | | | | 0.67 | | | | 693,559 | | | | 0.67 | |
| Overnight Line of Credit (OLOC) Advances | | | 926,517 | | | | 1.02 | | | | 2,039,423 | | | | 1.97 | |
| All other categories | | | 986,661 | | | | 1.09 | | | | 786,710 | | | | 0.76 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total par value | | | 90,737,700 | | | | 100.00 | % | | | 103,379,727 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Discount on AHP Advances | | | (260 | ) | | | | | | | (330 | ) | | | | |
| Hedging adjustments | | | 3,611,311 | | | | | | | | 5,773,479 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 94,348,751 | | | | | | | $ | 109,152,876 | | | | | |
| | | | | | | | | | | | | | | |
Short-term fixed-rate advances, Adjustable-rate advances, and overnight borrowings have been the more significant products that have declined at December 31, 2009, relative to December 31, 2008.
Member demand for advance products
Adjustable Rate Advances (“ARC Advances”)— Demand for ARC advances in the current year has gradually declined through the course of 2009. Outstanding member borrowings were $20.2 billion at December 31, 2008, declined to $18.5 billion at March 31, 2009 and to $17.3 billion at June 30, 2009, and was $15.5 billion at September 30, 2009. Generally, the FHLBNY’s larger members have been the more significant borrowers of ARCs.
ARC advances are medium- and long-term loans that can be linked to a variety of indices, such as 1-month LIBOR, 3-month LIBOR, the Federal funds rate, or Prime. Members use ARC advances to manage interest rate and basis risks by efficiently matching the interest rate index and repricing characteristics of floating-rate assets. The interest rate is set and reset (depending upon the maturity of the advance and the type of index) at a spread to that designated index. Principal is due at maturity and interest payments are due at each reset date, including the final payment date.
Fixed-rate Advances— Fixed-rate advances, comprising putable and non-putable advances, were the largest category of advances.
Demand for long-term fixed-rate advances has been soft in the last three quarters of 2009 after a strong first quarter. In the first quarter this year, member demand increased and outstanding par balances grew to $74.0 billion. Since then, demand declined and balances have remained flat through the remainder of the year, with new fixed-rate borrowings replacing maturing advances or advances “put” by the FHLBNY.
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In the first quarter of 2009, primary demand was for fixed-rate advances collateralized by marketable securities (also referred to as Repo Advances due to the nature of the collateral). At March 31, 2009, borrowed amounts of such advances grew to $28.0 billion from $26.4 billion at December 31, 2008, and then declined to $26.1 billion at June 30, 2009. Amounts outstanding have remained almost unchanged at that level through the remainder of the year. Repo Advances are offered at a pricing advantage to members in recognition of the value of the liquid security collateral. Changes in such borrowings are a reflection of member preference to inventory their securities holdings. A significant component of Fixed-rate advances is putable advances, also referred to as “Convertible Advances”. Putable advances also include Repo Advances that have put or “convertible” option features. Member demand for the competitively priced putable advances has remained steady during the year, although slightly down from $43.4 billion at December 31, 2008. Members have replaced maturing putable advances and advances put by the FHLBNY. Outstanding amounts of putable advances were $41.4 billion at December 31, 2009; $42.0 billion at September 30, 2009, and $43.2 billion at June 30, 2009 and March 31, 2009. Historically, Fixed-rate, putable advances have been more competitively priced relative to fixed-rate “bullet” advances because of the “put” feature that the Bank purchases from the member, driving down the coupon on the advance. In the present interest rate environment, the price advantage is not significant because of constraints in offering longer-term-advances that has also narrowed the price advantage of putable 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 two days to 30 years.
Short-term Advances— Demand for Short-term fixed-rate advances has been very weak and outstanding balances declined to $1.9 billion at September 30, 2009, a low point for the product, and ended the year 2009 up slightly to $2.2 billion at December 31, 2009. By way of contrast, the outstanding balance was $7.8 billion at December 31, 2008. Although demand for the product has been weak, balances declined unevenly during the year. In the first quarter of 2009, outstanding balances had declined to $4.6 billion. In the second quarter, because of stronger demand, balances grew to $5.2 billion.
Overnight Line of Credit (“OLOC Advances”) —Overnight borrowings were weak during the year and at December 31, 2009 and outstanding amounts declined.
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.
Member demand for the OLOC Advances may also reflect the seasonal needs of certain member banks for their short-term liquidity requirements. Some large members also use OLOC advances to adjust their balance sheet in line with their own leverage targets.
Merger Activity
Merger activity is an important factor and, if significant, would contribute to an uneven pattern in advance balances. Merger activity may result in the loss of new business if the member is acquired by a non-member. The FHLBank Act does not permit new advances to replace maturing advances to former members. Advances held by members who are acquired by non-members may remain outstanding until their contractual maturities. Merger activity may also result in a decline in the advance book if the acquired member decides to prepay existing advances partially or in full depending on the post-merger liquidity needs.
One member was acquired by a non-member financial institution in the current year third quarter. The former member is not considered to have a significant borrowing potential. In the fourth quarter, a large member with a significant borrowing potential reorganized its charter and became a non-member, resulting in the reclassification of $49.4 million of capital stock to a liability as mandatorily redeemable stock. The FHLBNY repurchased the stock from the former member. There were no members acquired by non-members in the first two quarters of 2009. Four members were acquired by non-members in 2008.
76
Early Prepayment of Advances
Early prepayment initiated by members and former members is another important factor that impacts advances to members. The FHLBNY charges a member a prepayment fee when the member prepays certain advances before the original maturity. Member initiated prepayments totaled $3.4 billion in par amount of advances in 2009, and the activity was primarily concentrated in the first quarter of this year, prepayments have not been significant during the remainder of the year. Member initiated prepayments totaled $4.1 billion in par amount of advances in 2008. The Bank recorded net prepayment fees of $22.9 million in 2009 and $21.7 million in 2008. For advances that are prepaid and hedged under hedge accounting rules, the FHLBNY generally terminates the hedging relationship upon prepayment and adjusts the prepayments fees received for the associated fair value basis of the hedged prepaid advance.
Advances — Maturities and coupons
The FHLBNY’s advances outstanding are summarized below by year of maturity (dollars in thousands):
Table 4: Advances Outstanding by Year of Maturity
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | Weighted2 | | | | | | | | | | | Weighted2 | | | | |
| | | | | | | Average | | | Percentage | | | | | | | Average | | | Percentage | |
| | | Amount | | | Yield | | | of Total | | | Amount | | | Yield | | | of Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Overdrawn demand deposit accounts | | $ | 2,022 | | | | 1.20 | % | | | — | % | | $ | — | | | | — | % | | | — | % |
| Due in one year or less | | | 24,128,022 | | | | 2.07 | | | | 26.59 | | | | 32,420,095 | | | | 2.52 | | | | 31.36 | |
| Due after one year through two years | | | 10,819,349 | | | | 2.73 | | | | 11.92 | | | | 16,150,121 | | | | 3.71 | | | | 15.62 | |
| Due after two years through three years | | | 10,069,555 | | | | 2.91 | | | | 11.10 | | | | 7,634,680 | | | | 3.76 | | | | 7.39 | |
| Due after three years through four years | | | 5,804,448 | | | | 3.32 | | | | 6.40 | | | | 6,852,514 | | | | 3.74 | | | | 6.63 | |
| Due after four years through five years | | | 3,364,706 | | | | 3.19 | | | | 3.71 | | | | 3,210,575 | | | | 3.88 | | | | 3.11 | |
| Due after five years through six years | | | 2,807,329 | | | | 3.91 | | | | 3.09 | | | | 836,689 | | | | 3.74 | | | | 0.81 | |
| Thereafter | | | 33,742,269 | | | | 3.78 | | | | 37.19 | | | | 36,275,053 | | | | 3.96 | | | | 35.08 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total par value | | | 90,737,700 | | | | 3.06 | % | | | 100.00 | % | | | 103,379,727 | | | | 3.44 | % | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Discount on AHP advances1 | | | (260 | ) | | | | | | | | | | | (330 | ) | | | | | | | | |
Hedging adjustments1 | | | 3,611,311 | | | | | | | | | | | | 5,773,479 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 94,348,751 | | | | | | | | | | | $ | 109,152,876 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| 1 | | 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 ($0.8) million, ($2.0) million, and ($0.4) million for the years ended December 31, 2009, 2008 and 2007. All other amortization charged to interest income aggregated were not significant for all periods reported. Interest rates on AHP advances ranged from 1.25% to 4.00% at December 31, 2009 and 1.25% to 6.04% at December 31, 2008. |
| |
| 2 | | The weighed average yield is the weighted average coupon rates for advances, unadjusted for swaps. For floating-rate advances, the weighted average rate is the rate outstanding at the reporting dates. |
In the interest rate environment at December 31, 2009 compared to 2008, coupons were lower but the greatest declines in yields were in the shorter-term advances because of the very low short-term rates at December 31, 2009. Contractual maturities of advances outstanding have remained relatively unchanged somewhat at December 31, 2009 compared to 2008, an indicator that members have generally not changed their borrowing terms with respect to the term to maturity. A slightly larger category of advances will mature within one year at December 31, 2009 relative to December 31, 2008.
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Advances — Interest Rate Terms
The following table summarizes interest-rate payment terms for advances (dollars in thousands):
Table 5: Advances by Interest-Rate Payment Terms
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | Percentage | | | | | | | Percentage | |
| | | Amount | | | of total | | | Amount | | | of total | |
| | | | | | | | | | | | | | | | | |
| Fixed-rate | | $ | 76,634,828 | | | | 84.46 | % | | $ | 83,173,877 | | | | 80.45 | % |
| Variable-rate | | | 13,730,850 | | | | 15.13 | | | | 19,740,850 | | | | 19.10 | |
| Variable-rate capped | | | 370,000 | | | | 0.41 | | | | 465,000 | | | | 0.45 | |
| Overdrawn demand deposit accounts | | | 2,022 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 90,737,700 | | | | 100.00 | % | | | 103,379,727 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Discount on AHP Advances | | | (260 | ) | | | | | | | (330 | ) | | | | |
| Hedging basis adjustments | | | 3,611,311 | | | | | | | | 5,773,479 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 94,348,751 | | | | | | | $ | 109,152,876 | | | | | |
| | | | | | | | | | | | | | | |
Fixed-rate borrowings remained popular with members but amounts borrowed have declined in line with the overall decline in member demand for advances. The product is popular with members and is reflected by an increasing percentage of total advances outstanding at December 31, 2009. Variable-rate advances outstanding declined in percentage terms and amounts outstanding. Member demand for adjustable-rate LIBOR-based funding has been weak as members may perceive the risk of a combination of an unsettled interest rate environment and a steepening yield curve to make variable-rate borrowing relatively unattractive from an interest-rate risk management perspective. Variable-rate capped advances also declined in a declining interest rate environment. Typically, capped ARCs are in demand by members in a rising rate environment as they would purchase cap options from the FHLBNY to limit borrowers’ interest rate exposure. With a capped variable-rate advance, the FHLBNY had offsetting purchased cap options that mirrored the terms of the caps sold to members, eliminating the FHLBNY’s exposure.
The following summarizes variable-rate advances by reference-index type (in thousands):
Table 6: Variable-Rate Advances
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| LIBOR indexed | | $ | 14,100,500 | | | $ | 18,980,500 | |
| Overdrawn demand deposit accounts | | | 2,022 | | | | — | |
| Federal funds | | | — | | | | 1,225,000 | |
| Prime | | | 350 | | | | 350 | |
| | | | | | | |
| | | | | | | | | |
Total | | $ | 14,102,872 | | | $ | 20,205,850 | |
| | | | | | | |
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Impact of Derivatives and hedging activities — Advances
The Bank hedges certain advances by the use of both cancellable and non-cancellable interest rate swaps. These qualify as fair value hedges under the derivatives and hedge accounting rules. Recorded fair value basis adjustments to advances in the Statements of Condition were a result of these hedging activities. The Bank hedges the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR and is also the discounting basis for computing changes in fair values of hedged advances. Net interest accruals from qualifying hedges under the derivatives and hedge accounting rules are recorded with interest income from advances in the Statements of Income. Fair value changes of qualifying hedged advances under the derivatives and hedge accounting rules are also recorded in the Statements of Income as a Net realized and unrealized gain (loss) on derivative and hedging activities, a component of Other income (loss). An offset is recorded as fair value basis adjustment to the carrying amount of the advances in the Statements of Condition.
The Bank primarily hedges putable or convertible advances and certain “bullet” fixed-rate advances that qualify under the hedging provisions of the accounting standards for derivatives and hedging. Notional amounts of advances hedged by the use of interest rate swaps in economic hedges were not significant.
At December 31, 2009, approximately $66.0 billion of interest rate swaps hedged advances compared to $62.3 billion at December 31, 2008. Except for an insignificant notional amount of derivatives that were designated as economic hedges of advances, the swaps were in a qualifying hedging relationship under the accounting standards for derivatives and hedging. Increased use of derivatives was consistent with the growth of fixed-rate advances, which the FHLBNY typically hedges to convert fixed-rate cash flows to LIBOR-indexed cash flows through the use of interest rate swaps.
Derivative transactions are employed to hedge fixed-rate advances in the following manner and to achieve the following principal objectives:
The FHLBNY:
| • | | Makes extensive use of the derivatives to restructure interest rates on fixed-rate advances, both putable or convertible and non-putable (“bullet”), to better match the FHLBNY’s cash flows, to enhance yields, and to manage risk from a changing interest rate environment. |
| • | | Converts at the time of issuance, certain simple fixed-rate bullet and putable fixed-rate advances into synthetic floating-rate advances by the simultaneous execution of interest rate swaps that convert the cash flows of the fixed-rate advances to conventional adjustable rate instruments tied to an index, typically 3-month LIBOR. |
| • | | Uses derivatives to manage the risks arising from changing market prices and volatility of a fixed coupon advance by matching the cash flows of the advance to the cash flows of the derivative, and making the FHLBNY indifferent to changes in market conditions. Putable advances are typically hedged by an offsetting derivative with a mirror-image call option with identical terms. |
| • | | Adjusts the reported carrying value of hedged fixed-rate advances for changes in their fair value (“fair value basis” or “fair value”) that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for advances in the Statements of Condition include fair value hedge basis adjustments. |
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The most significant element that impacts balance sheet reporting of advances is the recording of fair value basis adjustments to the carrying value of advances in the Statements of Condition. In addition, when putable advances are hedged by cancellable swaps, the possibility of exercise of the call shortens the expected maturity of the advance. The impact of derivatives to the Bank’s income is discussed in this MD&A under “Results of Operations”. Fair value basis adjustments as measured under the hedging rules are impacted by both hedge volume, the interest rate environment, and the volatility of the rate environment.
Hedge volume— At December 31, 2009 and 2008 almost all putable fixed-rate advances were hedged by interest rate swaps that qualified under fair value hedge accounting rules. The Bank also hedges certain long-term, single maturity (bullet) advances to hedge fair value risk from changes in the benchmark rate.
Hedge volume as measured by the amount of notional amounts of interest rate swaps outstanding that hedged advances, both economic and under hedging provisions of the accounting standards for derivatives and hedging, increased to $66.0 billion at December 31, 2009, compared to $62.3 billion at December 31, 2008. These amounts included notional amounts of swaps of $0.1 billion and $0.6 billion at December 31, 2009 and 2008 that were designated as economic hedge of advances. Changes in fair values of the swaps designated as economic hedges were recorded through earnings without the offset of changes in the fair values of the advances.
The largest component of interest rate swaps hedging advances at December 31, 2009 was comprised of cancellable SWAPS that hedged $41.4 billion in putable advances, slightly below $43.4 billion at December 31, 2008. Generally, the Bank hedges almost all putable advances with a cancellable interest rate swap. The put option in the advance is owned by the FHLBNY and mirrors the cancellable swap option terms owned by the swap counterparty. The Bank’s putable advance, also referred to as a convertible advance, contains a put option purchased by the Bank from the member. Under the terms of the put option, the Bank has the right to terminate the advance at agreed upon dates. The period until the option is exercisable is known as the lockout period. If the advance is put by the FHLBNY at the end of the lockout period, the member can borrow an advance product of the member’s choice at the then prevailing market rates and at the then existing terms and conditions.
Consistent with the increase in non-putable advances borrowed by members to replace maturing advances, the FHLBNY also executed increasing amounts of plain vanilla, non-cancellable interest rate swaps in 2009. At December 31, 2009, non-cancellable swaps were $23.4 billion and cancellable swaps that were no longer cancellable totaled $2.3 billion. At December 31, 2008, non-cancellable swaps were $18.4 billion and cancellable swaps that were no longer cancellable totaled $1.4 billion.
In addition, certain LIBOR-indexed advances have “capped” coupons that are in effect sold to borrowers. The fair value changes of the sold caps are offset by fair value changes of purchased options (caps) with mirror-image terms. Fair value changes of caps due to changes in the benchmark rate and option volatilities are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities in the Statements of Income. Notional amounts of purchased interest rate caps to “hedge” embedded caps were $0.4 billion and $0.5 billion at December 31, 2009 and 2008, and were designated as economic hedges of caps embedded in the variable-rate advances borrowed by members.
Fair value basis adjustments— The Bank uses interest rate derivatives to hedge the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR, and is also the discounting basis for computing changes in fair values of hedged advances. Recorded fair value basis adjustments in the Statements of Condition were associated with hedging activities under the hedge accounting provisions. Advances designated at inception as economic hedges do not have any basis adjustments and these were insignificant at December 31, 2009 and 2008. The reported book value of advances at December 31, 2009 included net fair value basis gains of $3.6 billion, compared to $5.8 billion at December 31, 2008 and represented net fair value basis adjustments under hedge accounting rules, and were primarily unrealized gains.
80
Unrealized fair value basis gains were consistent with the forward yield curves at December 31, 2009 and December 31, 2008 that were projecting forward rates below the fixed-rate coupons of advances that had been issued in prior periods at the then prevailing higher interest-rate environment. Since hedged advances are typically fixed-rate, in a lower interest rate environment relative to the coupons of the advances, fixed-rate advances will exhibit net unrealized fair value basis gains. At December 31, 2009 and 2008, unrealized gains from fair value basis adjustments to advances were almost entirely offset by net fair value unrealized losses of the derivatives associated with the fair value hedges of advances, thereby achieving the Bank’s hedging objectives of mitigating fair value basis risk.
The net fair value basis adjustments of hedged advances in an unrealized gain position declined to $3.6 billion at December 31, 2009 from $5.8 billion at December 31, 2008 primarily as a result of the steepening of the yield curve at December 31, 2009 relative to December 31, 2008. The 3-month LIBOR rate was 25 basis points at December 31, 2009. Long-term rates steepened significantly at December 31, 2009, as illustrated by the yields of 2.68% and 3.38% on the 5-year and 7-year swap curves. At December 31, 2008, the 3-month LIBOR rate was 1.43% and the forward curve was only slightly positively sloped, with the 5-year swap rate at 1.55% and the 7-year at 1.81%.
Advances — Call Dates and exercise options
The table below offers a view of the advance portfolio with the possibility of the exercise of the put option that is controlled by the FHLBNY, and put dates are summarized into similar maturity tenors as the previous table that summarizes advances by contractual maturities (dollars in thousands).
Table 7: Advances by Call Date
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage of | | | | | | | Percentage of | |
| | | 2009 | | | Total | | | 2008 | | | Total | |
| | | | | | | | | | | | | | | | | |
| Overdrawn demand deposit accounts | | $ | 2,022 | | | | — | % | | $ | — | | | | — | % |
| Due or putable in one year or less | | | 56,978,134 | | | | 62.79 | | | | 63,251,007 | | | | 61.18 | |
| Due or putable after one year through two years | | | 14,082,199 | | | | 15.52 | | | | 18,975,821 | | | | 18.36 | |
| Due or putable after two years through three years | | | 8,991,805 | | | | 9.91 | | | | 10,867,530 | | | | 10.51 | |
| Due or putable after three years through four years | | | 5,374,048 | | | | 5.92 | | | | 5,293,364 | | | | 5.12 | |
| Due or putable after four years through five years | | | 2,826,206 | | | | 3.12 | | | | 2,728,075 | | | | 2.64 | |
| Due or putable after five years through six years | | | 158,329 | | | | 0.18 | | | | 230,189 | | | | 0.22 | |
| Thereafter | | | 2,324,957 | | | | 2.56 | | | | 2,033,741 | | | | 1.97 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 90,737,700 | | | | 100.00 | % | | | 103,379,727 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Discount on AHP advances | | | (260 | ) | | | | | | | (330 | ) | | | | |
| Hedging adjustments | | | 3,611,311 | | | | | | | | 5,773,479 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 94,348,751 | | | | | | | $ | 109,152,876 | | | | | |
| | | | | | | | | | | | | | | |
Contrasting advances by contractual maturity dates with potential put dates illustrates the impact of hedging on the effective duration of the Bank’s advances. For more information, see Table 4. The Bank’s advances borrowed by members include a significant amount of putable advances in which the Bank has purchased from members the option to terminate advances at agreed upon dates. At December 31, 2009, the notional amount of advances that were still putable (one or more pre-determined option exercise dates remaining) was $41.4 billion compared to $43.4 billion at December 31, 2008. Typically, almost all putable advances are hedged by cancellable interest rate swaps in which the derivative counterparty has the right to exercise and terminate the swap at par at agreed upon dates. Under current hedging practices, when the swap counterparty exercises its right to call the cancellable swap, the Bank would typically also exercise its right to put the advance at par. Under this hedging practice, on a put option basis, the potential exercised maturity is significantly accelerated, and is an important factor in the Bank’s current hedge strategy.
81
Investments
The FHLBNY maintains investments for liquidity purposes, to manage capital stock repurchases and redemptions, to provide additional earnings, and to ensure the availability of funds to meet the credit needs of its members. The FHLBNY also maintains longer-term investment portfolios, which are principally mortgage-backed securities issued by government-sponsored mortgage agencies, a smaller portfolio of MBS issued by private enterprises, and securities issued by state or local housing finance agencies. Finance Agency regulations prohibit the FHLBanks, including the FHLBNY, from investing in certain types of securities and limit the investment in mortgage- and asset-backed securities.
Investments — Policies and practices
Finance Agency regulations limit investment in housing-related obligations of state and local governments and their housing finance agencies to obligations that carry ratings of double-A or higher. Mortgage- and asset-backed securities acquired must carry the highest ratings from Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Rating Services (“S&P”) at the time of purchase. Finance Agency regulations further limit the mortgage- and asset-backed investments of each FHLBank to 300% of that FHLBank’s capital. The FHLBNY was within the 300% limit for all periods reported. The FHLBNY’s investment in mortgage-backed securities during all periods reported complied with FHLBNY’s Board-approved policy of acquiring mortgage-backed securities issued or guaranteed by the government-sponsored housing enterprises, or prime residential mortgages rated triple-A by both Moody’s and Standard & Poor’s rating services at acquisition.
The FHLBNY’s practice is not to lend unsecured funds to members, including overnight Federal funds sold and certificates of deposits. The FHLBNY does not preclude or specifically seek out investments any differently than it would in the normal course of acquiring securities for investments, unless it is prohibited by existing regulations. Unsecured lending to members is not prohibited by Finance Agency regulations or Board of Directors’ policy. The FHLBNY is prohibited from purchasing a consolidated obligation issued directly by another FHLBank, but may acquire consolidated obligations for investment in the secondary market after the bond settles. There were no investments in consolidated obligations by the FHLBNY at December 31, 2009 or 2008.
On March 24, 2008, the Board of Directors of the Federal Housing Finance Board, predecessor to the Finance Agency adopted Resolution 2008-08, which temporarily expanded the authority of a FHLBank to purchase mortgage-backed securities (“MBS”) under certain conditions. The resolution allowed a FHLBank to increase its investments in MBS issued by Fannie Mae and Freddie Mac by an amount equal to three times its capital, which is to be calculated in addition to the existing limit. The expanded authority permitted MBS investments to be as much as 600% of the FHLBNY’s capital. The FHLBNY has not exercised the expanded authority provided under the temporary regulations to purchase MBS issued by Fannie Mae and Freddie Mac.
82
The following table summarizes changes in investments by categories (including held-to-maturity securities, available-for-sale securities, and money market investments) between December 31, 2009 and December 31, 2008. Amounts are after writing down the amortized cost basis of held-to-maturity impaired securities to fair values at the time of impairment. No securities classified as available-for-sale were OTTI. (dollars in thousands):
Table 8: Investments by Categories
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | | | Dollar | | | Percentage | |
| | | 2009 | | | 2008 | | | Variance | | | Variance | |
| | | | | | | | | | | | | | | | | |
State and local housing finance agency obligations1 | | $ | 751,751 | | | $ | 804,100 | | | $ | (52,349 | ) | | | (6.51 | )% |
| Mortgage-backed securities | | | | | | | | | | | | | | | | |
| Available-for-sale securities, at fair value | | | 2,240,564 | | | | 2,851,683 | | | | (611,119 | ) | | | (21.43 | ) |
| Held-to-maturity securities, at carrying value | | | 9,767,531 | | | | 9,326,443 | | | | 441,088 | | | | 4.73 | |
| | | | | | | | | | | | | |
| | | | 12,759,846 | | | | 12,982,226 | | | | (222,380 | ) | | | (1.71 | ) |
| | | | | | | | | | | | | | | | | |
Grantor trusts2 | | | 12,589 | | | | 10,186 | | | | 2,403 | | | | 23.59 | |
Certificates of deposit1 | | | — | | | | 1,203,000 | | | | (1,203,000 | ) | | | (100.00 | ) |
| Federal funds sold | | | 3,450,000 | | | | — | | | | 3,450,000 | | | NA | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total investments | | $ | 16,222,435 | | | $ | 14,195,412 | | | $ | 2,027,023 | | | | 14.28 | % |
| | | | | | | | | | | | | |
| | | |
| 1 | | Classified as held-to-maturity securities, at carrying value |
| |
| 2 | | Classified as available-for-sale securities, at fair value and represents investments in registered mutual funds and other fixed-income securities maintained under the grantor trusts |
Table 8 excludes $12.2 billion in interest-earning balance at Federal Reserve Bank of New York at December 31, 2008 ($0 at December 31, 2009)
83
Long-term investments
At December 31, 2009 and 2008, investments with original long-term contractual maturities were comprised of mortgage- and asset-backed securities, and investment in securities issued by state and local housing agencies. These investments were classified as either held-to-maturity or available-for-sale securities in accordance with accounting standard on investments in debt and equity securities as amended by the guidance on recognition and presentation of other-than-temporary impairments. Several grantor trusts have been established and owned by the FHLBNY to fund current and potential future payments to retirees for supplemental pension plan obligations. The trust funds are invested in fixed-income and equity funds, which were classified as available-for-sale.
Mortgage-backed securities — By issuer
Issuer composition of held-to-maturity mortgage-backed securities was as follows (carrying values; dollars in thousands):
Table 9: Mortgage-Backed Securities — By Issuer
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | Percentage | | | December 31, | | | Percentage | |
| | | 2009 | | | of total | | | 2008 | | | of total | |
| | | | | | | | | | | | | | | | | |
| U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 8,482,139 | | | | 86.84 | % | | $ | 7,577,036 | | | | 81.24 | % |
| U.S. agency residential mortgage-backed securities | | | 171,531 | | | | 1.76 | | | | 6,325 | | | | 0.07 | |
| U.S. agency commercial mortgage-backed securities | | | 49,526 | | | | 0.51 | | | | — | | | | — | |
| Private-label issued securities backed by home equity loans | | | 417,151 | | | | 4.27 | | | | 636,466 | | | | 6.83 | |
| Private-label issued residential mortgage-backed securities | | | 444,906 | | | | 4.55 | | | | 609,908 | | | | 6.54 | |
| Private-label issued commercial mortgage-backed securities | | | — | | | | — | | | | 266,994 | | | | 2.86 | |
| Private-label issued securities backed by manufactured housing loans | | | 202,278 | | | | 2.07 | | | | 229,714 | | | | 2.46 | |
| | | | | | | | | | | | | |
| Total Held-to-maturity securities-mortgage-backed securities | | $ | 9,767,531 | | | | 100.00 | % | | $ | 9,326,443 | | | | 100.00 | % |
| | | | | | | | | | | | | |
Held-to-maturity mortgage- and asset-backed securities(“MBS”)— Government sponsored enterprise (“GSE”) and U.S. government agency issued MBS totaled $8.7 billion and $7.6 billion at December 31, 2009 and 2008. They represented 89.1% and 81.3% of total MBS classified as held-to-maturity at those dates. Privately issued mortgage-backed securities made up the remaining 10.9% and 18.7% at December 31, 2009 and 2008 and included asset-backed securities, and mortgage-pass-throughs and Real Estate Mortgage Investment Conduit bonds.
In 2009, the Bank acquired $3.5 billion of GSE and U.S. government agency issued MBS for the held-to-maturity portfolio. Securities acquired were triple-A rated. The Bank’s conservative purchasing practice over the years is evidenced by the high concentration of mortgage-backed securities issued by the GSEs.
Local and housing finance agency bonds—The FHLBNY had investments in primary public and private placements of taxable obligations of state and local housing finance authorities (“HFA”) classified as held-to-maturity. Investments in state and local housing finance bonds help to fund mortgages that finance low-and moderate-income housing. In 2009, the Bank acquired $25.0 million of a bond issued by a housing development agency.
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Available-for-sale securities— The FHLBNY classifies investments that it may sell before maturity as available-for-sale and carries them at fair value. Fair value changes are recorded in AOCI until the security is sold or is anticipated to be sold. Composition of FHLBNY’s available-for-sale securities was as follows (dollars in thousands):
Table 10: Available-for-Sale Securities Composition
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | Percentage | | | December 31, | | | Percentage | |
| | | 2009 | | | of total | | | 2008 | | | of total | |
| | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 1,544,500 | | | | 68.93 | % | | $ | 1,854,989 | | | | 65.05 | % |
| Freddie Mac | | | 696,064 | | | | 31.07 | | | | 996,694 | | | | 34.95 | |
| | | | | | | | | | | | | |
| Total AFS mortgage-backed securities | | | 2,240,564 | | | | 100.00 | % | | | 2,851,683 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| Grantor Trusts — Mutual funds | | | 12,589 | | | | | | | | 10,186 | | | | | |
| | | | | | | | | | | | | | | |
| Total Available-for-sale portfolio | | $ | 2,253,153 | | | | | | | $ | 2,861,869 | | | | | |
| | | | | | | | | | | | | | | |
At December 31, 2009 and 2008, the entire AFS portfolio of mortgage-backed securities was comprised of securities issued by Fannie Mae and Freddie Mac. No acquisitions were added to the AFS portfolio in 2009. Two grantor trusts were established in 2007 to fund current and potential future payments to retirees for supplemental pension plan obligations. The trust funds are invested in money market funds, and fixed-income and equity funds, which are also designated as available-for-sale.
For more information and analysis with respect to investment securities, see Investment Quality in the section captioned Asset Quality and Concentration — Advances, Investment Securities, Mortgage Loans, and Counterparty Risks in this MD&A. Also see Notes 4 and 5 to the audited financial statements accompanying this report.
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External rating information of theheld-to-maturity portfoliowas as follows. (Carrying values; in thousands):
Table 11:External Rating of the Held-to-Maturity Portfolio
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | | | | | | | | | Below | | | | |
| | | | | | | | | | | | | | | | | | | Investment | | | | |
| | | AAA-rated | | | AA-rated | | | A-rated | | | BBB-rated | | | Grade | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 9,205,018 | | | $ | 299,314 | | | $ | 65,921 | | | $ | 31,261 | | | $ | 166,017 | | | $ | 9,767,531 | |
| State and local housing finance agency obligations | | | 72,992 | | | | 601,109 | | | | 21,430 | | | | 56,220 | | | | — | | | | 751,751 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Long-term securities | | | 9,278,010 | | | | 900,423 | | | | 87,351 | | | | 87,481 | | | | 166,017 | | | | 10,519,282 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 9,278,010 | | | $ | 900,423 | | | $ | 87,351 | | | $ | 87,481 | | | $ | 166,017 | | | $ | 10,519,282 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | AAA-rated | | | AA-rated | | | A-rated | | | BBB-rated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term securities | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 8,705,952 | | | $ | 229,714 | | | $ | 192,678 | | | $ | 198,099 | | | $ | 9,326,443 | |
| State and local housing finance agency obligations | | | 74,881 | | | | 672,999 | | | | — | | | | 56,220 | | | | 804,100 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Long-term securities | | | 8,780,833 | | | | 902,713 | | | | 192,678 | | | | 254,319 | | | | 10,130,543 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Short-term securities | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit | | | — | | | | 628,000 | | | | 575,000 | | | | — | | | | 1,203,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 8,780,833 | | | $ | 1,530,713 | | | $ | 767,678 | | | $ | 254,319 | | | $ | 11,333,543 | |
| | | | | | | | | | | | | | | | |
External rating information of the available-for-sale portfolio was as follows (the carrying values of AFS investments are at fair values; in thousands):
Table 12:External Rating of the Available-for-Sale Portfolio
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | AAA-rated | | | AA-rated | | | A-rated | | | BBB-rated | | | Unrated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 2,240,564 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,240,564 | |
| Other — Grantor trusts | | | — | | | | — | | | | — | | | | — | | | | 12,589 | | | | 12,589 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,240,564 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,589 | | | $ | 2,253,153 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | AAA-rated | | | AA-rated | | | A-rated | | | BBB-rated | | | Unrated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 2,851,683 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,851,683 | |
| Other — Grantor trusts | | | — | | | | — | | | | — | | | | — | | | | 10,186 | | | | 10,186 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,851,683 | | | $ | — | | | $ | — | | | $ | — | | | $ | 10,186 | | | $ | 2,861,869 | |
| | | | | | | | | | | | | | | | | | | |
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Weighted average rates — Mortgage-backed securities
The following table summarizes weighted average rates and amounts by contractual maturities. A significant portion of the MBS portfolio consisted of floating-rate securities and the weighted average rates will change with changes in the indexed LIBOR rate (dollars in thousands):
Table 13: Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Amortized | | | Weighted | | | Amortized | | | Weighted | |
| | | Cost | | | Average rate | | | Cost | | | Average rate | |
| | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | — | | | | — | % | | $ | 257,999 | | | | 7.39 | % |
| Due after one year through five years | | | 2,663 | | | | 6.25 | | | | — | | | | — | |
| Due after five years through ten years | | | 1,140,153 | | | | 4.78 | | | | 1,142,000 | | | | 4.76 | |
| Due after ten years | | | 10,977,950 | | | | 3.21 | | | | 10,839,087 | | | | 4.24 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | $ | 12,120,766 | | | | 3.36 | % | | $ | 12,239,086 | | | | 4.36 | % |
| | | | | | | | | | | | | |
Credit Impairment analysis (Other-than-temporary Impairment — OTTI)
In each interim quarterly period in 2009, management evaluated its portfolio of private-label mortgage-backed securities for credit impairment. Beginning with the quarter ended September 30, 2009, and at December 31, 2009, the FHLBNY performed its OTTI analysis by cash flow testing 100% of it private-label MBS. At December 31, 2008, and at the two interim quarters ended June 30, 2009, the FHLBNY’s methodology was to analyze all its private-label MBS to isolate securities that were considered to be at risk of OTTI and to perform cash flow analysis on securities at risk of OTTI. As a result of the evaluations, the FHLBNY recognized credit impairment OTTI related losses in each quarter of 2009. Cumulatively, 17 private-label held-to-maturity securities were deemed to be credit impaired in 2009. No credit impairment was observed in 2008 or 2007. Cumulative credit impairment losses of $20.8 million were recorded as a charge to 2009 income. The charge included credit losses of certain MBS that were determined to be OTTI in a previous quarter of 2009. The amount of non-credit OTTI was a loss of $110.6 million in AOCI at December 31, 2009. Of the 17 credit impaired securities, 14 securities are insured by bond insurers, Ambac and MBIA. The Bank’s analysis of the two bond insurers concluded that future credit losses due to projected collateral shortfalls of the impaired securities would not be fully supported by the two bond insurers. For more information see Notes 1 and 4 to audited financial statements accompanying this report.
Based on detailed cash flow credit analysis on a security level at December 31, 2009, the Bank has concluded that other than the 17 securities determined to be credit impaired during 2009, the gross unrealized losses for the remainder of Bank’s investment securities were primarily caused by interest rate changes, credit spread widening and reduced liquidity, and the securities were temporarily impaired as defined under the new guidance for recognition and presentation of other-than-temporary impairment.
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Fair values of investment securities
In an effort to achieve consistency among all of the FHLBanks on the pricing of investments in mortgage-backed securities, in the third quarter of 2009 the FHLBanks formed the MBS Pricing Governance Committee which was responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. Consistent with the guidance from the Governance Committee, the FHLBNY changed the methodology used to estimate the fair value of mortgage-backed securities as of September 30, 2009. Under the approved methodology, the Bank requests prices for all mortgage-backed securities from four specified third-party vendors, and, depending on the number of prices received for each security, selected a median or average price as defined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. Prior to the adoption of the new pricing methodology, the Bank used a similar process that utilized three third-party vendors and similar variance thresholds. This change in pricing methodology did not have a significant impact on the Bank’s estimated fair values of its mortgage-backed securities.
While the FHLBNY adopted this common methodology, the fair values of mortgage-backed investment securities are still estimated by FHLBNY’s management which remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used. The four specialized pricing services use pricing models or quoted prices of securities with similar characteristics. Inputs into the pricing models employed by pricing services for most of the Bank’s investments are market based and observable and are considered Level 2. The valuation techniques used by pricing services employ cash flow generators and option-adjusted spread models. Pricing spreads used as inputs in the models are based on new issue and secondary market transactions if the securities are traded in sufficient volumes in the secondary market.
The valuation of the Bank’s private-label securities that are all designated as held-to-maturity may require pricing services to use significant inputs that are subjective and may be considered to be Level 3 because the inputs may not be market based and observable. At December 31, 2009 and 2008, all private-label mortgage-backed securities were classified as held-to-maturity and were recorded in the balance sheet at their carrying values. Carrying value of a security is the same as its amortized cost, unless the security is determined to be OTTI. In the period the security is determined to be OTTI, its carrying value is generally adjusted down to its fair value.
For a comparison of carrying values and fair values of mortgage-backed securities, see Notes 4 and 5 to the audited financial statements accompanying this report.
In the fourth quarter of 2009, eight held-to-maturity private-label mortgage-backed securities were deemed to be credit impaired, and included six that were previously determined to be credit impaired. The fair values of securities determined to be OTTI as of December 31, 2009 and recorded as their carrying values in the Statement of Condition at December 31, 2009 were $42.9 million, and were considered to be Level 3 financial instruments within the fair value hierarchy. This determination was made based on management’s view that the private-label instruments may not have an active market because of the specific vintage of the impaired securities as well as inherent conditions surrounding the trading of private-label mortgage-backed securities; fair values of the securities were determined by management using third party specialized vendor pricing services that made appropriate adjustments to observed prices of comparable securities that were being transacted in an orderly market.
For more information about the corroboration and other analytical procedures performed by the FHLBNY, see Note 1 — Significant Accounting Policies and Estimates, and Note 18 — Fair values of financial instruments to the audited financial statements accompanying this report. Examples of securities priced under such a valuation technique, which are classified within Level 2 of the valuation hierarchy and valued using the “market approach” as defined in the accounting standards for fair value measurements and disclosures, include GSE issued collateralized mortgage obligations and money market funds.
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Short-term investments
The FHLBNY typically maintains substantial investments in high quality, short- and intermediate-term financial instruments, such as certificates of deposits as well as overnight and term Federal funds sold to highly rated financial institutions. These investments provide the liquidity necessary to meet members’ credit needs. Short-term investments also provide a flexible means of implementing the asset/liability management decisions to increase liquidity. The Bank invests in certificates of deposits with maturities not exceeding 270 days and issued by major financial institutions. Certificates of deposit are recorded at amortized cost basis and designated as held-to maturity investment.
Interest-bearing balances at the Federal Reserve Bank of New York— In October 2008, the Board of Governors of the Federal Reserve System directed the Federal Reserve Banks (“FRB”) to pay interest on balances in excess of certain required reserve and clearing balances. At December 31, 2008, the Bank had invested $12.2 billion in excess balances placed with the FRB as an interest-bearing deposit. Effective July 2, 2009, the FHLBNY no longer collected interest on excess balances with the FRB. The FRB will pay interest only on required reserves. Effective July 2, 2009 and at December 31, 2009, the cash at the FRB was classified as Cash and due from banks as the balances did not earn interest.
Federal funds sold— Historically, the FHLBNY has been a provider of Federal funds to its members, allowing the FHLBNY to warehouse and provide balance sheet liquidity to meet unexpected member borrowing demands. At December 31, 2009, Federal funds sold totaled $3.5 billion. At December 31, 2009, the Bank’s liquid funds were maintained at the FRB.
Certificates of deposits— At December 31, 2009, the FHLBNY had no investments outstanding in certificates of deposits. At December 31, 2008, certificates of deposits at highly-rated financial institutions, all maturing within 270 days or less, were $1.2 billion. Low yields and credit risk factors did not justify investments in certificates of deposits at December 31, 2009. Average investment in certificates of deposit in 2009 was $0.7 billion, compared to $6.6 billion in 2008.
Cash collateral pledged— Cash deposited by the FHLBNY as pledged collateral to derivative counterparties is reported as a deduction to Derivative liabilities in the Statements of Condition. The FHLBNY generally executes derivatives with major banks and broker-dealers and typically enters into bilateral collateral agreements. When the FHLBNY’s derivatives are in a net unrealized loss position as a liability from the FHLBNY’s perspective, counterparties are exposed and the Bank would be called upon to pledge cash collateral to mitigate the counterparties’ credit exposure. Collateral agreements include certain thresholds and pledge requirements that are generally triggered if exposures exceed the agreed upon thresholds. At December 31, 2009 and 2008, the Bank had deposited $2.2 billion and $3.8 billion in interest-earning cash as pledged collateral to derivative counterparties. Typically, such pledges earn interest at the overnight Federal funds rate.
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Mortgage Loans held-for-portfolio
At December 31, 2009 and 2008, the portfolio of mortgage loans was comprised of investments in Mortgage Partnership Finance loans (“MPF” or “MPF Program”) and Community Mortgage Asset loans (“CMA”). More details about the MPF program can be found in Mortgage Partnership Finance Program under the caption Acquired Member Assets Program in this MD&A. In the CMA program, the FHLBNY holds participation interests in residential and community development mortgage loans. Acquisition of participations under the CMA program was suspended indefinitely in November 2001 and the loans are being paid down under their contractual terms.
MPF Program— The amortized cost basis of loans in the MPF program was $1.3 billion and $1.5 billion at December 31, 2009 and 2008. Paydowns slightly outpaced acquisitions in 2009 as the FHLBNY acquired $150.1 million in new loans and paydowns were $285.8 million. The FHLBNY does not expect the MPF loans to increase substantially, and the Bank provides this product to its members as another alternative for them to sell their mortgage production. Included in the portfolio of MPF loans held-for-portfolio were $30.6 million and $36.8 million in loans at December 31, 2009 and 2008 that had been “table-funded” and therefore considered originated by the Bank. In a table-funded loan (MPF 100 product), the PFI uses the FHLBNY’s funds to make the mortgage loan to the borrower, and as credit protection, the PFI closes the loan “as agent” for the FHLBNY. The FHLBNY funded its last loan in this product on July 27, 2009. The Bank does not offer this table-funded product currently.
CMA Program— The amortized cost basis of loans in the CMA program, which has not been active since 2001 and has been declining steadily over time, was $3.9 million at December 31, 2009, down by $ 0.1 million from December 31, 2008.
Mortgage loans by loan type
The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):
Table 14: Mortgage Loans by Loan Type
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage of | | | | | | | Percentage of | |
| | | 2009 | | | Total | | | 2008 | | | Total | |
Real Estate: | | | | | | | | | | | | | | | | |
| Fixed medium-term single-family mortgages | | $ | 388,072 | | | | 29.43 | % | | $ | 467,845 | | | | 32.15 | % |
| Fixed long-term single-family mortgages | | | 926,856 | | | | 70.27 | | | | 983,493 | | | | 67.58 | |
| Multi-family mortgages | | | 3,908 | | | | 0.30 | | | | 4,009 | | | | 0.27 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 1,318,836 | | | | 100.00 | % | | | 1,455,347 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Unamortized premiums | | | 9,095 | | | | | | | | 10,662 | | | | | |
| Unamortized discounts | | | (5,425 | ) | | | | | | | (6,310 | ) | | | | |
Basis adjustment1 | | | (461 | ) | | | | | | | (408 | ) | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total mortgage loans held-for-portfolio | | | 1,322,045 | | | | | | | | 1,459,291 | | | | | |
| Allowance for credit losses | | | (4,498 | ) | | | | | | | (1,406 | ) | | | | |
| | | | | | | | | | | | | | | |
Total mortgage loans held-for-portfolio after allowance for credit losses | | $ | 1,317,547 | | | | | | | $ | 1,457,885 | | | | | |
| | | | | | | | | | | | | | | |
| | | |
| 1 | | Represents fair value basis of open and closed delivery commitments. |
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Mortgage loans — Conventional and insured loans.
The following classifies mortgage loans between conventional loans and loans insured by FHA/VA (in thousands):
Table 15: Mortgage Loans — Conventional and Insured Loans
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Federal Housing Administration and Veteran Administration insured loans | | $ | 5,975 | | | $ | 6,983 | |
| Conventional loans | | | 1,308,953 | | | | 1,444,356 | |
| Others | | | 3,908 | | | | 4,008 | |
| | | | | | | |
| | | | | | | | | |
Total par value | | $ | 1,318,836 | | | $ | 1,455,347 | |
| | | | | | | |
Mortgage loans — credit losses
Roll-forward of the allowance for credit losses was as follows (in thousands):
Table 16: Mortgage Loans — Allowance for Credit Losses
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Beginning balance | | $ | 1,406 | | | $ | 633 | | | $ | 593 | |
| Charge-offs | | | (16 | ) | | | — | | | | — | |
| Provision for credit losses on mortgage loans | | | 3,108 | | | | 773 | | | | 40 | |
| | | | | | | | | | |
Ending balance | | $ | 4,498 | | | $ | 1,406 | | | $ | 633 | |
| | | | | | | | | | |
Deposit Liabilities
Deposit liabilities comprised of member deposits and, from time-to-time, may also include unsecured overnight borrowings from other FHLBanks.
Member deposits— The FHLBNY operates deposit programs for the benefit of its members. Deposits are primarily short-term in nature with the majority maintained in demand accounts that reprice daily based upon rates prevailing in the overnight Federal funds market. Members’ liquidity preferences are the primary determinant of the level of deposits. Deposits at December 31, 2009, including demand and term, totaled $2.6 billion, compared to $1.5 billion at December 31, 2008. Fluctuations in member deposits have little impact on the Bank and are not a significant source of liquidity for the Bank.
Borrowings from otherFHLBanks — The Bank borrows from other FHLBanks, generally for a period of one day. There were no borrowings outstanding at December 31, 2009 and 2008. The average amount borrowed from another FHLBank was $0.4 million in 2009. All transactions were at market terms.
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Debt Financing Activity and Consolidated Obligations
Consolidated obligations, which are the joint and several obligations of the FHLBanks, are the principal funding source for the FHLBNY’s operations and consist of consolidated bonds and consolidated discount notes. Discount notes are consolidated obligations with maturities of up to 365 days, and consolidated bonds have maturities of one year or longer. Member deposits, capital, and to a lesser extent borrowings from other FHLBanks, are also funding sources.
Consolidated Obligation Liabilities
The issuance and servicing of consolidated obligations debt are performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Agency. Each FHLBank independently determines its participation in each issuance of consolidated obligations based on, among other factors, its own funding and operating requirements, maturities, interest rates, and other terms available for consolidated obligations in the market place. Although the FHLBNY is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. The FHLBanks, including the FHLBNY, have emphasized diversification of funding sources and channels as the need for funding from the capital markets has grown.
The two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP issue programs as described below. The FHLBNY participates in both programs.
The Global Debt Program provides the FHLBanks with the ability to distribute debt into multiple primary markets across the globe. The FHLBank global debt issuance facility has been in place since July 1994. FHLBank global bonds are known for their variety and flexibility; all can be customized to meet changing market demand with different structures, terms and currencies. Global Debt Program bonds are available in maturities ranging from one year to 30 years with the majority of global issues between one and five years. The most common Global Debt Program structures are bullets, floaters and fixed-rate callable bonds with maturities of one through ten years. Issue sizes are typically from $500 million to $5 billion and individual bonds can be reopened to meet additional demand. Bullets are the most common global bonds, particularly in sizes of $3 billion or larger.
In mid-1999, the Office of Finance implemented the TAP issue program on behalf of the FHLBanks. This program consolidates domestic bullet bond issuance through daily auctions of common maturities by reopening previously issued bonds. Effectively, the program has reduced the number of separate FHLBanks bullet issues and individual issues have grown as large as $1.0 billion. The increased issue sizes have a number of market benefits for investors, dealers and the 12 FHLBanks. TAP issues have improved market awareness, expanded secondary market trading opportunities, improved liquidity and stimulated greater demand from investors and dealers seeking high-quality Government Sponsored Enterprises securities with U.S. Treasury-like characteristics. The TAP issues follow the same 3-month quarterly cycles used for the issuance of “on-the-run” Treasury securities and also have semi-annual coupon payment dates (March, June, September and December). The coupons for new issues are determined by the timing of the first auction during a given quarter.
The FHLBanks also issue global consolidated obligations-bonds. Effective in January 2009, a debt issuance process was implemented by the FHLBanks and the Office of Finance to provide a scheduled monthly issuance of global bullet consolidated obligations-bonds. As part of this process, management from each of the FHLBanks will determine and communicate a firm commitment to the Office of Finance for an amount of scheduled global debt to be issued on its behalf. If the FHLBanks’ orders do not meet the minimum debt issue size, the proceeds are allocated to all FHLBanks based on the larger of the FHLBank’s commitment or allocated proceeds based on the individual FHLBank’s capital to total system capital. If the FHLBanks’ commitments exceed the minimum debt issue size, the proceeds are allocated based on relative capital of the FHLBanks’ with the allocation limited to the lesser of the allocation amount or actual commitment amount. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. The FHLBanks can, however, pass on any scheduled calendar slot and not issue any global bullet consolidated obligations- bonds upon agreement of eight of the 12 FHLBanks.
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In the third quarter of 2008, each FHLBank, including the FHLBNY, entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (“GSECF”), as authorized by the Housing Act. The GSECF was designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF would be considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings would be agreed to at the time of issuance. Loans under the Lending Agreement were to be secured by collateral acceptable to the U.S. Treasury, which consisted of FHLBank advances to members that had been collateralized in accordance with regulatory standards and mortgage-backed securities issued by Fannie Mae or Freddie Mac. Each FHLBank was required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible collateral updated on a weekly basis. As of December 31, 2009 and 2008, the FHLBNY had provided the U.S. Treasury listings of advance collateral amounting to $10.3 billion and $16.3 billion, which provided for maximum borrowings of $9.0 billion and $14.2 billion at December 31, 2009 and 2008. The amount of collateral can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of December 31, 2009, no FHLBank had drawn on this available source of liquidity. The GSECF authorization expired on December 31, 2009.
The FHLBanks, including the FHLBNY, continue to issue debt that is both competitive and attractive in the marketplace. In addition, the FHLBanks continuously monitor and evaluate their debt issuance practices to ensure that consolidated obligations are efficiently and competitively priced.
Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices include the London Interbank Offered Rate (“LIBOR”), Constant Maturity Treasury (“CMT”), 11th District Cost of Funds Index (“COFI”), Prime rate, the Federal funds rate, and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate bonds may also contain certain features that will result in complex coupon payment terms and call options. When the FHLBNY cannot use such complex coupons to hedge its assets, FHLBNY enters into derivative transactions containing offsetting features that effectively convert the terms of the bond to those of a simple variable-rate bond.
The consolidated obligations, beyond having fixed- or variable-rate coupon payment terms, may also be Optional Principal Redemption Bonds (callable bonds) that the FHLBNY may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings.
Highlights — Debt issuance and funding management
The primary source of funds for the FHLBNY continued to be through issuance of consolidated bonds and discount notes. Reported amounts of consolidated obligations outstanding, comprising of bonds and discount notes, at December 31, 2009 and December 31, 2008, were $104.8 billion and $128.6 billion, and funded 91.6% and 93.5% of Total assets at those dates. These financing ratios have remained substantially unchanged over the years at around 90%, indicative of the stable funding strategy pursued by the FHLBNY.
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Investor demand for FHLBank debt— The cost of term debt issuance has continued to be under pressure in 2009. Key investors from Asia have continued to reduce acquisitions of FHLBank debt and have very limited participation in recent debt issuances. Domestic banks, flush with cash, and the more active international investors have been participants in the market for FHLBank debt in 2009. The FHLBanks were disproportionately exposed to the money market fund industry through most of 2009 as discussed further below.
Following the conservatorship of Fannie Mae and Freddie Mac, market pricing of FHLBank issued debt indicated that market participants believe that obligations of the two GSEs offer lower credit risk than FHLBank debt obligations, which are generally grouped into the same GSE asset class as Fannie Mae and Freddie Mac. As a result, investors were more likely to require a premium to acquire FHLBank debt relative to debt issued by Fannie Mae and Freddie Mac. GSE debt pricing itself was under competitive pressure with the FDIC announcing guarantees to debt offered by commercial banks and other financial institutions. However, the Federal Reserve’s program of purchasing GSE debt for up to $200 billion helped to narrow the spreads of GSE debt to U.S. Treasuries from the levels existing earlier in the year.
At the height of the credit crises, money market funds and other domestic fund managers became key investors of FHLBank short-term debt and discount notes, considered as safe, high-quality, liquid investments that were attractively priced on a risk-adjusted basis relative to U.S. Treasury bills. For fund managers, discount notes were fundamental to balancing investment returns and protecting the $1.00 constant net asset value for money funds, since discount notes mature at a par amount of $1.00 as well. While the demand from the money market sector had positive implications for FHLBank debt, it put further pressure on sharply increased demand for even shorter bond maturities. Money market funds were maintaining average investment maturities of 50 days with a ceiling of 90 days as mandated under certain regulatory provisions. With credit markets returning to normalcy, money market fund balances have been in decline, and may result in lower volumes of issuances of discount notes. Investors are continuing to focus on competitively priced FHLBank high-quality, liquid assets, and the near-term outlook should create attractive funding opportunities for FHLBank shorter-term debt.
The outlook for the issuances of longer-term debt is still uncertain. It still remains uneconomical for the FHLBanks to issue longer-term debt. Yields demanded by investors for longer-term FHLBank debt and spreads between 3-month LIBOR and FHLBank long-term debt yield have remained at levels that make it expensive for the FHLBNY to issue term debt and offer longer-term advances to members even if there was sufficient investor demand for such debt. That scenario appears to be gradually changing at least with respect to funding costs for 5-year and shorter maturity debt. In the second half of 2009, the FHLBanks successfully placed more term debt in the form of Global Bond offerings and callable debt, but it is too early to predict if this trend will continue.
While investors are gradually seeking out a variety of FHLBank debt structures and this signals well for the FHLBank consolidated obligations, the shifts in demand within the variety of shorter-term FHLBank issued debt structures appear to be more to allow investors to re-align their investment preferences (non-callable, callable, step-up bonds, or discount notes) to the rapidly changing interest rate conditions. Investors are still unwilling to shift to longer-term issuances at yields that are economical for the FHLBanks. Investor demand in the first two quarters of 2009 had been for ultra short-term bullet and callable bonds, short-term floating-rate bonds, and discount notes. In the third quarter, demand shifted away from floaters and ultra short-term discount notes to longer maturity discount notes and short-term non-callable bonds. In the fourth quarter of 2009, the continuing deterioration of LIBOR levels for longer term discount notes drove bond investors away from this sector of the FHLBank discount notes, and the FHLBanks scaled back on large issuances of term discount notes, and instead relied on the issuances of discount notes with shortest maturities whenever necessary. Also in the fourth quarter of 2009, FHLBank issuances of short-term bullet debt were scaled back as investor interest was much more in the comparable callable FHLBank debt and callable step-up bonds. With the gradual steepening of the yield curve, step-up bond coupons became more attractive, and investors saw opportunities to hedge their yields in a rising rate environment. But unless investors recommit to the term funding market in sufficient volume, the FHLBanks will continue to meet financing needs in the very short end of the funding market.
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Debt extinguishment— No debt was transferred to another FHLBank in 2009. In the current year third quarter, the FHLBNY retired $0.5 billion through a debt buyback from an unrelated financial institution at a loss of $69.5 thousand. In 2008, the Bank did not extinguish any consolidated obligation bonds.
Consolidated obligation bonds
The following summarizes types of bonds issued and outstanding (dollars in thousands):
Table 17: Consolidated Obligation Bonds by Type
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage of | | | | | | | Percentage of | |
| | | 2009 | | | Total | | | 2008 | | | Total | |
| | | | | | | | | | | | | | | | | |
| Fixed-rate, non-callable | | $ | 48,647,625 | | | | 66.31 | % | | $ | 36,367,875 | | | | 44.92 | % |
| Fixed-rate, callable | | | 8,374,800 | | | | 11.42 | | | | 4,828,300 | | | | 5.96 | |
| Step Up, non-callable | | | 53,000 | | | | 0.07 | | | | — | | | | — | |
| Step Up, callable | | | 3,305,000 | | | | 4.51 | | | | 73,000 | | | | 0.09 | |
| Step Down, callable | | | — | | | | — | | | | 15,000 | | | | 0.02 | |
| Single-index floating rate | | | 12,977,500 | | | | 17.69 | | | | 39,670,000 | | | | 49.01 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 73,357,925 | | | | 100.00 | % | | | 80,954,175 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Bond premiums | | | 112,866 | | | | | | | | 63,737 | | | | | |
| Bond discounts | | | (33,852 | ) | | | | | | | (39,529 | ) | | | | |
| Fair value basis adjustments | | | 572,537 | | | | | | | | 1,254,523 | | | | | |
| Fair value basis adjustments on terminated hedges | | | 2,761 | | | | | | | | 7,857 | | | | | |
| Fair value option valuation adjustments and accrued interest | | | (4,259 | ) | | | | | | | 15,942 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total bonds | | $ | 74,007,978 | | | | | | | $ | 82,256,705 | | | | | |
| | | | | | | | | | | | | | | |
Tactical changes in the funding mix
The FHLBNY has consistently demonstrated the ability to seek out the most attractively priced funding the capital market has to offer by being flexible in the debt structure the Bank is willing to offer in order to meet the borrowing needs of its members and to achieve management’s asset/liability goals. As investor demand in the current year third quarter shifted from discount notes and floating-rate debt to fixed-rate “bullet” and callable debt, the FHLBNY has also been opportunistic in pursuing the debt structure most in demand at a reasonable price consistent with the Bank’s asset/liability match.
In 2009, the FHLBNY issued fixed-rate and discount notes in a mix of issuances to achieve its asset/liability management goals and be responsive to the changing market dynamics. The funding mix has resulted in a greater diversity of debt structures and funding alternatives, indicative of the flexibility of the Bank’s funding tactics in a volatile environment. The issuance of bonds has been the primary financing vehicle for the Bank, although the use of term and overnight discount notes remain a vital source of funding requirements because of the ease of issuance of discount notes as a flexible funding tool for day-to-day operations.
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Hedge ratio, or the percentage of debt hedged versus debt not hedged, and the mix between the use of non-cancellable and cancellable interest rate swaps to hedge bonds reflects the Bank’s balance sheet management preferences and the attractiveness of the pricing of cancellable swaps. The ratio of discount notes to bonds is another balance sheet management tool and that too is predicated on factors such as asset-liability cash-gap management and the attractiveness of the pricing of discount notes. In prior years, the use of term discount notes generally had declined because of the relative pricing advantage of issuing floating- rate, LIBOR-indexed debt or by issuing short-term callable debt and swapping out the fixed-rate cash flows for LIBOR-indexed cash flows by the simultaneous execution of cancellable interest rate swaps.
To accommodate members’ funding needs at reasonable spreads, the FHLBNY has been responsive to investor preferences and changing demands, the FHLBNY has continued to make tactical adjustments to its funding strategy. In the first two quarters of 2009 in response to strong investor demand for shorter-term FHLBank bonds and discount notes, the FHLBNY sharply increased its issuances of discount notes and short-term non-callable “bullet bonds” (single maturity at end). In the third quarter of 2009, as discount note pricing became relatively unattractive, the FHLBNY reduced its issuances of discount notes. The FHLBNY will continue to refine and adjust its funding tactics and as conditions in the debt market changes, the FHLBNY will also react promptly.
The principal tactical funding strategy changes employed in executing issuances of debt are outlined below:
| | • | | Discount notes— Average outstanding balances of discount notes, a measure of volume, was $24.7 billion in the third quarter of 2008, and increased to $34.5 billion in the fourth quarter of 2008. In response to market demand for shorter-term debt in the first two quarters of 2009, the Bank increased its issuance of discount notes. Volume grew dramatically to $46.2 billion and $48.7 billion in the first and second quarters of 2009. Starting very early in the third quarter of 2009, discount note pricing became relatively unfavorable, and the FHLBNY did not replace a significant portion of its maturing term-discount notes. The 1-month LIBOR reset lower, spreads to LIBOR tightened, and both negatively impacted pricing. Average outstanding balance of discount notes was allowed to decline to $39.5 billion in the third quarter of 2009, and to $31.7 billion in the fourth quarter of 2009. The utilization rate of discount notes to fund total assets, which is one measure of the Bank’s funding tactics, was 36.6% at June 30, 2009, a high for the year, declined to 26.9% at December 31, 2009. The comparable utilization rate at December 31, 2008 was 33.7%. |
In the first two quarters of 2009, the FHLBNY had also relied more on overnight and very short-term discount notes to take advantage of lower funding costs of overnight issuance of discount notes. In the third quarter of 2009, the FHLBNY reduced its issuance of overnight discount notes, partly as a result of the Federal Reserve’s action to eliminate interest on excess reserves which provided a ready source of a risk-free asset to fund with discount notes, partly as a result of tightening of spreads, and partly because the FHLBNY determined that term discount notes would better match its regulatory liquidity profile. At June 30, 2009, overnight discount notes outstanding were $11.3 billion. In contrast, overnight discount notes declined to $1.5 billion at September 30, 2009, and no overnight discount notes were outstanding at December 31, 2009.
| | • | | Floating rate bonds— Floating-rate bonds have declined steadily through the four quarters in 2009, and maturing bonds were not replaced because of marketplace perception of a pricing advantage of comparable GSE issued LIBOR-indexed floaters. FHLBank floating-rate bonds were extensively used in 2008, when the Bank issued floating-rate debt, indexed to 1-month LIBOR, Prime, and Fed effective rates, an innovative shift in funding tactics to take advantage of the historically wide spread between 3-month LIBOR and other indices. By executing interest rate swaps concurrently with the issuances of the floating-rate bonds and swapping the non-3 month LIBOR indices for 3-month LIBOR, the Bank effectively created variable funding that was indexed to 3-month LIBOR. |
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| | • | | Non-callable bonds— Non-callable bonds were the primary funding vehicle for the FHLBNY in 2009. Issuances of non-callable debt are predicated partly on pricing of such debt and investor demand, and partly on the need to achieve asset/liability management goals. The Bank has made a strong effort to issue fixed-rate longer-term debt and lock-in the relative low rates in the current interest-rate environment. This has been a challenge as investor appetite for term debt has continued to be lukewarm, given investor preference for discount notes, short-term bullets and short lock-out callable debt. Investor demand for non-callable debt has been uneven through 2009. In the second and third quarters of 2009, investors were receptive to the FHLBank non-callable bonds as an alternative to comparable debt available in the capital markets. Execution pricing for non-callable bonds was perceived as relatively more favorable. Responding to favorable investor demand, the FHLBNY increased the issuance of medium-term non-callable bonds. Non-callable bonds were $35.4 billion at March 31, 2009, grew to $41.5 billion at June 30, 2009 and to $47.5 billion at September 30, 2009. Since then, investor demand shifted to FHLBank issued short-term fixed-rate callable debt, and callable step-up bonds. As a result, issuances of non-callable bonds grew only marginally to $48.6 billion at December 31, 2009. |
| | • | | Callable-bonds— FHLBank longer-term fixed-rate callable-bonds, which had been considered by investors to be competitively priced, have not been an attractive investment asset for investors over the last several years, and continued to be under price pressure through most of 2009. The Bank’s use of funding with longer-term callable debt declined because of the erosion of their price advantage and weak demand. From time to time, the FHLBank has also issued fixed-rate callable bonds with a one-year maturity and a short lockout call option. This debt structure had grown in demand primarily from domestic money market funds as it offered an alternative investment to 3-month discount notes at an attractive pricing to similar maturity discount notes. During most of 2008 and 2009, issuances of such debt were limited. Early in the third quarter of 2009, short lockout callables (with call dates as short as 3 months from issue date) were once again sought out by investors, who saw a pricing advantage over similar maturity discount notes. In response, issuance volume increased and outstanding balances grew from $3.3 billion at June 30, 2009 to $4.8 billion at September 30, 2009, and to $8.4 billion at December 31, 2009. |
With a callable bond, the Bank purchases a call option from the investor and the option allows the Bank to terminate the bond at predetermined call dates at par. When the Bank purchases the call option from investors, it typically lowers the cost to the investor, who has traditionally been receptive to callable-bond yields offered by the FHLBNY. The Bank may also issue callable debt on an unswapped basis in a financing strategy to match the estimated prepayment characteristics of mortgage-backed securities and mortgage loans held-for-portfolio. As estimated lives and prepayment speeds of MBS and mortgage loans change with changes in the interest rate environment, those same factors are also likely to impact the call exercise feature of callable debt. These factors tend to shorten or lengthen the effective lives of the debt with changes in the interest rate environment, thereby achieving an offset to the prepayment options of MBS and mortgage loans.
| | • | | Callable step-up bonds— In the third quarter of 2009, the FHLBNY acquired $1.5 billion of callable step-up bonds, primarily with Bermudan call options, and outstanding balances grew to $3.3 billion at December 31, 2009, up from only $73.0 million at December 31, 2008. In the third quarter of 2009, short-term LIBOR rates reset lower. From the 12-month point and beyond, the yield curve steepened. Typically, as short and long-term rates diverge, step-up bonds become more popular as they offer a coupon structure that reflects the shape of the yield curve. Demand for callable step-up bonds in a variety of maturities has been steady during the fourth quarter of 2009, and the FHLBanks have responded by increasing the issuances of such bond structures. |
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Impact of hedging fixed-rate consolidated obligation bonds
The Bank hedges certain fixed-rate debt by the use of both cancellable and non-cancellable interest rate swaps in fair value hedges under the accounting standards for derivatives and hedging. The Bank may also hedge the anticipatory issuance of bonds under the provisions of “cash flow” hedging rules as provided in the accounting standards for derivatives and hedging though none were outstanding at December 31, 2009 or 2008.
Net interest accruals from qualifying interest rate swaps under the derivatives and hedge accounting rules are recorded together with interest expense of consolidated obligation bonds in the Statements of Income. Fair value changes of debt in a qualifying fair value hedge are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivative and hedging activities; an offset is recorded as a fair value basis adjustment to the carrying amount of the debt in the balance sheet. Net interest accruals associated with derivatives not qualifying under derivatives and hedge accounting rules are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
Derivatives are employed to hedge consolidated bonds in the following manner to achieve the indicated principal objectives:
The FHLBNY:
| • | | Makes extensive use of the derivatives to restructure interest rates on consolidated obligation bonds, both callable and non-callable, to better meet its members’ funding needs, to reduce funding costs, and to manage risk in a changing market environment. |
| • | | Converts, at the time of issuance, certain simple fixed-rate bullet and callable bonds into synthetic floating-rate bonds by the simultaneous execution of interest rate swaps that convert the cash flows of the fixed-rate bonds to conventional adjustable rate instruments tied to an index, typically 3-month LIBOR. |
| • | | Uses derivatives to manage the risk arising from changing market prices and volatility of a fixed coupon bond by matching the cash flows of the bond to the cash flows of the derivative and making the FHLBNY indifferent to changes in market conditions. Except when issued to fund MBS and MPF loans, callable bonds are typically hedged by an offsetting derivative with a mirror-image call option and identical terms. |
| • | | Adjusts the reported carrying value of hedged consolidated bonds for changes in their fair value (“fair value basis adjustments” or “fair value”) that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for consolidated obligation bonds in the Statements of Condition include fair value basis adjustments. |
| • | | Lowers its funding cost by the issuance of a callable bond and the execution of an associated interest rate swap with mirrored call options, which results in funding at a lower cost than the FHLBNY would otherwise have achieved. The issuance of callable bonds and the simultaneous swapping with a derivative instrument depends on the price relationships in both the bond and the derivatives markets. |
The most significant element that impacts balance sheet reporting of debt is the recording of fair value basis and valuation adjustments. In addition, when callable bonds are hedged by cancellable swaps, the possibility of exercise of the call shortens the expected maturity of the bond. The impact of hedging debt on recorded interest expense is discussed in this MD&A under “Results of Operations”. Its impact as a risk management tool is discussed under Item 7A Quantitative and Qualitative Disclosures about Market Risk.
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Fair value basis and valuation adjustments— The Bank uses interest rate derivatives to hedge the risk of changes in the benchmark rate, which the FHLBNY has adopted as LIBOR, and is also the discounting basis for computing changes in fair values of hedged advances. The Bank recorded net unrealized fair value losses of $0.6 billion and $1.3 billion as part of the carrying values of consolidated obligation bonds in the Statements of Condition at December 31, 2009 and 2008. Under the derivatives and hedge accounting provisions, the reported carrying value of consolidated obligation bonds is adjusted for changes in their fair value basis attributable to the risk being hedged.
Carrying values of bonds designated under the fair value option, are also adjusted for valuation adjustments to recognize changes in the full fair value of the bonds elected under the fair value option and measured under the accounting standards for fair value measurements and disclosures. At December 31, 2009, the unrealized fair value basis recorded was a gain of $4.3 million, net of interest accrued payable of $2.9 million. At December 31, 2008, the unrealized fair value basis was a loss of $15.9 million, including interest accrued payable of $7.6 million.
Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, the value and implied volatility of call options of callable bonds, and from the growth or decline in hedge volume.
Hedge volume— As of December 31, 2009 and 2008, the Bank had hedged $32.9 billion ($26.1 billion non-callable; $6.8 billion callable) and $22.1 billion ($20.0 billion non-callable; $2.1 billion callable) of fixed-rate consolidated bonds to hedge fair value risk from changes in the benchmark rate. Almost all callable bonds were hedged by cancellable swaps at December 31, 2009 and 2008. These hedges were in qualifying hedge relationships under the provisions of the accounting standards for derivatives and hedging. These hedges effectively converted the fixed-rate exposure of the bonds to a variable-rate exposure, generally indexed to 3-month LIBOR. The Bank’s callable bonds contain a call option purchased by the Bank from the investor. Under the terms of the call option, the Bank has the right to terminate the bond at agreed upon dates.
At December 31, 2009, outstanding par value of consolidated obligation bonds elected under the fair value option was $6.0 billion compared to $983.0 million at December 31, 2008.
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Summarized below are debt that were economically hedged by interest-rate swaps with matching terms at December 31, 2009 and 2008. At inception of the hedges, the Bank did not believe that the hedges would be highly effective in offsetting fair value changes between the derivative and the bonds (hedged item), and the FHLBNY accounted for the derivatives as freestanding (economic hedge). Hedges deemed at inception as economic do not generate basis adjustments for the hedged instruments since their carrying values are not adjusted for fair value changes.
Principal economic hedges are summarized below. At inception of the hedges, the Bank did not believe that the hedges would be highly effective in offsetting fair value changes between the derivative and the bonds and accounted for the derivatives as freestanding derivatives.
Floating-rate debt— At December 31, 2009, the FHLBNY had hedged $8.0 billion of floating-rate bonds that were indexed to interest rates other than 3-month LIBOR by entering into swap agreements with derivative counterparties that synthetically converted the floating rate debt cash flows to 3-month LIBOR. The comparable floating-rate debt that was economically hedged at December 31, 2008 was $25.0 billion.
Fixed-rate debt— At December 31, 2009, the FHLBNY had hedged $13.1 billion of short-term fixed-rate debt compared to $4.5 billion at December 31, 2008.
Discount notes —At December 31, 2009 and 2008, the Bank had hedged $3.8 billion and $7.5 billion of discount notes to mitigate fair value risk.
FVO economic hedge— At December 31, 2009, the FHLBNY had hedged $6.0 billion of short-term bonds designated under the FVO, compared to $983.0 million at December 31, 2008.
Impact of changes in interest rate— The carrying amounts of consolidated obligation bonds included fair value basis losses of $0.6 billion at December 31, 2009, compared to fair value basis losses of $1.3 billion at December 31, 2008. Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, and the value and implied volatility of call options of callable bonds.
Unrealized fair value basis losses at December 31, 2009 and 2008 were consistent with the forward yield curves at those dates that were projecting forward rates below the fixed-rate coupons of bonds hedged under the derivatives and hedge accounting rules and bonds designated under the FVO. Most of the hedged bonds had been issued in prior periods at the then prevailing higher interest-rate environment. Since such bonds are typically fixed-rate, in a declining interest rate environment, fixed-rate bonds exhibit unrealized fair value basis losses recorded under the derivatives and hedge accounting rules. Unrealized losses from fair value basis adjustments on hedged bonds were almost entirely offset by net fair value unrealized gains from derivatives associated with the hedged bonds, thereby achieving the Bank’s hedging objectives of mitigating fair value basis risk. The net fair value basis adjustments of hedged bonds in an unrealized loss position declined to $0.6 billion at December 31, 2009 from $1.3 billion at December 31, 2008 primarily as a result of the steepening of the yield curve at December 31, 2009 relative to December 31, 2008. The 3-month LIBOR rate was 25 basis points at December 31, 2009. Long-term rates steepened significantly at December 31, 2009, as illustrated by the yields of 2.68% and 3.38% on the 5-year and 7-year swap curves. At December 31, 2008, the 3-month LIBOR rate was 1.43% and the forward curve was only slightly positively sloped, with the 5-year swap rate at 1.55% and the 7-year at 1.81%.
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Consolidated obligation bonds — maturity or next call date
Swapped, callable bonds contain an exercise date or a series of exercise dates that may result in a shorter redemption period. Thus, issuance of a callable bond with an associated callable swap significantly alters the contractual maturity characteristics of the original bond and introduces the possibility of an exercise call date that is significantly shorter than the contractual maturity. The following table summarizes consolidated bonds outstanding by years to maturity or next call date (dollars in thousands):
Table 18: Consolidated Obligation Bonds — Maturity or Next Call Date
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage | | | | | | | Percentage | |
| | | 2009 | | | of total | | | 2008 | | | of total | |
Year of Maturity or next call date | | | | | | | | | | | | | | | | |
| Due or callable in one year or less | | $ | 50,481,350 | | | | 68.82 | % | | $ | 53,034,550 | | | | 65.51 | % |
| Due or callable after one year through two years | | | 11,352,200 | | | | 15.48 | | | | 15,472,350 | | | | 19.11 | |
| Due or callable after two years through three years | | | 4,073,575 | | | | 5.55 | | | | 4,843,700 | | | | 5.98 | |
| Due or callable after three years through four years | | | 3,606,250 | | | | 4.91 | | | | 1,445,575 | | | | 1.79 | |
| Due or callable after four years through five years | | | 1,325,800 | | | | 1.81 | | | | 2,954,450 | | | | 3.65 | |
| Due or callable after five years through six years | | | 529,050 | | | | 0.72 | | | | 684,800 | | | | 0.85 | |
| Thereafter | | | 1,989,700 | | | | 2.71 | | | | 2,518,750 | | | | 3.11 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 73,357,925 | | | | 100.00 | % | | | 80,954,175 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Bond premiums | | | 112,866 | | | | | | | | 63,737 | | | | | |
| Bond discounts | | | (33,852 | ) | | | | | | | (39,529 | ) | | | | |
| Fair value basis adjustments | | | 572,537 | | | | | | | | 1,254,523 | | | | | |
| Fair value basis adjustments on terminated hedges | | | 2,761 | | | | | | | | 7,857 | | | | | |
| Fair value option valuation adjustments and accrued interest | | | (4,259 | ) | | | | | | | 15,942 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total bonds | | $ | 74,007,978 | | | | | | | $ | 82,256,705 | | | | | |
| | | | | | | | | | | | | | | |
Because of the decline in the balance of callable bonds outstanding at December 31, 2009, the impact of call options was not a significant factor in the potential for shortening the duration of the bond to the first call exercise date. Based on potential call exercise date of the remaining callable bonds on pre-determined call dates, it was probable that some 84.3% of bonds outstanding at December 31, 2009 may get called or mature within two years, compared to 77.4% on a contractual maturity date basis. Call options are owned and exercisable by the Bank and are generally either a one-time option or quarterly. The Bank’s current practice is to exercise its option to call a bond when the swap counterparty exercises its option to call the callable swap hedging the callable bond.
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Discount Notes
Consolidated obligation discount notes provide the FHLBNY with short-term and overnight funds. Discount notes have maturities of up to one year and are offered daily through a dealer-selling group; the notes are sold at a discount from their face amount and mature at par. Through a sixteen-member selling group, the Office of Finance, acting on behalf of the twelve Federal Home Loan Banks, offers discount notes. In addition, the Office of Finance offers discount notes in four standard maturities in two auctions each week. The FHLBNY used discount notes to fund short-term advances, longer-term advances with short repricing intervals, convertible advances and money market investments.
The following summarizes discount notes issued and outstanding (dollars in thousands):
Table 19: Discount Notes Outstanding
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Par value | | $ | 30,838,104 | | | $ | 46,431,347 | |
| | | | | | | |
| | | | | | | | | |
| Amortized cost | | $ | 30,827,639 | | | $ | 46,329,545 | |
| Fair value basis adjustments | | | — | | | | 361 | |
| | | | | | | |
| | | | | | | | | |
| Total | | $ | 30,827,639 | | | $ | 46,329,906 | |
| | | | | | | |
| | | | | | | | | |
| Weighted average interest rate | | | 0.15 | % | | | 1.00 | % |
| | | | | | | |
In the current year first two quarters, the Bank had increased its holdings of term discount notes mainly because of favorable investor demand and pricing relative to term funding. In the current year third quarter, discount notes pricing was relatively less attractive as a funding vehicle given alternative funding options and the Bank reduced its reliance on discount notes, particularly the use of overnight discount notes, partly as a result of the Federal Reserve’s action to eliminate interest on excess reserves which provided a readily available risk-free asset which could be funded profitably by discount notes, and partly because the FHLBNY determined that term discount notes would better match its regulatory liquidity profile. In the current year first two quarters, the Bank issued $736.2 billion of discount notes; in contrast, in the third and fourth quarters the Bank issued $78.4 billion and $47.6 billion.
Generally, discount notes are utilized in funding short-term advances, some long-term advances as well as held-to-maturity and money market investments. The efficiency of issuing discount notes continues to be another factor in its use as a popular funding vehicle as discount notes can be issued any time and in a variety of amounts and maturities in contrast to other short-term funding sources, such as the issuance of callable debt with an associated interest rate derivative with matching terms. The importance of the instrument in day-to-day funding operations is illustrated by the very significant volume of the cash flows generated by discount note issuance. In 2009 the Bank issued $862.2 billion in discount notes. In the same period, cash flows from the issuance of consolidated obligation bonds were $54.5 billion. Contrasting transaction volumes between bonds and discount notes provides an indication that discount notes continued to be an important source of short-term funding.
As of December 31, 2009, no discount notes were hedged under the accounting standards for derivatives and hedging. At December 31, 2008, the Bank had hedged $779.0 million of discount notes to hedge fair value risk from changes in the benchmark rate in qualifying hedge relationships. The Bank generally hedges discount notes in economic hedges to convert the fixed-rate exposure of the discount notes to a variable-rate exposure, generally indexed to 3-month LIBOR. At December 31, 2009 and 2008, the Bank had also had executed economic hedges of $3.8 billion and $7.5 billion of discount notes to mitigate fair value risk.
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Rating actions with respect to the FHLBNY are outlined below:
Table 20: FHLBNY Ratings
Short-Term Ratings:
| | | | | | | | | | | |
| | | Moody’s Investors Service | | S & P |
| Year | | Outlook | | Rating | | Short-Term Outlook | | Rating |
| 2009 | | June 19, 2009 - Affirmed | | P-1 | | July 13, 2009 | | Short-Term rating affirmed | | A-1+ |
| | | February 2, 2009 - Affirmed | | P-1 | | | | | | |
| | | | | | | | | | | |
| 2008 | | October 29, 2008 - Affirmed | | P-1 | | June 16, 2008 | | Short-Term rating affirmed | | A-1+ |
| | | April 17, 2008 - Affirmed | | P-1 | | | | | | |
Long-Term Ratings:
| | | | | | | | | | | | | | | |
| | | Moody’s Investors Service | | S & P |
| Year | | Outlook | | Rating | | Long-Term Outlook | | Rating |
| 2009 | | June 19, 2009 - Affirmed | | Aaa/Stable | | July 13, 2009 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable |
| | | February 2, 2009 - Affirmed | | Aaa/Stable | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 2008 | | October 29, 2008 - Affirmed | | Aaa/Stable | | June 16, 2008 | | Long-Term rating affirmed | | outlook stable | | AAA/Stable |
| | | April 17, 2008 - Affirmed | | Aaa/Stable | | | | | | | | | | |
Mandatorily Redeemable Capital Stock
The FHLBNY’s capital stock is redeemable at the option of both the member and the FHLBNY subject to certain conditions. Such capital is considered to be mandatorily redeemable and a liability under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. Dividends related to capital stock classified as mandatorily redeemable are accrued at an estimated dividend rate and reported as interest expense in the Statements of Income. Mandatorily redeemable capital stock at December 31, 2009 and 2008 represented stock held primarily by former members who were no longer members by virtue of being acquired by members of other FHLBanks. Under existing practice, such stock will be repurchased when the stock is no longer required to support outstanding transactions with the FHLBNY.
The FHLBNY reclassifies the stock subject to redemption from equity to liability once a member: irrevocably exercises a written redemption right; gives notice of intent to withdraw from membership; or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership.
At December 31, 2009 and 2008, the amounts of mandatorily redeemable stock classified as a liability stood at $126.3 million and $143.1 million. Two members became non-members in 2009. One member’s borrowing potential was significant. In 2008, four members became non-members, due to merger and two were considered to have significant borrowing potential had the merger not occurred.
Capital stock held by non-members will be repurchased at maturity of the advances borrowed by non-members. In accordance with Finance Agency regulations, non-members cannot renew their advance borrowings at maturity. Such capital is considered to be a liability and mandatorily redeemable and subject to the provisions under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity.
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Under the provisions of the Bank’s Capital Plan, 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 a five-year period, the FHLBNY will redeem the capital stock unless it is needed to meet any applicable minimum stock investment requirements. Under current practice, the FHLBNY redeems all stock in excess of that required to support outstanding advances. The practice of redeeming excess capital stock also applies to the redemption of mandatorily redeemable stock held by former members in excess of amounts required to support advances outstanding to the former members. Typically, mandatorily redeemable capital stock would remain outstanding as a liability until the stock is no longer required to support outstanding advances to the former member, which is generally at maturity of the advance.
The Bank repurchased $66.7 million of mandatorily redeemable capital stock in 2009, $160.2 million in 2008, and $58.3 million in 2007. As non-member advances matured in their normal course, and were not replaced under Finance Agency rules, the Bank also repurchased the excess stock of the former members.
Expected redemption— Total outstanding capital stock considered as mandatorily redeemable at December 31, 2009 and 2008 were $126.3 million and $143.1 million. If present practice of redeeming excess stock continues, the Bank expects $102.5 million to be redeemed in 2010, $16.8 million in 2011, and the remaining $7.0 million beginning in 2013 and thereafter, in step with the expected maturities of advances outstanding to non-members. Prepayment of the advances may accelerate the redemption. Should the Bank modify its present practice of redeeming excess stock and exercise its rights under the Capital Plan, the redemption of non-member stock may take up to five years from the date the member became a non-member. For additional discussions about redemption rights of members and non-members, and interest paid on capital stock deemed to be mandatorily redeemable, see Notes 1, 11 and 13 to the audited financial statements accompanying this report.
Capital Resources
The FHLBanks, including FHLBNY, have a unique cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. The member’s stock requirement is based on the amount of mortgage-related assets on the member’s balance sheet and its use of FHLBNY advances, as prescribed by the FHLBank Act, which reflects the value of having ready access to FHLBNY as a reliable source of low-cost funds. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. The shares are not publicly traded.
At December 31, 2009, total capital stock $100 par value, putable and issued and held by members was 50,590,000 shares compared to 55,857,000 shares at December 31, 2008. Members are required to purchase FHLBNY stock in proportion to the volume of advances borrowed. Decrease in capital stock is in line with the decrease in advances borrowed by members.
Capital Structure
The Finance Agency established risk-based and leverage capital requirements for the 12 FHLBanks, including the FHLBNY. The rules also described the different classes of stock that the FHLBNY may issue, along with the rights and preferences that are associated with each class of stock. The Gramm-Leach-Bliley Act of 1999 (“GLB Act”) allows for the FHLBNY to have two classes of stock, each class may have sub-classes. Under the GLB Act, membership is voluntary for all members. Members that withdraw from the FHLBNY may not reapply for membership of any FHLBank for five years from the date of withdrawal. Membership without interruption between two FHLBanks is not considered to be a termination of membership for this purpose.
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The FHLBNY offers two classes of Class B capital stock. The FHLBNY’s capital stock consists of membership stock and activity-based stock. From time to time, the FHLBNY may issue or repurchase capital stock with new members, current members, or under certain circumstances with former members or their successors as necessary to allow the FHLBNY to satisfy the minimum capital requirements established by the GLB Act. Class B1 stock is issued to meet membership stock purchase requirements. Class B2 stock is issued to meet activity-based requirements. The FHLBNY requires member institutions to maintain Class B1 stock based on a percentage of the member’s mortgage-related assets and Class B2 stock-based on a percentage of advances and acquired member assets outstanding with the FHLBNY and certain commitments outstanding with the FHLBNY. Class B1 and Class B2 stockholders have the same voting rights and dividend rates.
Class B2 stock— Each member is required to maintain a certain minimum investment in capital stock of the FHLBNY. The minimum investment will be determined by a membership requirement and an activity-based requirement. Each member is required to maintain a certain minimum investment in membership stock for as long as the institution remains a member of the FHLBNY. Typically, membership stock is based upon the amount of the member’s residential mortgage loans and its other mortgage-related assets. Under current policy, membership stock is 0.20% of the member’s mortgage-related assets as of the previous calendar year-end. FHLBNY could determine that all of the membership stock formerly held by the member becomes excess stock, which would give the FHLBNY the discretion, but not the obligation, to repurchase that stock prior to the expiration of the five-year notice period.
Class B1 stock— In addition, each member is required to purchase activity-based stock in proportion to the volume of certain transactions between the member and the FHLBNY. Activity-based stock is equal to the sum of a specified percentage between 4.0% and 5.0% multiplied by the outstanding principal balance of advances and the outstanding principal balance of MPF loans. Under the current regulations, which became effective on December 1, 2005, the specified percentages is 4.5% for both advances and MPF loans, with the provision that the specific requirements for MPF loans are effective for transactions entered into after December 1, 2005, the date when the existing Capital Plan went into effect.
Upon five years’ written notice, a member can elect to have the FHLBank redeem its capital stock, subject to certain conditions and limitations. The FHLBNY can repurchase excess stock of both sub-classes at their discretion at any time prior to the end of the redemption period, provided that FHLBNY will continue to meet its regulatory capital requirements after the repurchase.
The FHLBNY may adjust the stock ownership requirements from time to time within the limits established in the Capital Plan. The FHLBNY may also modify capital stock ownership requirements outside these limits by modifying the Capital Plan with the approval of the Bank’s regulators, the Finance Agency. The shares of capital stock offered to members will be issued at par value and will not trade in any market. Redemptions and repurchases of such stock by the FHLBNY, and any transfers of such stock, must also be made at par value.
The Finance Agency has confirmed that mandatorily redeemable shares of its capital stock will not be included in the definition of total capital for purposes of determining the FHLBank’s compliance with Finance Agency regulatory capital requirements, calculating its mortgage securities investment authority (300 percent of total capital), calculating its unsecured credit exposure to other Government Sponsored Enterprises (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).
Capital Standards
The GLB Act specifies that the FHLBanks must meet certain minimum capital standards, including the maintenance of a minimum level of permanent capital sufficient to cover the credit, market, and operations risks to which the FHLBanks are subject. The FHLBNY must maintain: (1) a total capital ratio of at least 4.0%; (2) a leverage capital ratio of at least 5.0%; and (3) permanent capital in an amount equal to or greater than the “risk-based capital requirement” specified in the Finance Agency’s regulations. The capital requirements are described in greater detail below.
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The total capital ratio is the ratio of the FHLBNY’s total capital to its total assets. Total capital is the sum of: (1) capital stock; (2) retained earnings; (3) the general allowance for losses (if any); and (4) such other amounts (if any) that the Finance Agency may decide are appropriate to include. Finance Agency regulations require that the FHLBNY maintain a minimum total capital ratio of 4%.
The leverage ratio is the weighted ratio of total capital to total assets. For purposes of determining this weighted average ratio, total capital is computed by multiplying the FHLBNY’s permanent capital by 1.5 and adding to this product all other components of total capital. Finance Agency regulations require that the FHLBNY maintain a minimum leverage ratio of 5.0%.
The Finance Agency issued a final rule, effective August 4, 2009, to implement certain provisions of the Housing Act that require the Director of the Finance Agency to establish criteria based on the amount and type of capital held by an FHLBank for each of the following capital classifications: adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. This regulation defines critical capital levels for the FHLBanks, establishes the criteria for each of the capital classifications identified in the Housing Act and implements the Finance Agency’s prompt correction action authority over the FHLBanks. On July 20, 2009, the Finance Agency published Advisory Bulletin 2009-AB-01 which identified preliminary FHLBank capital classifications as a form of supervisory correspondence that should be treated by an FHLBank as unpublished information. Under this Advisory Bulletin, preliminary FHLBank capital classifications should be publicly disclosed only if the information is material to that FHLBank’s financial condition and business operations, provided that the disclosure is limited to a recital of the factual content of the unpublished information. (See Note 13 to the audited financial statements accompanying this report for the FHLBNY’s compliance with risk based capital rules).
The FHLBNY meets the “adequately capitalized” classification, which is the highest rating, under the Capital Rule. However, the Finance Agency has discretion to reclassify an FHLBank and to modify or add to the corrective action requirements for a particular capital classification, therefore management cannot predict the impact, if any, the Capital Rule will have on the Bank.
Stockholders’ Capital and Dividend
Stockholders’ Capital— Stockholders’ Capital comprised of capital stock, retained earnings and Accumulated other comprehensive income (loss), and decreased by $264.1 million to $5.6 billion at December 31, 2009.
Capital stock— Capital stock, par value $100, was $5.1 billion at December 31, 2009, down from $5.6 billion at December 31, 2008. The decrease in capital stock was consistent with decreases in advances borrowed by members. Since members are required to purchase stock as a percentage of advances borrowed from the FHLBNY, a decline in advances will typically result in a decline in capital stock. In addition, under our present practice, stock in excess of the amount necessary to support advance activity is redeemed daily by the FHLBNY. Therefore, the amount of capital stock outstanding varies directly with members’ outstanding borrowings under the provisions requiring members to purchase stock to support borrowings and its practice of redeeming excess capital stock.
Retained earnings— Retained earnings rose to $688.9 million at December 31, 2009 up from $382.9 million at December 31, 2008. Net income in 2009 was $570.8 million, and $264.7 million in dividend payments were made to members. Net income in 2008 was $259.1 million, and dividend payments were $294.5 million. For more information about the Bank’s retained earnings policy, refer to the section Retained Earnings and Dividend in this report.
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Accumulated other comprehensive income (loss)— Accumulated other comprehensive income (loss) was an accumulated net loss of $144.5 million at December 31, 2009. The principal components are summarized below. Also see, Note 14 to the audited financial statements accompanying this report.
| | • | | Net unrealized fair value losses declined to $3.4 million at December 31, 2009, compared to a loss of $64.4 million at December 31, 2008. Unrealized fair value losses on available-for-sale securities reversed almost entirely at December 31, 2009 from a year earlier, resulting in a favorable change of $61.0 million. |
| |
| | • | | In 2009 based on the management’s determination of a decrease in cash flows expected to be collected (cash flow shortfall) 17 held-to-maturity private-label MBS were determined to be OTTI, and the Bank recorded non-credit component losses in AOCI. At December 31, 2009, the amount of net loss in AOCI was $110.6 million. No OTTI was recognized in prior years. |
| |
| | • | | Net unrealized losses from cash flow hedges of $22.7 million ($30.2 million at December 31, 2008) were principally from terminated hedges of anticipated issuances of debt. These unrealized losses will be recorded in future periods as an expense over the terms of the hedged bonds as a yield adjustment to the fixed coupons of the debt. Over the next 12 months it is expected that $6.9 million of net losses will be reclassified as a charge to earnings. |
| |
| | • | | Minimum additional actuarially determined liabilities due on the Bank’s supplemental pension plans of $7.9 million at December 31, 2009 ($6.6 million at December 31, 2008). |
Dividend— As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission of providing low-cost funds to its members and providing its members with adequate returns on their capital invested in FHLBNY stock. The FHLBNY also has to balance its mission with a goal to strengthen its financial position through an increase in the level of retained earnings. The FHLBNY’s dividend policy takes these factors into consideration — the need to enhance retained earnings while reasonably compensating members for the use of their capital and to provide low-cost advances. By Finance Agency regulation, dividends may be paid out of current earnings or previously retained earnings. The FHLBNY may be restricted from paying dividends if it is not in compliance with any of its minimum capital requirements or if payment would cause the FHLBNY to fail to meet any of its minimum capital requirements. In addition, the FHLBNY may not pay dividends if any principal or interest due on any consolidated obligations has not been paid in full, or, under certain circumstances, if the FHLBNY fails to satisfy certain liquidity requirements under applicable Finance Agency regulations. None of these restrictions applied to the FHLBNY for any period presented in this Form 10-K.
Dividends are computed based on the weighted average stock outstanding during the quarter and are declared and paid subsequent to the end of the quarter. In 2009, four dividends were paid for a total of $4.95 per share, or 45.5% of net earnings per share, compared to $6.55 per share, or 124.5% of net earnings per share in 2008. In 2007, $7.51 per share was paid, or 87.6% of net earnings per share.
Dividends paid in the first quarter of 2010 for the fourth quarter of 2009 was 5.60% (annualized).
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Derivative Instruments and Hedging Activities
Interest rate swaps, swaptions, and cap and floor agreements (collectively, derivatives) enable the FHLBNY to manage its exposure to changes in interest rates by adjusting the effective maturity, repricing frequency, or option characteristics of financial instruments. The FHLBNY, to a limited extent, also uses interest rate swaps to hedge changes in interest rates prior to debt issuance and essentially lock in the FHLBNY’s funding cost.
Finance Agency regulations prohibit the speculative use of derivatives. The FHLBNY does not take speculative positions with derivatives or any other financial instruments, or trade derivatives for short-term profits. The FHLBNY does not have any special purpose entities or any other types of off-balance sheet conduits.
The notional amounts of derivatives are not recorded as assets or liabilities in the Statements of Condition, rather the fair values of all derivatives are recorded as either a derivative asset or a derivative liability. Although notional principal is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since the notional amount does not change hands (other than in the case of currency swaps, of which the FHLBNY has none).
All derivatives are recorded on the Statements of Condition at their estimated fair values and designated as either fair value or cash flow hedges for qualifying hedges, or as non-qualifying hedges (economic hedges or customer intermediations) under the accounting standards for derivatives and hedging. In an economic hedge, the Bank retains or executes derivative contracts, which are economically effective in reducing risk. Such derivatives are designated as economic hedges either because a qualifying hedge is not available, the difficulty to demonstrate that the hedge would be effective on an ongoing basis as a qualifying hedge, or the cost of a qualifying hedge is not economical. Changes in the fair value of a derivative are recorded in current period earnings for a fair value hedge, or in AOCI for the effective portion of fair value changes of a cash flow hedge.
Interest income and interest expense from interest rate swaps used for hedging are reported together with interest on the instrument being hedged if the swap qualifies for hedge accounting. If the swap is designated as an economic hedge, interest accruals are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
The FHLBNY uses derivatives in three ways: (1) as a fair value or cash flow hedge of an underlying financial instrument or as a cash flow hedge of a forecasted transaction; (2) as intermediation hedges to offset derivative positions (e.g., caps) sold to members; and (3) as an economic hedge, defined as a non-qualifying hedge of an asset or liability and used as an asset/liability management tool. The FHLBNY uses derivatives to adjust the interest rate sensitivity of consolidated obligations to more closely approximate the sensitivity of assets or to adjust the interest rate sensitivity of advances to more closely approximate the sensitivity of liabilities. In addition, the FHLBNY uses derivatives to: offset embedded options in assets and liabilities to hedge the market value of existing assets, liabilities, and anticipated transactions; or to reduce funding costs. For additional information see Note 17 — Derivatives and hedging activities to the audited financial statements accompanying this report.
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The following table summarizes the principal derivatives hedging strategies as of December 31, 2009 and 2008:
Table 21: Derivative Hedging Strategies
| | | | | | | | | | | | | |
| | | | | | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | Notional Amount | | | Notional Amount | |
| Derivatives/Terms | | Hedging Strategy | | Accounting Designation | | (in millions) | | | (in millions) | |
| Pay fixed, receive floating interest rate swap | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate | | Economic Hedge of fair value risk | | $ | 123 | | | $ | 618 | |
| Pay fixed, receive floating interest rate swap cancelable by counterparty | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate putable advance | | Fair Value Hedge | | $ | 40,252 | | | $ | 41,824 | |
| Pay fixed, receive floating interest rate swap no longer cancelable by counterparty | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate no-longer putable | | Fair Value Hedge | | $ | 2,283 | | | $ | 1,405 | |
| Pay fixed, receive floating interest rate swap non-cancelable | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate non-putable | | Fair Value Hedge | | $ | 23,367 | | | $ | 18,444 | |
| Purchased interest rate cap | | To offset the cap embedded in the variable rate advance | | Economic Hedge of fair value risk | | $ | 390 | | | $ | 465 | |
| Receive fixed, pay floating interest rate swap | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate | | Economic Hedge of fair value risk | | $ | 13,113 | | | $ | 4,515 | |
| Receive fixed, pay floating interest rate swap cancelable by counterparty | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate callable bond | | Fair Value Hedge | | $ | 6,785 | | | $ | 2,148 | |
| Receive fixed, pay floating interest rate swap no longer cancelable | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate no-longer callable | | Fair Value Hedge | | $ | 108 | | | $ | 373 | |
| Receive fixed, pay floating interest rate swap non-cancelable | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate non-callable | | Fair Value Hedge | | $ | 25,982 | | | $ | 19,609 | |
| Receive fixed, pay floating interest rate swap (non-callable) | | To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate. | | Fair Value Hedge | | $ | — | | | $ | 779 | |
| Receive fixed, pay floating interest rate swap (non-callable) | | To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate. | | Economic Hedge of fair value risk | | $ | 3,784 | | | $ | 7,509 | |
| Basis swap | | To convert non-LIBOR index to LIBOR to reduce interest rate sensitivity and repricing gaps. | | Economic Hedge of cash flows | | $ | 6,035 | | | $ | 14,360 | |
| Basis swap | | To convert 1M LIBOR index to 3M LIBOR to reduce interest rate sensitivity and repricing gaps. | | Economic Hedge of cash flows | | $ | 1,950 | | | $ | 10,590 | |
| Receive fixed, pay floating interest rate swap cancelable by counterparty | | Fixed rate callable bond converted to a LIBOR floating rate; matched to callable bond accounted for under fair value option. | | Fair Value Option | | $ | 5,690 | | | $ | 583 | |
| Receive fixed, pay floating interest rate swap no longer cancelable | | Fixed rate callable bond converted to a LIBOR floating rate; matched to bond no-longer callable accounted for under fair value option. | | Fair Value Option | | $ | — | | | $ | 400 | |
| Receive fixed, pay floating interest rate swap non-cancelable | | Fixed rate callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under fair value option. | | Fair Value Option | | $ | 350 | | | $ | — | |
| Pay fixed, receive floating interest rate swap | | Economic hedge on the Balance Sheet | | Economic Hedge | | $ | 1,050 | | | $ | 1,050 | |
| Receive fixed, pay floating interest rate swap | | Economic hedge on the Balance Sheet | | Economic Hedge | | $ | 1,050 | | | $ | 1,050 | |
| Purchased interest rate cap | | Economic hedge on the Balance Sheet | | Economic Hedge | | $ | 1,892 | | | $ | 1,892 | |
| Intermediary positions Interest rate swaps and caps | | To offset interest rate swaps and caps executed with members by executing offsetting derivatives with counterparties | | Economic Hedge of fair value risk | | $ | 320 | | | $ | 300 | |
The accounting designation “economic” hedges represented derivative transactions under hedge strategies that do not qualify for hedge accounting but are an approved risk management hedge.
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Derivatives Financial Instruments by hedge designation
The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by hedge designation.
The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands):
Table 22: Derivatives Financial Instruments by Hedge Designation
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | Estimated | | | | | | | Estimated | |
| | | Notional | | | Fair Value | | | Notional | | | Fair Value | |
Interest rate swaps | | | | | | | | | | | | | | | | |
| Derivatives in fair value hedging relationships | | $ | 98,776,447 | | | $ | (3,056,718 | ) | | $ | 84,582,796 | | | $ | (4,531,004 | ) |
| Derivatives not designated as hedging instruments | | | 27,104,963 | | | | 31,723 | | | | 39,691,142 | | | | (76,412 | ) |
| Derivatives matching bonds designated under FVO | | | 6,040,000 | | | | (2,632 | ) | | | 983,000 | | | | 7,699 | |
Interest rate caps/floors | | | | | | | | | | | | | | | | |
| Economic-fair value changes | | | 2,282,000 | | | | 71,494 | | | | 2,357,000 | | | | 8,174 | |
Mortgage delivery commitments (MPF) | | | | | | | | | | | | | | | | |
| Economic-fair value changes | | | 4,210 | | | | (39 | ) | | | 10,395 | | | | (108 | ) |
Other | | | | | | | | | | | | | | | | |
| Intermediation | | | 320,000 | | | | 352 | | | | 300,000 | | | | 484 | |
| | | | | | | | | | | | | |
Total | | $ | 134,527,620 | | | $ | (2,955,820 | ) | | $ | 127,924,333 | | | $ | (4,591,167 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total derivatives, excluding accrued interest | | | | | | $ | (2,955,820 | ) | | | | | | $ | (4,591,167 | ) |
| Cash collateral pledged to counterparties | | | | | | | 2,237,028 | | | | | | | | 3,836,370 | |
| Cash collateral received from counterparties | | | | | | | — | | | | | | | | (61,209 | ) |
| Accrued interest | | | | | | | (19,104 | ) | | | | | | | (25,418 | ) |
| | | | | | | | | | | | | | | |
Net derivative balance | | | | | | $ | (737,896 | ) | | | | | | $ | (841,424 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net derivative asset balance | | | | | | $ | 8,280 | | | | | | | $ | 20,236 | |
| Net derivative liability balance | | | | | | | (746,176 | ) | | | | | | | (861,660 | ) |
| | | | | | | | | | | | | | | |
Net derivative balance | | | | | | $ | (737,896 | ) | | | | | | $ | (841,424 | ) |
| | | | | | | | | | | | | | | |
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Derivative Financial Instruments by Product
The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by product and type of accounting treatment. The categories of “Fair value,” “Commitment,” and “Cash flow” hedges represented derivative transactions accounted for as hedges. The category of “Economic” hedges represented derivative transactions under hedge strategies that did not qualify for hedge accounting treatment but were an approved risk management strategy.
The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands):
Table 23: Derivative Financial Instruments by Product
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | Total estimated | | | | | | | Total estimated | |
| | �� | | | | | fair value | | | | | | | fair value | |
| | | | | | | (excluding | | | | | | | (excluding | |
| | | Total notional | | | accrued | | | Total notional | | | accrued | |
| | | amount | | | interest) | | | amount | | | interest) | |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | |
| Advances-fair value hedges | | $ | 65,901,667 | | | $ | (3,622,141 | ) | | $ | 61,673,607 | | | $ | (5,758,653 | ) |
| Consolidated obligations-fair value hedges | | | 32,874,780 | | | | 565,423 | | | | 22,909,189 | | | | 1,227,649 | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | |
| Advances-economic hedges | | | 513,089 | | | | (196 | ) | | | 1,082,700 | | | | (24,520 | ) |
| Consolidated obligations-economic hedges | | | 24,881,874 | | | | 36,954 | | | | 36,973,442 | | | | (45,884 | ) |
| MPF loan-commitments | | | 4,210 | | | | (39 | ) | | | 10,395 | | | | (108 | ) |
| Balance sheet | | | 1,892,000 | | | | 71,494 | | | | 1,892,000 | | | | 8,164 | |
| Intermediary positions-economic hedges | | | 320,000 | | | | 352 | | | | 300,000 | | | | 484 | |
| Balance sheet-macro hedges swaps | | | 2,100,000 | | | | (5,035 | ) | | | 2,100,000 | | | | (5,998 | ) |
Derivatives matching bonds designated under FVO | | | | | | | | | | | | | | | | |
| Interest rate swaps-consolidated obligations-bonds | | | 6,040,000 | | | | (2,632 | ) | | | 983,000 | | | | 7,699 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total notional and fair value | | $ | 134,527,620 | | | $ | (2,955,820 | ) | | $ | 127,924,333 | | | $ | (4,591,167 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total derivatives, excluding accrued interest | | | | | | $ | (2,955,820 | ) | | | | | | $ | (4,591,167 | ) |
| Cash collateral pledged to counterparties | | | | | | | 2,237,028 | | | | | | | | 3,836,370 | |
| Cash collateral received from counterparties | | | | | | | — | | | | | | | | (61,209 | ) |
| Accrued interest | | | | | | | (19,104 | ) | | | | | | | (25,418 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net derivative balance | | | | | | $ | (737,896 | ) | | | | | | $ | (841,424 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net derivative asset balance | | | | | | $ | 8,280 | | | | | | | $ | 20,236 | |
| Net derivative liability balance | | | | | | | (746,176 | ) | | | | | | | (861,660 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net derivative balance | | | | | | $ | (737,896 | ) | | | | | | $ | (841,424 | ) |
| | | | | | | | | | | | | | | |
Derivative Credit Risk Exposure
In addition to market risk, the FHLBNY is subject to credit risk in derivative transactions because of the potential for non-performance by the counterparties, which could result in the FHLBNY having to acquire a replacement derivative from a different counterparty at a cost. The FHLBNY also is subject to operational risks in the execution and servicing of derivative transactions.
The degree of counterparty credit risk may depend, among other factors, on the extent to which netting procedures and/or the provision of collateral are used to mitigate the risk. Seventeen counterparties (Fifteen non-members and two members) represented 100% of the total notional amount of the FHLBNY’s outstanding derivative transactions at December 31, 2009. See Table 24 below.
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Risk measurement— Although notional amount is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since derivative counterparties do not exchange the notional amount (except in the case of foreign currency swaps of which the FHLBNY has none). Counterparties use the notional amounts of derivative instruments to calculate contractual cash flows to be exchanged. The fair value of a derivative in a gain position is a more meaningful measure of the FHLBNY’s current market exposure on derivatives. The FHLBNY estimates exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a gain position, net of collateral pledged by the counterparty to mitigate the FHLBNY’s exposure. All derivative contracts with non-members are also subject to master netting agreements or other right of offset arrangements.
Exposure— At December 31, 2009 and 2008, the Bank’s credit risk, representing derivatives in a fair value gain position was approximately $8.3 million and $20.2 million. At December 31, 2009, the fair values of derivatives in a gain position were below the collateral threshold and derivative counterparties pledged no cash to the FHLBNY. At December 31, 2008, derivative counterparties had pledged $61.2 million in cash as collateral to the FHLBNY. The credit risk at December 31, 2009 and 2008 included $0.8 million and $0.7 million in net interest receivable.
In determining credit risk, the FHLBNY considers accrued interest receivable and payable, and the legal right to offset assets and liabilities by counterparty. The FHLBNY attempts to mitigate its exposure by requiring derivative counterparties to pledge cash collateral, if the amount of exposure is above the collateral threshold agreements.
At December 31, 2009, the FHLBNY had posted $2.2 billion in cash as collateral to derivative counterparties to mitigate derivatives in a net fair value liability (unfavorable) position. The FHLBNY is exposed to the extent that a counterparty may not repay the posted cash collateral to the FHLBNY due to unforeseen circumstances, such as bankruptcy. In such an event, the FHLBNY would then exercise its rights under the “International Swaps and Derivatives Association agreement” (“ISDA”) to replace the derivatives in a liability position (gain position for the acquiring counterparty) with another available counterparty in exchange for cash delivered to the FHLBNY. To the extent that the fair values of the replacement derivatives are less than the cash collateral posted, the FHLBNY may not receive cash equal to the amount posted.
Risk mitigation— The FHLBNY attempts to mitigate derivative counterparty credit risk by contracting only with experienced counterparties with investment-grade credit ratings. Annually, the FHLBNY’s management and Board of Directors review and approve all non-member derivative counterparties. Management monitors counterparties on an ongoing basis for significant business events, including ratings actions taken by nationally recognized statistical rating organizations. All approved derivatives counterparties must enter into a master ISDA agreement with the FHLBNY and, in addition, execute the Credit Support Annex to the ISDA agreement that provides for collateral support at predetermined thresholds. These annexes contain enforceable provisions for requiring collateral on certain derivative contracts that are in gain positions. The annexes also define the maximum net unsecured credit exposure amounts that may exist before collateral delivery is required. Typically, the maximum amount is based upon an analysis of individual counterparty’s rating and exposure. The FHLBNY also attempts to manage counterparty credit risk through credit analysis, collateral management and other credit enhancements, such as guarantees, and by following the requirements set forth in the Finance Agency’s regulations.
Despite these risk mitigating policies and processes, on September 15, 2008, an event of default occurred under outstanding derivative contracts with total notional amounts of $16.5 billion between Lehman Brothers Special Financing Inc. (“LBSF”) and the FHLBNY when credit support provider Lehman Brothers Holdings Inc. commenced a filing under Chapter 11 of the U.S. Bankruptcy Code. The Bank had deposited $509.6 million with LBSF as cash collateral. Since the default, the FHLBNY has replaced most of the derivatives that had been executed between LBSF and the FHLBNY through new agreements with other derivative counterparties. The Lehman bankruptcy proceedings are ongoing.
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Derivatives Counterparty Credit Ratings
The following table summarizes the FHLBNY’s credit exposure by counterparty credit rating (in thousands, except number of counterparties).
Table 24: Derivatives Counterparty Notional Balance by Credit Ratings
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | Total Net | | | | |
| | | Number of | | | Notional | | | Exposure at | | | Net Exposure after | |
| Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | |
| |
| AAA | | | — | | | $ | — | | | $ | — | | | $ | — | |
| AA | | | 7 | | | | 45,652,167 | | | | 684 | | | | 684 | |
| A | | | 8 | | | | 88,711,243 | | | | — | | | | — | |
Members (Note1 and Note2) | | | 2 | | | | 160,000 | | | | 7,596 | | | | 7,596 | |
| Delivery Commitments | | | — | | | | 4,210 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| |
Total | | | 17 | | | $ | 134,527,620 | | | $ | 8,280 | | | $ | 8,280 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | | | | | | | | | Total Net | | | | |
| | | Number of | | | Notional | | | Exposure at | | | Net Exposure after | |
| Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | |
| |
| AAA | | | 1 | | | $ | 9,167,456 | | | $ | — | | | $ | — | |
| AA | | | 6 | | | | 39,939,946 | | | | — | | | | — | |
| A | | | 7 | | | | 78,656,536 | | | | 64,890 | | | | 3,681 | |
Members (Note1 and Note2) | | | 3 | | | | 150,000 | | | | 16,555 | | | | 16,555 | |
| Delivery Commitments | | | — | | | | 10,395 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| |
Total | | | 17 | | | $ | 127,924,333 | | | $ | 81,445 | | | $ | 20,236 | |
| | | | | | | | | | | | | |
| | | |
| Note1: | | Fair values of $7.6 million and $16.6 million comprising of intermediated transactions with members and interest-rate caps sold to members (with capped floating-rate advances) were collateralized at December 31, 2009 and December 31, 2008. |
| |
| Note2: | | Members are required to pledge collateral to secure derivatives purchased by the FHLBNY as an intermediary on behalf of its members. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. As a result of the collateral agreements with its members, the FHLBNY believes that its maximum credit exposure due to the intermediated transactions was $0 at December 31, 2009 and December 31, 2008. |
| |
| Note3: | | As reported in the Statements of Condition. |
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Accounting for Derivatives — Hedge Effectiveness
An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective portion of the hedge. Those methods must be consistent with the entity’s approach to managing risk. At inception and during the life of the hedging relationship, management must demonstrate that the hedge is expected to be highly effective in offsetting changes in the hedged item’s fair value or the variability in cash flows attributable to the hedged risk.
Effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item relating to the risk being hedged. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an ongoing basis. Any ineffective portions are to be recognized in earnings immediately, regardless of the type of hedge. An assessment of effectiveness is required whenever financial statements or earnings are reported, and at least once every three months. FHLBNY assesses hedge effectiveness in the following manner:
| • | | Inception prospective assessment.Upon designation of the hedging relationship and on an ongoing basis, FHLBNY is required to demonstrate that it expects the hedging relationship to be highly effective. This is a forward-looking consideration. The prospective assessment at designation uses sensitivity analysis employing an option adjusted valuation model to generate changes in market value of the hedged item and the swap. These projected market values are then analyzed over multiple instantaneous, parallel rate shocks. The hedge is expected to be highly effective if the change in fair value of the swap divided by the change in the fair value of the hedged item is within the 80% -125% dollar value offset boundaries. See additional description of regression analysis in following paragraphs. |
| |
| • | | Ongoing prospective assessment. For purposes of assessing effectiveness on an ongoing basis, the Bank will utilize the regression results from its retrospective assessment as a means of demonstrating that it expects all “long-haul” hedge relationships to be highly effective in future periods (i.e., it will use the regression for both its ongoing prospective and retrospective assessment). |
| |
| • | | Retrospective assessment.At least quarterly, FHLBNY will be required to determine whether the hedging relationship was highly effective in offsetting changes in fair value or cash flows through the date of the periodic assessment. This is an evaluation of the past experience. |
FHLBNY uses a statistical method commonly referred to as regression analysis to analyze how a single dependent variable is affected by the changes in one (or more) independent variables. If the two variables are highly correlated, then movements of one variable can be reasonably expected to trigger similar movements in the other variable. Thus, regression analysis serves to measure the strength of empirical relationships and assessing the probability of hedge effectiveness. The FHLBNY tests the effectiveness of the hedges by regressing the changes in the net present value of future cash flows (“NPV”) of the derivative against changes in the net present value of the hedged transaction, typically an advance or a consolidated obligation.
The regression model being used is:
∆Vh = a + b∆VH
where ∆Vh is the change in the net present value of the hedging item, ∆VH is the change in the net present value of the hedged transaction, a is the ‘intercept’ of the regression and b is the ‘slope’ of the regression.
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The coefficient b should have a value very close to -1 if the hedging transaction is effective. At the same time, a should be very close to zero.
To determine whether a hedging transaction is effective requires checking whether, overall, the postulated linear model ‘fits’ the data well and whether the estimates of the parameters a and b come close enough to their hypothesized values that we can feel confident that it would be wrong to reject those hypothesized values.
The standard measure of overall fit is the so-called ���coefficient of determination’ (also nicknamed ‘R-squared’ because it is equal to the square of the coefficient of linear correlation). R-squared can be as low as 0 and as high as 1.0. An R-squared equal to 0 means that the changes in the dependent variable are totally unrelated to the changes in the independent variable. An R-squared of 1.0 implies perfect correlation. In this case, the assumed model explains the data perfectly. The changes in the independent variable ‘map’ onto the changes in the dependent variable exactly as ‘predicted’ by the model. This is a situation rarely observed in real-life situations. In practical situations, an R-squared equal to or in excess of .80 indicates a very good fit of the model. Accordingly, FHLBNY has determined that to consider the hedge relationship to be highly effective, the R-squared of the regression would have to be at least equal to .80.
An assumed model can be accepted only if the main hypotheses on which it rests cannot be rejected. In the context of regression analysis, hypothesis testing is a procedure that seeks to determine whether the estimated values of the parameters of the model (a and b) are close enough to their hypothesized values (zero for a and -1 for b) that it would be unreasonable to reject those hypotheses. The Bank employs the most commonly used test statistic called the F-test statistic, the Fisher probability distribution function. This standard F-Test incorporates all the variance of errors of the regression line. The FHLBNY has determined that to consider the hedge relationship to be highly effective, the F-Test statistic associated with regression errors must fall within a specified the interval.
An equivalent approach to hypothesis testing consists of defining an ‘acceptance region’ around the hypothesized value of the parameter(s) being estimated. If the estimated value of the parameter falls within the acceptance region, the hypothesis is not rejected. If it falls outside of the acceptance region, the hypothesis is rejected. FHLBNY has determined that to consider the hedge relationship to be highly effective, the estimate of the slope of the regression (b) must fall within an acceptance region ranging from -1.25 to -.80.
Discontinuation of hedge accounting
If a derivative no longer qualifies as a fair value or a cash flow hedge, the FHLBNY discontinues hedge accounting prospectively and reports the derivative in the Statement of Condition at its fair value and records fair value gains and losses in earnings until the derivative matures. If the FHLBNY was to discontinue a cash flow hedge, previously deferred gains and losses in AOCI would be recognized in current earnings at the time the hedged transaction affects earnings. For discontinued fair value hedges, the FHLBNY no longer adjusts the carrying value (basis) of the hedged item, typically an advance or a bond, for changes in their fair values. The FHLBNY then amortizes previous fair value adjustments to the basis of the hedged item over the life of the hedged item (for callable as well as non-callable previously hedged advances and bonds).
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Embedded derivatives
Before a trade is executed, the FHLBNY’s procedures require the identification and evaluation of embedded derivatives, if any, under accounting standards for derivatives and hedging. This evaluation will consider if the economic characteristics and the risks of the embedded derivative instrument are not clearly and closely related to the economic characteristic and risks of the host contract. At December 31, 2009, 2008 and 2007, the FHLBNY had no embedded derivatives that were required to be separated from the “host” contract because their economic or risk characteristics were not clearly and closely related to the economic characteristics and risks of the host contract.
Aggregation of similar items
The FHLBNY has de minimis amounts of similar advances that are hedged in aggregate as a portfolio. For such hedges, the FHLBNY performs a similar asset test to ensure the hedged advances share the risk exposure for which they are designated as being hedged. Other than a very limited number of portfolio hedges, the FHLBNY’s other hedged items and derivatives are hedged as separately identifiable instruments.
Measurement of hedge ineffectiveness
The FHLBNY calculates the fair values of its derivatives and associated hedged items using discounted cash flows and other adjustments to incorporate volatilities of future interest rates and options, if embedded, in the derivative or the hedged item. For each financial statement reporting period, the FHLBNY measures the changes in the fair values of all derivatives, and changes in fair value of the hedged items attributable to the risk being hedged unless the FHLBNY has assumed no ineffectiveness (referred to as the “short-cut method”) and reports changes through current earnings. For hedged items eligible for the short-cut method, the FHLBNY treats the change in fair value of the derivative as equal to the change in the fair value of the hedged item attributable to the change in the benchmark interest rate. To the extent the change in the fair value of the derivative is not equal to the change in the fair value of the hedged item when not using the short-cut method, the resulting difference represents hedge ineffectiveness, and is reported through current earnings.
Liquidity
The FHLBNY’s primary source of liquidity is the issuance of consolidated obligation bonds and discount notes. To refinance maturing consolidated obligations, the Bank relies on the willingness of the investors to purchase new issuances. The FHLBNY has access to the discount note market and the efficiency of issuing discount notes is an important factor as a source of liquidity since discount notes can be issued any time and in a variety of amounts and maturities. Member deposits and capital stock purchased by members are another source of funds. Short-term unsecured borrowings from other FHLBanks and in the Federal funds market provide additional sources of liquidity. With the passage of the Housing Act on July 30, 2008, the U.S. Treasury is authorized to purchase obligations issued by the FHLBanks, in any amount deemed appropriate by the U.S. Treasury. This temporary authorization expired December 31, 2009 and supplemented the existing limit of $4 billion. See Note 19 to the audited financial statements accompanying this report for discussion of the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (GSECF), which was designed to serve as a contingent source of liquidity for the FHLBanks via issuance of consolidated obligations to the U.S. Treasury.
The FHLBNY’s liquidity position remains in compliance with all regulatory requirements and management does not foresee any changes to that position.
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Finance Agency Regulations — Liquidity
Beginning December 1, 2005, with the implementation of the Capital Plan, the Financial Management Policy rules of the Finance Agency with respect to liquidity were superseded by regulatory requirements that are specified in Parts 917 and 965 of Finance Agency regulations and are summarized below.
Each FHLBank shall at all times have at least an amount of liquidity equal to the current deposits received from its members that may be invested in:
| • | | Obligations of the United States; |
| |
| • | | Deposits in banks or trust companies; or |
| |
| • | | Advances with a maturity not to exceed five years. |
In addition, each FHLBank shall provide for contingency liquidity which is defined as the sources of cash an FHLBank may use to meet its operational requirements when its access to the capital markets is impeded. The FHLBNY met its contingency liquidity requirements and liquidity in excess of requirements is summarized in the table titled Contingency Liquidity.
Violations of the liquidity requirements would result in non-compliance penalties under discretionary powers given to the Finance Agency under applicable regulations, which include other corrective actions.
Liquidity Management
The FHLBNY actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member demand, and the maturity profile of the FHLBNY’s assets and liabilities. The FHLBNY recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the FHLBNY is required to maintain certain liquidity measures in accordance with the FHLBank Act and policies developed by the FHLBNY management and approved by the FHLBNY’s Board of Directors. The specific liquidity requirements applicable to the FHLBNY are described in the next four sections:
Deposit Liquidity.The FHLBNY is required to invest an aggregate amount at least equal to the amount of current deposits received from the FHLBNY’s members in: (1) obligations of the U.S. government; (2) deposits in banks or trust companies; or (3) advances to members with maturities not exceeding five years. In addition to accepting deposits from its members, the FHLBNY may accept deposits from other FHLBank or from any other governmental instrumentality.
Deposit liquidity is calculated daily. Quarterly average reserve requirements and actual reserves are summarized below during each quarter in 2009 and 2008 (in millions). The FHLBNY met its requirements at all times.
117
Table 25: Deposit Liquidity
| | | | | | | | | | | | | |
| | | Average Deposit | | | Average Actual | | | | |
| For the quarters ended | | Reserve Required | | | Deposit Liquidity | | | Excess | |
| December 31, 2009 | | $ | 2,364 | | | $ | 53,089 | | | $ | 50,725 | |
| September 30, 2009 | | | 2,189 | | | | 55,890 | | | | 53,701 | |
| June 30, 2009 | | | 2,190 | | | | 57,886 | | | | 55,696 | |
| March 31, 2009 | | | 1,753 | | | | 63,267 | | | | 61,514 | |
| December 31, 2008 | | | 2,022 | | | | 66,246 | | | | 64,224 | |
| September 30, 2008 | | | 1,657 | | | | 55,038 | | | | 53,381 | |
| June 30, 2008 | | | 2,239 | | | | 51,053 | | | | 48,814 | |
| March 31, 2008 | | | 2,091 | | | | 47,764 | | | | 45,673 | |
Operational Liquidity. The FHLBNY must be able to fund its activities as its balance sheet changes from day to day. The FHLBNY maintains the capacity to fund balance sheet growth through its regular money market and capital market funding activities. Management monitors the Bank’s operational liquidity needs by regularly comparing the Bank’s demonstrated funding capacity with its potential balance sheet growth. Management then takes such actions as may be necessary to maintain adequate sources of funding for such growth.
Operational liquidity is measured daily. The FHLBNY met the requirements at all times. The following table summarizes excess operational liquidity by each quarter in 2009 and 2008 (in millions):
Table 26: Operational Liquidity
| | | | | | | | | | | | | |
| | | Average Balance Sheet | | | Average Actual | | | | |
| For the quarters ended | | Liquidity Requirement | | | Operational Liquidity | | | Excess | |
| December 31, 2009 | | $ | 6,710 | | | $ | 16,388 | | | $ | 9,678 | |
| September 30, 2009 | | | 18,348 | | | | 22,205 | | | | 3,857 | |
| June 30, 2009 | | | 11,925 | | | | 25,904 | | | | 13,979 | |
| March 31, 2009 | | | 9,543 | | | | 20,893 | | | | 11,350 | |
| December 31, 2008 | | | 8,226 | | | | 14,827 | | | | 6,601 | |
| September 30, 2008 | | | 7,548 | | | | 21,337 | | | | 13,789 | |
| June 30, 2008 | | | 7,440 | | | | 20,018 | | | | 12,578 | |
| March 31, 2008 | | | 5,229 | | | | 18,232 | | | | 13,003 | |
Contingency Liquidity.The FHLBNY is required by Finance Agency regulations to hold “contingency liquidity” in an amount sufficient to meet its liquidity needs if it is unable, by virtue of a disaster, to access the consolidated obligation debt markets for at least five business days. Contingency liquidity includes (1) marketable assets with a maturity of one year or less; (2) self-liquidating assets with a maturity of one year or less; (3) assets that are generally acceptable as collateral in the repurchase market; and (4) irrevocable lines of credit from financial institutions receiving not less than the second-highest credit rating from a nationally recognized statistical rating organization. The FHLBNY consistently exceeded the regulatory minimum requirements for contingency liquidity.
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Contingency liquidity is reported daily. The FHLBNY met the requirements at all times. The following table summarizes excess contingency liquidity by each quarter in 2009 and 2008 (in millions):
Table 27: Contingency Liquidity
| | | | | | | | | | | | | |
| | | Average Five Day | | | Average Actual | | | | |
| For the quarters ended | | Requirement | | | Contingency Liquidity | | | Excess | |
| December 31, 2009 | | $ | 2,188 | | | $ | 15,309 | | | $ | 13,121 | |
| September 30, 2009 | | | 2,962 | | | | 16,676 | | | | 13,714 | |
| June 30, 2009 | | | 11,877 | | | | 21,030 | | | | 9,153 | |
| March 31, 2009 | | | 7,443 | | | | 18,709 | | | | 11,266 | |
| December 31, 2008 | | | 4,727 | | | | 12,930 | | | | 8,203 | |
| September 30, 2008 | | | 4,210 | | | | 18,795 | | | | 14,585 | |
| June 30, 2008 | | | 3,948 | | | | 17,186 | | | | 13,238 | |
| March 31, 2008 | | | 4,887 | | | | 16,382 | | | | 11,495 | |
The FHLBNY sets standards in its risk management policy that address its day-to-day operational and contingency liquidity needs. These standards enumerate the specific types of investments to be held by the FHLBNY to satisfy such liquidity needs and are outlined above. These standards also establish the methodology to be used by the FHLBNY in determining the FHLBNY’s operational and contingency needs. Management continually monitors and projects the FHLBNY’s cash needs, daily debt issuance capacity, and the amount and value of investments available for use in the market for repurchase agreements. Management uses this information to determine the FHLBNY’s liquidity needs and to develop appropriate liquidity plans.
Other Liquidity Contingencies. As discussed more fully under the section Debt Financing - Consolidated Obligations, the FHLBNY is primarily liable for consolidated obligations issued on its behalf. The FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the following rules apply: the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock of any member or non-member stockholder until the Finance Agency approves the FHLBNY’s consolidated obligation payment plan or other remedy and until the FHLBNY pays all the interest or principal currently due on all its consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations.
The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $0.9 trillion and $1.3 trillion at December 31, 2009 and 2008. The FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future.
Finance Agency regulations also state that the FHLBanks must maintain, free from any lien or pledge, the following types of assets in an amount at least equal to the amount of consolidated obligations outstanding:
| | • | | Cash; |
| |
| | • | | Obligations of, or fully guaranteed by, the United States; |
| |
| | • | | Secured advances; |
| |
| | • | | Mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States; |
| |
| | • | | Investments described in section 16(a) of the FHLBank Act, including securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and |
| |
| | • | | Other securities that are rated Aaa by Moody’s or AAA by Standard & Poor’s. |
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Leverage Limits and Unpledged Asset Requirements
The FHLBNY met the Finance Agency’s requirement that unpledged assets, as defined under regulations, exceed the total of consolidated obligations as follows (in thousands):
Table 28: Unpledged Asset
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| Consolidated Obligations: | | | | | | | | |
| Bonds | | $ | 74,007,978 | | | $ | 82,256,705 | |
| Discount Notes | | | 30,827,639 | | | | 46,329,906 | |
| | | | | | | |
| Total consolidated obligations | | | 104,835,617 | | | | 128,586,611 | |
| | | | | | | |
| | | | | | | | | |
| Unpledged assets | | | | | | | | |
| Cash | | | 2,189,252 | | | | 18,899 | |
| Less: Member pass-through reserves at the FRB | | | (29,331 | ) | | | (31,003 | ) |
Secured Advances 1 | | | 94,348,751 | | | | 109,152,876 | |
Investments1 | | | 16,222,615 | | | | 26,364,661 | |
| Mortgage loans | | | 1,317,547 | | | | 1,457,885 | |
| Accrued interest receivable on advances and investments | | | 340,510 | | | | 492,856 | |
| Less: Pledged Assets | | | (2,045 | ) | | | (2,669 | ) |
| | | | | | | |
| | | | 114,387,299 | | | | 137,453,505 | |
| | | | | | | |
Excess unpledged assets | | $ | 9,551,682 | | | $ | 8,866,894 | |
| | | | | | | |
| | | |
| 1 | | At December 31, 2009, the Bank pledged $2.0 million to the FDIC see Note 4- Held-to-maturity securities. The Bank also provided to the U.S. Treasury a listing of $10.3 billion in advances with respect to a lending agreement. See Note 19 — Commitments and Contingencies. |
| |
| | | Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and such securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located. |
Purchases of MBS.Finance Agency investment regulations limit the purchase of mortgage-backed securities to 300% of capital. The FHLBNY was in compliance with the regulation at all times.
Table 29 :FHFA MBS Limits
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Actual | | | Limits | | | Actual | | | Limits | |
| |
Mortgage securities investment authority1 | | | 213 | % | | | 300 | % | | | 207 | % | | | 300 | % |
| | | | | | | | | | | | | |
| | | |
| 1 | | The measurement date is on a one-month “look-back” basis. |
On March 24, 2008, the Board of Directors of the Federal Housing Finance Board (“Finance Board”), predecessor to the Finance Agency, adopted Resolution 2008-08, which temporarily expands the authority of a FHLBank to purchase mortgage-backed securities (“MBS”) under certain conditions. The resolution allows an FHLBank to increase its investments in MBS issued by Fannie Mae and Freddie Mac by an amount equal to three times its capital, which is to be calculated in addition to the existing regulatory limit. The expanded authority would permit MBS to be as much as 600% of the FHLBNY’s capital.
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All mortgage loans underlying any securities purchased under this expanded authority must be originated after January 1, 2008. The Finance Board believed that such loans are generally of higher credit quality than loans originated at an earlier time, particularly in 2005 and 2006. The loans underlying any Fannie Mae and Freddie Mac issued MBS acquired pursuant to the new authority must be underwritten to conform to standards imposed by the federal banking agencies in the “Interagency Guidance on Nontraditional Mortgage Product Risks”dated October 4, 2006 and the “Statement on Subprime Mortgage Lending”dated July 10, 2007.
The FHLBank must notify the Finance Agency of its intention to exercise the new authority (Resolution 2008-08) at least 10 business days in advance of its first commitment to purchase additional Agency MBS. Currently, the Bank has not notified or exercised Resolution 2008-08, therefore no separate calculation was required.
Results of Operations
The following section provides a comparative discussion of the FHLBNY’s results of operations for the three-year period ended December 31, 2009. For a discussion of the Critical accounting estimates used by the FHLBNY that affect the results of operations, see section in the MD&A captioned Significant Accounting Policies and Estimates, and Recently Issued Accounting Standards.
Net Income
The FHLBNY manages its operations as a single business segment. Advances to members are the primary focus of the FHLBNY’s operations, and are the principal factor that impacts its operating results. Interest income from advances is the principal source of revenue. The primary expenses are interest paid on consolidated obligations debt, operating expenses, principally administrative and overhead expenses, and “assessments” on net income. The FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax. It is required to make payments to REFCORP and set aside funds from its income towards an Affordable Housing Program (“AHP”), together referred to as assessments. Other significant factors affecting the Bank’s Net income include the volume and timing of investments in mortgage-backed securities, debt repurchases and associated losses, and earnings from shareholders’ capital.
Net income — 2009 versus 2008.
The FHLBNY reported 2009 Net income of $570.8 million, or $10.88 per share, compared with 2008 Net income of $259.1 million, or $5.26 per share. Net income was after the deduction of AHP and REFCORP assessments, which are a fixed percentage of the FHLBNY’s pre-assessment income.
Net interest income before the provision for credit losses, a key metric for the FHLBNY, was $700.6 million for 2009, up slightly by $6.1 million, or 0.9% from the prior year. Net interest income is the primary contributor to Net income for the FHLBNY.
Decline in the cost of debt relative to earnings from advances and investments was one factor that drove 2009 Net interest income. The Bank shifted its funding mix in 2009 and funded a significant percentage of its assets utilizing discount notes and short-term debt at advantageous spreads. While yields earned from assets and yields paid on liabilities declined 193 basis points in a lower interest rate environment in 2009, relative to 2008, aggregate funding cost declined by 201 basis points. An increase in transaction volume as measured by average earning assets was another factor. Earning assets averaged $124.8 billion in 2009, up from $118.7 billion in 2008.
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Net interest spread, which is the difference between yields on interest-earning assets and yields on interest-costing liabilities, improved by 8 basis points in 2009 as a result of these favorable conditions and tactical funding adjustments. The favorable result was almost entirely offset by significant decline in interest income earned from the deployment of members’ capital and net non-interest bearing liabilities, together referred to as deployed capital, to fund interest-earning assets. The average deployed capital was $9.1 billion in 2009, and it potentially could have earned 149 basis points, the aggregate yield on earning assets in 2009. In 2008, average deployed capital was $6.7 billion but potentially could have earned a significantly higher yield of 342 basis points in 2008. Member capital in specific is typically utilized to fund short-term liquid investments, and the yields from such assets declined steeply in 2009. The potential earnings from investing members’ equity is typically lower in a low interest rate environment as in 2009, relative to 2008.
Net income in 2009 benefited from net gains of $164.7 million from derivatives and hedging activities in contrast to a net loss of $199.3 million in 2008. In order to manage the FHLBNY’s interest rate risk profile, management of the FHLBNY routinely uses derivatives to manage the interest rate risk inherent in the Bank’s assets and liabilities. The gains in 2009 were principally from favorable fair value changes of interest rate swaps designated in economic hedges of consolidated obligation bonds, and interest rate caps designated in economic hedges of certain GSE issued capped floating-rate MBS.
| | • | | Swaps designated as economic hedges were primarily interest rate basis swaps executed to reduce the FHLBNY’s debt expense exposure to changes in the 3-month LIBOR rates. The FHLBNY had issued floating-rate debt that were either indexed to 1-month LIBOR, prime, or the daily Federal funds rate, and the swaps synthetically converted the combined debt and swap cash flows to 3-month LIBOR rates. The basis swaps and other interest rate swaps were designated as economic hedges, because management could not establish with certainty that the hedges would be highly effective hedges in future periods, or the hedges had ceased to be highly effective hedges, or the operational burden of establishing hedge accounting was significant. The derivatives designated as economic hedges are marked to fair value through earnings with no offsetting changes in fair values of the hedged financial instruments. Favorable fair value gains of interest rate swaps in 2009 were primarily the reversal of fair value losses recorded in 2008 from swaps that had matured or were nearing maturity in 2009. When interest rate swaps are held to their contractual maturity (or put/call dates), nearly all of the cumulative net fair value gains and losses that are unrealized will generally reverse over time, and fair value changes will sum to zero. |
| | • | | Purchased interest rate caps also exhibited fair value gains in 2009. Fair values of interest rate caps are impacted by the level of interest rates, volatility (variability of interest rates), and terms to maturity. Long-term rates have been rising and in this interest rate environment, purchased caps will show favorable fair value gains. Such gains are unrealized and will also reverse if the caps are held to their contractual maturities. |
Year-over-year increase in 2009 Net income is further explained by the 2008 loss of $47.4 million ( on an after assessment basis), or $0.97 per share of capital as result of the bankruptcy of Lehman Brothers Special Financing (“LBSF”), a derivative counterparty to the FHLBNY which defaulted under the contractual terms of its agreement with FHLBNY on $16.5 billion in notional amount of derivatives outstanding at the time of bankruptcy.
In 2009, the FHLBNY identified credit impairment in 17 of its private-label mortgage-backed securities. Cash flow assessments of the expected credit performance of its private-label mortgage-backed securities for OTTI at each interim quarterly period in 2009 and at December 31, 2009 identified future losses. In assessing the expected credit performance of these securities, the Bank determined it was likely it would not fully recover the amortized cost of the 17 private-label held-to-maturity mortgage-backed securities, and the securities were deemed to be OTTI. Cumulative OTTI of $20.8 million in credit impairment charges were charged to earnings in 2009. In the first three quarters of 2009, the Bank had recorded cumulative credit impairment charges of $14.3 million. In the fourth quarter, credit impairment charges of $6.5 million were charged to earnings when management identified additional credit impairment on eight private-label mortgage-backed securities. Six of the eight securities had previously been deemed to be credit impaired in the interim periods in 2009. At December 31, 2009, the amount of non-credit OTTI, remaining after accretion, was a cumulative loss of $110.6 million in AOCI, a component of stockholders’ equity.
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Although 14 of the 17 securities that have been credit impaired in 2009 are insured by bond insurers, Ambac Assurance Corp (“Ambac”) and MBIA Insurance Corp (“MBIA”), the Bank’s analysis of the two bond insurers concluded that for the 14 insured securities, future credit losses due to projected collateral shortfalls would not be fully supported by the two bond insurers. For more information about impairment methodology and bond insurer analysis, see Note 1 — Significant Accounting Policies and Estimates, and Note 4 — Held-to-maturity securities to the audited financial statements accompanying this report.
Operating Expenses of the FHLBNY were $76.1 million in 2009, up from $66.3 million in 2008. The FHLBNY was also assessed for its share of the operating expenses for the Finance Agency and the Office of Finance, which totaled $8.1 million in 2009, up from $6.4 million in 2008.
REFCORP assessment totaled $142.7 million in 2009, up from $64.8 million in 2008. Affordable Housing Program (“AHP”) assessments set aside from income totaled $64.3 million in 2009, up from $29.8 million in 2008. Assessments are calculated on Net income before assessments and the increases were due to a significant increase in 2009 Net income compared to 2008. For more information about REFCORP and AHP assessments see the section Assessments in this Form 10-K.
The return on average equity, which is Net income divided by average Capital stock, Retained earnings, and AOCI was 10.02% in 2009, compared with 4.95% in 2008. Net earnings per share was $10.88 in 2009, compared with $5.26 in 2008.
Net income — 2008 versus 2007.
The FHLBNY reported 2008 Net income of $259.1 million, or $5.26 per share, compared with Net income of $323.1 million, or $8.57 per share, for 2007. The decrease in 2008 Net income year-over-year was mainly attributed to a credit loss provision of $64.5 million against receivables due from Lehman Brothers Special Financing Inc. (“LBSF”). The LBSF provision on an after assessment basis reduced 2008 Net income by $47.4 million, or $0.97 per share of capital.
Net interest income before the provision for credit losses was $694.5 million for 2008, up by $195.1 million, or 39.1 % from the prior year. Reported Net realized and unrealized loss from hedging activities was a loss of $199.3 million in 2008, compared to a gain of $18.4 million in 2007. The reported hedging loss in 2008 was primarily due to the accounting designation of swaps as economic hedges that necessitated the recording of unfavorable changes in their fair values without the offsetting benefit of favorable fair value changes of the economically hedged financial instrument. Operating Expenses were $66.3 million in 2008, slightly down by $0.3 million, from $66.6 million in 2007. REFCORP assessments were $64.8 million in 2008, down by $16.0 million, from 2007. AHP assessments were $29.8 million, down by $7.4 million, from 2007. Since assessments are calculated on Net income before assessments and the decrease was due to lower Net income in 2008 compared to 2007. The return on average equity in 2008 was 4.95%, compared with 7.85% in 2007. Net earnings per share in 2008 was $5.26, compared to $8.57 per share in 2007.
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Interest Income — 2009, 2008, and 2007
Interest income from advances and investments in mortgage-backed securities are the principal sources of income for the FHLBNY. Changes in both rate and intermediation volume (average interest-yielding assets) explain the change in the current year from the prior year. The principal categories of Interest Income by year are summarized below (dollars in thousands):
Table 30: Interest Income — Principal Sources
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | Percentage | | | Percentage | |
| | | 2009 | | | 2008 | | | 2007 | | | Variance 2009 | | | Variance 2008 | |
Interest Income | | | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 1,270,643 | | | $ | 3,030,799 | | | $ | 3,495,312 | | | | (58.08 | )% | | | (13.29) | % |
| Interest-bearing deposits | | | 19,865 | | | | 28,012 | | | | 3,333 | | | | (29.08 | ) | | | 740.44 | |
| Federal funds sold | | | 3,238 | | | | 77,976 | | | | 192,845 | | | | (95.85 | ) | | | (59.57 | ) |
| Available-for-sale securities | | | 28,842 | | | | 80,746 | | | | — | | | | (64.28 | ) | | | N/A | |
| Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | |
| Long-term securities | | | 461,491 | | | | 531,151 | | | | 596,761 | | | | (13.11 | ) | | | (10.99 | ) |
| Certificates of deposit | | | 1,626 | | | | 232,300 | | | | 408,308 | | | | (99.30 | ) | | | (43.11 | ) |
| Mortgage loans held-for-portfolio | | | 71,980 | | | | 77,862 | | | | 78,937 | | | | (7.55 | ) | | | (1.36 | ) |
| Loans to other FHLBanks and other | | | 2 | | | | 33 | | | | 9 | | | | (93.94 | ) | | | 266.67 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 1,857,687 | | | $ | 4,058,879 | | | $ | 4,775,505 | | | | (54.23 | )% | | | (15.01 | )% |
| | | | | | | | | | | | | | | | |
Reported Interest Income in the Statements of Income was adjusted for the cash flows associated with interest rate swaps in which the Bank generally pays fixed-rate cash flows to derivative counterparties and, in exchange, the Bank receives variable-rate LIBOR-indexed cash flows fixed-rate cash flows, which typically mirror the fixed-rate coupon received from advances borrowed by members.
Impact of hedging advances— The FHLBNY executes interest rate swaps to modify the effective interest rate terms of many of its fixed-rate advance products and typically all of its convertible or putable advances. In these swaps, the FHLBNY effectively converts a fixed-rate stream of cash flows from its fixed-rate advances to a floating-rate stream of cash flows, typically indexed to LIBOR. These cash flow patterns from derivatives were in line with the Bank’s interest rate risk management practices and effectively converted fixed-rate cash flows of hedged advances to LIBOR indexed cash flows. Derivative strategies are used to manage the interest rate risk inherent in fixed-rate advances and are designed to protect future interest income.
The table below summarizes interest income earned from advances and the impact of interest rate derivatives (in thousands):
Table 31: Impact of Interest Rate Swaps on Interest Income Earned from Advances
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
Advance Interest Income | | | | | | | | | | | | |
| Advance interest income before adjustment for interest rate swaps | | $ | 3,062,649 | | | $ | 3,483,979 | | | $ | 3,139,311 | |
Net interest adjustment from interest rate swaps1 | | | (1,792,006 | ) | | | (453,180 | ) | | | 356,001 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total Advance interest income reported | | $ | 1,270,643 | | | $ | 3,030,799 | | | $ | 3,495,312 | |
| | | | | | | | | | |
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In compliance with the terms of the swap agreement, the FHLBNY pays the swap counterparty fixed-rate cash flows, which typically mirrors the coupon on the advance. In return, the swap counterparty pays the FHLBNY a pre-determined spread plus the prevailing LIBOR, which by agreement resets generally every three months. In the table above, the unfavorable cash flow patterns of the interest rate swaps are indicative of the declining LIBOR rates (obligation of the swap counterparty) compared to fixed-rate obligation of the FHLBNY. The Bank is generally indifferent to changes in the cash flow patterns as it typically hedges its fixed-rate consolidated obligation debt, which is the Bank’s primary funding base, and achieves it overall net interest spread objective.
Under GAAP, net interest adjustments from derivatives as reported in the table above may be offset against the hedged financial instrument (e.g. advance) only if the derivative is in a hedge qualifying relationship. If the hedge does not qualify for hedge accounting, and the Bank designates the hedge as an economic hedge, the net interest adjustments from derivatives are not recorded with the advance revenues. Instead, the net interest adjustments from swaps are recorded in Other income (loss) as a Net realized and unrealized gains from derivatives and hedging activities. Thus, the accounting designation of a hedge may have a significant impact on reported Interest income from advances. There were no material amounts of net interest adjustments from interest rate swaps designated as economic hedges of advances that were reported in Other income in the current year or prior years related to swaps associated with advances.
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Interest Expense — 2009, 2008, and 2007
The FHLBNY’s primary source of funding is through the issuance of consolidated obligation bonds and discount notes in the global debt markets. Consolidated obligation bonds are medium- and long-term, while discount notes are short-term instruments. To fund its assets, the FHLBNY considers its interest rate risk and liquidity requirements in conjunction with consolidated obligation buyers’ preferences and capital market conditions when determining the characteristics of debt to be issued. Typically the Bank has used fixed-rate callable and non-callable bonds to fund mortgage-related assets and advances. Discount notes are issued to fund advances and investments with shorter-interest rate reset characteristics.
The principal categories of Interest Expense are summarized by year below. Changes in both rate and intermediation volume (average interest-costing liabilities), the mix of debt issuances between bonds and discount notes, and the impact of hedging strategies explain the changes in interest expense. (dollars in thousands):
Table 32: Interest Expenses — Principal Categories
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | Percentage | | | Percentage | |
| | | 2009 | | | 2008 | | | 2007 | | | Variance 2009 | | | Variance 2008 | |
Interest Expense | | | | | | | | | | | | | | | | | | | | |
| Consolidated obligations-bonds | | $ | 953,970 | | | $ | 2,620,431 | | | $ | 3,215,560 | | | | (63.59 | )% | | | (18.51 | )% |
| Consolidated obligations-discount notes | | | 193,041 | | | | 697,729 | | | | 937,534 | | | | (72.33 | ) | | | (25.58 | ) |
| Deposits | | | 2,512 | | | | 36,193 | | | | 106,777 | | | | (93.06 | ) | | | (66.10 | ) |
| Mandatorily redeemable capital stock | | | 7,507 | | | | 8,984 | | | | 11,731 | | | | (16.44 | ) | | | (23.42 | ) |
| Cash collateral held and other borrowings | | | 49 | | | | 1,044 | | | | 4,516 | | | | (95.31 | ) | | | (76.88 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest expense | | $ | 1,157,079 | | | $ | 3,364,381 | | | $ | 4,276,118 | | | | (65.61 | )% | | | (21.32 | )% |
| | | | | | | | | | | | | | | | |
The principal components of interest expense paid by type of consolidated obligation bonds and discount notes are summarized below (dollars in thousands):
Table 33: Consolidated Obligations — Interest Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | | | | | Percentage | | | | | | | Percentage | | | | | | | Percentage | |
| | | 2009 | | | of total | | | 2008 | | | of total | | | 2007 | | | of total | |
| | | | |
| Fixed-rate Bonds | | $ | 1,360,419 | | | | 79.71 | % | | $ | 2,052,066 | | | | 56.13 | % | | $ | 2,710,748 | | | | 68.13 | % |
| Floating-rate Bonds | | | 153,198 | | | | 8.98 | | | | 906,452 | | | | 24.79 | | | | 330,710 | | | | 8.31 | |
| Discount Notes | | | 193,041 | | | | 11.31 | | | | 697,729 | | | | 19.08 | | | | 937,534 | | | | 23.56 | |
| | | | | | | | | | | | | | | | | | | |
| | | | 1,706,658 | | | | 100.00 | % | | | 3,656,247 | | | | 100.00 | % | | | 3,978,992 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Net Impact of interest rate swaps | | | (559,647 | ) | | | | | | | (338,087 | ) | | | | | | | 174,102 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Reported Interest Expense | | $ | 1,147,011 | | | | | | | $ | 3,318,160 | | | | | | | $ | 4,153,094 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Recorded interest expense in the Statements of Income is adjusted for the cash flows associated with interest rate swaps in which the Bank generally pays variable-rate LIBOR-indexed cash flows to derivative counterparties and, in exchange, the Bank receives fixed-rate cash flows, which typically mirror the fixed-rate coupon payments to investors holding the debt. The Bank generally hedges its long-term fixed-rate bonds and almost all fixed-rate callable bonds with hedges that generally qualify for hedge accounting. In the current and prior years, the Bank economically hedged certain floating-rate bonds that were not indexed to 3-month LIBOR, and certain short-term fixed-rate debt and discount notes because it believed that the hedges would not be highly effective in offsetting changes in the fair values of the debt and the swap, and would not therefore qualify for hedge accounting.
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Impact of hedging debt— The FHLBNY issues both fixed-rate callable and non-callable debt. Typically, the Bank issues callable debt with the simultaneous execution of cancellable interest rate swaps to modify the effective interest rate terms and the effective durations of its fixed-rate callable debt. A substantial percentage of non-callable fixed-rate debt is also swapped to “plain vanilla” LIBOR-indexed cash flows.
These hedging strategies benefit the Bank in two principal ways: (1) fixed-rate callable bond in conjunction with interest rate swap containing a call feature that mirrors the option embedded in the callable bond enables the FHLBNY to meet its funding needs at yields not otherwise directly attainable through the issuance of callable debt; and, (2) the issuance of fixed-rate debt and the simultaneous execution of an interest rate swap converts the debt to an adjustable-rate instrument tied to an index, typically 3-month LIBOR. Derivative strategies are used to manage the interest rate risk inherent in fixed-rate debt and certain floating-rate debt that are not indexed to 3-month LIBOR rates. The strategies are designed to protect future interest income. The economic hedge of debt tied to indices other than 3-month LIBOR (Prime, Federal funds, and 1-month LIBOR) is designed to effectively convert the cash flows of the debt to 3-month LIBOR.
The table below summarizes interest expense paid on consolidated obligation bonds and discount notes and the impact of interest rate swaps (in thousands):
Table 34: Impact of Interest Rate Swaps on Consolidated Obligation Interest Expense
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
Consolidated bonds and discount notes-Interest expense | | | | | | | | | | | | |
| Bonds-Interest expense before adjustment for swaps | | $ | 1,513,617 | | | $ | 2,958,518 | | | $ | 3,041,458 | |
| Discount notes-Interest expense before adjustment for swaps | | | 193,041 | | | | 697,729 | | | | 937,534 | |
Net interest adjustment for interest rate swaps1 | | | (559,647 | ) | | | (338,087 | ) | | | 174,102 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total Consolidated bonds and discount notes-interest expense reported | | $ | 1,147,011 | | | $ | 3,318,160 | | | $ | 4,153,094 | |
| | | | | | | | | | |
Net interest income — 2009, 2008, and 2007
Net interest income is the principal source of revenue for the Bank, and represents the difference between interest income from interest-earning assets and interest expense paid on interest-costing liabilities. Net interest income is impacted by a variety of factors: member demand for advances and investment activity, the yields from advances and investments, and the cost of consolidated obligation debt that is issued by the Bank to fund advances and investments. The execution of interest rate swaps in the derivative market at a constant spread to LIBOR, in effect converting fixed-rate advances and fixed-rate debt to conventional adjustable-rate instruments indexed to LIBOR, results in an important intermediation for the Bank between the capital markets and the swap market. The intermediation has typically permitted the Bank to raise funds at lower costs than would otherwise be available through the issuance of simple fixed- or floating-rate debt in the capital markets. The FHLBNY deploys hedging strategies to protect future net interest income, but may reduce income in the short-run, although the FHLBNY expects them to benefit future periods. Income earned from assets funded by member capital and retained earnings, referred to as “deployed capital”, which are non-interest bearing, is another important contributor for the FHLBNY. All of these factors may fluctuate based on changes in interest rates, demand by members for advances, investor demand for debt issued by the FHLBNY the change in the spread between the yields on advances and investments, and the cost of financing these assets by the issuance of debt to investors.
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The following table summarizes key changes in the components of Net interest income for the three years ended December 31, 2009, 2008 and 2007 (dollars in thousands):
Table 35: Components of Net interest income
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | Percentage | | | Percentage | |
| | | 2009 | | | 2008 | | | 2007 | | | Variance 2009 | | | Variance 2008 | |
Interest Income | | | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 1,270,643 | | | $ | 3,030,799 | | | $ | 3,495,312 | | | | (58.08 | )% | | | (13.29 | )% |
| Interest-bearing deposits | | | 19,865 | | | | 28,012 | | | | 3,333 | | | | (29.08 | ) | | | 740.44 | |
| Federal funds sold | | | 3,238 | | | | 77,976 | | | | 192,845 | | | | (95.85 | ) | | | (59.57 | ) |
| Available-for-sale securities | | | 28,842 | | | | 80,746 | | | | — | | | | (64.28 | ) | | | N/A | |
| Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | |
| Long-term securities | | | 461,491 | | | | 531,151 | | | | 596,761 | | | | (13.11 | ) | | | (10.99 | ) |
| Certificates of deposit | | | 1,626 | | | | 232,300 | | | | 408,308 | | | | (99.30 | ) | | | (43.11 | ) |
| Mortgage loans held-for-portfolio | | | 71,980 | | | | 77,862 | | | | 78,937 | | | | (7.55 | ) | | | (1.36 | ) |
| Loans to other FHLBanks and other | | | 2 | | | | 33 | | | | 9 | | | | (93.94 | ) | | | 266.67 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | | 1,857,687 | | | | 4,058,879 | | | | 4,775,505 | | | | (54.23 | ) | | | (15.01 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Interest Expense | | | | | | | | | | | | | | | | | | | | |
| Consolidated obligations-bonds | | | 953,970 | | | | 2,620,431 | | | | 3,215,560 | | | | (63.59 | ) | | | (18.51 | ) |
| Consolidated obligations-discount notes | | | 193,041 | | | | 697,729 | | | | 937,534 | | | | (72.33 | ) | | | (25.58 | ) |
| Deposits | | | 2,512 | | | | 36,193 | | | | 106,777 | | | | (93.06 | ) | | | (66.10 | ) |
| Mandatorily redeemable capital stock | | | 7,507 | | | | 8,984 | | | | 11,731 | | | | (16.44 | ) | | | (23.42 | ) |
| Cash collateral held and other borrowings | | | 49 | | | | 1,044 | | | | 4,516 | | | | (95.31 | ) | | | (76.88 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total interest expense | | | 1,157,079 | | | | 3,364,381 | | | | 4,276,118 | | | | (65.61 | ) | | | (21.32 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net interest income before provision for credit losses | | $ | 700,608 | | | $ | 694,498 | | | $ | 499,387 | | | | 0.88 | % | | | 39.07 | % |
| | | | | | | | | | | | | | | | |
Net interest income
2009 Net interest income before provision for credit losses on mortgage loans was $700.6 million, up slightly by $6.1 million, or 0.9% from the prior year. 2008 Net interest income was $694.5 million, up significantly from $499.4 million in 2007. Net interest income is directly impacted by transaction volumes, as measured by average balances of interest earning assets, and by the prevailing balance sheet yields, as measured by coupons on earning assets minus yields paid on interest costing liabilities net of the cash flows paid or received on interest rate derivatives that qualified under hedge accounting rules.
Net interest income in 2009 was virtually flat year-over-year primarily because the benefits from the 8 basis points improvement in Net interest spread and $6.1 billion increase in transaction volume were almost entirely offset by significantly lower earnings from deployed capital (shareholders’ equity and net non-interest costing liabilities) in a historically low interest rate environment for short-term investments.
Net interest income in 2008 grew year-over-year by 39.1% due to the extraordinary increase in advance volume up by 41.5%. Net interest income grew by $202.9 million year-over-year due to an increase in overall transaction volumes. Deployed capital grew as members purchased additional FHLBNY stock and the higher stock balances offset to a large degree the unfavorable impact from earnings from deployed capital in a lower interest rate environment in 2008, relative to 2007.
For more information, see Table 38: Spread and Yield Analysis and Table 39: Rate and Volume Analysis.
The Bank deploys hedging strategies to protect future net interest income that may reduce income in the short-term. On a GAAP basis, the impact of derivatives was to reduce 2009 Net interest income by $1.2 billion, compared to also an unfavorable but a significantly smaller impact of $115.1 million in 2008. In 2007, the impact of derivatives employed to hedge interest rate risk made a positive contribution of $181.9 million to Net interest income. For more information, see Table 36: Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps.
128
In 2009 and 2008, certain hedging strategies were designated as economic hedges, primarily as hedges of FHLBNY debt. Under existing accounting rules, the interest income or expense generated from the derivatives designated as economic hedges are not reported as a component of Net interest income although they have an economic impact on Net interest income. Under GAAP, interest income or expense from such derivatives are recorded as derivative gains and losses in Other income (loss) as a Net realized and unrealized gain (loss) from derivatives and hedging activities. In 2009, on an economic basis, the economic impact of derivatives would have been to increase GAAP 2009 Net interest income by $8.0 million. In 2008, on an economic basis, the impact would have been to decrease GAAP 2008 Net interest expense by $127.1 million. In 2007, the impact was not material. The reporting classification of interest income or expense associated with swaps designated as economic hedges as either a component of Net interest income or Other income as gains or losses from hedging activities has no impact on Net income.
On a GAAP basis, 2009 Net interest income was $700.6 million, compared to $708.6 million on an economic basis. GAAP basis 2008 Net interest income was $694.5 million, compared to $567.4 million on an economic basis. In 2007, GAAP Net interest income of $499.4 million was not significantly different from economic Net interest income because of the insignificant amounts of economic hedges in 2007.
Earning assets— Transaction volume grew modestly in 2009. Average outstanding interest-earning assets increased by $6.1 billion, to $124.8 million in 2009. Member demand for advances as measured by average outstanding balances grew to $99.0 billion in 2009, up by $6.3 billion. In 2008, average earning assets grew to $118.7 billion, up by $29.5 billion, or 33.0% from 2007, driven by the surge in member demand for advances during the height of the dislocation in the credit markets.
Interest costing liabilities— In 2009 as in 2008, the Bank utilized a greater percentage of discount notes to fund its assets than in the preceding year. Discount notes, which are short-term, are typically lower costing liabilities. Average discount notes grew to $41.5 billion in 2009, an increase of 46.4%, compared to $28.3 billion in 2008. The comparable average was $19.0 billion in 2007. Weighted average yields paid on discount notes in 2009 was 47 basis points, significantly lower than 246 basis points paid in 2008, and 495 basis points paid in 2007. The positive spread between the yield on discount notes and the weighted average yield on total interest-earning assets was 102 basis points and 96 basis points in 2009 and 2008, compared to 40 basis points in 2007, illustrating the significant advantage in 2009 and 2008 of employing discount notes as a funding instrument.
Earnings from member capital— The FHLBNY earns income from investing its members’ capital to fund interest-earning assets. Member capital increased in 2009 and 2008 associated with the continued demand for advances borrowed by members. As a result, deployed capital, which is capital stock, retained earnings and net non-interest bearing liabilities grew and provided the FHLBNY with a significant source of income even as the potential for earning interest income declined with successive years of declining interest rates. Earnings from deployed capital are sensitive to changes in short-term interest rates. An average deployed capital of $9.1 billion in 2009 potentially could have earned 149 basis points, the aggregate yield on earning assets in the year. In 2008, average deployed capital was $6.7 billion but potentially could have earned 342 basis points. Deployed capital is typically utilized to fund short-term liquid investments, and the yields from such assets declined even more sharply in 2009, further exacerbating the decline in earning potential. In 2007, average deployed capital was $4.5 billion, significantly lower than the average in 2008, but earned a higher yield of 535 basis points. Based on an assumption that deployed capital was invested to earn 149 basis points, the annualized yield on aggregate earning assets in 2009, the Bank’s potential earnings from deployed capital was $136.3 million in 2009. The comparable potential earnings contributions from deployed capital in 2008 was $230.7 million and $241.9 million in 2007. Typically, the Bank earns relatively lower income in a lower interest rate environment on a given amount of average deployed capital.
129
Net interest spread— Net interest spread is the difference between annualized yields on interest-earning assets and yields on interest-bearing liabilities. The Bank deploys hedging strategies to protect future net interest income that may reduce income in the short-term. As discussed previously, on a GAAP basis, net interest income and expenses from hedge qualifying interest rate swaps are recorded as a component of Net interest spread. A significant amount of hedging strategies were designated in 2009 and 2008 as economic hedges, and under existing accounting rules, the interest income or expense associated with such derivatives is not reported as a component of Net interest spread although they have an economic impact on Net interest income. On a GAAP basis, 2009 Net interest spread earned was 49 basis points, up by 8 basis points from 41 basis points in 2008, and 30 basis points in 2007. The 2009 Net interest spread benefited from the shift in funding mix to more short-term debt and discount notes to fund the FHLBNY’s assets, which more than offset the decline in earnings from deployed capital. In 2008, decline in earnings from deployed capital had a lesser impact. The Bank also utilized a greater percentage of discount notes in 2008 than in 2007 and was a factor in the 11 basis points improvement in Net spread in 2008.
On an economic basis (Non-GAAP), the Bank estimates that had the Bank recorded swap interest, from swaps designated as economic hedges, as part of Net interest income, the 2009 Net interest spread would have improved by 1 basis point to 50 basis points, and reduced the 2008 Net interest spread by 11 basis points to 30 basis points. The impact would have been de minimis in 2007.
As measured on a GAAP basis, the 2009 return on average earning-assets (“ROA”) declined to 56 basis points compared to 59 basis points in 2008, and 56 basis points in 2007. ROA is a measure of the efficiency of the use of earning assets. On an economic basis (Non-GAAP), the 2009 ROA would have improved slightly to 57 basis points. The 2008 ROA would have declined to 48 basis points, and the 2007 ROA would have remained unchanged at 56 basis points. For more information, see Table 37.
The following table summarizes the impact of net interest adjustments from hedge qualifying interest-rate swaps (in thousands):
Table 36: Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | |
Interest Income | | $ | 3,649,693 | | | $ | 4,512,059 | | | $ | 4,419,504 | |
| Net interest adjustment from interest rate swaps | | | (1,792,006 | ) | | | (453,180 | ) | | | 356,001 | |
| | | | | | | | | | |
Reported interest income | | | 1,857,687 | | | | 4,058,879 | | | | 4,775,505 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Interest Expense | | | 1,716,726 | | | | 3,702,468 | | | | 4,102,016 | |
| Net interest adjustment from interest rate swaps | | | (559,647 | ) | | | (338,087 | ) | | | 174,102 | |
| | | | | | | | | | |
Reported interest expense | | | 1,157,079 | | | | 3,364,381 | | | | 4,276,118 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net interest income (Margin) | | $ | 700,608 | | | $ | 694,498 | | | $ | 499,387 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net interest adjustment — interest rate swaps | | $ | (1,232,359 | ) | | $ | (115,093 | ) | | $ | 181,899 | |
| | | | | | | | | | |
The Bank deploys hedging strategies to protect future net interest income that may reduce income in the short-term. Net interest accruals of derivatives designated in a fair value or cash flow hedge qualifying under the derivatives and hedge accounting rules were recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities, and had a significant impact on Net interest income. On a GAAP basis, the impact of derivatives was to reduce 2009 Net interest income by $1.2 billion, compared to also an unfavorable but a significantly smaller impact of $115.1 million in 2008. In 2007, the impact of derivatives employed to hedge interest rate risk made a positive contribution of $181.9 million to 2007 Net interest income.
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The following table contrasts Net interest income, Net income spread and Return on earning assets between GAAP and economic basis (dollar amounts in thousands):
Table 37: GAAP Versus Economic Basis — Contrasting Net Interest Income, Net Income Spread and Return on Earning Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | Amount | | | ROA | | | Net Spread | | | Amount | | | ROA | | | Net Spread | | | Amount | | | ROA | | | Net Spread | |
| | | | |
| GAAP net interest income | | $ | 700,608 | | | | 0.56 | % | | | 0.49 | % | | $ | 694,498 | | | | 0.59 | % | | | 0.41 | % | | $ | 499,387 | | | | 0.56 | % | | | 0.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income (expense) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Swaps not designated in a hedging relationship | | | 8,026 | | | | 0.01 | | | | 0.01 | | | | (127,056 | ) | | | (0.11 | ) | | | (0.11 | ) | | | 1,887 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Economic net interest income | | $ | 708,634 | | | | 0.57 | % | | | 0.50 | % | | $ | 567,442 | | | | 0.48 | % | | | 0.30 | % | | $ | 501,274 | | | | 0.56 | % | | | 0.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Explanation of the use of certain non-GAAP measures of Interest Income and Expense, Net Interest income and margin. The FHLBNY has presented its results of operations in accordance with U.S. generally accepted accounting principles. The FHLBNY has also presented certain information regarding its Interest Income and Expense, Net Interest income and Net Interest spread that combines interest expense on debt with net interest paid on interest rate swaps associated with debt that were hedged on an economic basis. These are non-GAAP financial measures used by management that the FHLBNY believes are useful to investors and members of the FHLBNY in understanding the Bank’s operational performance as well as business and performance trends. Although the FHLBNY believes these non-GAAP financial measures enhance investor and members’ understanding of the Bank’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. When discussing non-GAAP measures, the Bank has provided GAAP measures in parallel.
In 2009 and 2008, significant amounts of swaps were designated as economic hedges of consolidated obligation debt in a hedging strategy that converted floating-rate debt indexed to 1-month LIBOR, the Prime rate, and the Federal Funds Effective rate to 3-month LIBOR cash flows. The Bank also economically hedged certain short-term fixed-rate debt and discount notes that it also believed would not be highly effective in offsetting changes in the fair values of the debt and the swap. In compliance with accounting standards for derivatives and hedging, interest income and expense from such derivatives were recorded as derivative gains and losses in Other income (loss) as a Net realized and unrealized gain (loss) from derivatives and hedging activities.
131
Spread and Yield Analysis
Average balance sheet information is presented below as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average was calculated for the period. When daily weighted average balance information was not available, a simple monthly average balance was calculated. Average yields were derived by dividing income by the average balances of the related assets and average costs are derived by dividing expenses by the average balances of the related liabilities.
Table 38: Spread and Yield Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | Interest | | | | | | | | | | | Interest | | | | | | | | | | | Interest | | | | |
| | | Average | | | Income/ | | | | | | | Average | | | Income/ | | | | | | | Average | | | Income/ | | | | |
| (dollars in thousands) | | Balance | | | Expense | | | Rate1 | | | Balance | | | Expense | | | Rate1 | | | Balance | | | Expense | | | Rate1 | |
Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 98,965,716 | | | $ | 1,270,643 | | | | 1.28 | % | | $ | 92,616,501 | | | $ | 3,030,799 | | | | 3.27 | % | | $ | 65,454,319 | | | $ | 3,495,312 | | | | 5.34 | % |
| Certificates of deposit and other | | | 3,263,671 | | | | 6,096 | | | | 0.19 | | | | 7,802,425 | | | | 251,600 | | | | 3.22 | | | | 7,689,475 | | | | 411,641 | | | | 5.35 | |
| Federal funds sold and other overnight funds | | | 8,386,126 | | | | 18,635 | | | | 0.22 | | | | 4,333,408 | | | | 86,688 | | | | 2.00 | | | | 3,741,385 | | | | 192,845 | | | | 5.15 | |
| Investments | | | 12,761,836 | | | | 490,333 | | | | 3.84 | | | | 12,441,712 | | | | 611,897 | | | | 4.92 | | | | 10,798,926 | | | | 596,761 | | | | 5.53 | |
| Mortgage and other loans | | | 1,386,964 | | | | 71,980 | | | | 5.19 | | | | 1,467,561 | | | | 77,895 | | | | 5.31 | | | | 1,502,320 | | | | 78,946 | | | | 5.25 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | $ | 124,764,313 | | | $ | 1,857,687 | | | | 1.49 | % | | $ | 118,661,607 | | | $ | 4,058,879 | | | | 3.42 | % | | $ | 89,186,425 | | | $ | 4,775,505 | | | | 5.35 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Funded By: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated obligations-bonds | | $ | 71,860,494 | | | $ | 953,970 | | | | 1.33 | | | $ | 81,341,452 | | | $ | 2,620,431 | | | | 3.22 | | | $ | 63,276,726 | | | $ | 3,215,560 | | | | 5.08 | |
| Consolidated obligations-discount notes | | | 41,495,955 | | | | 193,041 | | | | 0.47 | | | | 28,349,373 | | | | 697,729 | | | | 2.46 | | | | 18,956,390 | | | | 937,534 | | | | 4.95 | |
| Interest-bearing deposits and other borrowings | | | 2,121,718 | | | | 2,561 | | | | 0.12 | | | | 2,058,389 | | | | 37,237 | | | | 1.81 | | | | 2,285,523 | | | | 111,293 | | | | 4.87 | |
| Mandatorily redeemable capital stock | | | 137,126 | | | | 7,507 | | | | 5.47 | | | | 166,372 | | | | 8,984 | | | | 5.40 | | | | 146,286 | | | | 11,731 | | | | 8.02 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 115,615,293 | | | | 1,157,079 | | | | 1.00 | % | | | 111,915,586 | | | | 3,364,381 | | | | 3.01 | % | | | 84,664,925 | | | | 4,276,118 | | | | 5.05 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital and other non-interest-bearing funds | | | 9,149,020 | | | | — | | | | | | | | 6,746,021 | | | | — | | | | | | | | 4,521,500 | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Funding | | $ | 124,764,313 | | | $ | 1,157,079 | | | | | | | $ | 118,661,607 | | | $ | 3,364,381 | | | | | | | $ | 89,186,425 | | | $ | 4,276,118 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Income/Spread | | | | | | $ | 700,608 | | | | 0.49 | % | | | | | | $ | 694,498 | | | | 0.41 | % | | | | | | $ | 499,387 | | | | 0.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Margin (Net interest income/Earning Assets) | | | | | | | | | | | 0.56 | % | | | | | | | | | | | 0.59 | % | | | | | | | | | | | 0.56 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| 1 | | Reported yields with respect to advances and debt may not necessarily equal the coupons on the instruments as derivatives are extensively used to change the yield and optionality characteristics of the underlying hedged items. When fixed-rate debt is issued by the Bank and hedged with an interest rate derivative, it effectively converts the debt into a simple floating-rate bond. Similarly, the Bank makes fixed-rate advances to members and hedges the advance with a pay-fixed, receive-variable interest rate derivative that effectively converts the fixed-rate asset to one that floats with prevailing LIBOR rates. Average balance sheet information is presented as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average balance is calculated for the period. When daily weighted average balance information is not available, a simple monthly average balance is calculated. Average yields are derived by dividing income by the average balances of the related assets and average costs are derived by dividing expenses by the average balances of the related liabilities. Yields and rates are annualized. |
132
Rate and Volume Analysis
The Rate and Volume Analysis presents changes in interest income, interest expense, and net interest income that are due to changes in volumes and rates. The following tables present the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected the FHLBNY’s interest income and interest expense (in thousands).
Table 39: Rate and Volume Analysis
2009 compared to 2008
| | | | | | | | | | | | | |
| | | For the years ended | |
| | | December 31, 2009 vs. December 31, 2008 | |
| | | Increase (decrease) | |
| | | Volume | | | Rate | | | Total | |
Interest Income | | | | | | | | | | | | |
| Advances | | $ | 207,773 | | | $ | (1,967,929 | ) | | $ | (1,760,156 | ) |
| Certificates of deposit and other | | | (146,358 | ) | | | (99,146 | ) | | | (245,504 | ) |
| Federal funds sold and other overnight funds | | | 81,073 | | | | (149,126 | ) | | | (68,053 | ) |
| Investments | | | 15,744 | | | | (137,308 | ) | | | (121,564 | ) |
| Mortgage loans and other loans | | | (4,278 | ) | | | (1,637 | ) | | | (5,915 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total interest income | | | 153,954 | | | | (2,355,146 | ) | | | (2,201,192 | ) |
| | | | | | | | | | | | | |
Interest Expense | | | | | | | | | | | | |
| Consolidated obligations-bonds | | | (305,431 | ) | | | (1,361,030 | ) | | | (1,666,461 | ) |
| Consolidated obligations-discount notes | | | 323,561 | | | | (828,249 | ) | | | (504,688 | ) |
| Deposits and borrowings | | | 1,146 | | | | (35,822 | ) | | | (34,676 | ) |
| Mandatorily redeemable capital stock | | | (1,579 | ) | | | 102 | | | | (1,477 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total interest expense | | | 17,697 | | | | (2,224,999 | ) | | | (2,207,302 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Changes in Net Interest Income | | $ | 136,257 | | | $ | (130,147 | ) | | $ | 6,110 | |
| | | | | | | | | | |
2008 compared to 2007
| | | | | | | | | | | | | |
| | | For the years ended | |
| | | December 31, 2008 vs. December 31, 2007 | |
| | | Increase (decrease) | |
| | | Volume | | | Rate | | | Total | |
Interest Income | | | | | | | | | | | | |
| Advances | | $ | 1,450,481 | | | $ | (1,914,994 | ) | | $ | (464,513 | ) |
| Certificates of deposit and other | | | 6,047 | | | | (166,088 | ) | | | (160,041 | ) |
| Federal funds sold and other overnight funds | | | 30,516 | | | | (136,673 | ) | | | (106,157 | ) |
| Investments | | | 90,782 | | | | (75,646 | ) | | | 15,136 | |
| Mortgage loans and other loans | | | (1,827 | ) | | | 776 | | | | (1,051 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total interest income | | | 1,575,999 | | | | (2,292,625 | ) | | | (716,626 | ) |
| | | | | | | | | | | | | |
Interest Expense | | | | | | | | | | | | |
| Consolidated obligations-bonds | | | 918,002 | | | | (1,513,131 | ) | | | (595,129 | ) |
| Consolidated obligations-discount notes | | | 464,553 | | | | (704,358 | ) | | | (239,805 | ) |
| Deposits and borrowings | | | (11,060 | ) | | | (62,996 | ) | | | (74,056 | ) |
| Mandatorily redeemable capital stock | | | 1,611 | | | | (4,358 | ) | | | (2,747 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total interest expense | | | 1,373,106 | | | | (2,284,843 | ) | | | (911,737 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Changes in Net Interest Income | | $ | 202,893 | | | $ | (7,782 | ) | | $ | 195,111 | |
| | | | | | | | | | |
133
Allowance for Credit Losses
Allowance for credit losses were $4.5 million, $1.4 million and $0.6 million at December 31, 2009, 2008 and 2007 and were recorded as a reduction in the carrying value of Mortgage-loans held-for-maturity in the Statements of Condition. The FHLBNY believes the allowance for loan losses is adequate to reflect the losses inherent in the FHLBNY’s mortgage loan portfolio at December 31, 2009, 2008 and 2007. The Bank did not deem it necessary to provide a loan loss allowance for its advances to members.
Mortgage loans— The Bank recorded a provision of $3.1 million, $773.0 thousand, and $40.0 thousand in 2009, 2008, and 2007 in the Statements of Income, against its mortgage loans held-for-portfolio based on identification of inherent losses under a policy described more fully in the Note — 1 Significant Accounting Policies and Estimates to the audited financial statements accompanying this report. Charge offs were insignificant in all periods, and were substantially recovered through the credit enhancement provisions of MPF loans.
Advances— The FHLBNY’s credit risk from advances at December 31, 2009 and 2008 were concentrated in commercial banks, savings institutions and insurance companies. All advances were fully collateralized during their entire term. In addition, borrowing members pledged their stock in the FHLBNY as additional collateral for advances. The FHLBNY has not experienced any losses on credit extended to any member since its inception. Based on the collateral held as security and prior repayment history, no allowance for losses is currently deemed necessary.
Non-Interest Income (Loss)
The principal components of non-interest income are described below:
Service fees— Service fees are derived primarily from providing correspondent banking services to members and fees earned on standby letters of credit. Service fees have declined over the years due to declining demand for such services. The Bank does not consider income from such services as a significant element of its operations.
Net realized and unrealized gain (loss) on derivatives and hedging activities— The Bank may designate a derivative as either a hedge of: the fair value of a recognized fixed-rate asset or liability or an unrecognized firm commitment (fair value hedge); a forecasted transaction; or the variability of future cash flows of a floating-rate asset or liability (cash flow hedge). The Bank may also designate a derivative as an economic hedge, which does not qualify for hedge accounting under the accounting standards for derivatives and hedging.
Changes in the fair value of a derivative that qualifies as a fair value hedge under the accounting standards for derivatives and hedging and the offsetting gain or loss on the hedged asset or liability that is attributable to the hedged risk are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. To the extent that changes in the fair value of the derivative is not entirely offset by changes in the fair value of the hedged asset or liability, the net impact from hedging activities is recorded as hedge ineffectiveness.
Net interest accruals of derivatives designated in qualifying fair value or cash flow hedges under the accounting standards for derivatives and hedging are recorded as adjustments to the interest income or interest expense of the hedged assets or liabilities. Net interest accruals of derivatives that do not qualify for hedge accounting under the accounting standards for derivatives and hedging and interest received from in-the-money options are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
134
The effective portion of changes in the fair value of a derivative that is designated and qualifies as a “cash flow” hedge under the accounting standards for derivatives and hedging are recorded in AOCI.
For all qualifying hedge relationships under the accounting standards for derivatives and hedging, hedge ineffectiveness resulting from differences between changes in fair values or cash flows of the hedged item and changes in fair value of the derivatives are recognized in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
Net realized and unrealized gains and losses from qualifying hedging activities under the accounting standards for derivatives and hedging are typically impacted by changes in the benchmark interest rate (designated as LIBOR by the FHLBNY) and the degree of ineffectiveness of hedging relationships between the change in the fair value of derivatives and the change in the fair value of the hedged assets and liabilities attributable to changes in benchmark interest rate. Typically, such gains and losses represent hedge ineffectiveness between changes in the fair value of the hedged item and changes in the fair value of the derivative.
Redemption of financial instruments and extinguishment of debt— The Bank retires debt principally to reduce future debt costs when the associated asset is either prepaid or terminated early, and less frequently from prepayments of mortgage-backed securities. The Bank typically receives prepayment fees to make the FHLBNY economically indifferent to the prepayment. When assets are prepaid ahead of their expected or contractual maturities, the Bank also attempts to extinguish debt (consolidated obligation bonds) in order to realign asset and liability cash flow patterns. Bond retirement typically requires a payment of a premium resulting in a loss.
In 2009 the Bank sold certain AFS securities at a gain of $0.4 million. Additionally, in 2009 the Bank was asked to redeem a housing finance agency bond classified as held-to-maturity at a premium that resulted in a gain of $0.3 million. In 2008 the Bank was asked by the issuer to redeem two housing finance agency bonds classified as held-to-maturity at a premium that resulted in a gain of $1.1 million. The sales of securities classified as held-to-maturity were considered “in-substance maturities” in accordance with the provisions for the accounting of investments in debt and equity securities.
135
The following table sets forth the main components of Other income (loss) (in thousands):
Table 40: Other Income
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Other income (loss): | | | | | | | | | | | | |
| Service fees | | $ | 4,165 | | | $ | 3,357 | | | $ | 3,324 | |
| Instruments held at fair value — Unrealized gain (loss) | | | 15,523 | | | | (8,325 | ) | | | — | |
| Total OTTI losses | | | (140,912 | ) | | | — | | | | — | |
| Portion of loss recognized in other comprehensive income | | | 120,096 | | | | — | | | | — | |
| | | | | | | | | | |
| Net impairment losses recognized in earnings | | | (20,816 | ) | | | — | | | | — | |
| | | | | | | | | | |
| Net realized and unrealized gain (loss) on derivatives and hedging activities | | | 164,700 | | | | (199,259 | ) | | | 18,356 | |
| Net realized gain from sale of available-for-sale and redemption of held-to-maturity securities | | | 721 | | | | 1,058 | | | | — | |
| Provision for derivative counterparty credit losses | | | — | | | | (64,523 | ) | | | — | |
| Other | | | 77 | | | | 233 | | | | (8,180 | ) |
| | | | | | | | | | |
Total other income (loss) | | $ | 164,370 | | | $ | (267,459 | ) | | $ | 13,500 | |
| | | | | | | | | | |
Earnings impact of Instruments held at fair value
Under the accounting standards for the fair value option (“FVO”) for financial assets and liabilities, the FHLBNY elected to carry certain consolidated obligation bonds at fair value in Other income (loss). The Bank records the unrealized gains and losses on these liabilities held at fair value. In general, transactions elected for the fair value option are in economic hedge relationships. The notional amounts of interest rate swaps executed and outstanding at December 31, 2009 and 2008 were $6.0 billion and $983.0 million and were executed to offset the fair value volatility of consolidated obligation bonds elected under the FVO. The principal balances of consolidated obligation bonds designated under the FVO were $6.0 billion and $983.0 million at December 31, 2009 and 2008 and were carried at fair value.
The fair value adjustments on consolidated obligation bonds carried at fair value in 2009 resulted in a net unrealized gain of $15.5 million and was reported in Other income (loss). In 2008, an unrealized loss of $8.3 million was recorded. No instruments were designated under the FVO prior to 2008. Fair value gains in 2009 were in part the result of the reversal of unrealized loss positions at the beginning of the year from maturing bonds (When bonds recorded at fair value are held to maturity, their cumulative fair value changes sum to zero at maturity), and in part due to unrealized fair value gains from $6.0 billion of bonds issued and designated under the FVO in 2009. Bonds are exhibiting unrealized fair value gains in a steepening interest rate environment at December 31, 2009. On an economic basis, these gains were partially offset by losses on derivatives that economically hedged the bonds. For more information, see Note 18 — Fair Values of Financial Instruments to the audited financial statements accompanying this report.
136
Net impairment losses recognized in earnings on held-to-maturity securities — Other-than-temporary impairment
In each interim quarterly period in 2009, management evaluated its portfolio of private-label mortgage-backed securities for credit impairment. As a result of the evaluations, the FHLBNY recognized credit impairment OTTI related losses in each quarter of 2009. Cumulatively, 17 private-label held-to-maturity securities were deemed to be OTTI in 2009. No credit impairment was observed in 2008 or 2007. Cumulative credit impairment losses of $20.8 million were recorded as charges to 2009 income. These charges included credit losses of certain MBS that were determined to be OTTI in a previous quarter of 2009.
The non-credit component of OTTI associated with the impairment recognized in 2009 was a cumulative loss of $110.6 million as of December 31, 2009, and was recorded as a deferred loss in AOCI. Of the 17 securities deemed OTTI in 2009, 14 securities are insured by bond insurers, Ambac and MBIA. The Bank’s analysis of the two bond insurers concluded that future credit losses due to projected collateral shortfalls of the impaired securities would not be fully supported by the two bond insurers. For more information see Notes 1 and 4 to the audited financial statements accompanying this report.
Based on detailed cash flow credit analysis on a security level at December 31, 2009, the Bank has concluded that other than the 17 securities determined to be credit impaired during 2009, gross unrealized losses for the remainder of Bank’s investment securities were primarily caused by interest rate changes, credit spread widening and reduced liquidity and the securities were temporarily impaired as defined under the new guidance for recognition and presentation of other-than-temporary impairment.
137
Earnings impact of derivatives and hedging activities — 2009, 2008, and 2007.
The following tables summarize the impact of hedging activities on earnings for each of the three years ended December 31, 2009, 2008, and 2007 (in thousands):
Table 41: Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | Consolidated | | | Consolidated | | | | | | | | | | |
| | | | | | | MPF | | | Obligation | | | Obligation | | | Balance | | | Intermediary | | | | |
| Earnings Impact | | Advances | | | Loans | | | Bonds | | | Discount Notes | | | Sheet | | | Positions | | | Total | |
| |
| Amortization/accretion of hedging activities reported in net interest income | | $ | (1,226 | ) | | $ | 36 | | | $ | (1,980 | ) | | $ | 361 | | | $ | — | | | $ | — | | | $ | (2,809 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Net realized and unrealized gains (losses) on derivatives and hedging activities | | | (4,542 | ) | | | — | | | | 25,648 | | | | — | | | | — | | | | — | | | | 21,106 | |
| Net gains (losses) derivatives-FVO | | | — | | | | — | | | | (1,168 | ) | | | — | | | | — | | | | — | | | | (1,168 | ) |
| Gains (losses)-economic hedges | | | (6,409 | ) | | | (20 | ) | | | 52,311 | | | | 33,606 | | | | 65,321 | | | | (47 | ) | | | 144,762 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reported in other income | | | (10,951 | ) | | | (20 | ) | | | 76,791 | | | | 33,606 | | | | 65,321 | | | | (47 | ) | | | 164,700 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | (12,177 | ) | | $ | 16 | | | $ | 74,811 | | | $ | 33,967 | | | $ | 65,321 | | | $ | (47 | ) | | $ | 161,891 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | | | | | | | | | Consolidated | | | Consolidated | | | | | | | | | | |
| | | | | | | MPF | | | Obligation | | | Obligation | | | Balance | | | Intermediary | | | | |
| Earnings Impact | | Advances | | | Loans | | | Bonds | | | Discount Notes | | | Sheet | | | Positions | | | Total | |
| |
| Amortization/accretion of hedging activities reported in net interest income | | $ | (2,472 | ) | | $ | 81 | | | $ | (459 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (2,850 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Net realized and unrealized gains (losses) on derivatives and hedging activities | | | 31,838 | | | | — | | | | (43,539 | ) | | | (333 | ) | | | — | | | | — | | | | (12,034 | ) |
| Net gains (losses) derivatives-FVO | | | — | | | | — | | | | 7,193 | | | | — | | | | — | | | | — | | | | 7,193 | |
| Gains (losses)-economic hedges | | | (22,656 | ) | | | (3 | ) | | | (159,686 | ) | | | 8,142 | | | | (20,695 | ) | | | 480 | | | | (194,418 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reported in other income | | | 9,182 | | | | (3 | ) | | | (196,032 | ) | | | 7,809 | | | | (20,695 | ) | | | 480 | | | | (199,259 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 6,710 | | | $ | 78 | | | $ | (196,491 | ) | | $ | 7,809 | | | $ | (20,695 | ) | | $ | 480 | | | $ | (202,109 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2007 | | | | |
| | | | | | | | | | | Consolidated | | | Consolidated | | | | | | | | | | |
| | | | | | | MPF | | | Obligation | | | Obligation | | | Balance | | | Intermediary | | | | |
| Earnings Impact | | Advances | | | Loans | | | Bonds | | | Discount Notes | | | Sheet | | | Positions | | | Total | |
| |
| Amortization/accretion of hedging activities reported in net interest income | | $ | (1,322 | ) | | $ | (159 | ) | | $ | 854 | | | $ | — | | | $ | — | | | $ | — | | | $ | (627 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Net realized and unrealized gains (losses) on derivatives and hedging activities | | | 7,968 | | | | — | | | | (2,049 | ) | | | — | | | | — | | | | — | | | | 5,919 | |
| Gains (losses)-economic hedges | | | 1,021 | | | | (171 | ) | | | 11,517 | | | | 43 | | | | — | | | | 27 | | | | 12,437 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reported in other income | | | 8,989 | | | | (171 | ) | | | 9,468 | | | | 43 | | | | — | | | | 27 | | | | 18,356 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 7,667 | | | $ | (330 | ) | | $ | 10,322 | | | $ | 43 | | | $ | — | | | $ | 27 | | | $ | 17,729 | |
| | | | | | | | | | | | | | | | | | | | | | |
Note: The FHLBNY did not designate any hedged item under the FVO in 2007.
138
Net realized and unrealized gain (loss) from derivatives and hedging activities — The FHLBNY reported the following net gains (losses) from derivatives and hedging activities (in thousands):
Table 42: Earnings Impact of Derivatives — By Hedge Type
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 20072 | |
Earnings impact of derivatives and hedging activities gain (loss): | | | | | | | | | | | | |
Derivatives designated as hedging instruments3 | | | | | | | | | | | | |
| Cash flow hedges-ineffectiveness | | $ | — | | | $ | (9 | ) | | $ | 9 | |
| Fair value hedges-ineffectiveness | | | 21,105 | | | | (12,025 | ) | | | 5,910 | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| Economic hedges-fair value changes-options | | | 61,977 | | | | (40,773 | ) | | | (2,611 | ) |
| Net interest income-options | | | (5,798 | ) | | | 101 | | | | 3,630 | |
| Economic hedges-fair value changes-MPF delivery commitments | | | (20 | ) | | | (3 | ) | | | (171 | ) |
Fair value changes-economic hedges1 | | | 86,786 | | | | (45,239 | ) | | | 9,695 | |
Net interest expense-economic hedges1 | | | (1,051 | ) | | | (126,533 | ) | | | 1,894 | |
| Balance sheet — Macro hedges swaps | | | 2,869 | | | | 18,029 | | | | — | |
Derivatives matched to bonds designated under FVO | | | | | | | | | | | | |
| Fair value changes-interest rate swaps/bonds | | | (1,168 | ) | | | 7,193 | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net impact on derivatives and hedging activities | | $ | 164,700 | | | $ | (199,259 | ) | | $ | 18,356 | |
| | | | | | | | | | |
| | | |
| 1 | | Includes de minimis amount of net gains on member intermediated swaps. |
| |
| 2 | | Presentation for prior periods have been conformed to match current period presentation and had no impact on the net gains (losses) on derivatives and hedging activities. |
| |
| 3 | | Net interest settlements from interest rate swaps hedging advances and consolidated obligations in a designated accounting relationship are recorded in interest income and interest expense. See Tables 31 and 32 for details. |
Key components of hedging gains and losses recorded in the Statements of Income as a Net realized and unrealized gain (loss) from hedging activities were primarily due to:
| | • | | Hedge ineffectiveness from fair value hedges of advances and consolidated obligation liabilities that qualified for hedge accounting treatment. Hedge ineffectiveness is typically the difference between changes in fair values of hedged consolidated obligation bonds and advances due to changes in the benchmark rate (adopted as the 3-month LIBOR rate) and changes in the fair value of the associated derivatives. |
| |
| | • | | Fair value changes of interest rate swaps designated in economic hedges of consolidated obligation bonds, without the offsetting benefit of fair value changes of the hedged bonds. |
| |
| | • | | Fair value changes of interest rate caps designated in economic hedges of GSE issued capped floating-rate MBS. In a rising rate environment, purchased caps are exhibiting favorable fair value gains. Such gains are unrealized and will also reverse if the caps are held to their contractual maturities. |
| |
| | • | | Income or expense, primarily interest accruals, associated with the interest rate swaps designated as economic hedges. |
Qualifying hedges under the accounting standards for derivatives and hedging- Hedge ineffectiveness occurs when changes in the fair value of the derivative and the associated hedged financial instrument, generally debt or an advance, do not perfectly offset each other. Hedge ineffectiveness is associated with changes in the benchmark interest rate and volatility, and the extent of the mismatch of the structures of the derivative and the hedged financial instrument.
139
In 2009, hedge ineffectiveness was a net fair value gain of $21.1 million. Fair value hedges of fixed-rate consolidated obligation bonds resulted in fair value gains of $25.6 million in 2009, and were partly offset by fair value losses of $4.5 million from hedges of fixed-rate advances. Hedging gains in 2009 in part were due to the reversal of 2008 fair value losses of debt hedges that matured in 2009 or were effectively matured when call options were exercised, and in part as a result of market volatility of interest rates causing fair values of hedged bonds to diverge from the swap fair values.
In 2008, fair value hedges of fixed-rate debt resulted in fair value losses of $43.8 million which were partly offset by fair value gains of $31.8 million from hedges of fixed-rate advances, for a net fair value loss of $12.0 million, and was mostly caused by the asymmetrical impact of interest rate volatility on hedged debt and swaps. In 2007, a net fair value gain of $5.9 million was recorded.
Economic hedges— An economic hedge represents derivative transactions that are an approved risk management hedge but may not qualify for hedge accounting treatment under the accounting standards for derivatives and hedging. When derivatives are designated as economic hedges, the fair value changes due to changes in the interest rate and volatility of rates are recorded through earnings without the offsetting change in the fair values of the hedged advances and debt as would be afforded under the derivatives and hedge accounting rules. In general, the FHLBNY’s derivatives are held to maturity or to their call or put dates. At inception, the fair value is “at market” and is generally zero. Until the derivative matures or is called or put on pre-determined dates, fair values will fluctuate with changes in the interest rate environment and volatility observed in the swap market. At maturity or scheduled call or put dates, the fair value will generally reverse to zero as the Bank’s derivatives settle at par. Therefore, nearly all of the cumulative net gains and losses that are unrealized at a point in time will reverse over the remaining contractual terms so that the cumulative gains or losses will sum to zero over the contractual maturity, scheduled call, or put dates.
However, interest income and expense have economic consequences since they result in exchanges of cash payments or receipts. If a derivative is prepaid prior to maturity or at predetermined call and put dates, they are settled at the then existing fair values in cash. Under hedge accounting rules, net swap interest expense and income associated with swaps in economic hedges of assets and liabilities are recorded as hedging losses and gains. On the other hand, when swaps qualify for hedge accounting treatment, interest income and interest expense from interest rate swaps are reported as a component of Net interest income together with interest on the instrument being hedged.
Economic hedges
Interest rate swaps— Fair value changes- In 2009, the primary economic hedges were:
| | • | | Interest rate “Basis swaps” that synthetically converted floating-rate funding based on Prime rate, Federal funds rate, and the 1-month LIBOR rate to 3-month LIBOR rate. |
| |
| | • | | Interest rate swaps hedging balance sheet risk. |
| |
| | • | | Interest rate swaps hedging discount notes and short-term fixed-rate consolidated obligation bonds. |
| |
| | �� | | Interest rate swaps that had been de-designated as economic hedges of advances and bonds because the hedges had became ineffective. |
140
Changes in the fair values of interest rate swaps in economic hedges, often referred to as “one-sided marks”, resulted in net favorable fair value gains of $86.8 million in 2009, and a loss of $45.2 million in 2008. A gain of $9.7 million was recorded in 2007.
| | • | | In 2009, net fair value gains of $86.8 million were principally due to the reversal of almost all fair value losses recorded in the Statements of Condition at December 31, 2008 on $25.0 billion of basis swaps designated as economic hedges of consolidated obligation bonds. In 2009, $23.0 billion of basis swaps matured and almost all previously recorded fair value losses reversed. The fair value basis of the remaining $2.0 billion of such swaps was not significant as the bonds were nearing maturity. Additional fair value gains were recorded in 2009 on $19.1 billion of new swaps executed in 2009 ($13.1 billion fixed-for-floating rate swaps, and $6.0 billion of basis swaps) and designated as economic hedges of short-term non-callable bonds. In an upward sloping yield curve environment, the pay fixed-rate, receive LIBOR-indexed swaps were in an unrealized fair value gain positions at December 31, 2009. The swaps will mature in 2010 and unrealized gains will reverse. |
| |
| | • | | In 2008, net fair value losses of $45.2 million were principally due to: |
| | • | | In 2008, $25.0 billion in notional amounts of basis swaps were executed to hedge floating-rate bonds indexed with spreads to 1-month LIBOR, Prime and the Federal funds effective rates. The basis swaps were designated as economic hedges. Simultaneous with the issuance of the debt, the Bank executed interest-rate basis swaps that required the swap counterparties to pay to the FHLBNY interest cash flows that matched the Bank’s interest payment obligations to investors on the debt — spreads to Prime, Federal funds effective rate and 1-month LIBOR. In exchange, the Bank was required to pay the swap counterparty a spread to the 3-month LIBOR index. This exchange of cash flows made the Bank indifferent to changes in the relationship between the 3-month LIBOR and the non-LIBOR indices from an economic perspective. Fair value changes of the swaps in relationship to 3-month LIBOR were “marked-to-market” without the benefit of offsetting changes in the fair values of the floating debt. In 2008, the historical relationships between 3-month LIBOR and the 1-month LIBOR rate, the Prime rate and the Federal funds effective rates were extraordinarily volatile. At December 31, 2008, the historical spreads narrowed from its historical levels causing the forward basis spreads to narrow as well and was the primary factor that explains the fair value losses in 2008. |
| | • | | In 2008, certain swaps had to be de-designated in the third quarter of 2008 and subsequently re-designated. In the interim, the derivatives were designated as standalone and $20.8 million in fair value losses were recorded in the third and fourth quarters of 2008 due to extraordinary market volatility in that period. |
| | • | | In 2007, certain short lock-out callable swaps had been designated as economic hedges of similar debt structures, and resulted in net fair value gains of $9.7 million. |
Cash flows— from swaps are recorded as interest income or interest expense as a Net realized and unrealized gain (loss) on derivatives and hedging activities if the swap is designated as an economic hedge. If the swap qualifies for hedge accounting treatment, cash flows are recorded as a component of Net interest income. The classification of swap accruals, either as a component of Net interest income or derivatives and hedging activities, has no impact on Net income.
| | • | | In 2009, net interest expenses of $1.1 million were recorded as a component of derivatives and hedging activities. They represented the net cash flows from swaps that were designated as economic hedges of consolidated obligation bonds, discount notes, and a handful of advances. |
141
| | • | | In 2008, net cash flow expense was very significant. Interest expenses of $126.5 million from swaps, primarily basis swaps, were recorded as a component of derivatives and hedging activities. Under the contractual terms of the basis swaps, the FHLBNY was receiving cash flows indexed to an agreed upon spread to the daily Federal funds effectives, the 1-month LIBOR rate, and Prime, and in return paying cash flows indexed to an agreed upon spread to the 3-month LIBOR rate. The daily Federal funds rates and the 1-month LIBOR rates were considerably lower in 2008 than the 3-month LIBOR rates, and resulted in net cash outflows. The formula for computing the cash flows of swaps indexed to the Prime rate also resulted in net cash outflows. These factors explain the significant expenses recorded in 2008. |
| |
| | • | | In 2007, the swap cash flows from swaps designated in economic hedges were favorable and net gains of $1.9 million were recorded. |
Interest rate caps— Fair value changes of purchased caps contributed net unrealized gains of $63.3 million in 2009. In the rising interest rate environment at December 31, 2009, relative to December 31, 2008, the fair values of interest rate caps exhibited favorable fair value gains, which will reverse over the contractual life of the caps if held to maturity. In the second quarter of 2008, the Bank had purchased $1.9 billion of interest-rate caps with final maturities in 2018 and strikes ranging from 6.20% to 6.75% indexed mainly to 1-month LIBOR. The caps were purchased at a cost $46.9 million. In 2008, the aggregate fair values of purchased caps declined in a lower interest rate environment resulting in a net charge of $38.7 million in 2008.
Derivative gains and losses reclassified from Accumulated other comprehensive income (loss) to current period income —The following table summarizes changes in derivative gains and (losses) and reclassifications into earnings from AOCI in the Statements of Condition (in thousands):
Table 43: Accumulated Other Comprehensive Income (Loss) to Current Period Income from Cash Flow Hedges
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| Accumulated other comprehensive income/(loss) from cash flow hedges | | 2009 | | | 2008 | | | 2007 | |
| | | | |
| Beginning of period | | $ | (30,191 | ) | | $ | (30,215 | ) | | $ | (4,763 | ) |
| Net hedging transactions | | | — | | | | (6,100 | ) | | | (26,114 | ) |
| Reclassified into earnings | | | 7,508 | | | | 6,124 | | | | 662 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| End of period | | $ | (22,683 | ) | | $ | (30,191 | ) | | $ | (30,215 | ) |
| | | | | | | | | | |
Cash Flow Hedges
In 2009, $7.5 million was reclassified from AOCI as an interest expense at the same time as the recognition of interest expense of the debt that had been hedged by the cash flow hedges in prior years.
There were no material amounts for the current or prior year that were reclassified from AOCI into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. Ineffectiveness from hedges designated as cash flow hedges was not material in any periods reported in this Form 10-K. Over the next twelve months, it is expected that $6.9 million of net losses recorded in AOCI will be recognized as an interest expense.
142
Non-Interest Expense
Operating expenses included the administrative and overhead costs of operating the Bank and the operating costs of providing advances and managing collateral associated with the advances, managing the investment portfolios, and providing correspondent banking services to members.
The FHLBanks, including the FHLBNY, fund the cost of the Office of Finance, a joint office of the FHLBanks that facilitates issuing and servicing the consolidated obligations of the FHLBanks, preparation of the combined quarterly and annual financial reports, and certain other functions. The FHLBanks are also assessed the operating expenses of the Finance Agency, the regulator of the FHLBanks.
The following table sets forth the main components of Other expenses (in thousands):
Table 44: Other Expenses
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Other expenses: | | | | | | | | | | | | |
| Operating | | $ | 76,065 | | | $ | 66,263 | | | $ | 66,569 | |
| Finance Agency and Office of Finance | | | 8,110 | | | | 6,395 | | | | 5,193 | |
| | | | | | | | | | |
| | | | |
Total other expenses | | $ | 84,175 | | | $ | 72,658 | | | $ | 71,762 | |
| | | | | | | | | | |
Operating expenses rose 14.8% in 2009 to $76.1 million, and primarily represented the cost of adding staff, increased cost of employee benefits, and general inflationary increase in salary expenses. Consulting costs were also significant and they ranged from strategic to information systems planning and implementation. Consulting cost with respect to the implementation of OTTI caused increases in audit and audit related expenses. The cost of compliance remains a very significant overhead expense for the Bank. Between 2008 and 2007, operating expenses were virtually unchanged.
Operating Expenses
The following table sets forth the major categories of operating expenses (dollars in thousands):
Table 45: Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | | | | | Percentage | | | | | | | Percentage | | | | | | | Percentage | |
| | | 2009 | | | of total | | | 2008 | | | of total | | | 2007 | | | of total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | $ | 49,778 | | | | 65.44 | % | | $ | 44,370 | | | | 66.96 | % | | $ | 44,740 | | | | 67.21 | % |
| Temporary workers | | | 162 | | | | 0.21 | | | | 282 | | | | 0.43 | | | | 125 | | | | 0.19 | |
| Occupancy | | | 4,347 | | | | 5.71 | | | | 4,079 | | | | 6.16 | | | | 3,957 | | | | 5.94 | |
| Depreciation and leasehold amortization | | | 5,405 | | | | 7.11 | | | | 4,971 | | | | 7.50 | | | | 4,498 | | | | 6.76 | |
| Computer service agreements and contractual services | | | 6,798 | | | | 8.94 | | | | 5,053 | | | | 7.62 | | | | 5,202 | | | | 7.81 | |
| Professional and legal fees | | | 3,274 | | | | 4.30 | | | | 2,469 | | | | 3.73 | | | | 2,538 | | | | 3.81 | |
| Other * | | | 6,301 | | | | 8.29 | | | | 5,039 | | | | 7.60 | | | | 5,509 | | | | 8.28 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | $ | 76,065 | | | | 100.00 | % | | $ | 66,263 | | | | 100.00 | % | | $ | 66,569 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | |
| | | |
| * | | Other primarily represents- audit fees, director fees and expenses, insurance and telecommunications. |
As of December 31, 2009, the FHLBNY had 259 full-time and 5 part-time employees. At December 31, 2008, the FHLBNY had 247 full-time and 4 part-time employees. At December 31, 2007, there were 238 full-time and 8 part-time employees.
143
Assessments
Each FHLBank is required to set aside a portion of earnings to fund its Affordable Housing Program (“AHP”) and to satisfy its Resolution Funding Corporation assessment (“REFCORP”). For more information, see “Affordable Housing Program and Other Mission Related Programs” and “Assessments” under Item 1 Business in this MD&A.
REFCORP assessment payments totaled $142.7 million in 2009, up from $64.8 million in 2008 and $80.8 million in 2007. Affordable Housing Program (“AHP”) assessments set aside from income totaled $64.3 million in 2009, up from $29.8 million in 2008 and $37.2 million in 2007. Assessments are calculated on Net income before assessments and the increases were due to significant increase in 2009 Net income compared to 2008 and 2007. For more information about REFCORP and AHP assessments see the section Assessments in this Form 10-K.
Affordable Housing Program obligations— The Bank fulfils its AHP obligations primarily through direct grants 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 FHLBNY sets aside 10% from its pre-assessment regulatory defined net income for the Affordable Housing Program. Regulatory defined net income is GAAP net income before interest expense on mandatorily redeemable capital stock and the assessment for AHP, but after the assessment for REFCORP. The amounts set aside are considered as the Bank’s liability towards its Affordable Housing Program obligations. AHP grants and subsidies are provided to members out of this liability.
The following table provides roll-forward information with respect to changes in Affordable Housing Program liabilities (in thousands):
Table 46: Affordable Housing Program Liabilities
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Beginning balance | | $ | 122,449 | | | $ | 119,052 | | | $ | 101,898 | |
| Additions from current period’s assessments | | | 64,251 | | | | 29,783 | | | | 37,204 | |
| Net disbursements for grants and programs | | | (42,211 | ) | | | (26,386 | ) | | | (20,050 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Ending balance | | $ | 144,489 | | | $ | 122,449 | | | $ | 119,052 | |
| | | | | | | | | | |
REFCORP— The following table provides roll-forward information with respect to changes in REFCORP liabilities (in thousands):
Table 47: REFCORP
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Beginning balance | | $ | 4,780 | | | $ | 23,998 | | | $ | 17,475 | |
| Additions from current period’s assessments | | | 142,689 | | | | 64,765 | | | | 80,776 | |
| Net disbursements to REFCORP | | | (123,235 | ) | | | (83,983 | ) | | | (74,253 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Ending balance | | $ | 24,234 | | | $ | 4,780 | | | $ | 23,998 | |
| | | | | | | | | | |
144
Asset Quality and Concentration — Advances, Investment securities, Mortgage loans, and Counterparty risks
The FHLBNY incurs credit risk — the risk of loss due to default — in its lending, investing, and hedging activities. It has instituted processes to help manage and mitigate this risk. Despite such processes, some amount of credit risk will always exist. External events, such as severe economic downturns, declining real estate values (both residential and non-residential), changes in monetary policy, adverse events in the capital markets, and other developments, could lead to member or counterparty default or impact the creditworthiness of investments. Such events would have a negative impact upon the FHLBNY’s income and financial performance.
The Bank faced an event of default in 2008 with the bankruptcy of one of its derivative counterparties. On September 15, 2008, Lehman Brothers Holdings, Inc. (“LBHI”), the parent company of Lehman Brothers Special Financing Inc. (“LBSF”) and a guarantor of LBSF’s obligations, filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. LBSF was a counterparty to FHLBNY on multiple derivative transactions with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF. The LBSF default was unforeseen and despite the Bank’s risk management practices and policies — selection of counterparties with strong reputation, collateral requirements and credit monitoring, and other processes, the default caused the Bank to reserve approximately $65 million as a charge to income in the third quarter of 2008 as the bankruptcy of LBHI and LBSF made the timing and the amount of the recovery uncertain.
The following table sets forth five year history of the FHLBNY’s advances and mortgage loan portfolios as of December 31, (in thousands):
Table 48: Advances and Mortgage Loan Portfolios
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 94,348,751 | | | $ | 109,152,876 | | | $ | 82,089,667 | | | $ | 59,012,394 | | | $ | 61,901,534 | |
| | | | | | | | | | | | | | | | |
| Mortgage loans before allowance for credit losses | | $ | 1,322,045 | | | $ | 1,459,291 | | | $ | 1,492,261 | | | $ | 1,484,012 | | | $ | 1,467,525 | |
| | | | | | | | | | | | | | | | |
Advances
The FHLBNY closely monitors the creditworthiness of the institutions to which it lends. The FHLBNY also closely monitors the quality and value of the assets that are pledged as collateral by its members. The FHLBNY periodically assesses the mortgage underwriting and documentation standards of its borrowing members. In addition, the FHLBNY has collateral policies and restricted lending procedures in place to manage its exposure to those members experiencing difficulty in meeting their capital requirements or other standards of creditworthiness.
The FHLBNY has not experienced any losses on advances extended to any member since its inception. The FHLBank Act affords any security interest granted to the FHLBNY by a member, or any affiliate of such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party) having the rights of a lien creditor. However, the FHLBNY’s security interest is not entitled to priority over claims and rights that (1) would be entitled to priority under applicable law, or (2) are held by a bona fide purchaser for value or by parties that are secured by actual perfected security interests.
145
The FHLBNY’s members are required to pledge collateral to secure advances. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. The FHLBNY has the right to take such steps, as it deems necessary, to protect its secured position on outstanding advances, including requiring additional collateral (whether or not such additional collateral would otherwise be eligible to secure a loan). The FHLBNY also has a statutory lien under the FHLBank Act on the capital stock of its members, which serves as further collateral for members’ indebtedness to the FHLBNY.
The FHLBNY has established asset classification and reserve policies. All adversely classified assets of the FHLBNY will have a reserve established for probable losses. Based upon the collateral held as security and prior repayment histories, no allowance for losses on advances is currently deemed necessary by management.
The FHLBNY uses methodologies to identify and measure credit risk arising from: creditworthiness risk arising from members, counterparties, and other entities; collateral risk arising from type, quality, and lien status; and concentration risk arising from borrower, portfolio, geographic area, industry, or product type.
Creditworthiness Risk — Advances
The FHLBNY’s potential exposure to creditworthiness risk arises from the deterioration of the financial health of FHLBNY members. The FHLBNY manages its exposure to the creditworthiness of members by monitoring their collateral and advance levels daily and by analyzing their financial health each quarter.
Collateral Risk — Advances
The FHLBNY is exposed to collateral risk if it is unable to perfect its interest in pledged collateral, or when the liquidation value of pledged collateral does not fully cover the FHLBNY’s exposure. The FHLBNY manages this risk by pricing collateral on a weekly basis, performing on-site reviews of pledged mortgage collateral from time to time, and reviewing pledged portfolio concentrations on a quarterly basis. The FHLBNY requires that members pledge a specific amount of excess collateral above the par amount of their outstanding obligations. Members provide the FHLBNY with reports of pledged collateral and the FHLBNY evaluates the eligibility and value of the pledged collateral.
The FHLBNY’s loan and collateral agreements give the FHLBNY a security interest in assets held by borrowers that is sufficient to cover their obligations to the FHLBNY. The FHLBNY may supplement this security interest by imposing additional reporting, segregation or delivery requirements on the borrower. The FHLBNY assigns specific collateral requirements to a borrower, based on a number of factors. These include, but are not limited to: (1) the borrower’s overall financial condition; (2) the degree of complexity involved in the pledging, verifying, and reporting of collateral between the borrower and the FHLBNY, especially when third-party pledges, custodians, outside service providers and pledges to other entities are involved; and (3) the type of collateral pledged.
The FHLBNY has also established collateral maintenance levels for borrower collateral that are intended to help ensure that the FHLBNY has sufficient collateral to cover credit extensions and reasonable expenses arising from potential collateral liquidation and other unknown factors. Collateral maintenance levels are designated by collateral type and are periodically adjusted to reflect current market and business conditions. Maintenance levels for individual borrowers may also be adjusted, based on the overall financial condition of the borrower or another, third-party entity involved in the collateral relationship with the FHLBNY. Borrowers are required to maintain an amount of eligible collateral with a liquidation value at least equal to the borrower’s current collateral maintenance level. All borrowers that pledge mortgage loans as collateral are also required to provide, on a monthly or quarterly basis, a detailed listing of mortgage loans pledged. The FHLBNY uses this detailed reporting to monitor and track payment performance of the collateral and to assess the risk profile of the pledged collateral based on mortgage characteristics, geographic concentrations and other pertinent risk factors.
146
Drawing on current industry standards, the FHLBNY establishes collateral valuation methodologies for each collateral type and calculates the estimated liquidation value of the pledged collateral to determine whether a borrower has satisfied its collateral maintenance requirement. The FHLBNY evaluates liquidation values on a weekly basis.
The FHLBNY makes on-site review of borrowers in connection with the evaluation of the borrowers’ pledged mortgage collateral. This review involves a qualitative assessment of risk factors that includes an examination of legal documentation, credit underwriting, and loan-servicing practices on mortgage collateral. The FHLBNY has developed the on-site review process to more accurately value each borrower’s pledged mortgage portfolio based on current secondary-market standards. The results of the review may lead to adjustments in the estimated liquidation value of pledged collateral. The FHLBNY may also make additional market value adjustments to a borrower’s pledged mortgage collateral based on the quality and accuracy of the automated data provided to the FHLBNY. See Tables 49-51 for more information.
Credit Risk and Concentration Risk — Advances
While the FHLBNY has never experienced a credit loss on an advance, the expanded eligible collateral for Community Financial Institutions and non-member housing associates permitted, but not required, by the Finance Agency provides the potential for additional credit risk for the FHLBNY. It is the FHLBNY’s current policy not to accept “expanded” eligible collateral from Community Financial Institutions. The management of the FHLBNY has the policies and procedures in place to appropriately manage credit risk associated with the advance business. In extending credit to a member, the FHLBNY adheres to specific credit policy limits approved by its Board of Directors. The FHLBNY has not established limits for the concentrations of specific types of advances, but management reports the activity in advances to the Board each month. Each quarter, management reports the concentrations of convertible advances made to individual members. There were no past due advances and all advances were current at December 31, 2009 and December 31, 2008. Management does not anticipate any credit losses, and accordingly, the FHLBNY has not provided an allowance for credit losses on advances. The FHLBNY’s potential credit risk from advances is concentrated in commercial banks, savings institutions and insurance companies. At December 31, 2009 and December 31, 2008, the Bank had advances of $59.5 billion and $65.7 billion outstanding to ten member institutions, representing 65.6% and 63.5% of total advances outstanding, and sufficient collateral was held to cover the advances to these institutions.
Collateral Coverage of Advances
The FHLBNY lends to financial institutions involved in housing finance within its district. In addition, the FHLBNY is permitted, but not required, to accept collateral in the form of small business or agricultural loans (“expanded collateral”) from Community Financial Institutions (“CFIs”). Borrowing members pledge their capital stock of the FHLBNY as additional collateral for advances. All member obligations with the FHLBNY must be fully collateralized throughout their entire term. As of December 31, 2009 and 2008, the FHLBNY had rights to collateral with an estimated value greater than outstanding advances. Based upon the financial condition of the member, the FHLBNY:
| | • | | Allows a member to retain possession of the collateral assigned to the FHLBNY, if the member executes a written security agreement and agrees to hold such collateral for the benefit of the FHLBNY; or |
| | • | | Requires the member specifically to assign or place physical possession of such collateral with the FHLBNY or its safekeeping agent. |
147
The following table summarizes pledged collateral in support of advances at December 31, 2009 and 2008 (in thousands):
Table 49: Collateral Supporting Advances to Members
| | | | | | | | | | | | | | | | | |
| | | | | | | Underlying Collateral for Advances | |
| | | | | | | | | | Securities and | | | | |
| | | Advances1 | | | Mortgage Loans2 | | | Deposits2 | | | Total2 | |
December 31, 2009 | | $ | 90,737,700 | | | $ | 111,346,235 | | | $ | 49,564,456 | | | $ | 160,910,691 | |
| | | | | | | | | | | | | | | | | |
December 31, 2008 | | $ | 103,379,727 | | | $ | 129,887,513 | | | $ | 54,067,104 | | | $ | 183,954,617 | |
| | | |
| Note1 | | Par value |
| |
| Note2 | | Estimate market value |
The level of over-collateralization is on an aggregate basis and may not necessarily be indicative of a similar level of over-collateralization on an individual transaction basis. At a minimum, each member pledged sufficient collateral to adequately secure the member’s outstanding obligation with the FHLBNY. In addition, most members maintain an excess amount of pledged collateral with the FHLBNY to secure future liquidity needs.
The following table summarizes pledged collateral in support of other member obligations (other than advances) at December 31, 2009 and 2008 (in thousands):
Table 50: Collateral Supporting Member Obligations Other Than Advances
| | | | | | | | | | | | | | | | | |
| | | | | | | Underlying Collateral for Other Obligations | |
| | | Other | | | | | | | Securities and | | | | |
| | | Obligations1 | | | Mortgage Loans2 | | | Deposits2 | | | Total 2 | |
December 31, 2009 | | $ | 720,622 | | | $ | 2,257,204 | | | $ | 126,970 | | | $ | 2,384,174 | |
| | | | | | | | | | | | | | | | | |
December 31, 2008 | | $ | 932,073 | | | $ | 1,804,514 | | | $ | 151,548 | | | $ | 1,956,062 | |
| | | |
| Note1 | | Standby financial letters of credit, derivatives and members’ credit enhancement guarantee amount (“MPFCE”) |
| |
| Note2 | | Estimated market value |
The outstanding member obligations consisted principally of standby letters of credit, and a small amount of collateralized value of outstanding derivatives, and members’ credit enhancement guarantee amount (“MPFCE”) on loans sold to the FHLBNY through the Mortgage Partnership Finance program. The FHLBNY’s underwriting and collateral requirements for securing Letters of Credit are the same as its requirements for securing advances.
148
The following table shows the breakdown of collateral pledged by members between those that were specifically listed and those in the physical possession or that of its safekeeping agent (in thousands):
Table 51: Location of Collateral Held
| | | | | | | | | | | | | | | | | |
| | | Estimated Market Values | |
| | | Collateral in | | | Collateral | | | | | | | |
| | | Physical | | | Specifically | | | Collateral | | | Total Collateral | |
| | | Possession | | | Listed | | | Pledged for AHP | | | Received | |
December 31, 2009 | | $ | 57,660,864 | | | $ | 105,714,763 | | | $ | (80,762 | ) | | $ | 163,294,865 | |
| | | | | | | | | | | | | | | | | |
December 31, 2008 | | $ | 60,462,019 | | | $ | 125,527,047 | | | $ | (78,387 | ) | | $ | 185,910,679 | |
The total of collateral pledged to the FHLBNY includes excess collateral pledged above the FHLBNY’s minimum collateral requirements. These minimum requirements range from 103% to 125% of outstanding advances, based on the collateral type. It is common for members to maintain excess collateral positions with the FHLBNY for future liquidity needs. Based on several factors (e.g. advance type, collateral type or member financial condition) members are required to comply with specified collateral requirements, including but not limited to, a detailed listing of pledged mortgage collateral and/or delivery of pledged collateral to FHLBNY or its designated collateral custodian(s). For example, all pledged securities collateral must be delivered to the FHLBNY’s nominee name at Citibank, N.A., the FHLBNY’s securities safekeeping custodian. Mortgage collateral that is required to be in the FHLBNY’s possession is typically delivered to the FHLBNY’s Jersey City, NJ facility. However, in certain instances, delivery to an FHLBNY approved custodian may be allowed.
149
Concentration analysis — Top Ten Advance Holders
The following table summarizes the top ten advance holders (dollars in thousands):
Table 52: Top Ten Advance Holders
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | | | Percentage of | | | | |
| | | | | | | | | Par | | | Total Par Value | | | | |
| | | City | | State | | | Advances | | | of Advances | | | Interest Income | |
| | | | | | | | | | | | | | | | | | | |
| Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,275,000 | | | | 19.0 | % | | $ | 710,900 | |
| Metropolitan Life Insurance Company | | New York | | NY | | | 13,680,000 | | | | 15.1 | | | | 356,120 | |
| New York Community Bank* | | Westbury | | NY | | | 7,343,174 | | | | 8.1 | | | | 310,991 | |
| Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 5,005,641 | | | | 5.5 | | | | 97,628 | |
| The Prudential Insurance Company of America | | Newark | | NJ | | | 3,500,000 | | | | 3.9 | | | | 93,601 | |
| Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | | 3,000,000 | | | | 3.3 | | | | 120,870 | |
| Emigrant Bank | | New York | | NY | | | 2,475,000 | | | | 2.7 | | | | 64,131 | |
| Doral Bank | | San Juan | | PR | | | 2,473,420 | | | | 2.7 | | | | 86,389 | |
| MetLife Bank, N.A. | | Bridgewater | | NJ | | | 2,430,500 | | | | 2.7 | | | | 46,142 | |
| Valley National Bank | | Wayne | | NJ | | | 2,322,500 | | | | 2.6 | | | | 103,707 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | $ | 59,505,235 | | | | 65.6 | % | | $ | 1,990,479 | |
| | | | | | | | | | | | | | | | |
| | | |
| * | | Officer of member bank also served on the Board of Directors of the FHLBNY. |
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | | | | | | | | | | | Percentage of | | | | |
| | | | | | | | | Par | | | Total Par Value | | | | |
| | | City | | State | | | Advances | | | of Advances | | | Interest Income | |
| | | | | | | | | | | | | | | | | | | |
| Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,525,000 | | | | 17.0 | % | | $ | 671,146 | |
| Metropolitan Life Insurance Company | | New York | | NY | | | 15,105,000 | | | | 14.6 | | | | 260,420 | |
| Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 7,999,689 | | | | 7.7 | | | | 257,649 | |
New York Community Bank* | | Westbury | | NY | | | 7,796,517 | | | | 7.5 | | | | 337,019 | |
| Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | | 3,738,000 | | | | 3.6 | | | | 151,066 | |
| The Prudential Insurance Company of America | | Newark | | NJ | | | 3,000,000 | | | | 2.9 | | | | 13,082 | |
| Merrill Lynch Bank & Trust Co., FSB | | New York | | NY | | | 2,972,000 | | | | 2.9 | | | | 68,625 | |
| Valley National Bank | | Wayne | | NJ | | | 2,646,500 | | | | 2.6 | | | | 103,918 | |
| Emigrant Bank | | New York | | NY | | | 2,525,000 | | | | 2.4 | | | | 64,116 | |
| Doral Bank | | San Juan | | PR | | | 2,412,500 | | | | 2.3 | | | | 89,643 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | $ | 65,720,206 | | | | 63.5 | % | | $ | 2,016,684 | |
| | | | | | | | | | | | | | | | |
| | | |
| * | | At December 31, 2008, officer of member bank also served on the Board of Directors of the FHLBNY. |
150
Investment quality
At December 31, 2009, long-term investments were principally comprised of (1) Mortgage-backed securities classified as held-to-maturity at a carrying value of $9.8 billion, of which 89.1% comprised of securities issued by government sponsored enterprises and a U.S. government agency, (2) Mortgage-backed securities classified as available-for-sale securities at fair value basis of $2.2 billion, entirely GSE issued mortgage-backed securities. In addition, the FHLBNY had investments of $751.8 million in primary public and private placements of taxable obligations of state and local housing finance authorities classified as held-to-maturity.
At December 31, 2009, short-term investments consisted of Federal funds sold.
The FHLBNY’s investments are summarized below (dollars in thousands):
Table 53: Year-Over-Year Change in Investments
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | | | Dollar | | | Percentage | |
| | | 2009 | | | 2008 | | | Variance | | | Variance | |
| | | | | | | | | | | | | | | | | |
State and local housing finance agency obligations1 | | $ | 751,751 | | | $ | 804,100 | | | $ | (52,349 | ) | | | (6.51 | )% |
| Mortgage-backed securities | | | | | | | | | | | | | | | | |
| Available-for-sale securities, at fair value | | | 2,240,564 | | | | 2,851,683 | | | | (611,119 | ) | | | (21.43 | ) |
| Held-to-maturity securities, at carrying value | | | 9,767,531 | | | | 9,326,443 | | | | 441,088 | | | | 4.73 | |
| | | | | | | | | | | | | |
| | | | 12,759,846 | | | | 12,982,226 | | | | (222,380 | ) | | | (1.71 | ) |
| | | | | | | | | | | | | | | | | |
Grantor trusts2 | | | 12,589 | | | | 10,186 | | | | 2,403 | | | | 23.59 | |
Certificates of deposit1 | | | — | | | | 1,203,000 | | | | (1,203,000 | ) | | | (100.00 | ) |
| Federal funds sold | | | 3,450,000 | | | | — | | | | 3,450,000 | | | NA | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total investments | | $ | 16,222,435 | | | $ | 14,195,412 | | | $ | 2,027,023 | | | | 14.28 | % |
| | | | | | | | | | | | | |
| | | |
| 1 | | Classified as held-to-maturity securities, at carrying value |
| |
| 2 | | Classified as available-for-sale securities, at fair value and represents investments in registered mutual funds and other fixed-income securities maintained under the grantor trusts |
Investment rating
External ratings and the changes in a security’s external rating are factors in the FHLBNY’s assessment of impairment; a rating or a rating change alone is not necessarily indicative of impairment or absence of impairment.
Mortgage-backed securities— Mortgage-backed securities were classified as either Available-for-sale or Held-to-maturity.
Available-for-sale — At December 31, 2009 and 2008, all MBS classified as available-for-sale were rated triple-A by a Nationally Recognized Statistical Rating Organization (“NRSRO”). All available-for-sale securities were securities issued by Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”).
151
The following tables contain information about credit ratings of the Bank’s investments in Held-to-maturity and Available-for-sale securities at December 31, 2009 and 2008 (in thousands):
Table 54: NRSRO Held-to-Maturity Securities
External ratings — Held-to-maturity securities — December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | NRSRO Ratings — December 31, 2009 | |
| | | | | | | | | | | | | | | | | | | | | | | Below | |
| | | Carrying | | | | | | | | | | | | | | | | | | | Investment | |
| Issued, guaranteed or insured: | | Value | | | AAA | | | AA | | | A | | | BBB | | | Grade | |
Pools of Mortgages | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 1,137,514 | | | $ | 1,137,514 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Freddie Mac | | | 335,369 | | | | 335,369 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total pools of mortgages | | | 1,472,883 | | | | 1,472,883 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 2,609,254 | | | | 2,609,254 | | | | — | | | | — | | | | — | | | | — | |
| Freddie Mac | | | 4,400,002 | | | | 4,400,002 | | | | — | | | | — | | | | — | | | | — | |
| Ginnie Mae | | | 171,531 | | | | 171,531 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total CMOs/REMICs | | | 7,180,787 | | | | 7,180,787 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Ginnie Mae-CMBS | | | 49,526 | | | | 49,526 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GSE MBS | | | | | | | | | | | | | | | | | | | | | | | | |
| CMOs/REMICs | | | 444,906 | | | | 319,583 | | | | 12,510 | | | | 38,332 | | | | — | | | | 74,481 | |
| Commercial mortgage-backed securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total non-federal-agency MBS | | | 444,906 | | | | 319,583 | | | | 12,510 | | | | 38,332 | | | | — | | | | 74,481 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Asset-Backed Securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing (insured) | | | 202,278 | | | | — | | | | 202,278 | | | | — | | | | — | | | | — | |
| Home equity loans (insured) | | | 227,834 | | | | 10,399 | | | | 71,653 | | | | 27,589 | | | | 26,657 | | | | 91,536 | |
| Home equity loans (uninsured) | | | 189,317 | | | | 171,840 | | | | 12,873 | | | | — | | | | 4,604 | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total asset-backed securities | | | 619,429 | | | | 182,239 | | | | 286,804 | | | | 27,589 | | | | 31,261 | | | | 91,536 | |
| | | | | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | $ | 9,767,531 | | | $ | 9,205,018 | | | $ | 299,314 | | | $ | 65,921 | | | $ | 31,261 | | | $ | 166,017 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | | | | | | | |
| State and local housing finance agency obligations | | $ | 751,751 | | | $ | 72,992 | | | $ | 601,109 | | | $ | 21,430 | | | $ | 56,220 | | | $ | — | |
| Certificates of deposit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total other | | $ | 751,751 | | | $ | 72,992 | | | $ | 601,109 | | | $ | 21,430 | | | $ | 56,220 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Held-to-maturity securities | | $ | 10,519,282 | | | $ | 9,278,010 | | | $ | 900,423 | | | $ | 87,351 | | | $ | 87,481 | | | $ | 166,017 | |
| | | | | | | | | | | | | | | | | | | |
152
External ratings — Held-to-maturity securities — December 31, 2008:
| | | | | | | | | | | | | | | | | | | | | |
| | | Carrying | | | NRSRO Ratings — December 31, 2008 | |
| Issued, guaranteed or insured: | | Value | | | AAA | | | AA | | | A | | | BBB | |
Pools of Mortgages | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 1,400,058 | | | $ | 1,400,058 | | | $ | — | | | $ | — | | | $ | — | |
| Freddie Mac | | | 422,088 | | | | 422,088 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Total pools of mortgages | | | 1,822,146 | | | | 1,822,146 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 2,032,050 | | | | 2,032,050 | | | | — | | | | — | | | | — | |
| Freddie Mac | | | 3,722,840 | | | | 3,722,840 | | | | — | | | | — | | | | — | |
| Ginnie Mae | | | 6,325 | | | | 6,325 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Total CMOs/REMICs | | | 5,761,215 | | | | 5,761,215 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Non-GSE MBS | | | | | | | | | | | | | | | | | | | | |
| CMOs/REMICs | | | 609,908 | | | | 509,056 | | | | — | | | | 62,401 | | | | 38,451 | |
| Commercial mortgage-backed securities | | | 266,994 | | | | 266,994 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Total non-federal-agency MBS | | | 876,902 | | | | 776,050 | | | | — | | | | 62,401 | | | | 38,451 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Asset-Backed Securities | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing (insured) | | | 229,714 | | | | — | | | | 229,714 | | | | — | | | | — | |
| Home equity loans (insured) | | | 376,587 | | | | 86,662 | | | | — | | | | 130,277 | | | | 159,648 | |
| Home equity loans (uninsured) | | | 259,879 | | | | 259,879 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Total asset-backed securities | | | 866,180 | | | | 346,541 | | | | 229,714 | | | | 130,277 | | | | 159,648 | |
| | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | $ | 9,326,443 | | | $ | 8,705,952 | | | $ | 229,714 | | | $ | 192,678 | | | $ | 198,099 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | | | |
| State and local housing finance agency obligations | | $ | 804,100 | | | $ | 74,881 | | | $ | 672,999 | | | $ | — | | | $ | 56,220 | |
| Certificates of deposit | | | 1,203,000 | | | | — | | | | 628,000 | | | | 575,000 | | | | — | |
| | | | | | | | | | | | | | | | |
| Total other | | $ | 2,007,100 | | | $ | 74,881 | | | $ | 1,300,999 | | | $ | 575,000 | | | $ | 56,220 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total Held-to-maturity securities | | $ | 11,333,543 | | | $ | 8,780,833 | | | $ | 1,530,713 | | | $ | 767,678 | | | $ | 254,319 | |
| | | | | | | | | | | | | | | | |
153
External ratings — Available-for-sale securities — December 31, 2009:
Table 55: NRSRO Available-for-Sale Securities
| | | | | | | | | | | | | | | | | |
| | | | | | | NRSRO Ratings — December 31, 2009 | |
| Issued, guaranteed or insured: | | Fair Value | | | AAA | | | AA | | | A | |
Pools of Mortgages | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Freddie Mac | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total pools of mortgages | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 1,544,500 | | | | 1,544,500 | | | | — | | | | — | |
| Freddie Mac | | | 696,064 | | | | 696,064 | | | | — | | | | — | |
| Ginnie Mae | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total CMOs/REMICs | | | 2,240,564 | | | | 2,240,564 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Non-GSE MBS | | | | | | | | | | | | | | | | |
| CMOs/REMICs | | | — | | | | — | | | | — | | | | — | |
| Commercial mortgage-backed securities | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total non-federal-agency MBS | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Asset-Backed Securities | | | | | | | | | | | | | | | | |
| Manufactured housing (insured) | | | — | | | | — | | | | — | | | | — | |
| Home equity loans (insured) | | | — | | | | — | | | | — | | | | — | |
| Home equity loans (uninsured) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total asset-backed securities | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total AFS mortgage-backed securities | | $ | 2,240,564 | | | $ | 2,240,564 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | |
Fixed income funds, equity funds and cash equivalents* | | $ | 12,589 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total Available-for-sale securities | | $ | 2,253,153 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
154
External ratings — Available-for-sale securities — December 31, 2008:
| | | | | | | | | | | | | | | | | |
| | | | | | | NRSRO Ratings — December 31, 2008 | |
| Issued, guaranteed or insured: | | Fair Value | | | AAA | | | AA | | | A | |
Pools of Mortgages | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Freddie Mac | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total pools of mortgages | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 1,854,989 | | | | 1,854,989 | | | | — | | | | — | |
| Freddie Mac | | | 996,694 | | | | 996,694 | | | | — | | | | — | |
| Ginnie Mae | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total CMOs/REMICs | | | 2,851,683 | | | | 2,851,683 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Non-GSE MBS | | | | | | | | | | | | | | | | |
| CMOs/REMICs | | | — | | | | — | | | | — | | | | — | |
| Commercial mortgage-backed securities | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total non-federal-agency MBS | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Asset-Backed Securities | | | | | | | | | | | | | | | | |
| Manufactured housing (insured) | | | — | | | | — | | | | — | | | | — | |
| Home equity loans (insured) | | | — | | | | — | | | | — | | | | — | |
| Home equity loans (uninsured) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total asset-backed securities | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total AFS mortgage-backed securities | | $ | 2,851,683 | | | $ | 2,851,683 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | |
Fixed income funds, equity funds and cash equivalents* | | $ | 10,186 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total Available-for-sale securities | | $ | 2,861,869 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
155
Fannie Mae and Freddie Mac Securities
The FHLBNY’s mortgage-backed securities were predominantly issued by Fannie Mae and Freddie Mac.
The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are in conservatorship, with the Finance Agency named as conservator, who will manage Fannie Mae and Freddie Mac in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market.
Available-for-sale securities —All MBS outstanding at December 31, 2009 and 2008 and classified as AFS were issued by Fannie Mae and Freddie Mac.
Held-to-maturity securities —Comprised of 89.1% and 81.3% of MBS also issued by Fannie Mae, Freddie Mac and a government agency at December 31, 2009 and 2008.
The following table summarizes the carrying value basis of held-to-maturity mortgage-backed securities by issuer (dollars in thousands):
Table 56: Carrying Value Basis of Held-to-Maturity Mortgage-Backed Securities by Issuer
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | Percentage | | | December 31, | | | Percentage | |
| | | 2009 | | | of total | | | 2008 | | | of total | |
| | | | | | | | | | | | | | | | | |
| U.S. government sponsored enterprise residential mortgage-backed securities | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 3,746,768 | | | | 38.36 | % | | $ | 3,432,108 | | | | 36.80 | % |
| Freddie Mac | | | 4,735,371 | | | | 48.48 | | | | 4,144,928 | | | | 44.44 | |
| U.S. agency residential mortgage-backed securities | | | 171,531 | | | | 1.76 | | | | 6,325 | | | | 0.07 | |
| U.S. agency commercial mortgage-backed securities | | | 49,526 | | | | 0.51 | | | | — | | | | — | |
| Private-label issued securities | | | 1,064,335 | | | | 10.89 | | | | 1,743,082 | | | | 18.69 | |
| | | | | | | | | | | | | |
| Total Held-to-maturity securities-mortgage-backed securities | | $ | 9,767,531 | | | | 100.00 | % | | $ | 9,326,443 | | | | 100.00 | % |
| | | | | | | | | | | | | |
156
Non-Agency Private label mortgage — and asset-backed securities
At December 31, 2009 and 2008, the Bank also held MBS that were privately issued. All private-label MBS were classified as held-to-maturity. The following table summarizes private-label mortgage- and asset-backed securities by fixed- or variable-rate coupon types (Unpaid principal balance; in thousands):
Table 57: Non-Agency Private Label Mortgage — And Asset-Backed Securities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | Variable | | | | | | | | | | | Variable | | | | |
| Private-label MBS | | Fixed Rate | | | Rate | | | Total | | | Fixed Rate | | | Rate | | | Total | |
| Private-label RMBS | | | | | | | | | | | | | | | | | | | | | | | | |
| Prime | | $ | 435,913 | | | $ | 4,359 | | | $ | 440,272 | | | $ | 596,430 | | | $ | 4,811 | | | $ | 601,241 | |
| Alt-A | | | 7,229 | | | | 3,713 | | | | 10,942 | | | | 9,129 | | | | 4,177 | | | | 13,306 | |
| | | | | | | | | | | | | | | | | | | |
| Total PL RMBS | | | 443,142 | | | | 8,072 | | | | 451,214 | | | | 605,559 | | | | 8,988 | | | | 614,547 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| Private-label CMBS | | | | | | | | | | | | | | | | | | | | | | | | |
| Prime | | | — | | | | — | | | | — | | | | 266,860 | | | | — | | | | 266,860 | |
| | | | | | | | | | | | | | | | | | | |
| Total PL CMBS | | | — | | | | — | | | | — | | | | 266,860 | | | | — | | | | 266,860 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| Home Equity Loans | | | | | | | | | | | | | | | | | | | | | | | | |
| Subprime | | | 437,042 | | | | 108,801 | | | | 545,843 | | | | 504,565 | | | | 132,135 | | | | 636,700 | |
| | | | | | | | | | | | | | | | | | | |
| Total Home Equity Loans | | | 437,042 | | | | 108,801 | | | | 545,843 | | | | 504,565 | | | | 132,135 | | | | 636,700 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | |
| Subprime | | | 202,299 | | | | — | | | | 202,299 | | | | 229,738 | | | | — | | | | 229,738 | |
| | | | | | | | | | | | | | | | | | | |
| Total Manufactured Housing Loans | | | 202,299 | | | | — | | | | 202,299 | | | | 229,738 | | | | — | | | | 229,738 | |
| | | | | | | | | | | | | | | | | | | |
| Total UPB of private-label MBS | | $ | 1,082,483 | | | $ | 116,873 | | | $ | 1,199,356 | | | $ | 1,606,722 | | | $ | 141,123 | | | $ | 1,747,845 | |
| | | | | | | | | | | | | | | | | | | |
Unpaid principal balance (UPB) is also known as the current face or par amount of a mortgage-backed security.
Other-Than-Temporary Impaired Securities
In each interim quarterly period in 2009, management evaluated its portfolio of private-label mortgage-backed securities for credit impairment. Beginning with the quarter ended September 30, 2009, and again at December 31, 2009, the FHLBNY performed its OTTI analysis by cash flow testing 100 percent of it private-label MBS. At December 31, 2008, and at the two interim quarters ended June 30, 2009, the FHLBNY’ methodology was to analyze all its private-label MBS to isolate securities that were considered to be at risk of OTTI and to perform cash flow analysis on securities at risk of OTTI. As a result of the evaluations, the FHLBNY recognized credit impairment OTTI related losses in each quarter of 2009. Cumulatively, 17 private-label held-to-maturity securities were deemed to be credit impaired in 2009. No credit impairment was recognized in 2008 or 2007. Cumulative credit impairment losses of $20.8 million were recorded as a charge to 2009 income. The charge included credit losses of certain MBS that were determined to be OTTI in a previous quarter of 2009. The amount of non-credit OTTI remaining after accretion at December 31, 2009 was a cumulative loss of $110.6 million in AOCI.
Based on detailed cash flow credit analysis on a security level, the Bank has concluded that other than the 17 securities determined to be credit impaired at December 31, 2009, gross unrealized losses for the remainder of Bank’s investment securities were primarily caused by interest rate changes, credit spread widening and reduced liquidity, and the securities were temporarily impaired as defined under the new guidance for recognition and presentation of other-than-temporary impairment. For more information see Notes 1 and 4 to the audited financial statements accompanying this report.
157
Fourteen of the 17 securities that were deemed credit impaired in 2009 are insured by bond insurers, Ambac and MBIA. The Bank’s analysis of the two bond insurers concluded that future credit losses due to projected collateral shortfalls of the impaired securities would not be fully supported by the two bond insurers.
The following table summarizes the key characteristics of the 16 credit impaired and unimpaired securities insured by MBIA and Ambac (in thousand):
Table 58: Monoline Insurance Protection on Credit Impaired PLMBS
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, 2009 | |
| | | | | | | Insurer MBIA | | | Cumulative OTTI Recorded | |
| | | No. of | | | Amortized | | | Carrying | | | Fair | | | Credit | | | Non-credit | |
| Ratings | | Securities | | | Cost Basis | | | Value | | | Value | | | Loss | | | Loss | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired* | | | 2 | | | $ | 29,051 | | | $ | 19,679 | | | $ | 17,161 | | | $ | (5,370 | ) | | $ | (10,075 | ) |
Unimpaired | | | 1 | | | | 2,885 | | | | 2,886 | | | | 2,276 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
Total | | | 3 | | | $ | 31,936 | | | $ | 22,565 | | | $ | 19,437 | | | $ | (5,370 | ) | | $ | (10,075 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, 2009 | |
| | | | | | | Insurer Ambac | | | Cumulative OTTI Recorded | |
| | | No. of | | | Amortized | | | Carrying | | | Fair | | | Credit | | | Non-credit | |
| Ratings | | Securities | | | Cost Basis | | | Value | | | Value | | | Loss | | | Loss | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired* | | | 12 | | | $ | 185,156 | | | $ | 115,083 | | | $ | 127,470 | | | $ | (13,255 | ) | | $ | (77,705 | ) |
Unimpaired | | | 1 | | | | 11,019 | | | | 11,019 | | | | 6,386 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
Total | | | 13 | | | $ | 196,175 | | | $ | 126,102 | | | $ | 133,856 | | | $ | (13,255 | ) | | $ | (77,705 | ) |
| | | | | | | | | | | | | | | | | | | |
158
The following table presents additional information of the fair values and gross unrealized losses of PLMBS by year of securitization and external rating at December 31, 2009 (in thousands):
Tables 59: PLMBS by Year of Securitization and External Rating
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | | | | | | | | | | | | | |
| | | Unpaid Principal Balance | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Below | | | | | | | Gross | | | | | | | | |
| | | Ratings | | | | | | | | | | | | | | | | | | | Investment | | | Amortized | | | Unrealized | | | | | | | Total OTTI | |
| Private-label MBS | | Subtotal | | | Triple-A | | | Double-A | | | Single-A | | | Triple-B | | | Grade | | | Cost | | | (Losses) | | | Fair Value | | | Losses | |
RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2006 | | $ | 63,276 | | | $ | — | | | $ | — | | | $ | 38,689 | | | $ | — | | | $ | 24,587 | | | $ | 62,654 | | | $ | (2,396 | ) | | $ | 60,258 | | | $ | — | |
| 2005 | | | 82,982 | | | | 28,687 | | | | — | | | | — | | | | — | | | | 54,295 | | | | 80,996 | | | | (1,708 | ) | | | 79,288 | | | | (3,204 | ) |
| 2004 and earlier | | | 294,014 | | | | 281,240 | | | | 12,774 | | | | — | | | | — | | | | — | | | | 292,773 | | | | (3,696 | ) | | | 289,958 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total RMBS Prime | | | 440,272 | | | | 309,927 | | | | 12,774 | | | | 38,689 | | | | — | | | | 78,882 | | | | 436,423 | | | | (7,800 | ) | | | 429,504 | | | | (3,204 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Alt-A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 and earlier | | | 10,942 | | | | 10,942 | | | | — | | | | — | | | | — | | | | — | | | | 10,944 | | | | (938 | ) | | | 10,006 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total RMBS | | | 451,214 | | | | 320,869 | | | | 12,774 | | | | 38,689 | | | | — | | | | 78,882 | | | | 447,367 | | | | (8,738 | ) | | | 439,510 | | | | (3,204 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
CMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 and earlier | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
HEL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 and earlier | | | 545,843 | | | | 205,480 | | | | 91,782 | | | | 48,838 | | | | 43,035 | | | | 156,708 | | | | 525,260 | | | | (151,818 | ) | | | 373,442 | | | | (137,708 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 and earlier | | | 202,299 | | | | — | | | | 202,299 | | | | — | | | | — | | | | — | | | | 202,278 | | | | (37,101 | ) | | | 165,177 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total PLMBS | | $ | 1,199,356 | | | $ | 526,349 | | | $ | 306,855 | | | $ | 87,527 | | | $ | 43,035 | | | $ | 235,590 | | | $ | 1,174,905 | | | $ | (197,657 | ) | | $ | 978,129 | | | $ | (140,912 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
159
The following table presents additional information of the fair values and gross unrealized losses of PLMBS by year of securitization and external rating at December 31, 2008 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | | | | | | | | | | | |
| | | Unpaid Principal Balance | | | | | | | | | | | |
| | | Ratings | | | | | | | | | | | | | | | | | | | Amortized | | | Unrealized | | | | |
| Private-label MBS | | Subtotal | | | Triple-A | | | Double-A | | | Single-A | | | Triple-B | | | Cost | | | (Losses) | | | Fair Value | |
RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2006 | | $ | 101,843 | | | $ | — | | | $ | — | | | $ | 62,968 | | | $ | 38,875 | | | $ | 100,851 | | | $ | (20,544 | ) | | $ | 80,308 | |
| 2005 | | | 110,334 | | | | 110,334 | | | | — | | | | — | | | | — | | | | 108,254 | | | | (5,415 | ) | | | 102,839 | |
| 2004 | | | 168,166 | | | | 168,166 | | | | — | | | | — | | | | — | | | | 168,173 | | | | (8,363 | ) | | | 159,810 | |
| 2003 and earlier | | | 220,898 | | | | 220,898 | | | | — | | | | — | | | | — | | | | 219,318 | | | | (6,722 | ) | | | 212,596 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total RMBS Prime | | | 601,241 | | | | 499,398 | | | | — | | | | 62,968 | | | | 38,875 | | | | 596,596 | | | | (41,044 | ) | | | 555,553 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Alt-A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 and earlier | | | 13,306 | | | | 13,306 | | | | — | | | | — | | | | — | | | | 13,310 | | | | (1,662 | ) | | | 11,648 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total RMBS | | | 614,547 | | | | 512,704 | | | | — | | | | 62,968 | | | | 38,875 | | | | 609,906 | | | | (42,706 | ) | | | 567,201 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
CMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 and earlier | | | 266,860 | | | | 266,860 | | | | — | | | | — | | | | — | | | | 266,994 | | | | (127 | ) | | | 267,016 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
HEL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 and earlier | | | 636,700 | | | | 346,631 | | | | — | | | | 130,404 | | | | 159,665 | | | | 636,466 | | | | (224,069 | ) | | | 412,397 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 and earlier | | | 229,738 | | | | — | | | | 229,738 | | | | — | | | | — | | | | 229,714 | | | | (75,418 | ) | | | 154,296 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total PLMBS | | $ | 1,747,845 | | | $ | 1,126,195 | | | $ | 229,738 | | | $ | 193,372 | | | $ | 198,540 | | | $ | 1,743,080 | | | $ | (342,320 | ) | | $ | 1,400,910 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
160
Weighted-average market price offers an analysis of unrealized loss percentage; a comparison of the weighted-average credit support to weighted-average collateral delinquency percentage is another indicator of the credit support available to absorb potential cash flow shortfalls.
Table 60: Weighted-Average Market Price of MBS
| | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Original | | | | | | | |
| | | Weighted- | | | Weighted- | | | Weighted-Average | |
| | | Average Credit | | | Average Credit | | | Collateral | |
| Private-label MBS | | Support % | | | Support % | | | Delinquency % | |
RMBS | | | | | | | | | | | | |
Prime | | | | | | | | | | | | |
| 2006 | | | 3.74 | % | | | 5.16 | % | | | 5.47 | % |
| 2005 | | | 2.67 | | | | 3.82 | | | | 2.32 | |
| 2004 and earlier | | | 1.58 | | | | 2.82 | | | | 0.79 | |
| | | | | | | | | | |
| Total RMBS Prime | | | 2.10 | | | | 3.35 | | | | 1.75 | |
| | | | | | | | | | | | | |
Alt-A | | | | | | | | | | | | |
| 2004 and earlier | | | 10.73 | | | | 32.35 | | | | 11.22 | |
| | | | | | | | | | |
| Total RMBS | | | 2.30 | | | | 4.05 | | | | 1.98 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
CMBS | | | | | | | | | | | | |
Prime | | | | | | | | | | | | |
| 2004 and earlier | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
HEL | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | |
| 2004 and earlier | | | 57.86 | | | | 65.34 | | | | 17.40 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Manufactured Housing Loans | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | |
| 2004 and earlier | | | 57.78 | | | | 55.56 | | | | 3.64 | |
| | | | | | | | | | |
Total Private-label MBS | | | 36.95 | % | | | 40.63 | % | | | 9.28 | % |
| | | | | | | | | | |
Definitions:
Original Weighted-Average Credit Support percentagerepresents the arithmetic mean of a cohort of securities by vintage; credit support is defined as the credit protection level at the time the mortgage-backed securities closed. Support is expressed as a percentage of the sum of: subordinate bonds, reserve funds, guarantees, overcollateralization, divided by the original collateral balance.
Weighted-Average Credit Support percentagerepresents the arithmetic mean of a cohort of securities by vintage; credit support is defined as the credit protection level as of the mortgage-backed securities most current payment date. Support is expressed as a percentage of the sum of: subordinate bonds, reserve funds, guarantees, overcollateralization, divided by the most current unpaid collateral balance.
161
Weighted-average collateral delinquency percentagerepresents the arithmetic mean of a cohort of securities by vintage: collateral delinquency is defined as the sum of the unpaid principal balance of loans underlying the mortgage-backed security where the borrower is 60 or more days past due, or in bankruptcy proceedings, or the loan is in foreclosure, or has become real estate owned divided by the aggregate unpaid collateral balance.
| | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Original | | | | | | | |
| | | Weighted- | | | Weighted- | | | Weighted-Average | |
| | | Average Credit | | | Average Credit | | | Collateral | |
| Private-label MBS | | Support % | | | Support % | | | Delinquency % | |
RMBS | | | | | | | | | | | | |
Prime | | | | | | | | | | | | |
| 2006 | | | 3.71 | % | | | 4.56 | % | | | 0.86 | % |
| 2005 | | | 2.68 | | | | 3.26 | | | | 1.00 | |
| 2004 | | | 2.05 | | | | 2.86 | | | | 0.40 | |
| 2003 and earlier | | | 1.21 | | | | 2.17 | | | | 0.27 | |
| | | | | | | | | | |
| Total RMBS Prime | | | 2.14 | | | | 2.97 | | | | 0.54 | |
| | | | | | | | | | | | | |
Alt-A | | | | | | | | | | | | |
| 2003 and earlier | | | 10.22 | | | | 31.60 | | | | 10.56 | |
| | | | | | | | | | |
| Total RMBS | | | 2.31 | | | | 3.59 | | | | 0.76 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
CMBS | | | | | | | | | | | | |
Prime | | | | | | | | | | | | |
| 2003 and earlier | | | 26.69 | | | | 38.73 | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
HEL | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | |
| 2003 and earlier | | | 58.31 | | | | 65.66 | | | | 12.53 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Manufactured Housing Loans | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | |
| 2003 and earlier | | | 58.26 | | | | 55.99 | | | | 1.88 | |
| | | | | | | | | | |
Total Private-label MBS | | | 33.79 | % | | | 38.45 | % | | | 5.08 | % |
| | | | | | | | | | |
162
External ratings are just one factor that is considered in analyzing if a security is other-than-temporarily impaired. The table below compares delinquency percentage across PLMBS security types, ratings and gross unrealized losses (dollars in thousands):
Table 61: PLMBS Security Types Delinquencies
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | Gross | | | Weighted-Average | | | | | | | Gross | | | Weighted-Average | |
| | | Amortized | | | Unrealized | | | Collateral | | | Amortized | | | Unrealized | | | Collateral | |
| Private-label MBS | | Cost | | | (Losses) | | | Delinquency %1 | | | Cost | | | (Losses) | | | Delinquency %1 | |
RMBS | | | | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | | | | |
| Rated Triple A | | $ | 308,639 | | | $ | (4,499 | ) | | | 0.69 | % | | $ | 495,744 | | | $ | (20,500 | ) | | | 0.48 | % |
| Rated Double A | | | 12,510 | | | | — | | | | 1.38 | | | | — | | | | — | | | | — | |
| Rated Single A | | | 38,332 | | | | (1,000 | ) | | | 4.64 | | | | 62,401 | | | | (12,027 | ) | | | 0.76 | |
| Rated Triple B | | | — | | | | — | | | | — | | | | 38,451 | | | | (8,517 | ) | | | 1.01 | |
| Below Investment Grade | | | 76,942 | | | | (2,301 | ) | | | 4.55 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total of RMBS Prime | | | 436,423 | | | | (7,800 | ) | | | 1.75 | | | | 596,596 | | | | (41,044 | ) | | | 0.54 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Alt-A | | | | | | | | | | | | | | | | | | | | | | | | |
| Rated Triple A | | | 10,944 | | | | (938 | ) | | | 11.22 | | | | 13,310 | | | | (1,662 | ) | | | 10.56 | |
| | | | | | | | | | | | | | | | | | | |
| Total of RMBS | | | 447,367 | | | | (8,738 | ) | | | 1.98 | | | | 609,906 | | | | (42,706 | ) | | | 0.76 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
CMBS | | | | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | | | | |
| Rated Triple A | | | — | | | | — | | | | — | | | | 266,994 | | | | (127 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
HEL | | | | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | | | | |
| Rated Triple A | | | 204,356 | | | | (54,224 | ) | | | 18.26 | | | | 346,541 | | | | (105,673 | ) | | | 13.54 | |
| Rated Double A | | | 91,074 | | | | (22,534 | ) | | | 10.96 | | | | — | | | | — | | | | — | |
| Rated Single A | | | 46,792 | | | | (15,930 | ) | | | 16.32 | | | | 130,277 | | | | (50,977 | ) | | | 5.68 | |
| Rated Triple B | | | 41,902 | | | | (15,798 | ) | | | 13.18 | | | | 159,648 | | | | (67,419 | ) | | | 15.96 | |
| Below Investment Grade | | | 141,136 | | | | (43,332 | ) | | | 21.53 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total of HEL Subprime | | | 525,260 | | | | (151,818 | ) | | | 17.40 | | | | 636,466 | | | | (224,069 | ) | | | 12.53 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | | | | |
| Rated Double A | | | 202,278 | | | | (37,101 | ) | | | 3.64 | | | | 229,714 | | | | (75,418 | ) | | | 1.88 | |
| | | | | | | | | | | | | | | | | | | |
Grand Total | | $ | 1,174,905 | | | $ | (197,657 | ) | | | 9.28 | % | | $ | 1,743,080 | | | $ | (342,320 | ) | | | 5.08 | % |
| | | | | | | | | | | | | | | | | | | |
| | | |
| 1 | | Weighted-average collateral delinquency rate is determined based on the underlying loans that are 60 days or more past due. The reported delinquency percentage represents weighted-average based on the dollar amounts of the individual securities in the category and their respective delinquencies. Combined weighted-average collateral delinquency rates are calculated based on UPB amount. |
163
Mortgage Loans — Held-for-portfolio
The following table summarizes Mortgage Partnership Finance Loans (“MPF” or “Mortgage Partnership Finance program”) by loss layer structure product types (in thousands):
Table 62: MPF by Loss Layers
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Original MPF | | $ | 280,312 | | | $ | 197,516 | | | $ | 153,939 | |
| MPF 100 | | | 30,542 | | | | 36,838 | | | | 40,532 | |
| MPF 125 | | | 392,097 | | | | 467,479 | | | | 433,864 | |
| MPF 125 Plus | | | 606,002 | | | | 742,523 | | | | 847,091 | |
| Other | | | 9,883 | | | | 10,991 | | | | 8,359 | |
| | | | | | | | | | |
| Total MPF Loans * | | $ | 1,318,836 | | | $ | 1,455,347 | | | $ | 1,483,785 | |
| | | | | | | | | | |
| | | |
| * | | Par amount of total mortgage loan held-for-portfolio includes CMA, par amount at December 31, 2009 was $3.9 million |
Original MPF— The first layer of losses are applied to the First Loss Account provided by the Bank. The member then provides a credit enhancement up to “AA” rating equivalent. Credit losses beyond the first two layers, though a remote possibility, would be absorbed by the FHLBNY.
MPF 100— The first layer of losses is applied to the First Loss Account provided by the Bank. Losses incurred in the First Loss Account are deducted from credit enhancement fees payable to the member after the third year. The member then provides a credit enhancement up to “AA” rating equivalent less the amount placed in the FLA. Losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses) would be absorbed by the Bank. Credit losses beyond the first two layers, though a remote possibility, would be absorbed by the FHLBNY.
MPF 125—The first layer of losses is applied to the First Loss Account provided by the Bank. Losses incurred in the First Loss Account are deducted from the credit enhancement fees payable to the member. The member then provides a credit enhancement up to “AA” rating equivalent less the amount placed in the FLA. Losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses) would be absorbed by the Bank. Credit losses beyond the first two layers, though a remote possibility would be absorbed by the FHLBNY.
MPF Plus— The first layer of losses is applied to the First Loss Account (“FLA”) in an amount equal to a specified percentage of loans in the pool as of the sale date. Losses incurred in the First Loss Account are deducted from the credit enhancement fees payable to the member. Losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses) would be absorbed by the Bank. The member acquires an additional Credit Enhancement (“CE”) coverage through a supplemental mortgage insurance policy (“SMI”) to cover second-layer losses that exceed the deductible (“FLA”) of the Supplemental Mortgage Insurance policy. Losses not covered by the First Loss Account or Supplemental Mortgage Insurance coverage will be paid by the member’s Credit Enhancement obligation up to “AA” rating equivalent. Losses that exceeded the Credit Enhancement obligation, though a remote possibility, would be absorbed by the Bank.
Federal Housing Administration/Veteran Administration Insured Loans—The Participating Financial Institution provides and maintains (“FHA/VA”) insurance for FHA/VA mortgage loans; the Participating Financial Institution is responsible for compliance with all FHA/VA requirements and for obtaining the benefit of the FHA/VA insurance or the insurance with respect to defaulted mortgage loans.
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Collateral types and general description of the primary mortgage loans are as follows:
| • | | MPF single-family fully amortizing residential loans are comprised of “Fixed 15” years or less, greater than 15 years but less than or equal to 20 years and greater than 20 years but less than or equal to 30 years maturity. Property types consist of 1-4 family attached, detached, and planned unit developments, condominiums, and non-mobile manufactured housing properties. |
| • | | Multi-family portfolio consists of “Ten-year balloon” notes collateralized by multi-family units from 5 to 1000 units in the metropolitan area of New York City. These participations were purchased under Community Mortgage Asset program, which has been suspended indefinitely and the portfolio is running off. Loans were underwritten to debt service coverage not to be less than 125% and a loan-to-value ratio not to exceed 75%. |
Limitations on the MPF portfolio are the loan lending limits established by Finance Agency.
Participating Financial Institutions (“PFI”) may use whichever underwriting system they choose. While MPF loans generally conform to criteria for sale such as used by Freddie Mac and Fannie Mae, in addition, each loan is created or sold only if the lender is willing to share in the management of that loan’s credit risk. Participating Financial Institutions contact the Federal Home Loan Bank of Chicago, the MPF Provider, to credit enhance and sell loans into the MPF program. The credit enhancement software used by the Mortgage Partnership Finance provider for MPF analyzes the risk characteristics of each loan and determines the amount of credit enhancement required, but the decision whether to deliver the loan into the Mortgage Partnership Finance Program is made solely by the Participating Financial Institution.
Most PFIs service loans on an actual/actual form of remittance which requires the PFI to remit whatever amounts it collects. Participating Financial Institutions participating in the Mortgage Partnership Finance Plus product must service loans on a scheduled/scheduled form of remittance which requires the Participating Financial Institution to remit each month whatever scheduled interest and scheduled principal payments are due, whether the amounts are collected. The PFI must remit scheduled interest and scheduled principal whether or not mortgage payments are received.
Mortgage loans — Past due
In the FHLBNY’s outstanding mortgage loans held-for-portfolio, non-performing loans and loans 90 days or more past due and accruing interest were as follows (in thousands):
Table 63: Mortgage Loans — Past Due
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Mortgage loans, net of provisions for credit losses | | $ | 1,317,547 | | | $ | 1,457,885 | |
| | | | | | | |
| | | | | | | | | |
| Non-performing mortgage loans held-for-portfolio | | $ | 16,007 | | | $ | 4,792 | |
| | | | | | | |
| | | | | | | | | |
| Mortgage loans past due 90 days or more and still accruing interest | | $ | 570 | | | $ | 507 | |
| | | | | | | |
Non-performing mortgage loans were conventional mortgage loans that were placed on non-accrual/non-performing status when the collection of the contractual principal or interest from the borrower was 90 days or more past due. FHLBNY considers conventional loans (excluding Federal Housing Administration (“FHA”) and Veteran Administration (“VA”) insured loans) that are 90 days or more past due as non-accrual loans. FHA and VA insured loans that were past due 90 days or more were not significant at any period reported, and interest was still being accrued because of VA and FHA insurance. No loans were impaired at December 31, 2009, 2008 and 2007 other than the non-accrual loans.
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Mortgage loans — Interest on Non-performing loans
The FHLBNY’s interest contractually due and actually received for non-performing loans were as follows (in thousands):
Table 64: Mortgage Loans — Interest Short-Fall
| | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
Interest contractually due1 | | $ | 714 | | | $ | 168 | |
| Interest actually received | | | 626 | | | | 146 | |
| | | | | | | |
| Shortfall | | $ | 88 | | | $ | 22 | |
| | | | | | | |
| | | |
| 1 | | The Bank does not recognize interest received as income from uninsured loans past due 90-days or greater. |
Non-performing mortgage loans were conventional mortgage loans that were placed on non-accrual/non-performing status when the collection of the contractual principal or interest from the borrower was 90 days or more past due. FHLBNY considers conventional loans (excluding Federal Housing Administration (“FHA”) and Veteran Administration (“VA”) insured loans) that are 90 days or more past due as non-accrual loans. FHA and VA insured loans that were past due 90 days or more were not significant at any period reported, and interest was still being accrued because of VA and FHA insurance. No loans were impaired in any periods in this report other than the non-accrual loans.
Mortgage Loans — Allowance for Credit Losses
Roll-forward information with respect to allowances for credit losses was as follows (in thousands):
Table 65: Mortgage Loans — Allowance for Credit Losses
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Beginning balance | | $ | 1,406 | | | $ | 633 | | | $ | 593 | |
| Charge-offs | | | (16 | ) | | | — | | | | — | |
| Provision for credit losses on mortgage loans | | | 3,108 | | | | 773 | | | | 40 | |
| | | | | | | | | | |
Ending balance | | $ | 4,498 | | | $ | 1,406 | | | $ | 633 | |
| | | | | | | | | | |
The First Loss Account memorializes the first tier of credit exposure of the FHLBNY. It is not an indication of inherent losses in the loan portfolio and is not a loan loss reserve. The FHLBNY is responsible for losses up to this “first loss level”. Losses beyond this layer are absorbed through credit enhancement provided by the member participating in the Mortgage Partnership Finance Program. All residual credit exposure is FHLBNY’s responsibility. In 2009 and 2008, charge offs were $22.7 thousand and $21.2 thousand. Of these amounts, charge offs in 2009 of $16.1 thousand were not recovered. No charge offs were incurred in 2007. There were 14 foreclosures completed in 2009.
In limited circumstances, the FHLBNY may require the PFI to repurchase loans. 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 repurchase the MPF Loans which are impacted by such failure. Reasons for which a PFI could be required to repurchase an MPF Loan may include but are not limited to MPF Loan in-eligibility, failure to perfect collateral with an approved custodian, a servicing breach, fraud, or other misrepresentation.
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For conventional MPF Loans in the years ended December 31, 2009, 2008 and 2007, the PFIs were required to repurchase 2, 5, and 10 loans for a total of $0.3 million, $1.2 million, and $1.9 million in each of those years. The FHLBNY has not experienced any losses related to conventional MPF Loan repurchases by the PFI.
Mortgage Loans — Credit Risk
Through the MPF program, the FHLBNY invests in home mortgage loans originated by or through members or approved state and local housing finance agencies (“housing associates”). The FHLBNY purchases these mortgages loans under the Finance Agency’s Acquired Member Assets (“AMA”) regulation. These assets may include: whole loans eligible to secure advances (excluding mortgages above the conforming-loan limit); whole loans secured by manufactured housing; or bonds issued by housing associates.
In the MPF program, the FHLBNY purchases conventional mortgage loans from its participating members, referred to as Participating Financial Institutions (“PFI”). Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) insured loans outstanding at December 31, 2009 and 2008 were $6.0 million, and $7.0 million, representing 0.45% and 0.48%, of the remaining outstanding mortgage loans held-for-portfolio.
The Bank performs periodic reviews of its portfolio to identify the potential for losses inherent in the portfolio and determine the likelihood of collection of the principal and interest. Mortgage loans that are past due and either classified under regulatory criteria (Sub-standard, doubtful or Loss), are separated from the aggregate pool, and evaluated separately for impairment. The FHLBNY bases its provision for credit losses on its estimate of probable credit losses inherent in the MPF portfolio without considering the private mortgage insurance and other credit enhancement features that accompany the MPF loans (but not the “First Loss Account”) to provide credit assurance to the FHLBNY. If adversely classified, or in non-accrual status, reserves for conventional mortgage loans, except FHA and VA insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses are fully reserved.
When a loan is foreclosed and the Bank takes possession of real estate, 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.
FHA and VA insured mortgage loans have minimal inherent credit risk; risk of such loans generally arises from servicers defaulting on their obligations. FHA and VA insured 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.
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Participating Financial Institutions Risk
The members or housing associates that are approved as Participating Financial Institutions continue to bear a significant portion of the credit risk through credit enhancements that they provide to the FHLBNY. The Acquired Member Assets regulation requires that these credit enhancements be sufficient to protect the FHLBNY from excess credit risk exposure. Specifically, the FHLBNY exposure must be no greater than it would be with an asset rated in the fourth-highest credit rating category by a Nationally Recognized Statistical Rating Organization, or such higher rating category as the FHLBNY may require. The Mortgage Partnership Finance program is constructed to provide the Bank with assets that are credit-enhanced to the second-highest credit rating category (double-A).
The top five Participating Financial Institutions (PFI) and the outstanding MPF loan balances are listed below (dollars in thousands):
Table 66: Top Five Participating Financial Institutions — Concentration
| | | | | | | | | |
| | | December 31, 2009 | |
| | | Mortgage | | | Percent of Total | |
| | | Loans | | | Mortgage Loans | |
| | | | | | | | | |
| Manufacturers and Traders Trust Company | | $ | 607,072 | | | | 46.17 | % |
| Astoria Federal Savings and Loan Association | | | 220,268 | | | | 16.75 | |
| Elmira Savings and Loan F.A. | | | 61,663 | | | | 4.69 | |
| Ocean First Bank | | | 51,277 | | | | 3.90 | |
| CFCU Community Credit Union | | | 42,344 | | | | 3.22 | |
| All Others | | | 332,304 | | | | 25.27 | |
| | | | | | | |
| | | | | | | | | |
Total1 | | $ | 1,314,928 | | | | 100.00 | % |
| | | | | | | |
| | | | | | | | | |
| | | December 31, 2008 | |
| | | Mortgage | | | Percent of Total | |
| | | Loans | | | Mortgage Loans | |
| | | | | | | | | |
| Manufacturers and Traders Trust Company | | $ | 743,853 | | | | 51.25 | % |
| Astoria Federal Savings and Loan Association | | | 264,516 | | | | 18.23 | |
| Elmira Savings and Loan F.A. | | | 80,241 | | | | 5.53 | |
| Ocean First Bank | | | 61,890 | | | | 4.26 | |
| The Lyons National Bank | | | 27,269 | | | | 1.88 | |
| All Others | | | 273,569 | | | | 18.85 | |
| | | | | | | |
| | | | | | | | | |
Total1 | | $ | 1,451,338 | | | | 100.00 | % |
| | | | | | | |
| | | |
| Note1 | | Totals do not include CMA loans. |
Mortgage Loans — Potential Credit Losses
Par amount of conventional MPF loans outstanding were $1.3 billion, $1.4 billion, and $1.5 billion at December 31, 2009, 2008 and 2007. The par value of Federal Housing Administration and Veteran Administration insured loans outstanding were $6.0 million, $7.0 million, and $8.4 million at December 31, 2009, 2008 and 2007.
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The FHLBNY and the Participating Financial Institution share the credit risks of the uninsured Mortgage Partnership Finance loans by structuring potential credit losses into layers. Collectability of the loans is first supported by liens on the real estate securing the loan. For conventional mortgage loans, additional loss protection is provided by private mortgage insurance required for Mortgage Partnership Finance loans with a loan-to-value ratio of more than 80% at origination, which is paid for by the borrower. Credit losses are first absorbed by FHLBNY up to the level of the First Loss Account for which the maximum exposures were estimated to be $13.9 million, $13.8 million, and $12.9 million at December 31, 2009, 2008 and 2007. For all MPF products, other than the MPF Original product, the FHLBNY is entitled to recover any “first losses” incurred from the member up to the amount of credit enhancement fees to be paid by the FHLBNY to the member. The member is responsible for the second loss layer. The member may also arrange for supplemental mortgage insurance (“SMI”) through a third party insurance provider as a credit support to cover the member’s second loss. The amounts that members were directly responsible in the second loss layer are estimated to be $18.1 million, $14.3 million, and $10.9 million at December 31, 2009, 2008 and 2007. The amounts of second loss covered through SMI support were an additional $17.9 million at December 31, 2009 and $19.0 million at December 31, 2008 and 2007. The FHLBNY is again responsible for any residual losses.
The following table provides roll-forward information with respect to the First Loss Account (in thousands):
Table 67: Roll-Forward First Loss Account
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
Beginning balance | | $ | 13,765 | | | $ | 12,947 | | | $ | 12,162 | |
| Additions | | | 192 | | | | 839 | | | | 785 | |
| Charge-offs | | | (23 | ) | | | (21 | ) | | | — | |
| Recoveries | | | — | | | | — | | | | — | |
| | | | | | | | | | |
Ending balance | | $ | 13,934 | | | $ | 13,765 | | | $ | 12,947 | |
| | | | | | | | | | |
The aggregate amount of the First Loss Account is memorialized and tracked but is neither recorded nor reported as a credit loss reserve in the FHLBNY’s financial statements. If “second losses” beyond this layer are incurred, they are absorbed through a credit enhancement provided by the Participating Financial Institutions. The credit enhancement held by PFIs ensures that the lender retains a credit stake in the loans it originates. For managing this risk, Participating Financial Institutions receive monthly “credit enhancement fees” from the FHLBNY.
Mortgage Loans — Credit Enhancement
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 Participating Financial Institution. For taking on the credit enhancement obligation, the Participating Financial Institution receives a credit enhancement fee that is paid by the FHLBNY. For certain Mortgage Partnership Finance products, the credit enhancement fee is accrued and paid each month. For other Mortgage Partnership Finance products, the credit enhancement fee is accrued monthly and is paid monthly after the FHLBNY has accrued 12 months of credit enhancement fees. Credit enhancement fees charged against interest income from mortgage loans was $1.6 million in 2009, and $1.7 million in 2008 and 2007. The FHLBNY incurred a loss in the amount of $16.1 thousand which took place in a MPF Original product where the Bank’s FLA was not reimbursed from credit enhancement fees. The Bank also suffered a loss in an MPF Plus product in the amount of $6.6 thousand that was fully recovered from credit enhancement fees.
The portion of the credit enhancement that is an obligation of the Participating Financial Institution (“PFI”) must be fully secured with pledged collateral. A portion of the credit enhancement may also be covered by insurance, subject to limitations specified in the Acquired Member Assets regulation. Each member or housing associate that participates in the Mortgage Partnership Finance program must meet financial performance criteria established by the FHLBNY. In addition, each approved PFI must have a financial review performed by the FHLBNY on an annual basis.
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The second layer is that amount of credit obligation that the Participating Financial Institution has taken on which will equate the loan to a double-A rating. The FHLBNY pays a Credit Enhancement fee to the Participating Financial Institution for taking on this obligation. The FHLBNY assumes all residual risk.
As of December 31, 2009, 2008 and 2007, the FHLBNY held Mortgage Partnership Finance loans collateralized by real estate in 51 states and territories. At December 31, 2009, there was a concentration of loans (73.5% by number of loans and 66.7% by amounts outstanding) in New York State, which is to be expected since the largest two PFIs are located in New York. At December 31, 2008, there was a concentration of loans (73.3% by number of loans and 69.8% by amounts outstanding) in New York State. At December 31, 2007, there was a concentration of loans (71.8% by numbers of loans, and 68.4% by amounts outstanding) in New York State.
The FHLBNY also holds participation interests in residential and community development mortgage loans through its pilot Community Mortgage Asset program. Acquisitions of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001. Participation interests in Community Mortgage Asset loans are reviewed at least annually.
Mortgage Loans — Allowance for Credit Losses
Management 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 classified either under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due are separated from the aggregate pool, and evaluated separately for impairment.
If adversely classified, or on non-accrual status, reserves for mortgage loans, except Federal Housing Administration and Veterans Administration insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses 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 Mortgage Partnership Finance loan.
Management of the FHLBNY identifies inherent losses through analysis of the conventional loans (not Federal Housing Administration and Veterans Administration insured loans) that are not classified or past due.
The FHLBNY also holds participation interest in residential and community development mortgage loans through its Community Mortgage Asset program. Acquisition of participations under the Community Mortgage Asset program was suspended indefinitely in November 2001, and the outstanding balance was down to $3.9 million at December 31, 2009 from $4.0 million at December 31, 2008. If adversely classified, Community Mortgage Asset 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 Community Mortgage Asset loan. Reserve values are calculated by subtracting the estimated liquidation value of the collateral (after sale value) from the current remaining balance of the Community Mortgage Asset Loan.
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Credit Risk Exposure on MPF Loans — Mortgage insurer default risk
Credit risk on MPF loans is the potential for financial loss due to borrower default or depreciation in the value of the real estate collateral securing the MPF Loan, offset by the PFI’s credit enhancement protection, which may take the form of a contingent performance based credit enhancement fees as well as the credit enhancement amount. The credit enhancement amount is a direct liability of the PFI to pay credit losses; the PFI may also arrange with an insurer for a SMI policy insuring a portion of the credit losses. To the extent credit losses are not recoverable from PMI, the FHLBNY has potential credit exposure should the loan default and the PFI directly or indirectly is unable to recover credit losses.
The MPF Program uses certain mortgage insurance companies to provide both primary mortgage insurance (“PMI”) and supplemental mortgage insurance (“SMI”) for MPF loans. The FHLBNY is exposed to the performance of mortgage insurers to the extent PFI’s rely on insurer credit protection. Credit exposure is defined as the total of PMI and SMI coverage written by a mortgage insurer on MPF loans held by FHLBNY that are delinquent.
All mortgage insurance providers have had their external ratings for insurer financial strength downgraded below AA- by one or more NRSROs since December 31, 2008. If a mortgage insurer fails to fulfill its obligations, the FHLBNY may bear any remaining loss of the borrowers’ default on the related mortgage loans not covered by the PFI.
The FHLBNY has stopped accepting new loans under master commitments with SMI from mortgage insurers that no longer meet MPF insurer requirements. If an SMI provider is downgraded below an “AA-” rating under the MPF Plus product, the PFI has six months to either replace the SMI policy or provide its own undertaking; or it may forfeit its performance based CE Fees. If a PMI provider is downgraded, the FHLBNY may request the servicer to obtain replacement PMI coverage with a different provider. However, it is possible that replacement coverage may be unavailable or result in additional cost to the FHLBNY.
Derivative counterparty ratings
The FHLBNY is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The FHLBNY transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. The FHLBNY is also subject to operational risks in the execution and servicing of derivative transactions. The degree of counterparty credit risk may depend, among other factors, on the extent to which netting procedures and/or the provision of collateral are used to mitigate the risk. The FHLBNY manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Agency’s regulations. The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, but it does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing derivatives in favorable fair value gain positions if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.
When derivative counterparties are exposed (derivatives are in a net liability position), the FHLBNY will be called upon to deposit cash collateral with the counterparty. The FHLBNY had deposited $2.2 billion and $3.8 billion with derivative counterparties as cash collateral at December 31, 2009 and 2008. The FHLBNY is exposed to the risk of derivative counterparties defaulting on the terms of the derivative contracts and failing to return cash deposited with counterparties. If such an event was to occur, the FHLBNY would be forced to replace derivatives by executing similar derivative contracts with other counterparties. To the extent that the FHLBNY receives cash from the replacement trades that is less than the amount of cash deposited with the defaulting counterparty, the FHLBNY is exposed. Derivative counterparties holding the FHLBNY’s cash as pledged collateral were rated single-A and better at December 31, 2009, and based on credit analyses and collateral requirements, the management of the FHLBNY does not anticipate any credit losses on its derivative agreements.
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The 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.
The following table summarizes the FHLBNY’s credit exposure by counterparty credit rating (in thousands, except number of counterparties).
Table 68: Credit Exposure by Counterparty Credit Rating
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | Total Net | | | | |
| | | Number of | | | Notional | | | Exposure at | | | Net Exposure after | |
| Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | |
| | | | | | | | | | | | | | | | | |
| AAA | | | — | | | $ | — | | | $ | — | | | $ | — | |
| AA | | | 7 | | | | 45,652,167 | | | | 684 | | | | 684 | |
| A | | | 8 | | | | 88,711,243 | | | | — | | | | — | |
Members (Note1 and Note2) | | | 2 | | | | 160,000 | | | | 7,596 | | | | 7,596 | |
| Delivery Commitments | | | — | | | | 4,210 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | | 17 | | | $ | 134,527,620 | | | $ | 8,280 | | | $ | 8,280 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | | | | | | | | | Total Net | | | | |
| | | Number of | | | Notional | | | Exposure at | | | Net Exposure after | |
| Credit Rating | | Counterparties | | | Balance | | | Fair Value | | | Cash Collateral3 | |
| | | | | | | | | | | | | | | | | |
| AAA | | | 1 | | | $ | 9,167,456 | | | $ | — | | | $ | — | |
| AA | | | 6 | | | | 39,939,946 | | | | — | | | | — | |
| A | | | 7 | | | | 78,656,536 | | | | 64,890 | | | | 3,681 | |
Members (Note1 and Note2) | | | 3 | | | | 150,000 | | | | 16,555 | | | | 16,555 | |
| Delivery Commitments | | | — | | | | 10,395 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | | 17 | | | $ | 127,924,333 | | | $ | 81,445 | | | $ | 20,236 | |
| | | | | | | | | | | | | |
| | | |
| Note1: | | Fair values of $7.6 million and $16.6 million comprising of intermediated transactions with members and interest-rate caps sold to members (with capped floating-rate advances) were collateralized at December 31, 2009 and December 31, 2008. |
| |
| Note2: | | Members are required to pledge collateral to secure derivatives purchased by the FHLBNY as an intermediary on behalf of its members. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) U.S. Treasury and government-agency securities; (3) mortgage-backed securities; and (4) certain other collateral which is real estate-related and has a readily ascertainable value, and in which the FHLBNY can perfect a security interest. As a result of the collateral agreements with its members, the FHLBNY believes that its maximum credit exposure due to the intermediated transactions was $0 at December 31, 2009 and December 31, 2008. |
| |
| Note3: | | As reported in the Statements of Condition. |
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Risk measurement— Although notional amount is a commonly used measure of volume in the derivatives market, it is not a meaningful measure of market or credit risk since derivative counterparties do not exchange the notional amount (except in the case of foreign currency swaps of which the FHLBNY has none). Counterparties use the notional amounts of derivative instruments to calculate contractual cash flows to be exchanged. The fair value of a derivative in a gain position is a more meaningful measure of the FHLBNY’s current market exposure on derivatives. The FHLBNY estimates exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a gain position, net of collateral pledged by the counterparty to mitigate the FHLBNY’s exposure. All derivative contracts with non-members are also subject to master netting agreements or other right of offset arrangements.
Exposure— In determining credit risk, the FHLBNY considers accrued interest receivable and payable, and the legal right to offset assets and liabilities by counterparty. The FHLBNY attempts to mitigate its exposure by requiring derivative counterparties to pledge cash collateral, if the amount of exposure is above the collateral threshold agreements. At December 31, 2009, the fair values of derivatives in a gain position were below the threshold and derivative counterparties pledged no cash to the FHLBNY. At December 31, 2008, derivative counterparties had pledged $61.2 million in cash as collateral to the FHLBNY.
At December 31, 2009, the FHLBNY had posted $2.2 billion in cash as collateral to derivative counterparties to mitigate derivatives in a net fair value liability (unfavorable) position. The FHLBNY is exposed to the extent that a counterparty may not re-pay the posted cash collateral to the FHLBNY under unforeseen circumstances, such as bankruptcy; in such an event the FHLBNY would then exercise its rights under the “International Swaps and Derivatives Association agreement” (“ISDA”) to replace the derivatives in a liability position (gain position for the acquiring counterparty) with another available counterparty in exchange for cash delivered to the FHLBNY. To the extent that the fair values of the replacement derivatives are less than the cash collateral posted, the FHLBNY may not receive cash equal to the amount posted received.
Derivative counterparty ratings— The Bank’s credit exposures at December 31, 2009, in a gain position, were primarily to member institutions on whose behalf the FHLBNY had acted as an intermediary or had sold interest rate caps, at the request of members, to create capped floating rate advance borrowings. The exposures were collateralized under standard collateral agreements with the FHLBNY’s member. Acting as an intermediary, the Bank had also purchased equivalent notional amounts of derivatives from unrelated derivative counterparties.
Risk mitigation— The FHLBNY attempts to mitigate derivative counterparty credit risk by contracting only with experienced counterparties with investment-grade credit ratings. Annually, the FHLBNY’s management and Board of Directors review and approve all non-member derivative counterparties. Management monitors counterparties on an ongoing basis for significant business events, including ratings actions taken by nationally recognized statistical rating organizations. All approved derivatives counterparties must enter into a master ISDA agreement with the FHLBNY and, in addition, execute the Credit Support Annex to the ISDA agreement that provides for collateral support at predetermined thresholds. These annexes contain enforceable provisions for requiring collateral on certain derivative contracts that are in gain positions. The annexes also define the maximum net unsecured credit exposure amounts that may exist before collateral delivery is required. Typically, the maximum amount is based upon an analysis of individual counterparty’s rating and exposure. The FHLBNY also attempts to manage counterparty credit risk through credit analysis, collateral management and other credit enhancements, such as guarantees, and by following the requirements set forth in the Finance Agency’s regulations.
Despite these risk mitigating policies and processes, on September 15, 2008, an event of default occurred under outstanding derivative contracts with total notional amounts of $16.5 billion between Lehman Brothers Special Financing Inc. (“LBSF”) and the FHLBNY when credit support provider Lehman Brothers Holdings Inc. commenced a filing under Chapter 11 of the U.S. Bankruptcy Code on September 15, 2008. Since the default, the FHLBNY has replaced most of the derivatives that had been executed between LBSF and the FHLBNY through new agreements with other derivative counterparties. The Lehman bankruptcy proceedings are ongoing.
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Commitments, Contingencies and Off-Balance Sheet Arrangements
Consolidated obligations — Joint and several liability
Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been transferred/assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks.
The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make a payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate among the other FHLBanks the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the 12 FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation (the Bank did not hold any consolidated obligations of other FHLBanks as investments at December 31, 2009). If principal or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.
Although the FHLBNY is primarily liable for those consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock from, any member or non-member stockholder until the Finance Agency approves the FHLBNY’s consolidated obligation payment plan or another remedy, and until the FHLBNY pays all the interest and principal currently due under all its consolidated obligations. The par amounts of the outstanding consolidated obligations of all 12 FHLBanks were $0.9 trillion, $1.3 trillion and $1.2 trillion at December 31, 2009, 2008 and 2007.
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The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. To the extent that an 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 Agency determines that the non-complying FHLBank is unable to make the payment, then the Finance Agency 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 Agency. As discussed more fully in Note 19 to the financial statements, the FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future. Accordingly, the FHLBNY has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at December 31, 2009 or December 31, 2008.
Because the FHLBNY is jointly and severally liable for debt issued by other FHLBanks, the FHLBNY has not identified consolidated obligations outstanding by primary obligor. The FHLBNY does not believe that the identification of particular banks as the primary obligors on these consolidated obligations is relevant because all FHLBanks are jointly and severally obligated to pay all consolidated obligations. The identity of the primary obligor does not affect the FHLBNY’s investment decisions. The FHLBNY’s ownership of consolidated obligations in which other FHLBanks are primary obligors does not affect the FHLBNY’s “guarantee” on consolidated obligations as there is no automatic legal right of offset. Even if the FHLBNY were to claim an “offset,” the FHLBNY would still be jointly and severally obligated for any debt service shortfall caused by the FHLBanks’ failure to pay.
Off-balance sheet arrangements with respect to derivatives are discussed in detail in Note 17 to the audited financial statements accompanying this report.
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The following table summarizes contractual obligations and other commitments as of December 31, 2009 (in thousands):
Table 69: Contractual Obligations and Other Commitments
(For more information, see Note 19 to the audited financial statements accompanying this report.)
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Payments due or expiration terms by period | |
| | | Less than | | | One year | | | Greater than three | | | Greater than | | | | |
| | | one year | | | to three years | | | years to five years | | | five years | | | Total | |
| Contractual Obligations | | | | | | | | | | | | | | | | | | | | |
Consolidated obligations-bonds at par1 | | $ | 40,896,550 | | | $ | 23,430,775 | | | $ | 6,091,550 | | | $ | 2,939,050 | | | $ | 73,357,925 | |
Mandatorily redeemable capital stock1 | | | 102,453 | | | | 16,766 | | | | 2,118 | | | | 4,957 | | | | 126,294 | |
Premises (lease obligations)2 | | | 3,060 | | | | 6,161 | | | | 5,413 | | | | 6,427 | | | | 21,061 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total contractual obligations | | | 41,002,063 | | | | 23,453,702 | | | | 6,099,081 | | | | 2,950,434 | | | | 73,505,280 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Other commitments | | | | | | | | | | | | | | | | | | | | |
| Standby letters of credit | | | 667,554 | | | | 9,139 | | | | 15,023 | | | | 6,199 | | | | 697,915 | |
| Consolidated obligations-bonds/ discount notes traded not settled | | | 2,145,000 | | | | — | | | | — | | | | — | | | | 2,145,000 | |
| Firm commitment-advances | | | 100,000 | | | | — | | | | — | | | | — | | | | 100,000 | |
| Open delivery commitments (MPF) | | | 4,210 | | | | — | | | | — | | | | — | | | | 4,210 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total other commitments | | | 2,916,764 | | | | 9,139 | | | | 15,023 | | | | 6,199 | | | | 2,947,125 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total obligations and commitments | | $ | 43,918,827 | | | $ | 23,462,841 | | | $ | 6,114,104 | | | $ | 2,956,633 | | | $ | 76,452,405 | |
| | | | | | | | | | | | | | | | |
| | | |
| 1 | | Callable bonds contain exercise date or a series of exercise dates that may result in a shorter redemption period. Mandatorily redeemable capital stock is categorized by the dates at which the corresponding advances outstanding mature. Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock, under which stock may not be redeemed until the later of five years from the date the member becomes a nonmember or the related advance matures. |
| |
| 2 | | Immaterial amount of commitments for equipment leases are not included. |
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management.Market risk or interest rate risk (“IRR”) is the risk of loss to market value or future earnings that may result from changes in the interest rate environment. Embedded in IRR is a tradeoff of risk versus reward wherein the FHLBNY could earn higher income by having higher IRR through greater mismatches between its assets and liabilities at the cost of potentially significant declines in market value and future income if the interest rate environment turned against the FHLBNY’s expectations. The FHLBNY has opted to retain a modest level of IRR which allows it to preserve its capital value while generating steady and predictable income. In keeping with that philosophy, the FHLBNY’s balance sheet consists of predominantly short-term and LIBOR-based assets and liabilities. More than 80 percent of the FHLBNY’s financial assets are either short-term or LIBOR-based, and a similar percentage of its liabilities are also either short-term or LIBOR based. These positions protect the FHLBNY’s capital from large changes in value arising from interest rate or volatility changes.
The primary tool used by management to achieve the desired risk profile is the use of interest rate exchange agreements (“Swaps”). All the LIBOR-based advances are long-term advances that are swapped to 3- or 1-month LIBOR or possess adjustable rates which periodically reset to a LIBOR index. Similarly, a majority of the long-term consolidated obligations are swapped to 3- or 1-month LIBOR. These features create a relatively steady income that changes in concert with prevailing interest rate changes to maintain a spread to short-term rates.
Despite its conservative philosophy, IRR does arise from a number of aspects of the FHLBNY’s portfolio. These include the embedded prepayment rights, refunding needs, rate resets between the FHLBNY’s short-term assets and liabilities, and basis risks arising from differences between the yield curves associated with the FHLBNY’s assets and its liabilities. To address these risks, the FHLBNY uses certain key IRR measures including re-pricing gaps, duration of equity (“DOE”), value at risk (“VaR”), net interest income (“NII”) at risk, key rate durations (“KRD”), and forecasted dividend rates.
Risk Measurements.The FHLBNY’s Risk Management Policy sets up a series of risk limits that the FHLBNY calculates on a regular basis. The risk limits are as follows:
| | • | | The option-adjusted DOE is limited to a range of +/- four years in the rates unchanged case and to a range of +/- six years in the +/-200bps shock cases. Due to the low interest rate environment beginning in early 2008, the December 2008, March 2009, June 2009, September 2009, and December 2009 rates were too low for a meaningful parallel down-shock measurement. |
| | • | | The one-year cumulative re-pricing gap is limited to 10 percent of total assets. |
| | • | | The sensitivity of expected net interest income over a one-year period is limited to a - -15 percent change under both the +/-200bps shocks compared to the rates unchanged case. |
| | • | | The potential decline in the market value of equity is limited to a 10 percent change under the +/-200bps shocks. |
| | • | | KRD exposure at any of nine term points (3-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 15-year, and 30-year) is limited to between +/-12 months. |
177
The FHLBNY’s portfolio, including its derivatives, is tracked and the overall mismatch between assets and liabilities is summarized by using a DOE measure. The FHLBNY’s last five quarterly DOE results are shown in years in the table below (note that, due to the on-going low interest rate environment, there was no down-shock measurement performed between the fourth quarter of 2008 and the fourth quarter of 2009):
| | | | | | | | | | | | | |
| | | Base Case DOE | | | -200bps DOE | | | +200bps DOE | |
| December 31, 2008 | | | -2.05 | | | | N/A | | | | 1.44 | |
| March 31, 2009 | | | -2.24 | | | | N/A | | | | 1.23 | |
| June 30, 2009 | | | -0.83 | | | | N/A | | | | 1.67 | |
| September 30, 2009 | | | -0.39 | | | | N/A | | | | 3.88 | |
| December 31, 2009 | | | 0.42 | | | | N/A | | | | 3.68 | |
The DOE has remained within its limits. Duration indicates any cumulative re-pricing/maturity imbalance in the FHLBNY’s financial assets and liabilities. A positive DOE indicates that, on average, the liabilities will re-price or mature sooner than the assets while a negative DOE indicates that, on average, the assets will re-price or mature earlier than the liabilities. The FHLBNY measures its DOE using software that incorporates any optionality within the FHLBNY’s portfolio using well-known and tested financial pricing theoretical models.
The FHLBNY does not solely rely on the DOE measure as a mismatch measure between its assets and liabilities. It also performs the more traditional gap measure that subtracts re-pricing/maturing liabilities from re-pricing/maturing assets over time. The FHLBNY observes the differences over various horizons, but has set a 10 percent of assets limit on cumulative re-pricings at the one-year point. This quarterly observation of the one-year cumulative re-pricing gap is provided in the table below and all values are below 10 percent of assets; well within the limit:
| | | | | |
| | | One Year Re- | |
| | | pricing Gap | |
| December 31, 2008 | | $9.764 Billion |
| March 31, 2009 | | $7.593 Billion |
| June 30, 2009 | | $5.936 Billion |
| September 30, 2009 | | $5.480 Billion |
| December 31, 2009 | | $4.626 Billion |
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The FHLBNY’s review of potential interest rate risk issues also includes the effect of changes in interest rates on expected net income. The FHLBNY projects asset and liability volumes and spreads over a one-year horizon and then simulates expected income and expenses from those volumes and other inputs. The effects of changes in interest rates are measured to test whether the FHLBNY has too much exposure in its net interest income over the coming twelve-month period. To measure the effect, the change to the spread in the shocks is calculated and compared against the base case and subjected to a -15 percent limit. The quarterly sensitivity of the FHLBNY’s expected net interest income under both +/-200bps shocks over the next twelve months is provided in the table below (note that, due to the on-going low interest rate environment, the down-shock measurement was not performed between the fourth quarter of 2008 and the fourth quarter of 2009):
| | | | | | | | | |
| | | Sensitivity in | | | Sensitivity in | |
| | | the -200bps | | | the +200bps | |
| | | Shock | | | Shock | |
| December 31, 2008 | | | N/A | | | | 24.73 | % |
| March 31, 2009 | | | N/A | | | | 13.11 | % |
| June 30, 2009 | | | N/A | | | | 0.43 | % |
| September 30, 2009 | | | N/A | | | | 9.23 | % |
| December 31, 2009 | | | N/A | | | | 4.53 | % |
Aside from net interest income, the other significant impact on changes in the interest rate environment is the potential impact on the value of the portfolio. These calculated and quoted market values are estimated based upon their financial attributes including optionality and then re-estimated under the assumption that interest rates suddenly rise or fall by 200bps. The worst effect, whether it is the up or the down shock, is compared to the internal limit of 10 percent. The quarterly potential maximum decline in the market value of equity under these 200bps shocks is provided below (note that, due to the on-going low interest rate environment the down-shock measurement was not performed between the fourth quarter of 2008 and the fourth quarter of 2009):
| | | | | | | | | |
| | | Down-shock | | | +200bps Change in | |
| | | Change in MVE | | | MVE | |
| December 31, 2008 | | | N/A | | | | -0.43 | % |
| March 31, 2009 | | | N/A | | | | 1.01 | % |
| June 30, 2009 | | | N/A | | | | -1.81 | % |
| September 30, 2009 | | | N/A | | | | -4.68 | % |
| December 31, 2009 | | | N/A | | | | -5.08 | % |
As noted, the potential declines under these shocks are within the FHLBNY’s limits of a maximum 10 percent.
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The following table displays the FHLBNY’s maturity/re-pricing gaps as of December 31, 2009 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | Interest Rate Sensitivity | |
| | | December 31, 2009 | |
| | | | | | | More than | | | More than | | | More than | | | | |
| | | Six months | | | six months to | | | one year to | | | three years to | | | More than | |
| | | or less | | | one year | | | three years | | | five years | | | five years | |
| | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | |
| Non-MBS Investments | | $ | 8,621 | | | $ | 124 | | | $ | 371 | | | $ | 249 | | | $ | 587 | |
| MBS Investments | | | 6,773 | | | | 903 | | | | 2,420 | | | | 1,167 | | | | 879 | |
| Adjustable-rate loans and advances | | | 14,101 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Net unswapped | | | 29,495 | | | | 1,027 | | | | 2,791 | | | | 1,416 | | | | 1,466 | |
| | | | | | | | | | | | | | | | | | | | | |
| Fixed-rate loans and advances | | | 9,588 | | | | 7,853 | | | | 16,124 | | | | 8,254 | | | | 34,814 | |
| Swaps hedging advances | | | 63,852 | | | | (6,722 | ) | | | (14,389 | ) | | | (7,950 | ) | | | (34,791 | ) |
| | | | | | | | | | | | | | | | |
| Net fixed-rate loans and advances | | | 73,441 | | | | 1,131 | | | | 1,735 | | | | 304 | | | | 23 | |
| Loans to other FHLBanks | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | $ | 102,935 | | | $ | 2,158 | | | $ | 4,526 | | | $ | 1,720 | | | $ | 1,489 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | $ | 2,590 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Discount notes | | | 28,770 | | | | 2,057 | | | | — | | | | — | | | | — | |
| Swapped discount notes | | | 1,422 | | | | (1,422 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Net discount notes | | | 30,193 | | | | 635 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Consolidated Obligation Bonds | | | | | | | | | | | | | | | | | | | | |
| FHLB bonds | | | 25,717 | | | | 16,014 | | | | 22,829 | | | | 6,033 | | | | 2,844 | |
| Swaps hedging bonds | | | 39,617 | | | | (14,298 | ) | | | (19,513 | ) | | | (4,501 | ) | | | (1,305 | ) |
| | | | | | | | | | | | | | | | |
| Net FHLB bonds | | | 65,334 | | | | 1,716 | | | | 3,316 | | | | 1,532 | | | | 1,539 | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | $ | 98,117 | | | $ | 2,351 | | | $ | 3,316 | | | $ | 1,532 | | | $ | 1,539 | |
| | | | | | | | | | | | | | | | |
Post hedge gaps1: | | | | | | | | | | | | | | | | | | | | |
| Periodic gap | | $ | 4,819 | | | $ | (193 | ) | | $ | 1,210 | | | $ | 188 | | | $ | (50 | ) |
| Cumulative gaps | | $ | 4,819 | | | $ | 4,626 | | | $ | 5,837 | | | $ | 6,024 | | | $ | 5,974 | |
| | | |
| Note: Numbers may not add due to rounding. |
| |
| 1 | | Repricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the repricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity. |
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The following tables display the FHLBNY’s maturity/re-pricing gaps as of December 31, 2008 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | Interest Rate Sensitivity | |
| | | December 31, 2008 | |
| | | | | | | More than | | | More than | | | More than | | | | |
| | | Six months | | | six months to | | | one year to | | | three years to | | | More than | |
| | | or less | | | one year | | | three years | | | five years | | | five years | |
| | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | |
| Non-MBS Investments | | $ | 18,298 | | | $ | 405 | | | $ | 404 | | | $ | 126 | | | $ | 259 | |
| MBS Investments | | | 6,938 | | | | 2,940 | | | | 1,801 | | | | 350 | | | | 209 | |
| Adjustable-rate loans and advances | | | 20,206 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Net unswapped | | | 45,442 | | | | 3,345 | | | | 2,206 | | | | 475 | | | | 468 | |
| | | | | | | | | | | | | | | | | | | | | |
| Fixed-rate loans and advances | | | 21,972 | | | | 3,725 | | | | 14,712 | | | | 7,539 | | | | 35,226 | |
| Swaps hedging advances | | | 56,677 | | | | (2,842 | ) | | | (11,801 | ) | | | (6,864 | ) | | | (35,170 | ) |
| | | | | | | | | | | | | | | | |
| Net fixed-rate loans and advances | | | 78,649 | | | | 882 | | | | 2,911 | | | | 675 | | | | 56 | |
| Loans to other FHLBanks | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | $ | 124,091 | | | $ | 4,227 | | | $ | 5,117 | | | $ | 1,151 | | | $ | 524 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | $ | 1,497 | | | $ | 15 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Discount notes | | | 43,981 | | | | 2,348 | | | | — | | | | — | | | | — | |
| Swapped discount notes | | | 2,031 | | | | (2,031 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Net discount notes | | | 46,012 | | | | 318 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Consolidated Obligation Bonds | | | | | | | | | | | | | | | | | | | | |
| FHLB bonds | | | 36,367 | | | | 16,153 | | | | 19,613 | | | | 5,405 | | | | 3,441 | |
| Swaps hedging bonds | | | 32,833 | | | | (14,640 | ) | | | (13,571 | ) | | | (3,178 | ) | | | (1,445 | ) |
| | | | | | | | | | | | | | | | |
| Net FHLB bonds | | | 69,200 | | | | 1,513 | | | | 6,043 | | | | 2,227 | | | | 1,996 | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | $ | 116,709 | | | $ | 1,846 | | | $ | 6,043 | | | $ | 2,227 | | | $ | 1,996 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Post hedge gaps1: | | | | | | | | | | | | | | | | | | | | |
| Periodic gap | | $ | 7,382 | | | $ | 2,382 | | | $ | (926 | ) | | $ | (1,076 | ) | | $ | (1,472 | ) |
| Cumulative gaps | | $ | 7,382 | | | $ | 9,764 | | | $ | 8,837 | | | $ | 7,761 | | | $ | 6,289 | |
| | | |
| Note: Numbers may not add due to rounding. |
| |
| 1 | | Repricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the repricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity. |
181
Operational Risk Management.Operational risk is the risk of loss resulting from the failures or inadequacies of internal processes, people, and systems, or resulting from external events. Operational risks include those arising from fraud, human error, computer system failures and a wide range of external events — from adverse weather to terrorist attacks. The management of these risks is the responsibility of the senior managers at the operating level. To assist them in discharging this responsibility and to ensure that operational risk is managed consistently throughout the organization, the FHLBNY has developed an operational risk management framework, which evolves as warranted by circumstances and changing conditions. The FHLBNY’s Operational Risk Management framework defines the core governing principles for operational risk management and provides the framework to identify, control, monitor, measure, and report operational risks in a consistent manner across the FHLBNY.
Risk and Control Self-Assessment. FHLBNY’s Risk and Control Self-Assessment incorporates standards for risk and control self-assessment which apply to all businesses and establish Risk and Control Self-Assessment as the process for identifying the risks inherent in a business’ activities and for evaluating and monitoring the effectiveness of the controls over those risks. It is the policy of the FHLBNY to require businesses and staff functions to perform a Risk and Control Self-Assessment on a periodic basis. The Risk and Control Self-Assessment must include documentation of the control environment as well as policies for assessing risks and controls, testing commensurate with risk level and tracking corrective action for control breakdowns or deficiencies. The Risk and Control Self-Assessment also must require periodic reporting to senior management and to the Board’s Audit and Risk Management Committees.
182
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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Financial Statements | | | | |
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| | | 184 | |
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| | | 185 | |
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| | | 186 | |
| | | | | |
| | | 187 | |
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| | | 188 | |
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| | | 189 | |
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| | | 191 | |
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Supplementary Data | | | | |
| | | | | |
| | | 34 | |
183
Federal Home Loan Bank of New York
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, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework. Based on its assessment, management of the Bank determined that as of December 31, 2009, 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 the effectiveness of internal control over financial reporting. Their report, which expresses an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2009, appears on the following page.
184
Federal Home Loan Bank of New York
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the Federal Home Loan Bank of New York:
In our opinion, the accompanying statements of condition and the related statements of income, of capital and of cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of New York (the “Bank”) at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Bank’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the financial statements, effective January 1, 2009, the Bank adopted guidance that revises the recognition and reporting requirements for other-than-temporary impairments of debt securities classified as held-to-maturity.
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.
PricewaterhouseCoopers LLP
New York, NY
March 25, 2010
185
Federal Home Loan Bank of New York
Statements of Condition (in thousands, except par value)
As of December 31, 2009 and 2008
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
Assets | | | | | | | | |
| Cash and due from banks (Note 2) | | $ | 2,189,252 | | | $ | 18,899 | |
| Interest-bearing deposits (Note 3) | | | — | | | | 12,169,096 | |
| Federal funds sold | | | 3,450,000 | | | | — | |
| Available-for-sale securities, net of unrealized losses of $3,409 and $64,420 at December 31, 2009 and 2008 (Note 5) | | | 2,253,153 | | | | 2,861,869 | |
| Held-to-maturity securities (Note 4) | | | | | | | | |
| Long-term securities | | | 10,519,282 | | | | 10,130,543 | |
| Certificates of deposit | | | — | | | | 1,203,000 | |
| Advances (Note 6) | | | 94,348,751 | | | | 109,152,876 | |
| Mortgage loans held-for-portfolio, net of allowance for credit losses of $4,498 and $1,406 at December 31, 2009 and 2008 (Note 7) | | | 1,317,547 | | | | 1,457,885 | |
| Accrued interest receivable | | | 340,510 | | | | 492,856 | |
| Premises, software, and equipment | | | 14,792 | | | | 13,793 | |
| Derivative assets (Note 17) | | | 8,280 | | | | 20,236 | |
| Other assets | | | 19,339 | | | | 18,838 | |
| | | | | | | |
| | | | | | | | | |
Total assets | | $ | 114,460,906 | | | $ | 137,539,891 | |
| | | | | | | |
| | | | | | | | | |
Liabilities and capital | | | | | | | | |
| | | | | | | | | |
Liabilities | | | | | | | | |
| Deposits (Note 8) | | | | | | | | |
| Interest-bearing demand | | $ | 2,616,812 | | | $ | 1,333,750 | |
| Non-interest bearing demand | | | 6,499 | | | | 828 | |
| Term | | | 7,200 | | | | 117,400 | |
| | | | | | | |
| | | | | | | | | |
| Total deposits | | | 2,630,511 | | | | 1,451,978 | |
| | | | | | | |
| | | | | | | | | |
| Consolidated obligations, net (Note 10) | | | | | | | | |
| Bonds (Includes $6,035,741 and $998,942 at December 31, 2009 and 2008 at fair value under the fair value option) | | | 74,007,978 | | | | 82,256,705 | |
| Discount notes | | | 30,827,639 | | | | 46,329,906 | |
| | | | | | | |
| Total consolidated obligations | | | 104,835,617 | | | | 128,586,611 | |
| | | | | | | |
| | | | | | | | | |
| Mandatorily redeemable capital stock (Note 11) | | | 126,294 | | | | 143,121 | |
| | | | | | | | | |
| Accrued interest payable | | | 277,788 | | | | 426,144 | |
| Affordable Housing Program (Note 12) | | | 144,489 | | | | 122,449 | |
| Payable to REFCORP (Note 12) | | | 24,234 | | | | 4,780 | |
| Derivative liabilities (Note 17) | | | 746,176 | | | | 861,660 | |
| Other liabilities | | | 72,506 | | | | 75,753 | |
| | | | | | | |
| | | | | | | | | |
Total liabilities | | | 108,857,615 | | | | 131,672,496 | |
| | | | | | | |
| | | | | | | | | |
Commitments and Contingencies(Notes 10, 12, 17 and 19) | | | | | | | | |
| | | | | | | | | |
Capital(Note 13) | | | | | | | | |
| Capital stock ($100 par value), putable, issued and outstanding shares: | | | | | | | | |
| 50,590 and 55,857 at December 31, 2009 and 2008 | | | 5,058,956 | | | | 5,585,700 | |
| Retained earnings | | | 688,874 | | | | 382,856 | |
| Accumulated other comprehensive income (loss) (Note 14) | | | | | | | | |
| Net unrealized loss on available-for-sale securities | | | (3,409 | ) | | | (64,420 | ) |
| Non-credit portion of OTTI on held-to-maturity securities, net of accretion | | | (110,570 | ) | | | — | |
| Net unrealized loss on hedging activities | | | (22,683 | ) | | | (30,191 | ) |
| Employee supplemental retirement plans (Note 16) | | | (7,877 | ) | | | (6,550 | ) |
| | | | | | | |
| | | | | | | | | |
Total capital | | | 5,603,291 | | | | 5,867,395 | |
| | | | | | | |
| | | | | | | | | |
Total liabilities and capital | | $ | 114,460,906 | | | $ | 137,539,891 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
186
Federal Home Loan Bank of New York
Statements of Income (in thousands, except per share data)
Years Ended December 31, 2009, 2008, and 2007
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Interest income | | | | | | | | | | | | |
| Advances (Note 6) | | $ | 1,270,643 | | | $ | 3,030,799 | | | $ | 3,495,312 | |
| Interest-bearing deposits (Note 3) | | | 19,865 | | | | 28,012 | | | | 3,333 | |
| Federal funds sold | | | 3,238 | | | | 77,976 | | | | 192,845 | |
| Available-for-sale securities (Note 5) | | | 28,842 | | | | 80,746 | | | | — | |
| Held-to-maturity securities (Note 4) | | | | | | | | | | | | |
| Long-term securities | | | 461,491 | | | | 531,151 | | | | 596,761 | |
| Certificates of deposit | | | 1,626 | | | | 232,300 | | | | 408,308 | |
| Mortgage loans held-for-portfolio (Note 7) | | | 71,980 | | | | 77,862 | | | | 78,937 | |
| Loans to other FHLBanks and other (Note 20) | | | 2 | | | | 33 | | | | 9 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total interest income | | | 1,857,687 | | | | 4,058,879 | | | | 4,775,505 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest expense | | | | | | | | | | | | |
| Consolidated obligations-bonds (Note 10) | | | 953,970 | | | | 2,620,431 | | | | 3,215,560 | |
| Consolidated obligations-discount notes (Note 10) | | | 193,041 | | | | 697,729 | | | | 937,534 | |
| Deposits (Note 8) | | | 2,512 | | | | 36,193 | | | | 106,777 | |
| Mandatorily redeemable capital stock (Note 11) | | | 7,507 | | | | 8,984 | | | | 11,731 | |
| Cash collateral held and other borrowings (Note 20) | | | 49 | | | | 1,044 | | | | 4,516 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total interest expense | | | 1,157,079 | | | | 3,364,381 | | | | 4,276,118 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net interest income before provision for credit losses | | | 700,608 | | | | 694,498 | | | | 499,387 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Provision for credit losses on mortgage loans | | | 3,108 | | | | 773 | | | | 40 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net interest income after provision for credit losses | | | 697,500 | | | | 693,725 | | | | 499,347 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Other income (loss) | | | | | | | | | | | | |
| Service fees | | | 4,165 | | | | 3,357 | | | | 3,324 | |
| Instruments held at fair value — Unrealized gain (loss) (Note 18) | | | 15,523 | | | | (8,325 | ) | | | — | |
| Total OTTI losses | | | (140,912 | ) | | | — | | | | — | |
| Portion of loss recognized in other comprehensive income | | | 120,096 | | | | — | | | | — | |
| | | | | | | | | | |
| Net impairment losses recognized in earnings | | | (20,816 | ) | | | — | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net realized and unrealized gain (loss) on derivatives and hedging activities (Note 17) | | | 164,700 | | | | (199,259 | ) | | | 18,356 | |
| Net realized gain from sale of available-for-sale and redemption of held-to-maturity securities (Notes 4 and 5) | | | 721 | | | | 1,058 | | | | — | |
| Provision for derivative counterparty credit losses (Notes 17 and 19) | | | — | | | | (64,523 | ) | | | — | |
| Other | | | 77 | | | | 233 | | | | (8,180 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total other income (loss) | | | 164,370 | | | | (267,459 | ) | | | 13,500 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Other expenses | | | | | | | | | | | | |
| Operating | | | 76,065 | | | | 66,263 | | | | 66,569 | |
| Finance Agency and Office of Finance | | | 8,110 | | | | 6,395 | | | | 5,193 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total other expenses | | | 84,175 | | | | 72,658 | | | | 71,762 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Income before assessments | | | 777,695 | | | | 353,608 | | | | 441,085 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Affordable Housing Program (Note 12) | | | 64,251 | | | | 29,783 | | | | 37,204 | |
| REFCORP (Note 12) | | | 142,689 | | | | 64,765 | | | | 80,776 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total assessments | | | 206,940 | | | | 94,548 | | | | 117,980 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | | $ | 570,755 | | | $ | 259,060 | | | $ | 323,105 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Basic earnings per share (Note 15) | | $ | 10.88 | | | $ | 5.26 | | | $ | 8.57 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Cash dividends paid per share | | $ | 4.95 | | | $ | 6.55 | | | $ | 7.51 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
187
Federal Home Loan Bank of New York
Statements of Capital (in thousands, except per share data)
Years Ended December 31, 2009, 2008, and 2007
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | |
| | | Capital Stock1 | | | | | | | Other | | | | | | | Total | |
| | | Class B | | | Retained | | | Comprehensive | | | Total | | | Comprehensive | |
| | | Shares | | | Par Value | | | Earnings | | | Income (Loss) | | | Capital | | | Income (Loss) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 35,463 | | | $ | 3,546,253 | | | $ | 368,688 | | | $ | (10,548 | ) | | $ | 3,904,393 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of capital stock | | | 32,535 | | | | 3,253,548 | | | | — | | | | — | | | | 3,253,548 | | | | | |
| Redemption of capital stock | | | (22,448 | ) | | | (2,244,849 | ) | | | — | | | | — | | | | (2,244,849 | ) | | | | |
| Shares reclassified to mandatorily redeemable capital stock | | | (1,870 | ) | | | (186,981 | ) | | | — | | | | — | | | | (186,981 | ) | | | | |
| Cash dividends ($7.51 per share) on capital stock | | | — | | | | — | | | | (273,498 | ) | | | — | | | | (273,498 | ) | | | | |
| Net Income | | | — | | | | — | | | | 323,105 | | | | — | | | | 323,105 | | | $ | 323,105 | |
| Net change in Accumulated other comprehensive income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized loss on available-for-sale securities | | | — | | | | — | | | | — | | | | (373 | ) | | | (373 | ) | | | (373 | ) |
| Hedging activities | | | — | | | | — | | | | — | | | | (25,452 | ) | | | (25,452 | ) | | | (25,452 | ) |
| Employee supplemental retirement plans | | | — | | | | — | | | | — | | | | 698 | | | | 698 | | | | 698 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | $ | 297,978 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | | 43,680 | | | $ | 4,367,971 | | | $ | 418,295 | | | $ | (35,675 | ) | | $ | 4,750,591 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of capital stock | | | 51,315 | | | $ | 5,131,525 | | | $ | — | | | $ | — | | | $ | 5,131,525 | | | | | |
| Redemption of capital stock | | | (38,490 | ) | | | (3,849,038 | ) | | | — | | | | — | | | | (3,849,038 | ) | | | | |
| Shares reclassified to mandatorily redeemable capital stock | | | (648 | ) | | | (64,758 | ) | | | — | | | | — | | | | (64,758 | ) | | | | |
| Cash dividends ($6.55 per share) on capital stock | | | — | | | | — | | | | (294,499 | ) | | | — | | | | (294,499 | ) | | | | |
| Net Income | | | — | | | | — | | | | 259,060 | | | | — | | | | 259,060 | | | $ | 259,060 | |
| Net change in Accumulated other comprehensive income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized loss on available-for-sale securities | | | — | | | | — | | | | — | | | | (64,047 | ) | | | (64,047 | ) | | | (64,047 | ) |
| Hedging activities | | | — | | | | — | | | | — | | | | 24 | | | | 24 | | | | 24 | |
| Employee supplemental retirement plans | | | — | | | | — | | | | — | | | | (1,463 | ) | | | (1,463 | ) | | | (1,463 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | $ | 193,574 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2008 | | | 55,857 | | | $ | 5,585,700 | | | $ | 382,856 | | | $ | (101,161 | ) | | $ | 5,867,395 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of capital stock | | | 32,095 | | | $ | 3,209,506 | | | $ | — | | | $ | — | | | $ | 3,209,506 | | | | | |
| Redemption of capital stock | | | (36,864 | ) | | | (3,686,402 | ) | | | — | | | | — | | | | (3,686,402 | ) | | | | |
| Shares reclassified to mandatorily redeemable capital stock | | | (498 | ) | | | (49,848 | ) | | | — | | | | — | | | | (49,848 | ) | | | | |
| Cash dividends ($4.95 per share) on capital stock | | | — | | | | — | | | | (264,737 | ) | | | — | | | | (264,737 | ) | | | | |
| Net Income | | | — | | | | — | | | | 570,755 | | | | — | | | | 570,755 | | | $ | 570,755 | |
| Net change in Accumulated other comprehensive income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-credit portion of OTTI on held-to-maturity securities, net of accretion | | | — | | | | — | | | | — | | | | (110,570 | ) | | | (110,570 | ) | | | (110,570 | ) |
| Net unrealized gain on available-for-sale securities | | | — | | | | — | | | | — | | | | 61,011 | | | | 61,011 | | | | 61,011 | |
| Hedging activities | | | — | | | | — | | | | — | | | | 7,508 | | | | 7,508 | | | | 7,508 | |
| Employee supplemental retirement plans | | | — | | | | — | | | | — | | | | (1,327 | ) | | | (1,327 | ) | | | (1,327 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | $ | 527,377 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | | 50,590 | | | $ | 5,058,956 | | | $ | 688,874 | | | $ | (144,539 | ) | | $ | 5,603,291 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
188
Federal Home Loan Bank of New York
Statements of Cash Flows — (in thousands)
Years Ended December 31, 2009, 2008, and 2007
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Operating activities | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net Income | | $ | 570,755 | | | $ | 259,060 | | | $ | 323,105 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | | | |
| Net premiums and discounts on consolidated obligations, investments, mortgage loans and other adjustments | | | (120,715 | ) | | | (78,409 | ) | | | 106,372 | |
| Concessions on consolidated obligations | | | 7,006 | | | | 8,772 | | | | 12,810 | |
| Premises, software, and equipment | | | 5,405 | | | | 4,971 | | | | 4,498 | |
| Provision for derivative counterparty credit losses | | | — | | | | 64,523 | | | | — | |
| Provision for credit losses on mortgage loans | | | 3,108 | | | | 773 | | | | 40 | |
| Net realized (gains) from redemption of held-to-maturity securities | | | (281 | ) | | | (1,058 | ) | | | — | |
| Net realized (gains) from sale of available-for-sale securities | | | (440 | ) | | | — | | | | — | |
| Credit impairment losses on held-to-maturity securities | | | 20,816 | | | | — | | | | — | |
| Change in net fair value adjustments on derivatives and hedging activities | | | 188,151 | | | | (386,416 | ) | | | (6,387 | ) |
| Change in fair value adjustments on financial instruments held at fair value | | | (15,523 | ) | | | 8,325 | | | | — | |
| Net change in: | | | | | | | | | | | | |
| Accrued interest receivable | | | 152,345 | | | | 69,467 | | | | (156,200 | ) |
| Derivative assets due to accrued interest | | | 246,371 | | | | 185,343 | | | | 70,134 | |
| Derivative liabilities due to accrued interest | | | (252,684 | ) | | | 78,731 | | | | (7,538 | ) |
| Other assets | | | 814 | | | | (67,367 | ) | | | (18 | ) |
| Affordable Housing Program liability | | | 22,040 | | | | 3,397 | | | | 17,155 | |
| Accrued interest payable | | | (153,033 | ) | | | (222,109 | ) | | | (79,345 | ) |
| REFCORP liability | | | 19,454 | | | | (19,218 | ) | | | 6,522 | |
| Other liabilities | | | (1,575 | ) | | | 3,813 | | | | (18,483 | ) |
| | | | | | | | | | |
| Total adjustments | | | 121,259 | | | | (346,462 | ) | | | (50,440 | ) |
| | | | | | | | | | |
Net cash provided (used) by operating activities | | | 692,014 | | | | (87,402 | ) | | | 272,665 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | |
| Net change in: | | | | | | | | | | | | |
| Interest-bearing deposits | | | 13,768,437 | | | | (15,609,066 | ) | | | (396,400 | ) |
| Federal funds sold | | | (3,450,000 | ) | | | 4,381,000 | | | | (720,000 | ) |
| Deposits with other FHLBanks | | | (25 | ) | | | (67 | ) | | | (10 | ) |
| Premises, software, and equipment | | | (6,404 | ) | | | (5,610 | ) | | | (6,545 | ) |
| Held-to-maturity securities: | | | | | | | | | | | | |
| Long-term securities | | | | | | | | | | | | |
| Purchased | | | (3,511,033 | ) | | | (2,284,435 | ) | | | (1,080,245 | ) |
| Repayments | | | 2,919,664 | | | | 2,334,966 | | | | 2,044,987 | |
| In-substance maturities | | | 77,701 | | | | 102,390 | | | | — | |
| Net change in certificates of deposit | | | 1,203,000 | | | | 9,097,200 | | | | (4,709,200 | ) |
| Available-for-sale securities: | | | | | | | | | | | | |
| Purchased | | | (710 | ) | | | (3,244,495 | ) | | | (13,704 | ) |
| Proceeds | | | 543,924 | | | | 335,314 | | | | — | |
| Proceeds from sales | | | 132,461 | | | | 653 | | | | 144 | |
| Advances: | | | | | | | | | | | | |
| Principal collected | | | 370,709,084 | | | | 596,335,124 | | | | 397,682,249 | |
| Made | | | (358,067,057 | ) | | | (619,122,796 | ) | | | (419,285,033 | ) |
| Mortgage loans held-for-portfolio: | | | | | | | | | | | | |
| Principal collected | | | 285,888 | | | | 170,272 | | | | 165,262 | |
| Purchased and originated | | | (150,058 | ) | | | (138,255 | ) | | | (175,148 | ) |
| Principal collected on other loans made | | | — | | | | — | | | | 113 | |
| Loans to other FHLBanks | | | | | | | | | | | | |
| Loans made | | | (472,000 | ) | | | (661,000 | ) | | | (55,000 | ) |
| Principal collected | | | 472,000 | | | | 716,000 | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net cash provided (used) by investing activities | | | 24,454,872 | | | | (27,592,805 | ) | | | (26,548,530 | ) |
| | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
189
Federal Home Loan Bank of New York
Statements of Cash Flows — (in thousands)
Years Ended December 31, 2009, 2008, and 2007
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Financing activities | | | | | | | | | | | | |
| Net change in: | | | | | | | | | | | | |
Deposits and other borrowings1 | | $ | 772,634 | | | $ | 328,165 | | | $ | (766,373 | ) |
| Short-term loans from other FHLBanks: | | | | | | | | | | | | |
| Proceeds from loans | | | 135,000 | | | | 1,260,000 | | | | 662,000 | |
| Payments for loans | | | (135,000 | ) | | | (1,260,000 | ) | | | (662,000 | ) |
| Consolidated obligation bonds: | | | | | | | | | | | | |
| Proceeds from issuance | | | 54,502,275 | | | | 62,035,840 | | | | 42,535,228 | |
| Payments for maturing and early retirement | | | (62,024,547 | ) | | | (47,118,882 | ) | | | (38,180,904 | ) |
| Payments for transfers to other FHLBanks | | | — | | | | — | | | | (490,884 | ) |
| Consolidated obligation discount notes: | | | | | | | | | | | | |
| Proceeds from issuance | | | 862,167,891 | | | | 686,114,086 | | | | 441,178,795 | |
| Payments for maturing | | | (877,586,478 | ) | | | (674,495,767 | ) | | | (418,707,804 | ) |
| Capital stock: | | | | | | | | | | | | |
| Proceeds from issuance | | | 3,209,506 | | | | 5,131,525 | | | | 3,253,548 | |
| Payments for redemption / repurchase | | | (3,686,402 | ) | | | (3,849,038 | ) | | | (2,244,849 | ) |
| Redemption of Mandatorily redeemable capital stock | | | (66,675 | ) | | | (160,233 | ) | | | (58,335 | ) |
Cash dividends paid2 | | | (264,737 | ) | | | (294,499 | ) | | | (273,498 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net cash (used) provided by financing activities | | | (22,976,533 | ) | | | 27,691,197 | | | | 26,244,924 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 2,170,353 | | | | 10,990 | | | | (30,941 | ) |
| | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of the period | | | 18,899 | | | | 7,909 | | | | 38,850 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of the period | | $ | 2,189,252 | | | $ | 18,899 | | | $ | 7,909 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Supplemental disclosures: | | | | | | | | | | | | |
| Interest paid | | $ | 1,401,932 | | | $ | 2,821,378 | | | $ | 3,419,404 | |
Affordable Housing Program payments3 | | $ | 42,211 | | | $ | 26,386 | | | $ | 20,050 | |
| REFCORP payments | | $ | 123,235 | | | $ | 83,983 | | | $ | 74,253 | |
| Transfers of mortgage loans to real estate owned | | $ | 1,400 | | | $ | 755 | | | $ | 356 | |
| Portion of non-credit OTTI losses on held-to-maturity securities | | $ | 120,096 | | | $ | — | | | $ | — | |
| | | |
| 1 | | Cash flows from derivatives considered as financing activity — $343,018 cash out-flows in 2009; $450,393 cash in-flows in 2008; and $0 in 2007. |
| |
| 2 | | Does not include payments to holders of Mandatorily redeemable capital stock. |
| |
| 3 | | AHP payments = (beginning accrual - ending accrual) + AHP assessment for the period; payments represent funds released to the Affordable Housing Program. |
The accompanying notes are an integral part of these financial statements.
190
Federal Home Loan Bank of New YorkNotes 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.
The FHLBNY obtains its funds from several sources. A primary source is the issuance of FHLBank debt instruments, called consolidated obligations, to the public. The issuances and servicing of consolidated obligations are performed by the Office of Finance, a joint office of the FHLBanks. These debt instruments represent the joint and several obligations of all the FHLBanks. Additional sources of FHLBNY funding are member deposits and the issuance of capital stock. Deposits may be accepted from member financial institutions and federal instrumentalities.
Members of the cooperative must purchase FHLBNY stock according to regulatory requirements (For more information, see Note 11 — Mandatorily Redeemable Capital Stock and Note 13 — Capital). The business of the cooperative is to provide liquidity for the members (primarily in the form of loans referred to as “advances”) and to provide a return on members’ investment in FHLBNY stock in the form of a dividend. Since the members are both stockholders and customers, the Bank operates such that there is a trade-off between providing value to them via low pricing for advances with a relatively lower dividend versus higher advances pricing with a relatively higher dividend. The FHLBNY is managed to deliver balanced value to members, rather than to maximize profitability or advance volume through low pricing.
All federally insured depository institutions, insured credit unions and insurance companies engaged in residential housing finance can apply for membership in the FHLBank in their district. All members are required to purchase capital stock in the FHLBNY as a condition of membership. A member of another FHLBank or a financial institution that is not a member of any FHLBank may also hold FHLBNY stock as a result of having acquired an FHLBNY member. Because the Bank operates as a cooperative, the FHLBNY conducts business with related parties in the normal course of business and considers all members and non-member stockholders as related parties in addition to the other FHLBanks. See Note 20 — Related party transactions.
The FHLBNY’s primary business is making collateralized advances to members which is the principal factor that impacts the financial condition of the FHLBNY.
Since July 30, 2008, the FHLBNY has been supervised and regulated by the Federal Housing Finance Agency (“Finance Agency”), which is an independent agency in the executive branch of the U.S. government. With the passage of the “Housing and Economic Recovery Act of 2008” (“Housing Act”), the Finance Agency was established and became the new independent Federal regulator (the “Regulator”) of the FHLBanks, effective July 30, 2008. The Federal Housing Finance Board (“Finance Board”), the FHLBanks’ former regulator, was merged into the Finance Agency as of October 27, 2008. The Finance Board was abolished one year after the date of enactment of the Housing Act. Finance Board regulations, orders, determinations and resolutions remain in effect until modified, terminated, set aside or superseded in accordance with the Housing Act by the FHFA Director, a court of competent jurisdiction or by operation of the law.
191
Federal Home Loan Bank of New York
Notes to Financial Statements
As of July 2008, the FHLBNY is supervised and regulated by the Federal Housing Finance Agency (“Finance Agency”), which is an independent agency in the executive branch of the U.S. government. The Finance Agency’s mission statement is to provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and to support a stable and liquid mortgage market. However, while the Finance Agency establishes regulations governing the operations of the FHLBanks, the Bank functions as a separate entity with its own management, employees and board of directors.
Tax Status
The FHLBanks, including the FHLBNY, are exempt from ordinary federal, state, and local taxation except for local real estate taxes.
Assessments
Resolution Funding Corporation(“REFCORP”)Assessments.Although the FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate taxes, it is required to make payments to REFCORP.
REFCORP was established by Congress in 1989 to help facilitate the U.S. government’s bailout of failed financial institutions. The REFCORP assessments are used by the U.S. Treasury to pay a portion of the annual interest expense on long-term obligations issued to finance a portion of the cost of the bailout. Principal of those long-term obligations is paid from a segregated account containing zero-coupon U.S. government obligations, which were purchased using funds that Congress directed the FHLBanks to provide for that purpose in 1989.
Each FHLBank is required to pay 20 percent of income calculated in accordance with accounting principles generally accepted in the U.S. (“GAAP”) after the assessment for the Affordable Housing Program, but before the assessment for REFCORP. The Affordable Housing Program and REFCORP assessments are calculated simultaneously because of their dependence on each other. The FHLBNY accrues its REFCORP assessment on a monthly basis.
The Resolution Funding Corporation has been designated as the calculation agent for the Affordable Housing Program and REFCORP assessments. Each FHLBank provides the amount of quarterly income before Affordable Housing Program and REFCORP assessments and other information to the Resolution Funding Corporation, which then performs the calculations for each quarter end.
192
Federal Home Loan Bank of New York
Notes to Financial Statements
Affordable Housing Program(“AHP”)Assessments. Section 10(j) of the FHLBank Act requires each FHLBank to establish an Affordable Housing Program. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the Affordable Housing Program the greater of $100 million or 10 percent of regulatory defined net income. Regulatory defined net income is GAAP net income before interest expense related to mandatorily redeemable capital stock under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity,and the assessment for Affordable Housing Program, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency. The FHLBNY accrues the AHP expense monthly.
Note 1. Significant Accounting Policies and Estimates, and Recently Issued Accounting Standards and Interpretations.
Significant Accounting Policies and Estimates
The FHLBNY has identified certain accounting policies that it believes are significant because they require management to make subjective judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or by using different assumptions. These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios, evaluating the impairment of the Bank’s securities portfolios, estimating the liabilities for employee benefit programs, and estimating fair values of certain assets and liabilities.
Fair Value Measurements and Disclosures— The accounting standard on fair value measurements and disclosures discusses how entities should measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources or those that can be directly corroborated to market sources, while unobservable inputs reflect the FHLBNY’s market assumptions. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal or most advantageous market for the asset or liability between market participants at the measurement date. This definition is based on an exit price rather than transaction or entry price.
Valuation Techniques— Three valuation techniques are prescribed under the fair value measurement standards — Market approach, Income approach and Cost approach. Valuation techniques for which sufficient data is available and that are appropriate under the circumstances should be used.
In determining fair value, FHLBNY uses various valuation methods, including both the market and income approaches.
| | • | | Market approach — This technique uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. |
| | • | | Income approach — This technique uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted), based on assumptions used by market participants. The present value technique used to measure fair value depends on the facts and circumstances specific to the asset or liability being measured and the availability of data. |
| | • | | Cost approach — This approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost). |
193
Federal Home Loan Bank of New York
Notes to Financial Statements
The accounting guidance on fair value measurements and disclosures establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, and would be based on market data obtained from sources independent of FHLBNY. Unobservable inputs are inputs that reflect FHLBNY’s assumptions about the parameters market participants would use in pricing the asset or liability, and would be based on the best information available in the circumstances.
The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1— Quoted prices for identical instruments in active markets.
Level 2— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuations in which all significant inputs and significant parameters are observable in active markets.
Level 3— Valuations based upon valuation techniques in which significant inputs and significant parameters are unobservable.
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors including, for example, the characteristics peculiar to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by FHLBNY in determining fair value is greatest for instruments categorized as Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purpose the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
At December 31, 2009 and 2008, the FHLBNY measured and recorded fair values using the above guidance for derivatives, available-for-sale securities, and certain consolidated obligation bonds that were designated under the fair value option accounting (“FVO”). At December 31, 2009 and 2008, the Bank had designated consolidated obligation debt of $6.0 billion and $983.0 million under the FVO. Held-to-maturity securities determined to be credit impaired or OTTI at December 31, 2009 were also measured at fair value on a non-recurring basis. Recorded fair values of OTTI securities were $42.9 million at December 31, 2009. No fair values were recorded on a non-recurring basis at December 31, 2008.
Fair Values of Derivative positions —The FHLBNY is an end-user of over-the-counter (“OTC”) derivatives to hedge assets and liabilities under hedge accounting rules to mitigate fair value risks. In addition, the Bank records the fair value of an insignificant amount of mortgage-delivery commitments as derivatives. For additional information, see Note 17 - Derivatives and hedging activities.
Valuations of derivative assets and liabilities reflect the value of the instrument including the value associated with counterparty risk. Derivative values also take into account the FHLBNY’s own credit standing. The computed fair values of the FHLBNY’s OTC derivatives take into consideration the effects of legally enforceable master netting agreements that allow the FHLBNY to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The agreements include collateral thresholds that reflect the net credit differential between the FHLBNY and its derivative counterparties. On a contract-by-contract basis, the collateral and netting arrangements sufficiently mitigated the impact of the credit differential between the FHLBNY and its derivative counterparties to an immaterial level such that an adjustment for nonperformance risk was not deemed necessary. Fair values of the derivatives were computed using quantitative models and employed multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors. These multiple market inputs were predominantly actively quoted and verifiable through external sources, including brokers and market transactions.
194
Federal Home Loan Bank of New York
Notes to Financial Statements
Fair Values of investments classified as available-for-sale securities —Changes in the values of available-for-sale securities are recorded in Accumulated other comprehensive income (loss), a component of members’ capital, with an offset to the recorded value of the investments in the Statements of Condition. The Bank’s investments classified as available-for-sale (“AFS”) are comprised of mortgage-backed securities that are GSE issued, variable-rate, collateralized mortgage obligations and are marketable at their recorded fair values. A small percentage of the AFS portfolio at December 31, 2009 and 2008 consisted of investments in equity and bond mutual funds held by grantor trusts owned by the FHLBNY. The unit prices, or the “Net asset values,” of the underlying mutual funds were available through publicly viewable web sites and the units were marketable at recorded fair values.
The fair values of these investment securities are estimated by management using specialized pricing services that employ pricing models or quoted prices of securities with similar characteristics. Inputs into the pricing models are market based and observable. Examples of securities, which would generally be classified within Level 2 of the valuation hierarchy and valued using the “market approach” as defined under the accounting standard for fair value measurements and disclosures, include GSE issued collateralized mortgage obligations and money market funds.
See Note 18 — Fair Values of financial instruments — for additional disclosures about fair values and Levels associated with assets and liabilities recorded on the Bank’s Statements of Condition at December 31, 2009 and 2008.
Fair Value of held-to-maturity securities on a Nonrecurring Basis —Certain held-to-maturity investment securities are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments when there is evidence of other-than-temporary impairment. In accordance with the guidance on recognition and presentation of other-than-temporary impairment, certain held-to-maturity mortgage-backed securities were determined to be credit impaired at December 31, 2009 and the securities were recorded at their fair values of $42.9 million on a non-recurring basis. For more information, see Note 4 — Held-to-maturity securities.
Financial Assets and Financial Liabilities recorded under the Fair Value Option —The accounting standards on the fair value option for financial assets and liabilities, created a fair value option (“FVO”) allowing, but not requiring, 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. In the third quarter of 2008 and thereafter, the FHLBNY has elected the FVO designation for certain consolidated obligation bonds. The changes in fair values of the designated bonds are economically hedged by interest rate swaps. See Note 18 — Fair Values of financial instruments for more information.
Investments
Early adoption by the FHLBNY of the guidance on disclosures about the fair value of financial instruments at January 1, 2009 required the Bank to incorporate certain clarifications and definitions in its investment policies. The new guidance amends the accounting rules for investments in debt and equity securities, and is primarily intended to provide greater clarity to investors about the credit and noncredit component of an Other-than-temporary impairment (“OTTI”) event and to more effectively communicate when an OTTI event has occurred. The new guidance has been incorporated in the Bank’s investment policies as summarized below.
195
Federal Home Loan Bank of New York
Notes to Financial Statements
Held-to-maturity securities— The FHLBNY classifies investments for which it has both the ability and intent to hold to maturity as held-to-maturity investments. Such investments are recorded at amortized cost basis, which includes adjustments made to the cost of an investment for accretion and amortization of discounts and premiums, collection of cash, and fair value hedge accounting adjustments. If a held-to-maturity security is determined to be OTTI, the amortized cost basis of the security is adjusted for credit losses. Amortized cost basis of a held-to-maturity OTTI security is further adjusted for impairment related to all other factors (also referred to as the non-credit component of OTTI) and recognized in Accumulated other comprehensive income (loss); the adjusted amortized cost basis is the carrying value of the OTTI security as reported in the Statements of Condition. Carrying value for a held-to-maturity security that is not OTTI is its amortized cost basis.
Under the accounting guidance for investments in debt and equity securities, changes in circumstances may cause the FHLBNY to change its intent to hold certain securities to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness or changes in regulatory requirements, is not considered inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the FHLBNY that could not have been reasonably anticipated may cause the FHLBNY to sell or transfer a held-to-maturity security without necessarily calling into question its intent to hold other debt securities to maturity. The Bank did not transfer or sell any held-to-maturity securities due to changes in circumstances in 2009, 2008 or 2007.
In accordance with accounting guidance for investments in debt and equity securities, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (1) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) such that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value, or (2) the sale of a security occurs after the FHLBNY has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition.
Available-for-sale securities— The FHLBNY classifies investments that it may sell before maturity as available-for-sale and carries them at fair value.
Until available-for-sale securities (“AFS”) are sold or expected to be sold, changes in fair values are recorded in Accumulated other comprehensive income (loss) as Net unrealized gain or (loss) on available-for-sale securities. If available-for-sale securities had been hedged under a fair value hedge qualifying for hedge accounting, the FHLBNY would record the portion of the change in fair value related to the risk being hedged in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities together with the related change in the fair value of the derivative, and would record the remainder of the change in Accumulated other comprehensive income (loss) as a Net unrealized gain (loss) on available-for-sale securities. If available-for-sale securities had been hedged under a cash flow hedge qualifying for hedge accounting, the FHLBNY would record the effective portion of the change in value of the derivative related to the risk being hedged in Accumulated other comprehensive income (loss) (“AOCI”) as a Net unrealized gain (loss) on derivatives and hedging activities. The ineffective portion would be recorded in Other income (loss) and presented as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
196
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 FHLBNY’s 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 at the original acquisition date of the asset.
The FHLBNY computes the amortization and accretion of premiums and discounts on investments other than mortgage-backed securities using the level-yield method to the contractual maturities of the 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.
Other-than-temporary impairment (“OTTI”) — Accounting and Governance Policies — Impairment analysis, Pricing of mortgage-backed securities, and Bond insurer methodology.
The FHLBNY regularly evaluates its investments for impairment and determines if unrealized losses are temporary based in part on the creditworthiness of the issuers, and in part on the underlying collateral within the structure of the security and the cash flows expected to be collected on the security. A security is considered impaired if its fair value is less than its amortized cost basis. If management has made a decision to sell such an impaired security, OTTI is considered to have occurred. If a decision to sell the impaired investment has not been made, but management concludes that it is more likely than not that it will be required to sell such a security before recovery of the amortized cost basis of the security, an OTTI is also considered to have occurred.
Even if management does not intend to sell such an impaired security, an OTTI has occurred if cash flow analysis determines that a credit loss exists. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is a credit loss. To determine if a credit loss exists, management compares the present value of the cash flows expected to be collected to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the security’s amortized cost, an OTTI exists, irrespective of whether management will be required to sell such a security. The Bank’s methodology to calculate the present value of expected cash flows is to discount the expected cash flows (principal and interest) of a fixed-rate security, that is being evaluated for OTTI, by using the effective interest rate of the security as of the date it was acquired. For a variable-rate security that is evaluated for OTTI, the expected cash flows are computed using a forward-rate curve. To calculate the present value of expected cash flows of a variable-rate security, the cash flows are discounted using the forward rates.
If management determines that it intends to sell a security in an unrealized loss position or can no longer assert that it will not be required to sell such as security before recovery of the amortized cost basis of the security, the entire impairment is considered OTTI and is recorded as a charge to earnings in the period management reaches such a decision.
However, if management determines that OTTI exists only because of a credit loss (even if it does not intend to sell or it will not be required to sell such a security), the amount of OTTI related to credit loss will affect earnings and the amount of loss related to factors other than credit loss is recognized as a component of AOCI.
197
Federal Home Loan Bank of New York
Notes to Financial Statements
If the FHLBNY determines that OTTI has occurred, it accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment. The investment security is written down to fair value, which becomes its new amortized cost basis. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.
For securities designated as available-for-sale, subsequent unrealized changes to the fair values (other than OTTI) are recorded in AOCI. For securities designated as held-to-maturity, the amount of OTTI recorded in AOCI for the non-credit component of OTTI is amortized prospectively over the remaining life of the securities based on the timing and amounts of estimated future cash flows. Amortization out of AOCI is offset by an increase in the carrying value of securities until the securities are repaid or are sold or subsequent OTTI is recognized in earnings.
If subsequent evaluation indicates a significant increase in cash flows greater than previously expected to be collected or if actual cash flows are significantly greater than previously expected, the increases are accounted for as a prospective adjustment to the accretable yield through interest income. In subsequent periods, if the fair value of the investment security has further declined below its then-current carrying value and there has been a decrease in the estimated cash flows the FHLBNY expects to collect, the FHLBNY will deem the security as OTTI.
OTTI FHLBank System Governance Committee— On April 28, 2009, and May 7, 2009, the Finance Agency, the FHLBanks’ regulator, provided the FHLBanks with guidance on the process for determining OTTI with respect to the FHLBanks’ holdings of private-label MBS and their adoption of the guidance for recognition and presentation of other-than-temporary impairment in the first quarter of 2009. The goal of the guidance is to promote consistency among all FHLBanks in the process for determining OTTI for private-label MBS.
Beginning with the second quarter of 2009, consistent with the objectives of the Finance Agency, the FHLBanks formed an OTTI Governance Committee (“OTTI Committee”) with the responsibility for reviewing and approving key modeling assumptions, inputs, and methodologies to be used by the FHLBanks to generate the cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS. The OTTI Committee charter was approved on June 11, 2009, and provides a formal process by which the FHLBanks can provide input on and approve the assumptions.
Although a FHLBank may engage another FHLBank to perform its OTTI analysis under the guidelines of the OTTI Committee, each FHLBank is responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and for performing the required present value calculations using appropriate historical cost bases and yields. FHLBanks that hold the same private-label MBS are required to consult with one another to make sure that any decision that a commonly held private-label MBS is other-than-temporarily impaired, including the determination of fair value and the credit loss component of the unrealized loss, is consistent among those FHLBanks.
The OTTI Committee’s role and scope with respect to the assessment of credit impairment for the FHLBNY’s private-label MBS are discussed further in the section “Impairment analysis of mortgage-backed securities”.
198
Federal Home Loan Bank of New York
Notes to Financial Statements
FHLBank System Pricing Committee— In an effort to achieve consistency among the FHLBanks’ pricing of investments of mortgage-backed securities, in the third quarter of 2009, the FHLBanks also formed the MBS Pricing Governance Committee, which was responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. Consistent with the guidance from the Pricing Committee, the FHLBNY updated its methodology used to estimate the fair value of mortgage-backed securities starting with the interim period ended September 30, 2009. Under the approved methodology, the FHLBNY requests prices for all mortgage-backed securities from four specific third-party vendors. Prior to the change, the FHLBNY used three of the four vendors specified by the Pricing Committee. Depending on the number of prices received from the four vendors for each security, the FHLBNY selects a median or average price as defined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review by the FHLBNY. In certain limited instances (i.e., when prices are outside of variance thresholds or the third-party services do not provide a price), the FHLBNY obtains a price from securities dealers that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. Prices for CUSIPs held in common with other FHLBanks are reviewed for consistency. The incorporation of the Pricing Committee guidelines did not have a significant impact in the FHLBNY’s estimate of the fair values of its investment securities at implementation of the policy as of September 30, 2009.
Bond Insurer analysis— Certain held-to-maturity private-label MBS owned by the FHLBNY are insured by third-party bond insurers (“monoline insurers”). The bond insurance on these investments guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool. The FHLBNY performs cash flow credit impairment tests on all of its private-label insured securities, and the analysis of the MBS protected by such third-party insurance looks first to the performance of the underlying security, and considers its embedded credit enhancements in the form of excess spread, overcollateralization, and credit subordination, to determine the collectability of all amounts due. If the embedded credit enhancement protections are deemed insufficient to make timely payment of all amounts due, then the FHLBNY considers the capacity of the third-party bond insurer to cover any shortfalls.
Certain monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. In estimating the insurers’ capacity to provide credit protection in the future to cover any shortfall in cash flows expected to be collected for securities deemed to be OTTI, the FHLBNY has developed a methodology to assess the ability of the monoline insurers to meet future insurance obligations.
The methodology calculates the length of time a monoline is expected to remain financially viable to pay claims for securities insured. It employs, for the most part, publicly available information to identify cash flows used up by a monoline for insurance claims. Based on the monoline’s existing insurance reserves, the methodology attempts to predict the length of time over which the monoline’s claims-paying resources could sustain bond insurance losses. The methodology establishes boundaries that can be used on a consistent basis, and includes both quantitative factors and qualitative considerations that management utilizes to estimate the period of time that it is probable that the Bank’s insured securities will receive cash flow support from the monolines.
For the FHLBNY’s insured securities that are deemed to be credit impaired absent insurer protection, the methodology compares the timing and amount of the cash flow shortfall to the timing of when a monoline’s claim-paying resource is deemed exhausted. The analysis quantifies both the timing and the amount of cash flow shortfall that the insurer is unlikely to be able to cover. However, estimation of an insurer’s financial strength to remain viable over a long time horizon requires significant judgment and assumptions. Predicting when the insurers may no longer have the ability to perform under their contractual agreements, then comparing the timing and amounts of cash flow shortfalls of securities that are credit impaired absent insurer protection requires significant judgment.
199
Federal Home Loan Bank of New York
Notes to Financial Statements
For reasons outlined in previous paragraphs, the FHLBNY believes that bond insurance is an inherent aspect of credit support within the structure of the security itself and it is appropriate to include insurance in its evaluation of expected cash flows and determination of OTTI. The FHLBNY has also established that the terms of insurance enable the insurance to travel with the security if the security is sold in the future. Currently, the monolines that provide insurance for the Bank’s securities are going concerns and are honoring claims with their existing capital resources. Within the boundaries set in the methodology outlined above, the Bank believes it is appropriate to assert that insurer credit support can be relied upon over a certain period of time. As with all assumptions, changes to these assumptions may result in materially different outcomes and the realization of additional other-than-temporary impairment charges in the future.
Impairment analysis of mortgage-backed securities
Securities with a fair value below amortized cost basis are considered impaired. Determining whether a decline in fair value is OTTI requires significant judgment. The FHLBNY evaluates its individual held-to-maturity investment in private-label issued mortgage- and asset-backed securities for OTTI on a quarterly basis. As part of this process, the FHLBNY assesses if it has the intent to sell the security or it is more likely than not that it will be required to sell the impaired investment before recovery of its amortized cost basis. To assess whether the entire amortized cost basis of the FHLBNY’s private-label MBS will be recovered in future periods, beginning with the quarters ended September 30, 2009 and at December 31, 2009, the Bank performed OTTI analysis by cash flow testing 100 percent of its 54 private-label MBS at September 30, 2009 and December 31, 2009. At December 31, 2008, and at the first two quarters of 2009, the FHLBNY’ methodology was to analyze all its private-label MBS to isolate securities that were considered to be at risk of OTTI and to perform cash flow analysis on securities at risk of OTTI.
At December 31, 2008, the FHLBNY’s screening and monitoring process, which included pricing, credit rating and credit enhancement coverage, had identified 21 private-label MBS with weak performance measures indicating the possibility of OTTI, and were cash flow tested for credit impairment. See Note 4 — Held-to-maturity securities for more information about credit impaired securities.
Cash flow analysis derived from the FHLBNY’s own assumptions —Assessment for OTTI employed by the FHLBNY’s own techniques and assumptions were determined primarily using historical performance data of the 54 private-label MBS. These assumptions and performance measures were benchmarked by comparing to performance parameters from “market consensus”, to data obtained from specialized consulting services, and to the assumptions and parameters provided by the OTTI Committee for the FHLBNY’s private-label MBS, which represented about 50 percent of the FHLBNY’s private-label MBS portfolio.
The FHLBNY’s analysis was performed using an internal process, as described below, to develop bond performance parameters and a third party model was used to generate expected cash flows to be collected. The Bank’s internal process calculated the historical average of each bond’s prepayments, defaults, and loss severities, and considered other factors such as delinquencies and foreclosures. Management’s assumptions were primarily based on historical performance statistics extracted from reports from trustees, loan servicer reports and other sources. In arriving at historical performance assumptions, which is the FHLBNY’s expected case assumptions, the FHLBNY also considered various characteristics of each security including, but not limited to, the following: the credit rating and related outlook or status; the creditworthiness of the issuers of the debt securities; the underlying type of collateral; the year of securitization or vintage, the duration and level of the unrealized loss, credit enhancements, if any; and other collateral-related characteristics such as FICO® credit scores, and delinquency rates. The relative importance of this information varies based on the facts and circumstances surrounding each security as well as the economic environment at the time of assessment.
200
Federal Home Loan Bank of New York
Notes to Financial Statements
Each bond’s performance parameters, primarily prepayments, defaults and loss severities, which were calculated by the Bank’s internal approach were then input into a third party specialized cash flow model that allocated the projected collateral level losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancements for the senior securities were derived from the presence of subordinate securities, losses were generally allocated first to the subordinate securities until their principal balance was reduced to zero.
If the security is insured by a bond insurer and the security relies on the insurer for support either currently or potentially in future periods, the FHLBNY performed another analysis to assess the financial strength of the monoline insurers. The results of the insurer financial analysis (“monoline burn-out period”) were then incorporated in the third-party cash flow model, as a key input. If the cash flow model projected cash flow shortfalls (credit impairment) on an insured security, the monoline’s burn-out period, an end date for credit support, was then input to the cash flow model. The end date, also referred to as the burn-out date, provided the necessary information as an input to the cash flow model for the continuation of cash flows up till the burn-out date. Any cash flow shortfalls that occurred beyond the “burn-out” date were considered to be not recoverable and the insured security was then deemed to be credit impaired.
Role and scope of the OTTI Governance Committee
Starting with the third quarter, the OTTI Committee has adopted guidelines that each FHLBank should assess credit impairment by cash flow testing of 100 percent of private-label securities that are within its scope. Of the 54 private-label MBS owned by the FHLBNY, 27 MBS backed by sub-prime loans, home equity loans, and manufactured housing loans were deemed to be outside the scope of the OTTI Committee because sufficient loan level collateral data was not available to determine the assumptions under the OTTI Committee’s approach described below. The remaining 27 securities were modeled in the OTTI Committee common platform. The FHLBNY developed key modeling assumptions and forecasted cash flows using the FHLBNY’s own assumptions for 100 percent of its private-label MBS.
Cash flow derived from the OTTI Committee common platform— Consistent with the guidelines provided by the OTTI Committee, the FHLBNY has contracted with the FHLBanks of San Francisco and Chicago to perform cash-flow analyses for the securities within the scope of the OTTI Committee as a means of benchmarking the FHLBNY’s own cash flow analysis. FHLBank of San Francisco cash flow tested 13 private-label prime residential MBS, with total unpaid principal balance of $372.9 million at December 31, 2009. The FHLBank of Chicago cash flow tested 14 private-label home equity residential mortgage-backed subprime securities, with total unpaid principal balance of $187.7 million at December 31, 2009. Although the FHLBNY has engaged the two FHLBanks to perform the cash flow analysis for the 27 private-label MBS, the FHLBNY is ultimately responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and performing the required present value calculations using appropriate historical cost bases and yields.
The two FHLBanks performed cash flow analysis for the FHLBNY’s private-label securities in scope using two third-party models to establish the modeling assumptions and calculate the forecasted cash flows in the structure of the MBS. The first model considered borrower characteristics and the particular attributes of the loans underlying a security in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model was the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which were based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The FHLBanks’ housing price forecast at December 31, 2009 assumed CBSA level current-to-through home price declines ranging from 0 percent to 15 percent over the next 9 to 15 months. Thereafter, home prices were projected to increase 0 percent in the first six months, 0.5 percent in the next six months, 3 percent in the second year and 4 percent in each subsequent year.
201
Federal Home Loan Bank of New York
Notes to Financial Statements
The month-by-month projections of future loan performance derived from the first model, which reflected projected prepayments, defaults and loss severities, were then input into a second model that allocated the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities was derived from the presence of subordinate securities, losses were generally allocated first to the subordinate securities until their principal balance was reduced to zero.
The projected cash flows were based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on model approach described above reflects a best estimate scenario and includes a base case current-to-through housing price forecast and a base case housing price recovery path described in the prior paragraph. The cash flows tested on the securities within the scope of the OTTI Committee resulted in the credit impairment of three securities, which were also deemed to be credit impaired by the FHLBNY’s cash flow analysis.
GSE issued securities— The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac or a government agency by considering the creditworthiness and performance of the debt securities and the strength of the GSE’s guarantees of the securities. Based on the Bank’s analysis, GSE and agency issued securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE and agency issued securities given the current levels of collateral and credit enhancements and guarantees that exist to protect the investments.
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 management based on the 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.
Advances
The FHLBNY reports advances at amortized cost, net of unearned commitment fees, discounts and premiums, (discounts are generally associated with advances for the Affordable Housing Program) and any hedging adjustments. The FHLBNY records interest on advances to income as earned, and amortizes the premium and accretes the discounts on advances to interest income using a level-yield methodology. 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. Borrowing members pledge their capital stock of the FHLBNY as additional collateral for advances. As Note 6-Advances more fully describes, community financial institutions (FDIC-insured institutions with assets of $1.0 billion or less during 2009) 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 financial condition of its borrowers, 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.
202
Federal Home Loan Bank of New York
Notes to Financial Statements
Prepayment Fees on advances
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 fair value basis adjustments included in the book basis of the advance as interest income from advances. From time to time, the FHLBNY will enter into an agreement with a member to modify the terms of an existing advance. The FHLBNY evaluates whether the modified advance meets the accounting criteria to qualify as a modification of an existing advance or as a new advance in accordance with provisions under creditor’s accounting for a modification or exchange of debt instruments. 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 as interest income from advances.
For advances that are hedged and meet the accounting standards for derivatives and hedging, 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 the prepayment of a previous advance to that member, the FHLBNY evaluates whether the new advance qualifies as a modification of the original advance. The evaluation includes 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 the level-yield method. If the modified advance is also hedged and the hedge meets the hedging criteria in accordance with accounting standards for derivatives and hedging, basis adjustments continue to be made after the modification, and subsequent value changes attributable to hedged risks are recorded in Other income (loss) as Net realized and unrealized gain (loss) 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 as interest income from advances.
203
Federal Home Loan Bank of New York
Notes to Financial Statements
Mortgage Loans Held-for-portfolio
The FHLBNY participates in the Mortgage Partnership Finance program® (“MPF”®) by purchasing and originating conventional mortgage loans from its participating members, hereafter referred to as Participating Financial Institutions (“PFI”). Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) insured loans purchased were not a significant total of the outstanding mortgage loans held-for-portfolio at December 31, 2009 and 2008. The FHLBNY manages the liquidity, interest rate and prepayment option risk of the MPF loans, while the PFIs retain servicing activities. The FHLBNY and the PFI share the credit risks of the uninsured MPF loans by structuring potential credit losses into layers. Collectability of the loans is first supported by liens on the real estate securing the loan. For conventional mortgage loans, additional loss protection is provided by private mortgage insurance required for MPF loans with a loan-to-value ratio of more than 80 percent at origination, which is paid for by the borrower. Credit losses are absorbed by the FHLBNY to the extent of the First Loss Account (“FLA”) for which the maximum exposure is estimated to be $13.9 million and $13.8 million at December 31, 2009 and 2008. 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 or originates as an agent for the FHLBNY (only relates to MPF 100 product). For assuming this risk, PFIs receive monthly “credit enhancement fees” from the FHLBNY.
The amount of the credit enhancement is computed with the use of a Standard & Poor’s model to determine the amount of credit enhancement necessary to bring a pool of uninsured loans to “AA” credit risk. The credit enhancement becomes an obligation of the PFI. For certain MPF products, the credit enhancement fee is accrued and paid each month. For other MPF products, the credit enhancement fee is accrued and paid monthly after the FHLBNY has accrued 12 months of credit enhancement fees.
Delivery commitment fees are charged to a PFI for extending the scheduled delivery period of the loans. Pair-off fees may be assessed and charged to PFI when the settlement of the delivery commitment (1) fails to occur, or (2) the principal amount of the loans purchased by the FHLBNY under a delivery commitment is not equal to the contract amount beyond established limits.
The FHLBNY records credit enhancement fees as a reduction to 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. The FHLBNY defers and amortizes premiums, costs, and discounts as interest income using the level yield method to the loan’s contractual maturities. The FHLBNY classifies mortgage loans as held-for-portfolio and, accordingly, reports them at their principal amount outstanding, net of premiums, costs and discounts, which is the fair value of the mortgage loan on settlement date.
The FHLBNY places a 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.
Allowance for credit losses on mortgage loans.The Bank reviews its portfolio to identify the losses inherent within the portfolio and to determine the likelihood of collection of the principal and interest. Mortgage loans, that are 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 allowance for credit losses on mortgage loans was $4.5 million and $1.4 million as of December 31, 2009 and 2008.
204
Federal Home Loan Bank of New York
Notes to Financial Statements
The Bank identifies inherent losses through analysis of the conventional loans (FHA and VA are insured loans, and excluded from the analysis) that are not adversely classified or past due. Reserves are based on the estimated costs to recover any portions of the MPF loans that are not FHA and VA insured. When a loan is foreclosed, the Bank will charge to the loan loss reserve account for any excess of the carrying value of the loan over the net realizable value of the foreclosed loan.
If adversely classified, or on non-accrual status, reserves for conventional mortgage loans, except FHA and VA insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses are reserved. FHA and VA insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicers defaulting on their obligations. FHA and VA insured mortgage loans, if adversely classified, would have reserves established only in the event of a default of a PFI, and would be based on aging, collateral value and estimated costs to recover any uninsured portion of the MPF loan.
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 the outstanding balance was approximately $3.9 million and $4.0 million at December 31, 2009 and 2008. 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.
Mandatorily Redeemable Capital Stock
Generally, the FHLBNY’s capital stock is redeemable at the option of both the member and the FHLBNY, subject to certain conditions, and is subject to the provisions under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. Dividends related to capital stock classified as mandatorily redeemable stock are accrued at an estimated dividend rate and reported as interest expense in the Statements of Income.
Mandatorily redeemable capital stock at December 31, 2009 and 2008 represented stocks held by former members who were no longer members by virtue of being acquired by members of another FHLBank. Under existing practice, such stock will be repurchased when the stock is no longer required to support outstanding transactions with the FHLBNY. The FHLBNY repurchases excess stock upon the receipt of a request for redemption of such stock from a member, and the member’s stock is typically repurchased by the Bank by the next business day.
Redemption rights under the Capital Plan
Under the FHLBNY’s 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 Capital 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 Capital Plan, 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 in the Capital Plan (e.g., to help secure any remaining advances) or if other limitations apply as specified in the Capital Plan.
205
Federal Home Loan Bank of New York
Notes to Financial Statements
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 following such redemption. However, 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.
Accounting considerations under the Capital Plan
There are three triggering events that could cause the FHLBNY to repurchase capital stock.
| | • | | a member requests redemption of excess membership 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 repurchased. Since 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 made at the time the request is delivered.
Under the 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 made at the time the notification of the intent to withdraw is delivered. There was one request for voluntary withdrawal and one termination from membership due to insolvency during 2009 and none during 2008. When a member is acquired by a non-member, the FHLBNY reclassifies stock of former members to a liability on the day the member’s charter is dissolved.
In compliance with the accounting guidance for certain financial instruments with characteristics of both liabilities and equity, 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 reclassified as a liability are accrued at an estimated dividend rate and reported as interest expense in the Statements of Income. The repurchase 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. Accrued estimated dividends were not material and were included with interest payable in the Statements of Condition. The FHLBanks have a unique cooperative structure. Stocks can only be acquired and redeemed at par value. Shares are not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.
206
Federal Home Loan Bank of New York
Notes to Financial Statements
Affordable Housing Program
The FHLBank Act requires each FHLBank to establish and fund an AHP (see Note 12 — Affordable Housing Program and REFCORP). 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 rates 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. The amounts are then recorded as a discount on the AHP advance, and were 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 income before assessments and before adjustment for dividends associated with mandatorily redeemable capital stock. Dividend payments are reported as interest expense in accordance with the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. If the FHLBNY incurs a loss for the entire year, no AHP assessment or assessment credit is due or accrued, as explained more fully in Note 12 - - Affordable Housing Program and REFCORP.
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 each of the 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, and purchased caps and floors if the derivative counterparties default and the related collateral, if any, is of insufficient value to the FHLBNY. Accounting for derivatives is addressed under accounting standards for derivatives and hedging. All derivatives are recognized on the balance sheet at their estimated fair values, including accrued unpaid interest as either a derivative asset or a derivative liability net of cash collateral received from and pledged to derivative counterparties.
Each derivative is designated as one of the following:
| | (1) | | a qualifying1 hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a “fair value” hedge); |
| | (2) | | a qualifying1 hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge); |
| | (3) | | a non-qualifying1 hedge of an asset or liability (“economic hedge”) for asset-liability management purposes; or |
| | (4) | | a non-qualifying1 hedge of another derivative (an “intermediation” hedge) that is offered as a product to members or used to offset other derivatives with non-member counterparties. |
| | | |
| 1 | | Note: The terms “qualifying” and “non-qualifying” refer to accounting standards for derivatives and hedging. |
207
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY had no foreign currency assets, liabilities or hedges in 2009, 2008 or 2007.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current period’s earnings in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are reported in AOCI, a component of equity, until earnings are affected by the variability of the cash flows of the hedged transaction (i.e., until the recognition of interest on a variable rate asset or liability is recorded in earnings).
The FHLBNY records derivatives on trade date, but records the associated hedged consolidated obligations and advances on settlement date. Hedge accounting commences on trade date, at which time subsequent changes to the derivative’s fair value are recorded along with the offsetting changes in the fair value of the hedged item attributable to the risk being hedged. On settlement date, the basis adjustments to the hedged item’s carrying amount are combined with the principal amounts and the basis becomes part of the total carrying amount of the hedged item.
The FHLBNY has defined its market settlement conventions for hedged items to be five business days or less for advances and thirty calendar days or less, using a next business day convention, for consolidated obligations bonds and discount notes. These market settlement conventions are the shortest period possible for each type of advance and consolidated obligation from the time the instruments are committed to the time they settle.
The FHLBNY considers hedges of committed advances and consolidated obligation bonds eligible for the “short cut” provisions, under accounting standards for derivatives and hedging, as long as settlement of the committed asset or liability occurs within the market settlement conventions for that type of instrument. A short-cut hedge is a highly effective hedging relationship that uses an interest rate swap as the hedging instrument to hedge a recognized asset or liability and that meets the criteria under the accounting standards for derivatives and hedging to qualify for an assumption of no ineffectiveness. To meet the short-cut provisions that assumes no ineffectiveness, the FHLBNY expects the fair value of the swap to be zero on the date the FHLBNY designates the hedge.
For both fair value and cash flow hedges that qualify for hedge accounting treatment, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction) are recorded in current period’s earnings in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The differentials between accruals of interest income and expense on derivatives designated as fair value or cash flow hedges that qualify for hedge accounting treatment are recognized as adjustments to the interest income or expense of the hedged advances and consolidated obligations.
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 the asset or liability being hedged. Both the net interest and the fair value adjustments on the derivative are recorded in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. Interest income and expense and changes in fair values derivatives designated as economic hedges (also referred to as standalone hedges), or as intermediated derivatives for members are also recorded in the manner described above.
208
Federal Home Loan Bank of New York
Notes to Financial Statements
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, standalone instrument with the same terms would qualify as a derivative instrument, the embedded derivative would be separated from the host contract as prescribed for hybrid financial instruments under accounting standards for derivatives and hedge accounting, and carried at fair value. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, the changes in fair value would be reported in current earnings (such as an investment security classified as “trading”; or, if the FHLBNY cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the balance sheet at fair value and no portion of the contract would be designated as a hedging instrument. The FHLBNY had no financial instruments with embedded derivatives that required bifurcation at December 31, 2009 and 2008.
When hedge accounting is discontinued because the FHLBNY determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBNY continues to carry the derivative on the balance sheet at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield methodology.
When hedge accounting is discontinued because the FHLBNY determines that the derivative no longer qualifies as an effective cash flow hedge of an existing hedged item, the FHLBNY continues to carry the derivative on the balance sheet at its fair value and reclassifies the basis adjustment in AOCI to earnings when earnings are affected by the existing hedge item, which is the original forecasted transaction. Under limited circumstances, when the FHLBNY discontinues cash flow hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period plus the following two months, but it is probable the transaction will still occur in the future, the gain or loss on the derivative remains in AOCI and is recognized into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within two months after that, the gains and losses that were included in AOCI are recognized immediately in earnings.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the FHLBNY would continue to carry the derivative on the balance sheet at its fair value, removing from the balance sheet any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
Cash Collateral associated with Derivative Contracts
The Bank reports derivative assets and derivative liabilities in its Statements of Condition after giving effect to legally enforceable master netting agreements with derivative counterparties, which include interest receivable and payable on derivative contracts and the fair values of the derivative contracts. The Bank records cash collateral received and paid in the Statements of Condition as Derivative assets and liabilities in the following manner — Cash collateral pledged by the Bank is reported as a deduction to Derivative liabilities; cash collateral received from derivative counterparties is reported as a deduction to Derivative assets. No securities were either pledged or received as collateral for derivatives at December 31, 2009 or 2008.
209
Federal Home Loan Bank of New York
Notes to Financial Statements
Premises, Software and Equipment
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 eight 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).
Concessions on Consolidated Obligations
Concessions are paid to dealers in connection with the issuance of certain consolidated obligation bonds and discount notes. 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. Concessions paid on consolidated obligations designated under the Fair Value Option (“FVO”) accounting standards are expensed as incurred. Concessions paid on consolidated obligations not designated under the FVO, are deferred and amortized, using a level-yield methodology, over the terms to maturity or the estimated lives of the consolidated obligations. The FHLBNY charges to expense as incurred the concessions applicable to the sale of consolidated obligation discount notes because of their short maturities; amounts are recorded in consolidated obligations interest expense.
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 contractual 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 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 FHLBanks 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 Agency, in consultation with the Secretary of the U.S. Treasury, selects the appropriate discounting factors to be used in this annuity calculation. 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 Agency and Office of Finance Expenses
The FHLBNY is assessed for its proportionate share of the costs of operating the Finance Agency and the Office of Finance. The Finance Agency is authorized to impose assessments on the FHLBanks including FHLBNY, in amounts sufficient to pay the Finance Agency’s annual operating expenses.
210
Federal Home Loan Bank of New York
Notes to Financial Statements
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.
Earnings per Common Share
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, certificates of deposits, and interest-earning balances at the Federal Reserve Banks are reported in the Statements of Cash Flows as investing activities. Cash collateral pledged is reported as a deduction to Derivative liabilities and cash collateral received is reported as a deduction to Derivative assets in the Statements of Condition. In the Statements of Cash Flows, cash collateral pledged or received is reported as net changes in investing and financing activities.
Cash flows from a derivative instrument that is accounted for as a fair value or cash flow hedge, including those designated as economic hedges, are reflected as cash flows from operating activities provided that the derivative instrument does not include an other-than-insignificant financing element at inception.
In the third quarter of 2008, the Bank replaced a significant amount of derivative contracts that had been executed with Lehman Brothers Special Financing Inc. (“LBSF”), when LBSF filed for bankruptcy. The derivatives were replaced at terms that were generally “off-market” and required the derivative counterparties to pay cash to the FHLBNY to assume the derivatives which were primarily in a gain position from the perspective of the counterparties. All cash inflows and outflows of the replacement trades were reported as a financing activity at the inception of the trades in the Statements of Cash Flows. Consistent with the accounting provisions of derivatives and hedge accounting, the interest rate exchanges at each payment dates are reported as a financing activity as well because the derivatives contained a financing element considered to be more-than-insignificant at inception.
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.
Recently issued Accounting Standards and Interpretations
Accounting for the Consolidation of Variable Interest Entities —On June 12, 2009, the Financial Accounting Standards Board (“FASB”) issued guidance to improve financial reporting by enterprises involved with variable interest entities (“VIEs”) and to provide more relevant and reliable information to users of financial statements. This guidance amends the manner in which entities evaluate whether consolidation is required for VIEs. The guidance also requires that an entity continually evaluate VIEs for consolidation, rather than making such an assessment based upon the occurrence of triggering events. Additionally, the guidance requires enhanced disclosures about how an entity’s involvement with a VIE affects its financial statements and its exposure to risks. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the FHLBNY), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The FHLBNY is evaluating the impact of this pronouncement on its financial statements, results of operations and cash flows, which is not expected to be significant.
211
Federal Home Loan Bank of New York
Notes to Financial Statements
Accounting for Transfers of Financial Assets —On June 12, 2009, the FASB issued guidance, which is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Key provisions of the guidance include: (i) the removal of the concept of qualifying special purpose entities: (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred; and (iii) the requirement that to qualify for sale accounting, the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. The guidance also requires enhanced disclosures about transfers of financial assets and the transferor’s continuing involvement. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the FHLBNY), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The FHLBNY is evaluating the effect of the adoption of this guidance on its financial condition, results of operations and cash flows, which is not expected to be significant.
Codification of Accounting Standards —On June 29, 2009, the FASB established FASB’s Accounting Standards Codification (“Codification”) as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. The Codification is effective for interim and annual periods ending after September 15, 2009. The FHLBNY adopted the Codification for the period ended September 30, 2009. As the Codification is not intended to change or alter previous GAAP, its adoption did not affect the FHLBNY’s financial condition, results of operations or cash flows.
Subsequent Events —On February 25, 2010, the FASB issued final guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued (FASB ASC 855-10). This guidance sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. This guidance is effective for interim and annual financial periods ending after June 15, 2009. The FHLBNY adopted this guidance in the quarter ended June 30, 2009. Its adoption resulted in additional disclosures in the financial statements in Form 10-Q for the interim periods ended June 30, 2009 and September 30, 2009. For more information, see Note 22 — Subsequent events.
Enhanced Disclosures about Derivative Instruments and Hedging Activities —On March 19, 2008, the FASB issued guidance which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows (FASB ASC 815-10-65-1). The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009 for the FHLBNY). Since the new guidance only requires additional disclosures concerning derivatives and hedging activities, its adoption as of January 1, 2009 did not have an effect on our financial condition, results of operations or cash flows. The expanded disclosures related to this guidance are included in Note 17 — Derivatives and hedging activities.
212
Federal Home Loan Bank of New York
Notes to Financial Statements
In September 2008, the FASB issued guidance to require enhanced disclosures about credit derivatives and guarantees and amend the existing guidance on guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others (FASB ASC 460-10) to exclude credit derivative instruments accounted for at fair value under the accounting standard for derivatives and hedge accounting (FASB ASC 815-10). The new guidance is effective for financial statements issued for reporting periods ending after November 15, 2008. Since the new guidance only requires additional disclosures concerning credit derivatives and guarantees, its adoption as of January 1, 2009 did not have an effect on our financial condition, results of operations or cash flows.
Recognition and Presentation of Other-Than-Temporary Impairments —On April 9, 2009, the FASB issued guidance for recognition and presentation of other-than-temporary impairment (OTTI) (FASB ASC 320-10-65-1). The new guidance is intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. The guidance applies to debt securities and requires that the total OTTI be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income (loss), which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income (loss) if an investor can assert that (a) it does not have the intent to sell, or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery, and (c) it expects to recover the amortized cost basis of the security. The guidance was applicable for all entities beginning with the quarter ended June 30, 2009, with earlier adoption at January 1, 2009 permitted. The FHLBNY early adopted this guidance at January 1, 2009, and has recorded OTTI on its securities under the new rules. No cumulative effect transition adjustment was recorded since the FHLBNY had no OTTI securities prior to 2009. The expanded disclosures related to the new guidance are included in Note 4 - Held-to-maturity securities and Note 5 — Available-for-sale securities.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly —On April 9, 2009, the FASB issued guidance, which clarifies the approach to, and provides additional factors to consider in estimating fair value when the volume and level of activity for the asset or liability have significantly decreased (FASB ASC 820-10-65-4). It also includes guidance on identifying circumstances that indicate a transaction is not orderly. The guidance is effective and should be applied prospectively for financial statements issued for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for reporting periods ending after March 15, 2009. If an entity elected to early adopt this guidance, it must also have concurrently adopted the OTTI guidance. The FHLBNY elected to early adopt this guidance effective January 1, 2009. The enhanced disclosures related to this guidance are included in Note 18 — Fair Values of financial instruments.
Reclassifications
Certain amounts in the 2008 and 2007 financial statements have been reclassified to conform to the 2009 presentation.
213
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 2. Cash and due from banks
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Banks are included in cash and due from banks.
Compensating balances
The Bank maintained average required clearing balances with the Federal Reserve Banks of approximately $1.0 million for the years ended December 31, 2009 and 2008. 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 $29.3 million and $31.0 million as of December 31, 2009 and 2008. The Bank includes member reserve balances in Other liabilities in the Statements of Condition.
Note 3. Interest-bearing deposits
In October 2008, the Board of Governors of the Federal Reserve System directed the Federal Reserve Banks (“FRB”) to pay interest on balances in excess of certain required reserve and clearing balances. The formula for calculating interest earned is based on average excess balances over the calculation period; rates are generally tied to the Federal funds rate. At December 31, 2008, the Bank had invested $12.2 billion in excess balances placed with the FRB as interest-bearing deposit. Effective July 2, 2009, the FHLBNY no longer collected interest on excess balances with the FRB. The FRB will pay interest only on required reserves. At December 31, 2009, the cash at the FRB was classified as Cash and Due from Banks as the balances did not earn interest.
Note 4. Held-to-maturity securities
Held-to-maturity securities consist of mortgage- and asset-backed securities (collectively mortgage-backed securities or “MBS”), state and local housing finance agency bonds, and short-term certificates of deposits issued by highly rated banks and financial institutions.
At December 31, 2009 and 2008, the FHLBNY had pledged MBS with an amortized cost basis of $2.0 million and $2.7 million to the FDIC in connection with deposits maintained by the FDIC at the FHLBNY.
214
Federal Home Loan Bank of New York
Notes to Financial Statements
Mortgage-backed securities— The FHLBNY’s investments in MBS are predominantly government sponsored enterprise issued securities. The carrying value of investments in mortgage-backed securities issued by Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”) (together, government sponsored enterprises or “GSEs”) and a U.S. government agency at December 31, 2009 was $8.7 billion, or 89.1% of the total MBS classified as held-to-maturity. The comparable carrying value of GSE issued MBS at December 31, 2008 was $7.6 billion, or 81.3% of total MBS classified as held-to-maturity. The carrying value (amortized cost less non-credit component of OTTI) of privately issued mortgage- and asset-backed securities at December 31, 2009 and 2008 was $1.1 billion and $1.7 billion. Privately issued MBS primarily included asset-backed securities, mortgage pass-throughs and Real Estate Mortgage Investment Conduit bonds, and securities supported by manufactured housing loans.
Certificates of deposits— Investments in certificates of deposit are also classified as held-to-maturity. All such investments mature within one year. There was no investment in certificates of deposits at December 31, 2009. The amortized cost basis of certificates of deposit was $1.2 billion at December 31, 2008.
State and local housing finance agency bonds— Investments in primary public and private placements of taxable obligations of state and local housing finance authorities (“HFA”) were classified as held-to-maturity and the amortized cost basis was $751.8 million and $804.1 million at December 31, 2009 and 2008.
215
Federal Home Loan Bank of New York
Notes to Financial Statements
Major Security Types
Amortized cost basis, as defined under the recently issued guidance on recognition and presentation of other-than-temporary impairment, includes adjustments made to the cost of an investment for accretion, amortization, collection of cash, and fair value hedge accounting adjustments. If a held-to-maturity security is determined to be OTTI, the amortized cost basis of the security is adjusted for previous OTTI recognized in earnings. Amortized cost basis of a held-to-maturity OTTI security is further adjusted for impairment related to all other factors (also referred to as the non-credit component of OTTI) recognized in AOCI, and the adjusted amortized cost basis is the carrying value of the OTTI security reported in the Statements of Condition. Carrying value of a held-to-maturity security that is not OTTI is its amortized cost basis.
The amortized cost basis, the gross unrecognized holding gains and losses, the fair values of held-to-maturity securities, and OTTI recognized in AOCI were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Amortized | | | | | | | | | | | Gross | | | Gross | | | | |
| | | Cost | | | OTTI | | | Carrying | | | Unrecognized | | | Unrecognized | | | Fair | |
| Issued, guaranteed or insured: | | Basis | | | in OCI | | | Value | | | Holding Gains | | | Holding Losses | | | Value | |
Pools of Mortgages | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 1,137,514 | | | $ | — | | | $ | 1,137,514 | | | $ | 38,378 | | | $ | — | | | $ | 1,175,892 | |
| Freddie Mac | | | 335,368 | | | | — | | | | 335,368 | | | | 12,903 | | | | — | | | | 348,271 | |
| | | | | | | | | | | | | | | | | | | |
| Total pools of mortgages | | | 1,472,882 | | | | — | | | | 1,472,882 | | | | 51,281 | | | | — | | | | 1,524,163 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 2,609,254 | | | | — | | | | 2,609,254 | | | | 70,222 | | | | (2,192 | ) | | | 2,677,284 | |
| Freddie Mac | | | 4,400,003 | | | | — | | | | 4,400,003 | | | | 128,952 | | | | (3,752 | ) | | | 4,525,203 | |
| Ginnie Mae | | | 171,531 | | | | — | | | | 171,531 | | | | 245 | | | | (1,026 | ) | | | 170,750 | |
| | | | | | | | | | | | | | | | | | | |
| Total CMOs/REMICs | | | 7,180,788 | | | | — | | | | 7,180,788 | | | | 199,419 | | | | (6,970 | ) | | | 7,373,237 | |
| | | | | | | | | | | | | | | | | | | |
Ginnie Mae-CMBS | | | 49,526 | | | | — | | | | 49,526 | | | | 62 | | | | — | | | | 49,588 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GSE MBS | | | | | | | | | | | | | | | | | | | | | | | | |
| CMOs/REMICs | | | 447,367 | | | | (2,461 | ) | | | 444,906 | | | | 2,437 | | | | (7,833 | ) | | | 439,510 | |
| Commercial MBS | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total non-federal-agency MBS | | | 447,367 | | | | (2,461 | ) | | | 444,906 | | | | 2,437 | | | | (7,833 | ) | | | 439,510 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Asset-Backed Securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing (insured) | | | 202,278 | | | | — | | | | 202,278 | | | | — | | | | (37,101 | ) | | | 165,177 | |
| Home equity loans (insured) | | | 307,279 | | | | (79,445 | ) | | | 227,834 | | | | 12,795 | | | | (25,136 | ) | | | 215,493 | |
| Home equity loans (uninsured) | | | 217,981 | | | | (28,664 | ) | | | 189,317 | | | | 3,436 | | | | (34,804 | ) | | | 157,949 | |
| | | | | | | | | | | | | | | | | | | |
| Total asset-backed securities | | | 727,538 | | | | (108,109 | ) | | | 619,429 | | | | 16,231 | | | | (97,041 | ) | | | 538,619 | |
| | | | | | | | | | | | | | | | | | | |
| Total MBS | | $ | 9,878,101 | | | $ | (110,570 | ) | | $ | 9,767,531 | | | $ | 269,430 | | | $ | (111,844 | ) | | $ | 9,925,117 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | | | | | | | |
| State and local housing finance agency obligations | | $ | 751,751 | | | $ | — | | | $ | 751,751 | | | $ | 3,430 | | | $ | (11,046 | ) | | $ | 744,135 | |
| Certificates of deposit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total other | | $ | 751,751 | | | $ | — | | | $ | 751,751 | | | $ | 3,430 | | | $ | (11,046 | ) | | $ | 744,135 | |
| | | | | | | | | | | | | | | | | | | |
| | |
Total Held-to-maturity securities | | $ | 10,629,852 | | | $ | (110,570 | ) | | $ | 10,519,282 | | | $ | 272,860 | | | $ | (122,890 | ) | | $ | 10,669,252 | |
| | | | | | | | | | | | | | | | | | | |
216
Federal Home Loan Bank of New York
Notes to Financial Statements
| | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Amortized | | | Gross | | | Gross | | | | |
| | | Cost | | | Unrealized | | | Unrealized | | | Fair | |
| Issued, guaranteed or insured: | | Basis | | | Holding Gains | | | Holding Losses | | | Value | |
Pools of Mortgages | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 1,400,058 | | | $ | 26,789 | | | $ | — | | | $ | 1,426,847 | |
| Freddie Mac | | | 422,088 | | | | 7,860 | | | | — | | | | 429,948 | |
| | | | | | | | | | | | | |
| Total pools of mortgages | | | 1,822,146 | | | | 34,649 | | | | — | | | | 1,856,795 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 2,032,051 | | | | 51,138 | | | | (125 | ) | | | 2,083,064 | |
| Freddie Mac | | | 3,722,840 | | | | 101,595 | | | | (30 | ) | | | 3,824,405 | |
| Ginnie Mae | | | 6,325 | | | | — | | | | (187 | ) | | | 6,138 | |
| | | | | | | | | | | | | |
| Total CMOs/REMICs | | | 5,761,216 | | | | 152,733 | | | | (342 | ) | | | 5,913,607 | |
| | | | | | | | | | | | | |
Non-GSE MBS | | | | | | | | | | | | | | | | |
| CMOs/REMICs | | | 609,907 | | | | — | | | | (42,706 | ) | | | 567,201 | |
| Commercial mortgage-backed securities | | | 266,994 | | | | 149 | | | | (127 | ) | | | 267,016 | |
| | | | | | | | | | | | | |
| Total non-federal-agency MBS | | | 876,901 | | | | 149 | | | | (42,833 | ) | | | 834,217 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Asset-Backed Securities | | | | | | | | | | | | | | | | |
| Manufactured housing (insured) | | | 229,714 | | | | — | | | | (75,418 | ) | | | 154,296 | |
| Home equity loans (insured) | | | 376,587 | | | | — | | | | (144,957 | ) | | | 231,630 | |
| Home equity loans (uninsured) | | | 259,879 | | | | — | | | | (79,112 | ) | | | 180,767 | |
| | | | | | | | | | | | | |
| Total asset-backed securities | | | 866,180 | | | | — | | | | (299,487 | ) | | | 566,693 | |
| | | | | | | | | | | | | |
| Total mortgage-backed securities | | $ | 9,326,443 | | | $ | 187,531 | | | $ | (342,662 | ) | | $ | 9,171,312 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | |
| State and local housing finance agency obligations | | $ | 804,100 | | | $ | 6,573 | | | $ | (47,512 | ) | | $ | 763,161 | |
| Certificates of deposit | | | 1,203,000 | | | | 328 | | | | — | | | | 1,203,328 | |
| | | | | | | | | | | | | |
| Total other | | $ | 2,007,100 | | | $ | 6,901 | | | $ | (47,512 | ) | | $ | 1,966,489 | |
| | | | | | | | | | | | | |
| | |
Total Held-to-maturity securities | | $ | 11,333,543 | | | $ | 194,432 | | | $ | (390,174 | ) | | $ | 11,137,801 | |
| | | | | | | | | | | | | |
217
Federal Home Loan Bank of New York
Notes to Financial Statements
Unrealized Losses
The following tables summarize held-to-maturity securities with fair values below their amortized cost basis. The fair values and gross unrealized holding losses are aggregated by major security type and by the length of time individual securities have been in a continuous unrealized loss position as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Less than 12 months | | | 12 months or more | | | Total | |
| | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | |
| | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
Non-MBS Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | |
| State and local housing finance agency obligations | | $ | 212,112 | | | $ | (8,611 | ) | | $ | 43,955 | | | $ | (2,435 | ) | | $ | 256,067 | | | $ | (11,046 | ) |
| | | | | | | | | | | | | | | | | | | |
Total Non-MBS | | | 212,112 | | | | (8,611 | ) | | | 43,955 | | | | (2,435 | ) | | | 256,067 | | | | (11,046 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
MBS Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | |
MBS — Other US Obligations | | | | | | | | | | | | | | | | | | | | | | | | |
| Ginnie Mae | | | 122,359 | | | | (1,020 | ) | | | 2,274 | | | | (6 | ) | | | 124,633 | | | | (1,026 | ) |
MBS-GSE | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 780,645 | | | | (2,192 | ) | | | — | | | | — | | | | 780,645 | | | | (2,192 | ) |
| Freddie Mac | | | 814,881 | | | | (3,752 | ) | | | — | | | | — | | | | 814,881 | | | | (3,752 | ) |
| | | | | | | | | | | | | | | | | | | |
Total MBS-GSE | | | 1,595,526 | | | | (5,944 | ) | | | — | | | | — | | | | 1,595,526 | | | | (5,944 | ) |
| | | | | | | | | | | | | | | | | | | |
MBS-Private-Label | | | 113,140 | | | | (1,523 | ) | | | 765,445 | | | | (196,134 | ) | | | 878,585 | | | | (197,657 | ) |
| | | | | | | | | | | | | | | | | | | |
Total MBS | | | 1,831,025 | | | | (8,487 | ) | | | 767,719 | | | | (196,140 | ) | | | 2,598,744 | | | | (204,627 | ) |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,043,137 | | | $ | (17,098 | ) | | $ | 811,674 | | | $ | (198,575 | ) | | $ | 2,854,811 | | | $ | (215,673 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Less than 12 months | | | 12 months or more | | | Total | |
| | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | |
| | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
Non-MBS Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | |
| State and local housing finance agency obligations | | $ | 78,261 | | | $ | (16,065 | ) | | $ | 84,108 | | | $ | (31,447 | ) | | $ | 162,369 | | | $ | (47,512 | ) |
| | | | | | | | | | | | | | | | | | | |
Total Non-MBS | | | 78,261 | | | | (16,065 | ) | | | 84,108 | | | | (31,447 | ) | | | 162,369 | | | | (47,512 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
MBS Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | |
MBS — Other US Obligations | | | | | | | | | | | | | | | | | | | | | | | | |
| Ginnie Mae | | | 6,137 | | | | (187 | ) | | | — | | | | — | | | | 6,137 | | | | (187 | ) |
MBS-GSE | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | | 3,452 | | | | (125 | ) | | | — | | | | — | | | | 3,452 | | | | (125 | ) |
| Freddie Mac | | | 1,102 | | | | (30 | ) | | | 32 | | | | — | | | | 1,134 | | | | (30 | ) |
| | | | | | | | | | | | | | | | | | | |
Total MBS-GSE | | | 4,554 | | | | (155 | ) | | | 32 | | | | — | | | | 4,586 | | | | (155 | ) |
| | | | | | | | | | | | | | | | | | | |
MBS-Private-Label | | | 509,273 | | | | (115,061 | ) | | | 718,321 | | | | (227,259 | ) | | | 1,227,594 | | | | (342,320 | ) |
| | | | | | | | | | | | | | | | | | | |
Total MBS | | | 519,964 | | | | (115,403 | ) | | | 718,353 | | | | (227,259 | ) | | | 1,238,317 | | | | (342,662 | ) |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 598,225 | | | $ | (131,468 | ) | | $ | 802,461 | | | $ | (258,706 | ) | | $ | 1,400,686 | | | $ | (390,174 | ) |
| | | | | | | | | | | | | | | | | | | |
218
Federal Home Loan Bank of New York
Notes to Financial Statements
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.
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Amortized | | | Estimated | | | Amortized | | | Estimated | |
| | | Cost | | | Fair Value | | | Cost | | | Fair Value | |
| State and local housing finance agency obligations | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | 2,820 | | | $ | 2,869 | | | $ | — | | | $ | — | |
| Due after one year through five years | | | 9,315 | | | | 9,338 | | | | 17,665 | | | | 18,209 | |
| Due after five years through ten years | | | 62,065 | | | | 62,766 | | | | 60,400 | | | | 55,060 | |
| Due after ten years | | | 677,551 | | | | 669,162 | | | | 726,035 | | | | 689,892 | |
| | | | | | | | | | | | | |
| State and local housing finance agency obligations | | | 751,751 | | | | 744,135 | | | | 804,100 | | | | 763,161 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | |
| Due in one year or less | | | — | | | | — | | | | 257,999 | | | | 258,120 | |
| Due after one year through five years | | | 2,661 | | | | 2,645 | | | | — | | | | — | |
| Due after five years through ten years | | | 1,140,154 | | | | 1,172,718 | | | | 1,142,000 | | | | 1,149,541 | |
| Due after ten years | | | 8,735,286 | | | | 8,749,754 | | | | 7,926,444 | | | | 7,763,651 | |
| | | | | | | | | | | | | |
| Mortgage-backed securities | | | 9,878,101 | | | | 9,925,117 | | | | 9,326,443 | | | | 9,171,312 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Certificates of deposit | | | | | | | | | | | | | | | | |
| Due in one year or less | | | — | | | | — | | | | 1,203,000 | | | | 1,203,328 | |
| | | | | | | | | | | | | |
| Certificates of deposit | | | — | | | | — | | | | 1,203,000 | | | | 1,203,328 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total Held-to-maturity securities | | $ | 10,629,852 | | | $ | 10,669,252 | | | $ | 11,333,543 | | | $ | 11,137,801 | |
| | | | | | | | | | | | | |
The amortized cost of held-to-maturity securities included discounts of $29.8 million ($38.3 million at December 31, 2008) and premiums of $14.9 million ($18.5 million at December 31, 2008). In 2009, accretion of $6.4 million, net of amortization, was recorded to interest income. In 2008 and 2007, amortization expenses, net of accretion were charges to interest income of $1.8 million and $1.9 million.
219
Federal Home Loan Bank of New York
Notes to Financial Statements
Interest rate payment terms
The following table summarizes interest rate payment terms of long-term securities classified as held-to-maturity (in thousands):
| | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Amortized | | | OTTI | | | Carrying | |
| | | Cost Basis | | | in OCI | | | Value | |
Mortgage-backed securities | | | | | | | | | | | | |
CMO | | | | | | | | | | | | |
| Fixed | | $ | 4,281,206 | | | $ | (5,047 | ) | | $ | 4,276,159 | |
| Floating | | | 3,089,976 | | | | — | | | | 3,089,976 | |
| | | | | | | | | | |
| CMO Total | | | 7,371,182 | | | | (5,047 | ) | | | 7,366,135 | |
| | | | | | | | | | | | | |
Pass Thru | | | | | | | | | | | | |
| Fixed | | | 2,396,776 | | | | (104,146 | ) | | | 2,292,630 | |
| Floating | | | 110,143 | | | | (1,377 | ) | | | 108,766 | |
| | | | | | | | | | |
| Pass Thru Total | | | 2,506,919 | | | | (105,523 | ) | | | 2,401,396 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total MBS | | | 9,878,101 | | | | (110,570 | ) | | | 9,767,531 | |
| | | | | | | | | | |
| | |
State and local housing finance agency obligations | | | | | | | | | | | | |
| Fixed | | | 173,781 | | | | — | | | | 173,781 | |
| Floating | | | 577,970 | | | | — | | | | 577,970 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | 751,751 | | | | — | | | | 751,751 | |
| | | | | | | | | | |
Total Held-to-maturity securities | | $ | 10,629,852 | | | $ | (110,570 | ) | | $ | 10,519,282 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Amortized | | | OTTI | | | Carrying | |
| | | Cost Basis1 | | | in OCI | | | Value | |
Mortgage-backed securities | | | | | | | | | | | | |
CMO | | | | | | | | | | | | |
| Fixed | | $ | 6,213,857 | | | $ | — | | | $ | 6,213,857 | |
| Floating | | | 17,406 | | | | — | | | | 17,406 | |
| | | | | | | | | | |
| CMO Total | | | 6,231,263 | | | | — | | | | 6,231,263 | |
| | | | | | | | | | | | | |
Pass Thru | | | | | | | | | | | | |
| Fixed | | | 2,960,477 | | | | — | | | | 2,960,477 | |
| Floating | | | 134,703 | | | | — | | | | 134,703 | |
| | | | | | | | | | |
| Pass Thru Total | | | 3,095,180 | | | | — | | | | 3,095,180 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total MBS | | | 9,326,443 | | | | — | | | | 9,326,443 | |
| | | | | | | | | | |
| | |
State and local housing finance agency obligations | | | | | | | | | | | | |
| Fixed | | | 240,820 | | | | — | | | | 240,820 | |
| Floating | | | 563,280 | | | | — | | | | 563,280 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | 804,100 | | | | — | | | | 804,100 | |
| | | | | | | | | | |
Total Held-to-maturity securities | | $ | 10,130,543 | | | $ | — | | | $ | 10,130,543 | |
| | | | | | | | | | |
| | | |
| 1 | | Does not include short-term investments classified as HTM. |
220
Federal Home Loan Bank of New York
Notes to Financial Statements
Impairment analysis of GSE issued securities— The FHLBNY evaluates its individual securities issued by Fannie Mae, Freddie Mac and a government agency by considering the creditworthiness and performance of the debt securities and the strength of the GSE’s guarantees of the securities. Based on the Bank’s analysis, GSE and agency issued securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE and agency issued securities given the current levels of collateral, credit enhancements and guarantees that exist to protect the investments.
Impairment analysis of held-to-maturity non-agency private-label mortgage- and asset-backed securities (“PLMBS”) —To assess whether the entire amortized cost bases of the Bank’s private-label MBS will be recovered, the Bank performed cash flow analysis for 100 percent of the FHLBNY’s private-label MBS outstanding at December 31, 2009, including private-label MBS that were determined to be other-than-temporarily impaired in previous reporting periods in 2009.
Year ended December 31, 2008— The Bank did not experience any OTTI during 2008 or 2007. At December 31, 2008, the FHLBNY’s screening and monitoring process, which included pricing, credit rating and credit enhancement coverage, had identified 21 private-label MBS with weak performance measures indicating the possibility of OTTI. Bonds selected through the screening process were cash flow tested for credit impairment. Fourteen of the securities were determined to be impaired absent bond insurer support to meet scheduled cash flows in the future. Based on financial analysis of the bond insurers at December 31, 2008, it was determined that Ambac Assurance Corp. (“Ambac”) and MBIA Insurance Corp. (“MBIA”) had the ability to meet future claims, and the 14 bonds were determined to be credit-protected by the two insurers, and no OTTI charge was deemed necessary. The remaining securities were considered to be only temporarily impaired based on cash flow analysis at December 31, 2008.
Year ended December 31, 2009— In the interim periods ended March 31, 2009 and June 30, 2009, the FHLBNY had employed its screening procedures and identified private-label MBS with weak performance measures. Bonds selected through the screening process were cash flow tested for credit impairment. In the third quarter of 2009 and at December 31, 2009, the FHLBNY cash flow tested 100 percent of its private-label MBS to identify credit impairment.
Private-label mortgage-backed securities that are insured by monoline insurers were also cash flow tested for credit impairment at December 31, 2009, including monoline insured securities that were previously determined to be credit impaired. Predicting when bond insurers may no longer have the ability to perform under their contractual agreements is a key impairment measurement parameter which the FHLBNY continually adjusts to factor the changing operating conditions at Ambac and MBIA. In a series of rating actions in 2009, MBIA and Ambac have been downgraded to below investment grade. Financial information, cash flows and results of operations from the two monolines have been closely monitored and analyzed by the management of FHLBNY. In each subsequent interim period, the FHLBNY management has incrementally shortened the period it believes the two monolines can continue to provide insurance support as a result of the changing operating conditions at Ambac and MBIA, and the FHLBNY’s analysis had estimated that the period of support to be no more than 18 months at December 31, 2009. The FHLBNY performs this analysis and makes a re-evaluation of the bond insurance support period quarterly. Changes to these and other key assumptions may result in materially different outcomes and the realization of additional other-than-temporary impairment charges in the future.
221
Federal Home Loan Bank of New York
Notes to Financial Statements
Certain uninsured bonds were also determined to be credit impaired based on cash flow shortfall in the interim periods of 2009. In many instances, the FHLBNY’s cash flow analysis observed additional credit impairment also referred to as credit re-impairments. Observed historical performance parameters of certain securities had deteriorated in 2009, and these factors had increased loss severities in the cash flow analyses of those private-label MBS. Recorded cumulative credit impairment of uninsured and insured securities during 2009 is summarized in the table below.
The table below summarizes the key characteristics of the impact of securities determined to be OTTI during 2009, including securities determined to be OTTI in the fourth quarter of 2009 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, 2009 | | | As of December 31, 2009 | |
| | | | | | | Insurer MBIA | | | Insurer Ambac | | | Uninsured | | | OTTI | | | Gross Unrecognized Losses | |
| Security | | | | | | | | | | Fair | | | | | | | Fair | | | | | | | Fair | | | Credit | | | Non-credit | | | Less than | | | More than | |
| Classification | | Count | | | UPB | | | Value | | | UPB | | | Value | | | UPB | | | Value | | | Loss | | | Loss | | | 12 months | | | 12 months | |
RMBS-Prime* | | | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 54,295 | | | $ | 51,715 | | | $ | (438 | ) | | $ | (2,766 | ) | | $ | (1,187 | ) | | $ | — | |
HEL Subprime* | | | 16 | | | | 34,425 | | | | 17,161 | | | | 198,532 | | | | 127,470 | | | | 80,774 | | | | 53,783 | | | | (20,378 | ) | | | (117,330 | ) | | | — | | | | (13,674 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 17 | | | $ | 34,425 | | | $ | 17,161 | | | $ | 198,532 | | | $ | 127,470 | | | $ | 135,069 | | | $ | 105,498 | | | $ | (20,816 | ) | | $ | (120,096 | ) | | $ | (1,187 | ) | | $ | (13,674 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| * | | RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans. |
The table below summarizes the key characteristics of the securities that were deemed OTTI in the fourth quarter of 2009 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Q4 2009 activity | | | As of December 31, 2009 | |
| | | | | | | Insurer MBIA | | | Insurer Ambac | | | Uninsured | | | OTTI | | | Gross Unrecognized Losses | |
| Security | | | | | | | | | | Fair | | | | | | | Fair | | | | | | | Fair | | | Credit | | | Non-credit | | | Less than | | | More than | |
| Classification | | Count | | | UPB | | | Value | | | UPB | | | Value | | | UPB | | | Value | | | Loss | | | Loss | | | 12 months | | | 12 months | |
RMBS-Prime* | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
HEL Subprime* | | | 8 | | | | — | | | | — | | | | 89,092 | | | | 53,027 | | | | 20,118 | | | | 12,874 | | | | (6,540 | ) | | | (16,212 | ) | | | — | | | | (2,663 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 8 | | | $ | — | | | $ | — | | | $ | 89,092 | | | $ | 53,027 | | | $ | 20,118 | | | $ | 12,874 | | | $ | (6,540 | ) | | $ | (16,212 | ) | | $ | — | | | $ | (2,663 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| * | | RMBS-Prime — Private-label MBS supported by prime residential loans; HEL Subprime — MBS supported by home equity loans. |
Based on the results of its cash flow analyses of 100 percent of its held-to-maturity private-label MBS in the fourth quarter of 2009, the FHLBNY determined that it was likely that it will not fully recover the amortized cost of eight of its private-label MBS and, accordingly, these securities were deemed to be OTTI at December 31, 2009.
The eight credit impaired securities included six securities that had been credit impaired in previous quarters of 2009. At December 31, 2009, the total unpaid principal balance of the six securities was $64.6 million and the carrying value prior to impairment was $36.0 million. The additional credit impairment charge recorded at December 31, 2009 for the six securities was $5.8 million. Five of the six securities are insured by bond insurer Ambac. The total unpaid principal balance of the five insured securities was $60.8 million and the carrying value prior to impairment was $33.8 million. The Bank’s analysis of Ambac’s resources and its claim paying ability resulted in the shortening of the length of time to 18 months over which the Bank estimates that Ambac’s claims-paying resource could sustain Ambac’s insurance losses, and additional credit losses were recognized on the five securities insured by Ambac.
The cash flow analysis at December 31, 2009 also identified two securities that were previously not determined to be OTTI. Credit impairment was $0.7 million, and non-credit OTTI was $16.2 million; unpaid principal balance and carrying value prior to impairment was $44.6 million; carrying value after OTTI was $27.7 million, which is the fair value of the two securities at December 31, 2009, the date of the write-down.
222
Federal Home Loan Bank of New York
Notes to Financial Statements
The table below summarizes the weighted average and range of Key Base Assumptions for securities determined to be OTTI in 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Key Base Assumption — OTTI Securities | |
| | | CDR | | | CPR | | | Loss Severity % | |
| | | Range | | | Average | | | Range | | | Average | | | Range | | | Average | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
RMBS-Prime* | | | 2.0 | | | | 2.0 | | | | 14.0 | | | | 14.0 | | | | 40.0 | | | | 40.0 | |
HEL Subprime* | | | 3.55-16.80 | | | | 7.7 | | | | 2.00-16.80 | | | | 6.3 | | | | 51.1-100.0 | | | | 86.8 | |
| | | |
| * | | RMBS-Prime — Private-label MBS supported by prime residential loans; |
| |
| | | HEL Subprime — MBS supported by home equity loans. |
| |
| ** | | Conditional Prepayment Rate (CPR): 1-((1-SMM^12) where, SMM is defined as the “Single Monthly Mortality (SMM)” = (Voluntary partial and full prepayments + repurchases + Liquidated Balances)/Beginning Principal Balance — Scheduled Principal). Voluntary prepayment excludes the liquidated balances mentioned above. |
| |
| ** | | Conditional Default Rate (CDR): 1-((1-MDR)^12) where, MDR is defined as the “Monthly Default Rate (MDR)” = (Beginning Principal Balance of Liquidated Loans)/(Total Beginning Principal Balance). |
| |
| ** | | Loss Severity(Principal and interest in the current period) = Sum (Total Realized Loss Amount)/Sum (Beginning Principal and interest Balance of Liquidated Loans). |
| |
| ** | | If the present value of cash flows expected to be collected (discounted at the security’s effective yield) is less than the amortized cost basis of the security, an other-than-temporary impairment is considered to have occurred because the entire amortized cost basis of the security will not be recovered. The Bank considers whether or not it will recover the entire amortized cost of the security by comparing the present value of the cash flows expected to be collected from the security (discounted at the security’s effective yield) with the amortized cost basis of the security. |
Monoline support— The FHLBNY has identified certain MBS that have been determined to be credit impaired despite credit protection from Ambac and MBIA to meet scheduled payments in the future. Cash flows on certain insured securities are currently experiencing cash flow shortfalls. Ambac and MBIA are paying claims in order to meet current cash flow deficiency within the structure of the securities.
Monoline Analysis and Methodology —The two monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. A rating downgrade implies an increased risk that the insurer will fail to fulfill its obligations to reimburse the investor for claims under the insurance policies. Monoline insurers are segmented into two categories of claims paying ability — (1) Adequate, and (2) At Risk. These categories represent an assessment of an insurer’s ability to perform as a financial guarantor.
Adequate.Monolines determined to possess “adequate” claims paying ability are expected to provide full protection on their insured private-label mortgage-backed securities. Accordingly, bonds insured by monolines with adequate ability to cover written insurance are run with full financial guarantee set to “on” in the cashflow model.
At Risk.For monolines with at risk coverage, further analysis is performed to establish an expected case regarding the time horizon of the monoline’s ability to fulfill its financial obligations and provide credit support. Accordingly, bonds insured by monolines in the at risk category are run with a partial financial guarantee in the cashflow model. This partial claim paying condition is expressed in the cashflow model by specifying a “guarantee ignore” date. The ignore date is based on the “burnout period” calculation method.
223
Federal Home Loan Bank of New York
Notes to Financial Statements
Burnout Period.The projected time horizon of credit protection provided by an insurer is a function of claims paying resources and anticipated claims in the future. This assumption is referred to as the “burnout period” and is expressed in months, and is computed by dividing each (a) insurers’ total claims paying resources by the (b) “burnout rate” projection. This variable uses monthly or aggregate dollar amount of claims each insurer has paid most recently, and additional qualitative information pertinent to the financial guarantor.
Based on the methodology, the Bank has classified FSA (name changed in 2009 to Assured Guaranty Municipal Corp.) as adequate, and MBIA and Ambac as “at risk”. The Bank analyzed the going-concern basis of Ambac and MBIA and their financial strength to perform with respect to their contractual obligations for the securities owned by the FHLBNY; the monolines are currently performing under the terms of their contractual agreements with respect to the FHLBNY’s insured bonds. However, estimation of an insurer’s financial strength to remain viable over a long time horizon requires significant judgment and assumptions. Predicting when the insurers may no longer have the ability to perform under their contractual agreements, then comparing the timing and amounts of cash flow shortfalls of securities that are credit impaired to when insurer protection may not be available, and determining credit impairment requires significant judgment.
The monoline analysis methodology resulted in the following “Protection time horizon” dates for Ambac and MBIA during 2009:
| | | | | | | | | |
| | | Protection time horizon calculation | |
| | | Ambac | | | MBIA | |
December 31, 2009 | | | | | | | | |
| Burnout period (months) | | | 18 | | | | 18 | |
| Coverage ignore date | | | 6/30/2011 | | | | 6/30/2011 | |
| | | | | | | | | |
September 30, 2009 | | | | | | | | |
| Burnout period (months) | | | 83 | | | | 31 | |
| Coverage ignore date | | | 7/31/2016 | | | | 3/31/2012 | |
| | | | | | | | | |
June 30, 2009 | | | | | | | | |
| Burnout period (months) | | | 105 | | | | 32 | |
| Coverage ignore date | | | 3/1/2018 | | | | 2/1/2012 | |
| | | | | | | | | |
March 31, 2009 | | | | | | | | |
| Burnout period (months) | | | 116 | | | | 50 | |
| Coverage ignore date | | | 11/30/2018 | | | | 5/31/2018 | |
224
Federal Home Loan Bank of New York
Notes to Financial Statements
The following table provides rollforward information of the credit component of OTTI recognized as a charge to earnings related to held-to-maturity securities for which a significant portion of the OTTI (non-credit component) was recognized in AOCI (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
Beginning balance | | $ | — | | | $ | — | |
| | |
| Additions to the credit component for OTTI loss not previously recognized | | | 20,816 | | | | — | |
| Additional credit losses for which an OTTI charge was previously recognized | | | — | | | | — | |
| Increases in cash flows expected to be collected, recognized over the remaining life of the securities | | | — | | | | — | |
| | | | | | | |
| | |
Ending balance | | $ | 20,816 | | | $ | — | |
| | | | | | | |
With respect to the Bank’s remaining investments, the Bank believes no OTTI exists. The Bank’s conclusion is based upon multiple factors: bond issuers’ continued satisfaction of their obligations under the contractual terms of the securities; the estimated performance of the underlying collateral; the evaluation of the fundamentals of the issuers’ financial condition; and the estimated support from the monoline insurers under the contractual terms of insurance. Management has not made a decision to sell such securities at December 31, 2009. Management has also concluded that it is more likely than not that it will not be required to sell such securities before recovery of the amortized cost basis of the securities. Based on factors outlined above, the FHLBNY believes that the remaining securities classified as held-to-maturity were not other-than-temporarily impaired as of December 31, 2009.
However, without recovery in the near term such that liquidity returns to the mortgage-backed securities market and spreads return to levels that reflect underlying credit characteristics, or if the credit losses of the underlying collateral within the mortgage-backed securities perform worse than expected, or if the presumption of the ability of monoline insurers to support the insured securities identified at December 31, 2009 as dependent on insurance is further negatively impacted by the insurers’ future financial performance, additional OTTI may be recognized in future periods.
The FHLBNY evaluated its credit impaired private-label MBS under a base case (or best estimate) scenario, and also performed a cash flow analysis for each of those securities under a more adverse external assumption that forecasted a larger home price decline and a slower rate of housing price recovery. The stress test scenario and associated results do not represent the Bank’s current expectations and therefore should not be construed as a prediction of the Bank’s future results, market conditions or the actual performance of these securities.
The results of the adverse case scenario are presented below alongside the FHLBNY’s expected outcome for the credit impaired securities (the base case) (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | |
| | | For the year ended December 31, 2009 | |
| | | Actual Results — Base Case HPI Scenario | | | Pro-forma Results — Adverse HPI Scenario | |
| | | # of | | | | | | | OTTI related to | | | OTTI related to | | | # of | | | | | | | OTTI related to | | | OTTI related to | |
| | | Securities | | | UPB | | | credit loss | | | non-credit loss | | | Securities | | | UPB | | | credit loss | | | non-credit loss | |
| RMBS Prime | | | 1 | | | $ | 54,295 | | | $ | 438 | | | $ | 2,461 | | | | 3 | | | $ | 117,571 | | | $ | 699 | | | $ | 4,595 | |
| Alt-A | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| HEL Subprime | | | 16 | | | | 313,731 | | | | 20,378 | | | | 108,109 | | | | 16 | | | | 313,731 | | | | 23,163 | | | | 105,324 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 17 | | | $ | 368,026 | | | $ | 20,816 | | | $ | 110,570 | | | | 19 | | | $ | 431,302 | | | $ | 23,862 | | | $ | 109,919 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
225
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 5. Available-for-sale securities
Major Security types— The unamortized cost, gross unrealized gains, losses, and the fair value of investments classified as available-for-sale were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Amortized | | | | | | | | | | | Gross | | | Gross | | | | |
| | | Cost | | | OTTI | | | Carrying | | | Unrealized | | | Unrealized | | | Fair | |
| | | Basis | | | in OCI | | | Value | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash equivalents | | $ | 1,230 | | | $ | — | | | $ | 1,230 | | | $ | — | | | $ | — | | | $ | 1,230 | |
| Equity funds | | | 8,995 | | | | — | | | | 8,995 | | | | 57 | | | | (1,561 | ) | | | 7,491 | |
| Fixed income funds | | | 3,672 | | | | — | | | | 3,672 | | | | 196 | | | | — | | | | 3,868 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| CMO-Floating | | | 2,242,665 | | | | — | | | | 2,242,665 | | | | 6,937 | | | | (9,038 | ) | | | 2,240,564 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,256,562 | | | $ | — | | | $ | 2,256,562 | | | $ | 7,190 | | | $ | (10,599 | ) | | $ | 2,253,153 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Amortized | | | | | | | | | | | Gross | | | Gross | | | | |
| | | Cost | | | OTTI | | | Carrying | | | Unrealized | | | Unrealized | | | Fair | |
| | | Basis | | | in OCI | | | Value | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash equivalents | | $ | 835 | | | $ | — | | | $ | 835 | | | $ | — | | | $ | — | | | $ | 835 | |
| Equity funds | | | 8,978 | | | | — | | | | 8,978 | | | | — | | | | (3,516 | ) | | | 5,462 | |
| Fixed income funds | | | 3,833 | | | | — | | | | 3,833 | | | | 66 | | | | (10 | ) | | | 3,889 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| CMO-Floating | | | 2,912,643 | | | | — | | | | 2,912,643 | | | | 364 | | | | (61,324 | ) | | | 2,851,683 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,926,289 | | | $ | — | | | $ | 2,926,289 | | | $ | 430 | | | $ | (64,850 | ) | | $ | 2,861,869 | |
| | | | | | | | | | | | | | | | | | | |
There were no AFS mortgage-backed securities supported by commercial loans at December 31, 2009 and 2008.
Unrealized Losses — MBS securities classified as available-for-sale securities (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Less than 12 months | | | 12 months or more | | | Total | |
| | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | |
| | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
MBS-GSE | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | — | | | $ | — | | | $ | 1,006,860 | | | $ | (6,394 | ) | | $ | 1,006,860 | | | $ | (6,394 | ) |
| Freddie Mac | | | — | | | | — | | | | 662,237 | | | | (2,644 | ) | | | 662,237 | | | | (2,644 | ) |
| | | | | | | | | | | | | | | | | | | |
Total MBS-GSE | | | — | | | | — | | | | 1,669,097 | | | | (9,038 | ) | | | 1,669,097 | | | | (9,038 | ) |
| | | | | | | | | | | | | | | | | | | |
Total Temporarily Impaired | | $ | — | | | $ | — | | | $ | 1,669,097 | | | $ | (9,038 | ) | | $ | 1,669,097 | | | $ | (9,038 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Less than 12 months | | | 12 months or more | | | Total | |
| | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | |
| | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
MBS-GSE | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae | | $ | 1,662,928 | | | $ | (35,047 | ) | | $ | 142,630 | | | $ | (3,539 | ) | | $ | 1,805,558 | | | $ | (38,586 | ) |
| Freddie Mac | | | 957,617 | | | | (21,744 | ) | | | 39,077 | | | | (994 | ) | | | 996,694 | | | | (22,738 | ) |
| | | | | | | | | | | | | | | | | | | |
Total MBS-GSE | | | 2,620,545 | | | | (56,791 | ) | | | 181,707 | | | | (4,533 | ) | | | 2,802,252 | | | | (61,324 | ) |
| | | | | | | | | | | | | | | | | | | |
Total Temporarily Impaired | | $ | 2,620,545 | | | $ | (56,791 | ) | | $ | 181,707 | | | $ | (4,533 | ) | | $ | 2,802,252 | | | $ | (61,324 | ) |
| | | | | | | | | | | | | | | | | | | |
226
Federal Home Loan Bank of New York
Notes to Financial Statements
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, previous OTTI recognized in earnings and/or fair value hedge accounting adjustments. There were no AFS securities determined to be OTTI at December 31, 2009 or 2008. No AFS securities were hedged at December 31, 2009 and 2008. Amortization of discounts recorded to income were $5.2 million, $3.8 million, and $0 for the years ended December 31, 2009, 2008, and 2007.
Management of the FHLBNY has concluded that gross unrealized losses at December 31, 2009 and 2008, as summarized in the table above, were caused by interest rate changes, credit spreads widening and reduced liquidity in the applicable markets. The FHLBNY has reviewed the investment security holdings and determined, based on creditworthiness of the securities and including any underlying collateral and/or insurance provisions of the security, that unrealized losses in the analysis above represent temporary impairment.
Impairment analysis on Available-for-sale securities—The Bank’s portfolio of mortgage-backed securities classified as available-for-sale (“AFS”) is comprised entirely of securities issued by GSEs collateralized mortgage obligations which are “pass through” securities. The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac by considering the creditworthiness and performance of the debt securities and the strength of the government-sponsored enterprises’ guarantees of the securities. Based on the Bank’s analysis, GSE securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. The U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE issued securities given the current levels of collateral, credit enhancements, and guarantees that exist to protect the investments. Management has not made a decision to sell such securities at December 31, 2009 or subsequently. Management also concluded that it is more likely than not that it will not be required to sell such securities before recovery of the amortized cost basis of the security. The FHLBNY believes that these securities were not other-than-temporarily impaired as of December 31, 2009 or 2008. The Bank established certain grantor trusts to fund current and future payments under certain supplemental pension plans and these are classified as available-for-sale. The grantor trusts invest in money market, equity and fixed-income and bond funds. Investments in equity and fixed-income funds are redeemable at short notice, and realized gains and losses from investments in the funds were not significant. No available-for-sale-securities had been pledged at December 31, 2009 or 2008.
Redemption terms
The amortized cost and estimated fair value of securities classified as available-for-sale, 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.
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Amortized | | | Fair | | | Amortized | | | Fair | |
| | | Cost Basis | | | Value | | | Cost Basis | | | Value | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | |
| GSE issued Pass-throughs Due after ten years | | $ | 2,242,665 | | | $ | 2,240,564 | | | $ | 2,912,643 | | | $ | 2,851,683 | |
| | | | | | | | | | | | | |
| Fixed income funds, equity funds and cash equivalents* | | | 13,897 | | | | 12,589 | | | | 13,646 | | | | 10,186 | |
| | | | | | | | | | | | | |
| |
Total | | $ | 2,256,562 | | | $ | 2,253,153 | | | $ | 2,926,289 | | | $ | 2,861,869 | |
| | | | | | | | | | | | | |
| | | |
| * | | Determined to be redeemable at anytime. |
227
Federal Home Loan Bank of New York
Notes to Financial Statements
Interest rate payment terms
The following table summarizes interest rate payment terms of securities classified as available-for-sale securities (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | Amortized Cost | | | Carrying Value | | | Amortized Cost | | | Carrying Value | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | |
| Mortgage pass-throughs-GSE issued | | | | | | | | | | | | | | | | |
| Variable-rate* | | $ | 2,242,665 | | | $ | 2,240,564 | | | $ | 2,912,643 | | | $ | 2,851,683 | |
| Fixed-rate | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | 2,242,665 | | | | 2,240,564 | | | | 2,912,643 | | | | 2,851,683 | |
| | | | | | | | | | | | | |
| Fixed income funds, equity funds and cash equivalents | | | 13,897 | | | | 12,589 | | | | 13,646 | | | | 10,186 | |
| | | | | | | | | | | | | |
Total | | $ | 2,256,562 | | | $ | 2,253,153 | | | $ | 2,926,289 | | | $ | 2,861,869 | |
| | | | | | | | | | | | | |
Note 6. Advances
Redemption terms
Contractual redemption terms and yields of advances were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | Weighted2 | | | | | | | | | | | Weighted2 | | | | |
| | | | | | | Average | | | Percentage | | | | | | | Average | | | Percentage | |
| | | Amount | | | Yield | | | of Total | | | Amount | | | Yield | | | of Total | |
| |
| Overdrawn demand deposit accounts | | $ | 2,022 | | | | 1.20 | % | | | — | % | | $ | — | | | | — | % | | | — | % |
| Due in one year or less | | | 24,128,022 | | | | 2.07 | | | | 26.59 | | | | 32,420,095 | | | | 2.52 | | | | 31.36 | |
| Due after one year through two years | | | 10,819,349 | | | | 2.73 | | | | 11.92 | | | | 16,150,121 | | | | 3.71 | | | | 15.62 | |
| Due after two years through three years | | | 10,069,555 | | | | 2.91 | | | | 11.10 | | | | 7,634,680 | | | | 3.76 | | | | 7.39 | |
| Due after three years through four years | | | 5,804,448 | | | | 3.32 | | | | 6.40 | | | | 6,852,514 | | | | 3.74 | | | | 6.63 | |
| Due after four years through five years | | | 3,364,706 | | | | 3.19 | | | | 3.71 | | | | 3,210,575 | | | | 3.88 | | | | 3.11 | |
| Due after five years through six years | | | 2,807,329 | | | | 3.91 | | | | 3.09 | | | | 836,689 | | | | 3.74 | | | | 0.81 | |
| Thereafter | | | 33,742,269 | | | | 3.78 | | | | 37.19 | | | | 36,275,053 | | | | 3.96 | | | | 35.08 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total par value | | | 90,737,700 | | | | 3.06 | % | | | 100.00 | % | | | 103,379,727 | | | | 3.44 | % | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Discount on AHP advances1 | | | (260 | ) | | | | | | | | | | | (330 | ) | | | | | | | | |
Hedging adjustments1 | | | 3,611,311 | | | | | | | | | | | | 5,773,479 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 94,348,751 | | | | | | | | | | | $ | 109,152,876 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| 1 | | 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 ($0.8) million, ($2.0) million, and ($0.4) million for the years ended December 31, 2009, 2008 and 2007. All other amortization charged to interest income aggregated were not significant for all periods reported. Interest rates on AHP advances ranged from 1.25% to 4.00% at December 31, 2009 and 1.25% to 6.04% at December 31, 2008. |
| |
| 2 | | The weighed average yield is the weighted average coupon rates for advances, unadjusted for swaps. For floating-rate advances, the weighted average rate is the rate outstanding at the reporting dates. |
228
Federal Home Loan Bank of New York
Notes to Financial Statements
Impact of putable advances on advance maturities
The Bank offers putable advances to members. With a putable advance, the Bank effectively purchases a put option from the member that allows the Bank to terminate the fixed-rate advance, which is normally exercised when interest rates have increased from those prevailing at the time the advance was made. When the Bank exercises the put option, it will offer to extend additional credit to members at the then prevailing market rates and terms. Typically, the Bank will hedge putable advances with cancellable interest rate swaps with matching terms and will sell the exercise option that will allow swap counterparties to terminate the swaps at the same predetermined exercise dates as the advances. As of December 31, 2009 and 2008, the Bank had putable advances outstanding totaling $41.4 billion and $43.4 billion, representing 45.6% and 42.0% of par amounts of advances outstanding at those dates.
The table below offers a view of the advance portfolio with the possibility of the exercise of the put option that is controlled by the FHLBNY, and put dates are summarized into similar maturity tenors as the previous table that summarizes advances by contractual maturities (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage of | | | | | | | Percentage of | |
| | | 2009 | | | Total | | | 2008 | | | Total | |
| | | | | | | | | | | | | | | | | |
| Overdrawn demand deposit accounts | | $ | 2,022 | | | | — | % | | $ | — | | | | — | % |
| Due or putable in one year or less | | | 56,978,134 | | | | 62.79 | | | | 63,251,007 | | | | 61.18 | |
| Due or putable after one year through two years | | | 14,082,199 | | | | 15.52 | | | | 18,975,821 | | | | 18.36 | |
| Due or putable after two years through three years | | | 8,991,805 | | | | 9.91 | | | | 10,867,530 | | | | 10.51 | |
| Due or putable after three years through four years | | | 5,374,048 | | | | 5.92 | | | | 5,293,364 | | | | 5.12 | |
| Due or putable after four years through five years | | | 2,826,206 | | | | 3.12 | | | | 2,728,075 | | | | 2.64 | |
| Due or putable after five years through six years | | | 158,329 | | | | 0.18 | | | | 230,189 | | | | 0.22 | |
| Thereafter | | | 2,324,957 | | | | 2.56 | | | | 2,033,741 | | | | 1.97 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 90,737,700 | | | | 100.00 | % | | | 103,379,727 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Discount on AHP advances | | | (260 | ) | | | | | | | (330 | ) | | | | |
| Hedging adjustments | | | 3,611,311 | | | | | | | | 5,773,479 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 94,348,751 | | | | | | | $ | 109,152,876 | | | | | |
| | | | | | | | | | | | | | | |
Security Terms
The FHLBNY lends to financial institutions involved in housing finance within its district. In addition, the FHLBNY is permitted, but not required, to accept collateral in the form of small business or agricultural loans (“expanded collateral”) from Community Financial Institutions (“CFIs”). CFIs are defined in the Housing Act as those institutions that have, as of the date of the transaction at issue, less than $1.0 billion in average total assets over the three years preceding that date (subject to annual adjustment by the Finance Agency director based on the consumer price index). 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, 2009 and 2008, 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. |
229
Federal Home Loan Bank of New York
Notes to Financial Statements
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 percent to 125 percent of outstanding advances, based on the collateral type. It is common 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., 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. In both instances, the members provide periodic listings updating the information of the mortgage collateral in possession.
As of December 31, 2009, members had pledged a total of $163.3 billion ($186.0 billion at December 31, 2008). At a minimum, each member pledged sufficient collateral to adequately collateralize their outstanding obligations with the Bank. At December 31, 2009, $57.7 billion of collateral ($60.5 billion at December 31, 2008) was in the Bank’s physical possession or that of its safekeeping agent(s); $105.7 billion ($125.5 billion at December 31, 2008) was specifically listed. Under this collateralization arrangement, the member holds or engaged a third party custodian for physical possession of specific collateral pledged to the FHLBNY but the member provides listings of loans pledged to the FHLBNY with detailed loan information such as loan amount, payments, maturity date, interest rate, loan-to-value, collateral type, FICO scores, etc.
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, 2009 and 2008. 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, savings institutions and insurance companies.
Concentration of advances outstanding— Advances to the FHLBNY’s top ten borrowing member institutions aggregated $59.5 billion ($65.7 billion at December 31, 2008), representing 65.6% (63.5% at December 31, 2008) of the par amounts of advances outstanding at December 31, 2009. The FHLBNY held sufficient collateral to cover the advances to all of these institutions, and it does not expect to incur any credit losses.
230
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):
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | Percentage | | | | | | | Percentage | |
| | | Amount | | | of total | | | Amount | | | of total | |
| | | | | | | | | | | | | | | | | |
| Fixed-rate | | $ | 76,634,828 | | | | 84.46 | % | | $ | 83,173,877 | | | | 80.45 | % |
| Variable-rate | | | 13,730,850 | | | | 15.13 | | | | 19,740,850 | | | | 19.10 | |
| Variable-rate capped | | | 370,000 | | | | 0.41 | | | | 465,000 | | | | 0.45 | |
| Overdrawn demand deposit accounts | | | 2,022 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 90,737,700 | | | | 100.00 | % | | | 103,379,727 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Discount on AHP Advances | | | (260 | ) | | | | | | | (330 | ) | | | | |
| Hedging basis adjustments | | | 3,611,311 | | | | | | | | 5,773,479 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 94,348,751 | | | | | | | $ | 109,152,876 | | | | | |
| | | | | | | | | | | | | | | |
Variable-rate advances were mainly indexed to the London Interbank Offered Rate (“LIBOR”) or the Federal funds effective rate.
Note 7. Mortgage loans held-for-portfolio
Mortgage Partnership Finance program loans, or (MPF) constitute the majority of the mortgage loans held-for-portfolio. The MPF program involves investment by the FHLBNY in mortgage loans that are purchased from or originated through its participating financial institutions (“PFIs”). The members retain servicing rights and may credit-enhance the portion of the loans participated to the FHLBNY. No intermediary trust is involved. Mortgage loans that are considered to have been originated by the FHLBNY were $30.5 million and $36.8 million at December 31, 2009 and 2008. Mortgage loans also included 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 $3.9 million and $4.0 million at December 31, 2009 and 2008.
The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage of | | | | | | | Percentage of | |
| | | 2009 | | | Total | | | 2008 | | | Total | |
Real Estate: | | | | | | | | | | | | | | | | |
| Fixed medium-term single-family mortgages | | $ | 388,072 | | | | 29.43 | % | | $ | 467,845 | | | | 32.15 | % |
| Fixed long-term single-family mortgages | | | 926,856 | | | | 70.27 | | | | 983,493 | | | | 67.58 | |
| Multi-family mortgages | | | 3,908 | | | | 0.30 | | | | 4,009 | | | | 0.27 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 1,318,836 | | | | 100.00 | % | | | 1,455,347 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Unamortized premiums | | | 9,095 | | | | | | | | 10,662 | | | | | |
| Unamortized discounts | | | (5,425 | ) | | | | | | | (6,310 | ) | | | | |
Basis adjustment1 | | | (461 | ) | | | | | | | (408 | ) | | | | |
| | | | | | | | | | | | | | | |
| Total mortgage loans held-for-portfolio | | | 1,322,045 | | | | | | | | 1,459,291 | | | | | |
| Allowance for credit losses | | | (4,498 | ) | | | | | | | (1,406 | ) | | | | |
| | | | | | | | | | | | | | | |
Total mortgage loans held-for-portfolio after allowance for credit losses | | $ | 1,317,547 | | | | | | | $ | 1,457,885 | | | | | |
| | | | | | | | | | | | | | | |
| | | |
| 1 | | Represents fair value basis of open and closed delivery commitments. |
The estimated fair values of the mortgage loans as of December 31, 2009 and 2008 are reported in Note 18 — Fair Values of financial instruments.
231
Federal Home Loan Bank of New York
Notes to Financial Statements
Loans insured by the Federal Housing Administration and Veteran Administration were $6.0 million and $7.0 million at December 31, 2009 and 2008. Conventional mortgages and loans in the CMA program constituted the remaining balance of mortgage loans held-for-portfolio.
The FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers (See Note 1 — Significant Accounting Policies). 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 $13.9 million and $13.8 million at December 31, 2009 and 2008. The FLA is not recorded or reported as a reserve for loan losses as it serves as a memorandum or information account. The FHLBNY is responsible for absorbing the first layer. The second layer is that amount of credit obligations that the Participating Financial Institution (“PFI”) has taken on which will equate the loan to a double-A rating. The FHLBNY pays a Credit Enhancement fee to the PFI for taking on this obligation. The FHLBNY assumes all residual risk. Credit Enhancement fees accrued were $1.6 million for year ended December 31, 2009, and $1.7 million for each of the years ended December 31, 2008 and 2007, and reported as a reduction to mortgage loan interest income. The amount of charge-offs in each period reported was insignificant and it was not necessary for the FHLBNY to recoup any losses from the PFIs.
The following provides roll-forward analysis of the allowance for credit losses (in thousands):
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Beginning balance | | $ | 1,406 | | | $ | 633 | | | $ | 593 | |
| Charge-offs | | | (16 | ) | | | — | | | | — | |
| Provision for credit losses on mortgage loans | | | 3,108 | | | | 773 | | | | 40 | |
| | | | | | | | | | |
Ending balance | | $ | 4,498 | | | $ | 1,406 | | | $ | 633 | |
| | | | | | | | | | |
As of December 31, 2009 and 2008, the FHLBNY had $16.0 million and $4.8 million of non-accrual loans. Mortgage loans are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements. As of December 31, 2009 and 2008, 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):
| | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| |
Secured by 1-4 family | | $ | 570 | | | $ | 507 | |
| | | | | | | |
232
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 8. Deposits
The FHLBNY accepts demand, overnight and term deposits from its members. 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):
| | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | | | |
| Due in one year or less | | $ | 7,200 | | | $ | 117,400 | |
| | | | | | | |
| | | | | | | | | |
Total term deposits | | $ | 7,200 | | | $ | 117,400 | |
| | | | | | | |
Note 9. Borrowings
Securities sold under agreements to repurchase
The FHLBNY did not have any securities sold under agreement to repurchase as of December 31, 2009 or 2008. Terms, amounts and outstanding balances of borrowings from other Federal Home Loan Banks are described under Note 20 — Related party transactions.
Note 10. Consolidated obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their fiscal agent. Consolidated bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. Discount notes sell at less than their face amount and are redeemed at par value when they mature.
The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. Although it has never occurred, to the extent that an FHLBank would make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine.
Based on management’s review, the FHLBNY has no reason to record actual or contingent liabilities with respect to the occurrence of events or circumstances that would require the FHLBNY to assume an obligation on behalf of other FHLBanks. The par amounts of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations held by the FHLBanks, were approximately $0.9 trillion and $1.3 trillion as of December 31, 2009 and 2008.
Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located.
233
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY met the qualifying unpledged asset requirements in each of the years reported as follows:
| | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | | | |
Percentage of unpledged qualifying assets to consolidated obligations | | | 109 | % | | | 107 | % |
| | | | | | | |
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, 2009 and 2008, the combined FHLBanks’ capital stock was 5.7% and 4.1% of the par value of consolidated obligations outstanding, and the SAA balance was approximately $5 thousand and $6 thousand at December 31, 2009 and 2008. 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%.
General Terms
FHLBank consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices include the London Interbank Offered Rate (“LIBOR”), Constant Maturity Treasury (“CMT”), 11th District Cost of Funds Index (“COFI”), and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate bonds may also contain certain features that may result in complex coupon payment terms and call options. When such consolidated obligations are issued, the FHLBNY may enter into derivatives containing offsetting features that effectively convert the terms of the bond to those of a simple variable- or fixed-rate bond.
Consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also include Optional Principal Redemption Bonds (callable bonds) that the FHLBNY may redeem in whole or in part at its discretion on predetermined call dates, according to the terms of the bond offerings.
With respect to interest payment terms, consolidated bonds may also have step-up, or step-down terms. Step-up bonds generally pay interest at increasing fixed rates for specified intervals over the life of the bond. Step-down bonds pay interest at decreasing fixed rates. These bonds generally contain provisions enabling the FHLBNY to call bonds at its option on predetermined exercise dates at par.
234
Federal Home Loan Bank of New York
Notes to Financial Statements
The following summarizes consolidated obligations issued by the FHLBNY and outstanding at December 31, 2009 and 2008 (in thousands):
| | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | | | | |
| Consolidated obligation bonds-amortized cost | | $ | 73,436,939 | | | $ | 80,978,383 | |
| Fair value basis adjustments | | | 572,537 | | | | 1,254,523 | |
| Fair value basis on terminated hedges | | | 2,761 | | | | 7,857 | |
| Fair value option valuation adjustments and accrued interest | | | (4,259 | ) | | | 15,942 | |
| | | | | | | |
| | | | | | | | | |
Total Consolidated obligation-bonds | | $ | 74,007,978 | | | $ | 82,256,705 | |
| | | | | | | |
| | | | | | | | | |
| Discount notes-amortized cost | | $ | 30,827,639 | | | $ | 46,329,545 | |
| Fair value basis adjustments | | | — | | | | 361 | |
| | | | | | | |
| | | | | | | | | |
Total Consolidated obligation-discount notes | | $ | 30,827,639 | | | $ | 46,329,906 | |
| | | | | | | |
Redemption Terms of consolidated obligation bonds
The following is a summary of consolidated bonds outstanding by year of maturity (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | Weighted | | | | | | | | | | | Weighted | | | | |
| | | | | | | Average | | | Percentage | | | | | | | Average | | | Percentage | |
| Maturity | | Amount | | | Rate1 | | | of total | | | Amount | | | Rate1 | | | of total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| One year or less | | $ | 40,896,550 | | | | 1.34 | % | | | 55.75 | % | | $ | 49,568,550 | | | | 1.93 | % | | | 61.23 | % |
| Over one year through two years | | | 15,912,200 | | | | 1.69 | | | | 21.69 | | | | 16,192,550 | | | | 3.20 | | | | 20.00 | |
| Over two years through three years | | | 7,518,575 | | | | 2.28 | | | | 10.25 | | | | 5,299,700 | | | | 3.73 | | | | 6.55 | |
| Over three years through four years | | | 3,961,250 | | | | 3.49 | | | | 5.40 | | | | 2,469,575 | | | | 4.75 | | | | 3.05 | |
| Over four years through five years | | | 2,130,300 | | | | 4.27 | | | | 2.90 | | | | 3,352,450 | | | | 3.99 | | | | 4.14 | |
| Over five years through six years | | | 644,350 | | | | 5.15 | | | | 0.88 | | | | 989,300 | | | | 5.06 | | | | 1.22 | |
| Thereafter | | | 2,294,700 | | | | 5.06 | | | | 3.13 | | | | 3,082,050 | | | | 5.35 | | | | 3.81 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total par value | | | 73,357,925 | | | | 1.87 | % | | | 100.00 | % | | | 80,954,175 | | | | 2.64 | % | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Bond premiums | | | 112,866 | | | | | | | | | | | | 63,737 | | | | | | | | | |
| Bond discounts | | | (33,852 | ) | | | | | | | | | | | (39,529 | ) | | | | | | | | |
| Fair value basis adjustments | | | 572,537 | | | | | | | | | | | | 1,254,523 | | | | | | | | | |
| Fair value basis adjustments on terminated hedges | | | 2,761 | | | | | | | | | | | | 7,857 | | | | | | | | | |
| Fair value option valuation adjustments and accrued interest | | | (4,259 | ) | | | | | | | | | | | 15,942 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total bonds | | $ | 74,007,978 | | | | | | | | | | | $ | 82,256,705 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| 1 | | Weighted average rate represents the weighted average coupons of bonds, unadjusted for swaps. The weighted average coupon of bonds outstanding at December 31, 2009 and 2008, represent contractual coupons payable to investors. |
Amortization of bond premiums and discounts resulted in net reduction of interest expense of $29.9 million, $14.1 million, and $1.8 million in 2009, 2008 and 2007. Amortization of basis adjustments from terminated hedges were $7.0 million, $5.9 million and $2.1 million, and were recorded as an expense in 2009, 2008, and 2007.
Debt extinguished
During 2009, the FHLBNY retired $500.0 million of consolidated obligation bonds at a cost that exceeded book value by $69.5 thousand, which was recorded as a loss. The bonds retired were associated with the prepayment of advances for which prepayment fees were received. During the year ended December 31, 2008, the FHLBNY did not retire any consolidated bonds. In 2007, debt transferred and retired totaled $626.2 million at a cost that exceeded book value by $8.6 million.
235
Federal Home Loan Bank of New York
Notes to Financial Statements
Transfers of consolidated bonds to other FHLBanks
The Bank may transfer certain bonds at negotiated market rates to other FHLBanks to meet the FHLBNY’s asset and liability management objectives. There were no transfers in 2009 and 2008. See Note 20 — Related party transactions for more information.
Impact of callable bonds on consolidated bond maturities
The Bank issues callable bonds to investors. With a callable bond, the Bank effectively purchases an option from the investor that allows the Bank to terminate the consolidated obligation bond at pre-determined option exercise dates, which is normally exercised when interest rates have decreased from those prevailing at the time the bonds were issued. Typically, the Bank will hedge callable bonds with cancellable interest rate swaps with matching terms and will sell the exercise option that will allow swap counterparties to terminate the swaps at the same predetermined exercise dates as the bonds. As of December 31, 2009 and 2008, the Bank had callable bonds totaling $11.7 billion and $4.9 billion, representing 15.9% and 6.1% of par amounts of consolidated bonds outstanding at those dates.
The following summarizes bonds outstanding by year of maturity or next call date (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage | | | | | | | Percentage | |
| | | 2009 | | | of total | | | 2008 | | | of total | |
Year of Maturity or next call date | | | | | | | | | | | | | | | | |
| Due or callable in one year or less | | $ | 50,481,350 | | | | 68.82 | % | | $ | 53,034,550 | | | | 65.51 | % |
| Due or callable after one year through two years | | | 11,352,200 | | | | 15.48 | | | | 15,472,350 | | | | 19.11 | |
| Due or callable after two years through three years | | | 4,073,575 | | | | 5.55 | | | | 4,843,700 | | | | 5.98 | |
| Due or callable after three years through four years | | | 3,606,250 | | | | 4.91 | | | | 1,445,575 | | | | 1.79 | |
| Due or callable after four years through five years | | | 1,325,800 | | | | 1.81 | | | | 2,954,450 | | | | 3.65 | |
| Due or callable after five years through six years | | | 529,050 | | | | 0.72 | | | | 684,800 | | | | 0.85 | |
| Thereafter | | | 1,989,700 | | | | 2.71 | | | | 2,518,750 | | | | 3.11 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 73,357,925 | | | | 100.00 | % | | | 80,954,175 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Bond premiums | | | 112,866 | | | | | | | | 63,737 | | | | | |
| Bond discounts | | | (33,852 | ) | | | | | | | (39,529 | ) | | | | |
| Fair value basis adjustments | | | 572,537 | | | | | | | | 1,254,523 | | | | | |
| Fair value basis adjustments on terminated hedges | | | 2,761 | | | | | | | | 7,857 | | | | | |
| Fair value option valuation adjustments and accrued interest | | | (4,259 | ) | | | | | | | 15,942 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total bonds | | $ | 74,007,978 | | | | | | | $ | 82,256,705 | | | | | |
| | | | | | | | | | | | | | | |
236
Federal Home Loan Bank of New York
Notes to Financial Statements
Callable and non-callable consolidated obligation bonds
The FHLBNY uses fixed-rate callable debt to finance callable advances and mortgage-backed securities. Simultaneous with the debt issuance, the FHLBNY may also execute a cancellable 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 allow the Bank to provide members attractively priced, fixed-rate advances (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Non-callable | | $ | 61,678,125 | | | $ | 76,037,875 | |
| Callable | | | 11,679,800 | | | | 4,916,300 | |
| | | | | | | |
| | | | | | | | | |
Total par value | | $ | 73,357,925 | | | $ | 80,954,175 | |
| | | | | | | |
Interest rate payment terms
The following summarizes types of bonds issued and outstanding (in thousands).
| | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | Percentage of | | | | | | | Percentage of | |
| | | 2009 | | | Total | | | 2008 | | | Total | |
| | |
| Fixed-rate, non-callable | | $ | 48,647,625 | | | | 66.31 | % | | $ | 36,367,875 | | | | 44.92 | % |
| Fixed-rate, callable | | | 8,374,800 | | | | 11.42 | | | | 4,828,300 | | | | 5.96 | |
| Step Up, non-callable | | | 53,000 | | | | 0.07 | | | | — | | | | — | |
| Step Up, callable | | | 3,305,000 | | | | 4.51 | | | | 73,000 | | | | 0.09 | |
| Step Down, callable | | | — | | | | — | | | | 15,000 | | | | 0.02 | |
| Single-index floating rate | | | 12,977,500 | | | | 17.69 | | | | 39,670,000 | | | | 49.01 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total par value | | | 73,357,925 | | | | 100.00 | % | | | 80,954,175 | | | | 100.00 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Bond premiums | | | 112,866 | | | | | | | | 63,737 | | | | | |
| Bond discounts | | | (33,852 | ) | | | | | | | (39,529 | ) | | | | |
| Fair value basis adjustments | | | 572,537 | | | | | | | | 1,254,523 | | | | | |
| Fair value basis adjustments on terminated hedges | | | 2,761 | | | | | | | | 7,857 | | | | | |
| Fair value option valuation adjustments and accrued interest | | | (4,259 | ) | | | | | | | 15,942 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total bonds | | $ | 74,007,978 | | | | | | | $ | 82,256,705 | | | | | |
| | | | | | | | | | | | | | | |
Discount notes
Consolidated discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par when they mature. The FHLBNY’s outstanding consolidated discount notes were as follows (dollars in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Par value | | $ | 30,838,104 | | | $ | 46,431,347 | |
| | | | | | | |
| | | | | | | | | |
| Amortized cost | | $ | 30,827,639 | | | $ | 46,329,545 | |
| Fair value basis adjustments | | | — | | | | 361 | |
| | | | | | | |
| | | | | | | | | |
Total | | $ | 30,827,639 | | | $ | 46,329,906 | |
| | | | | | | |
| | | | | | | | | |
Weighted average interest rate | | | 0.15 | % | | | 1.00 | % |
| | | | | | | |
237
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 11. Mandatorily redeemable capital stock
Generally, the FHLBNY’s capital stock is redeemable at the option of either the member or the FHLBNY subject to certain conditions, and is subject to the provisions under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity.
The FHLBNY is a cooperative whose member financial institutions own almost all of the FHLBNY’s capital stock. Member shares cannot be purchased or sold except between the Bank and its members at its $100 per share par value. Also, the FHLBNY does not have equity securities that trade in a public market. Future filings with the SEC will not be in anticipation of the sale of equity securities in a public market as the FHLBNY is prohibited by law from doing so, and the FHLBNY is not controlled by an entity that has equity securities traded or contemplated to be traded in a public market. Therefore, the FHLBNY is a nonpublic entity based on the definition given in the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. In addition, although the FHLBNY is a nonpublic entity, the FHLBanks issue consolidated obligations that are traded in the public market. Based on this factor, the FHLBNY complies with the provisions of the accounting guidance for certain financial instruments with characteristics of both liabilities and equity as a nonpublic SEC registrant.
In accordance with the accounting guidance for certain financial instruments with characteristics of both liabilities and equity, the FHLBNY reclassifies the stock subject to redemption from equity to a liability once a member: irrevocably exercises a written redemption right; gives notice of intent to withdraw from membership; or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership. Under such circumstances, the member shares will then meet the definition of a mandatorily redeemable financial instrument and are reclassified to a liability at fair value. Dividends on member shares are accrued and also classified as a liability in the Statements of Condition and reported as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments, once settled, is reflected as financing cash outflows in the Statements of Cash Flows. In compliance with the accounting guidance, dividends on mandatorily redeemable capital stock in the amounts of $7.5 million, $9.0 million and $11.7 million were recorded as interest expense for the years ended December 31, 2009, 2008 and 2007.
If a member cancels its notice of voluntary withdrawal, the FHLBNY will reclassify the mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.
At December 31, 2009 and 2008, mandatorily redeemable capital stock of $126.3 million and $143.1 million were held by former members who had attained non-member status by virtue of being acquired by non-members. A small number of members had also become non-members by relocating their charters to outside the FHLBNY’s membership district.
238
Federal Home Loan Bank of New York
Notes to Financial Statements
Anticipated redemptions of mandatorily redeemable capital stock were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Redemption less than one year | | $ | 102,453 | | | $ | 38,328 | |
| Redemption from one year to less than three years | | | 16,766 | | | | 83,159 | |
| Redemption from three years to less than five years | | | 2,118 | | | | 14,646 | |
| Redemption after five years or greater | | | 4,957 | | | | 6,988 | |
| | | | | | | |
| | | | | | | | | |
Total | | $ | 126,294 | | | $ | 143,121 | |
| | | | | | | |
Anticipated redemptions assume the Bank will follow its current practice of daily redemption of capital in excess of the amount required to support advances. Commencing January 1, 2008, the Bank may also redeem, at its discretion, non-members’ membership stock.
Voluntary withdrawal from membership— As of December 31, 2009, one member had formally notified the Bank of its intent to withdraw from membership and voluntarily redeem its capital stock, and redemption requests for stock remained pending at December 31, 2009. Additionally, there was one termination due to insolvency from membership during 2009. These amounts were not significant.
Members acquired by non-members— Two members became non-members in 2009. When a member is acquired by a non-member, the FHLBNY reclassifies stock of a member to a liability on the day the member’s charter is dissolved. Under existing practice, the FHLBNY repurchases stock held by former members if such stock is considered “excess” and is no longer required to support outstanding advances. Membership stock held by former members is reviewed and repurchased annually.
The following table provides roll-forward information with respect to changes in mandatorily redeemable capital stock liabilities (in thousands):
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Beginning balance | | $ | 143,121 | | | $ | 238,596 | | | $ | 109,950 | |
| Capital stock subject to mandatory redemption reclassified from equity | | | 49,848 | | | | 64,758 | | | | 186,981 | |
Redemption of mandatorily redeemable capital stock1 | | | (66,675 | ) | | | (160,233 | ) | | | (58,335 | ) |
| | | | | | | | | | |
| | |
Ending balance | | $ | 126,294 | | | $ | 143,121 | | | $ | 238,596 | |
| | | | | | | | | | |
| | |
Accrued interest payable | | $ | 2,029 | | | $ | 1,260 | | | $ | 4,921 | |
| | | | | | | | | | |
| | | |
| 1 | | Redemption includes repayment of excess stock. |
| |
| | | (The annualized accrual rates were 5.60%, 3.50% and 8.05% for 2009, 2008 and 2007) |
Note 12. Affordable Housing Program and REFCORP
The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of regulatory defined net income. The FHLBNY charges the amount set aside for AHP to income and recognizes it as a liability. The FHLBNY relieves the AHP liability as members use the subsidies. If the result of the aggregate 10 percent calculation described above is less than $100 million for all twelve FHLBanks, then the FHLBank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before AHP and REFCORP to the sum of the income before AHP and REFCORP of the twelve FHLBanks. There was no shortfall in 2009, 2008 or 2007. The FHLBNY had outstanding principal in AHP-related advances of $2.1 million and $5.0 million as of December 31, 2009 and 2008.
239
Federal Home Loan Bank of New York
Notes to Financial Statements
Regulatory income is defined as income before assessments, and before interest expense related to mandatorily redeemable capital stock under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation by the Finance Agency. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. Each FHLBank accrues this expense monthly based on its income before assessments. A FHLBank reduces its AHP liability as members use subsidies.
If a FHLBank experienced a loss during a quarter, but still had income for the year, the FHLBank’s obligation to the AHP would be calculated based on the FHLBank’s year-to-date income. If the FHLBank had income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBank experienced a loss for a full year, the FHLBank would have no obligation to the AHP for the year unless the aggregate 10 percent calculation described above was less than $100 million for all 12 FHLBanks, if it were, each FHLBank would be required to assure that the aggregate contribution of the FHLBanks equals $100 million. The pro ration would be made on the basis of an FHLBank’s income in relation to the income of all FHLBanks for the previous year. Each FHLBank’s required annual AHP contribution is limited to its annual net earnings.
The following provides roll-forward information with respect to changes in Affordable Housing Program liabilities (in thousands):
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Beginning balance | | $ | 122,449 | | | $ | 119,052 | | | $ | 101,898 | |
| Additions from current period’s assessments | | | 64,251 | | | | 29,783 | | | | 37,204 | |
| Net disbursements for grants and programs | | | (42,211 | ) | | | (26,386 | ) | | | (20,050 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Ending balance | | $ | 144,489 | | | $ | 122,449 | | | $ | 119,052 | |
| | | | | | | | | | |
Each FHLBank is required to pay to REFCORP 20 percent of income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. Each FHLBank accrues its REFCORP assessment on a monthly basis. REFCORP has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLBank provides its net income before AHP and REFCORP to REFCORP, which then performs the calculations for each quarter end. The FHLBanks will continue to be obligated to pay these amounts until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. The cumulative amount to be paid to REFCORP by each FHLBank is not determinable at this time because it depends on the future earnings of all FHLBanks and interest rates. If a FHLBank experienced a net loss during a quarter, but still had net income for the year, the FHLBank’s obligation to REFCORP would be calculated based on the FHLBank’s year-to-date GAAP net income. If the FHLBank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBank experienced a net loss for a full year, the FHLBank would have no obligation to REFCORP for the year.
240
Federal Home Loan Bank of New York
Notes to Financial Statements
The Finance Agency is required to extend the term of the FHLBanks’ obligation to REFCORP for each calendar quarter in which the FHLBanks’ quarterly payment falls short of $75 million.
Note 13. Capital
The FHLBanks, including the FHLBNY, have a cooperative structure. To access FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in FHLBNY. The member’s stock requirement is generally based on its use of FHLBNY products, subject to a minimum membership requirement, as prescribed by the FHLBank Act and the FHLBNY Capital Plan. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. It is not publicly traded. An option to redeem capital stock that is greater than a member’s minimum requirement is held by both the member and the FHLBNY.
Under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and the Finance Agency’s capital regulations, the FHLBNY’s Capital Plan offers two sub-classes of Class B capital stock, Class B1 and Class B2. Class B1 stock is issued to meet membership stock purchase requirements. Class B2 stock is issued to meet activity-based requirements. The FHLBNY requires member institutions to maintain Class B1 stock based on a percentage of the member’s mortgage-related assets and Class B2 stock-based on a percentage of advances and acquired member assets outstanding with the FHLBank and certain commitments outstanding with the FHLBank. Class B1 and Class B2 stockholders have the same voting rights and dividend rates.
Members can redeem Class A stock by giving six months’ notice, and redeem Class B stock by giving five year’s notice. Only “permanent” capital, defined as retained earnings and Class B stock, satisfies the FHLBank risk-based capital requirement. In addition, the GLB Act specifies a 5.0 percent minimum leverage ratio based on total capital and a 4.0 percent minimum capital ratio that does not include the 1.5 weighting factor applicable to the permanent capital that is used in determining compliance with the 5.0 percent minimum leverage ratio.
Capital Plan under GLB Act
The FHLBNY implemented its current capital plan on December 1, 2005 through the issuance of Class B stock. The conversion was considered a capital exchange and was accounted for at par value. Members’ capital stock held immediately prior to the conversion date was automatically exchanged for an equal amount of Class B Capital Stock, comprised of Membership Stock (referred to as “Subclass B1 Stock”) and Activity-Based Stock (referred to as “Subclass B2 Stock”).
Any member that withdraws from membership must wait five years from the divestiture date for all capital stock that is held as a condition of membership unless the institution has cancelled its notice of withdrawal prior to that date and before being readmitted to membership in any FHLBank. Commencing in 2008, the Bank at its discretion may repay a non-member’s membership stock before the end of the five-year waiting period.
241
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY is subject to risk-based capital rules. Specifically, the FHLBNY is subject to three capital requirements under its capital plan. First, the FHLBNY must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, its market risk, and operations risk capital requirements calculated in accordance with the FHLBNY policy, rules, and regulations of the Finance Agency. Only permanent capital, defined as Class B stock and retained earnings, satisfies this risk-based capital requirement. The Finance Agency may require the FHLBNY to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements. In addition, the FHLBNY is required to maintain at least a 4.0% total capital-to-asset ratio and at least a 5.0% leverage ratio at all times. The leverage ratio is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 time divided by total assets. The FHLBNY was in compliance with the aforementioned capital rules and requirements for all periods presented.
On December 12, 2007 the Finance Board (predecessor to the Finance Agency) approved amendments to the FHLBNY’s ’s capital plan. The amendments allow the FHLBNY to recalculate the membership stock purchase requirement any time after 30 days subsequent to a merger. The amendments also permit the FHLBNY to use a zero mortgage asset base in performing the calculation, which recognizes the fact that the corporate entity that was once its member no longer exists. As a result of these amendments, the FHLBNY could determine that all of the membership stock formerly held by the member becomes excess stock, which would give the FHLBNY the discretion, but not the obligation, to repurchase that stock prior to the expiration of the five-year notice period.
The following table summarizes the Bank’s risk-based capital ratios (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Required4 | | | Actual | | | Required4 | | | Actual | |
| Regulatory capital requirements: | | | | | | | | | | | | | | | | |
Risk-based capital1 | | $ | 606,716 | | | $ | 5,874,125 | | | $ | 650,333 | | | $ | 6,111,676 | |
| Total capital-to-asset ratio | | | 4.00 | % | | | 5.14 | % | | | 4.00 | % | | | 4.44 | % |
Total capital2 | | $ | 4,578,436 | | | $ | 5,878,623 | | | $ | 5,501,596 | | | $ | 6,113,082 | |
| Leverage ratio | | | 5.00 | % | | | 7.70 | % | | | 5.00 | % | | | 6.67 | % |
Leverage capital3 | | $ | 5,723,045 | | | $ | 8,815,685 | | | $ | 6,876,995 | | | $ | 9,168,920 | |
| | | |
| 1 | | Actual “Risk-based capital” is capital stock and retained earnings plus mandatorily redeemable capital stock. Section 932.2 of the Finance Agency’s regulations also refers to this amount as “Permanent Capital.” |
| |
| 2 | | Required “ Total capital” is 4% of total assets. Actual “Total capital” is “Actual Risk-based capital” plus allowance for credit losses. Does not include reserves for the Lehman Brothers receivable which is a specific reserve. |
| |
| 3 | | Actual Leverage capital is “Risk-based capital” times 1.5 plus allowance for loan losses. |
| |
| 4 | | Required minimum. |
The Finance Agency has indicated that the accounting treatment for certain shares determined to be mandatorily redeemable will not be included in the definition of total capital for purposes of determining the Bank’s compliance with regulatory capital requirements, calculating mortgage securities investment authority (300 percent of total capital), calculating unsecured credit exposure to other GSEs (100 percent of total capital), or calculating unsecured credit limits to other counterparties (various percentages of total capital depending on the rating of the counterparty).
242
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 14. Total comprehensive income
Total comprehensive income is comprised of Net income and Accumulated other comprehensive income (loss) (“AOCI”), which includes unrealized gains and losses on available-for-sale securities, cash flow hedging activities, employee supplemental retirement plans, and the non-credit portion of OTTI on HTM securities. Changes in AOCI and total comprehensive income were as follows for each of the three years ended December 31, 2009 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Non-credit | | | | | | | | | | | Accumulated | | | | | | | | |
| | | Available- | | | OTTI on HTM | | | Cash | | | Supplemental | | | Other | | | | | | | Total | |
| | | for-sale | | | securities, | | | flow | | | Retirement | | | Comprehensive | | | Net | | | Comprehensive | |
| | | securities | | | net of accretion | | | hedges | | | Plans | | | Income (Loss) | | | Income | | | Income | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2006 | | $ | — | | | $ | — | | | $ | (4,763 | ) | | $ | (5,785 | ) | | $ | (10,548 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change | | | (373 | ) | | | — | | | | (25,452 | ) | | | 698 | | | | (25,127 | ) | | $ | 323,105 | | | $ | 297,978 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | (373 | ) | | | — | | | | (30,215 | ) | | | (5,087 | ) | | | (35,675 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change | | | (64,047 | ) | | | — | | | | 24 | | | | (1,463 | ) | | | (65,486 | ) | | $ | 259,060 | | | $ | 193,574 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2008 | | | (64,420 | ) | | | — | | | | (30,191 | ) | | | (6,550 | ) | | | (101,161 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change | | | 61,011 | | | | (110,570 | ) | | | 7,508 | | | | (1,327 | ) | | | (43,378 | ) | | $ | 570,755 | | | $ | 527,377 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | $ | (3,409 | ) | | $ | (110,570 | ) | | $ | (22,683 | ) | | $ | (7,877 | ) | | $ | (144,539 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Note 15. Earnings per share of capital
The following table sets forth the computation of earnings per share (dollars in thousands except per share amounts):
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Net income | | $ | 570,755 | | | $ | 259,060 | | | $ | 323,105 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net income available to stockholders | | $ | 570,755 | | | $ | 259,060 | | | $ | 323,105 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average shares of capital | | | 53,807 | | | | 50,894 | | | | 39,178 | |
| Less: Mandatorily redeemable capital stock | | | (1,371 | ) | | | (1,664 | ) | | | (1,463 | ) |
| | | | | | | | | | |
| Average number of shares of capital used to calculate earnings per share | | | 52,436 | | | | 49,230 | | | | 37,715 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net earnings per share of capital | | $ | 10.88 | | | $ | 5.26 | | | $ | 8.57 | |
| | | | | | | | | | |
Basic and diluted earnings per share of capital are the same. The FHLBNY has no dilutive potential common shares or other common stock equivalents.
243
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 16. Employee retirement plans
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (“DB Plan”). The DB Plan is a tax-qualified multiple-employer defined benefit pension plan that covers all officers and employees of the Bank. For accounting purposes, the DB Plan is a multi-employer plan and does not segregate its assets, liabilities, or costs by participating employer. The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The Bank’s contributions are a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations.
In addition, the Bank maintains a Benefit Equalization Plan (“BEP”) that restores defined benefits and contribution benefits to those employees who have had their qualified defined benefit and defined contribution benefits limited by IRS regulations. The contribution component of the BEP is a supplemental defined contribution plan. The plan’s liability consists of the accumulated compensation deferrals and accrued interest on the deferrals. The BEP is an unfunded plan. The Bank has established several grantor trusts to meet future benefit obligations and current payments to beneficiaries in supplemental pension plans. The Bank also offers a Retiree Medical Benefit Plan, which is a postretirement health benefit plan. There are no funded plan assets that have been designated to provide postretirement health benefits. The Board of Directors of the FHLBNY approved certain amendments to the Retiree Medical Benefit Plan effective as of January 1, 2008. The amendments did not have a material impact on reported results of operations or financial condition of the Bank.
On January 1, 2009, the Bank offered a Nonqualified Deferred Compensation Plan to certain officer employees and to the members of the Board of Directors of the Bank. Participants in the plan would elect to defer all or a portion of their compensation earned for a minimum period of five years. This benefit plan and other nonqualified supplemental pension plans were terminated effective November 10, 2009. Plan terminations had no material effect on the Bank’s financial results, financial position or cash flows for all reported periods.
Retirement Plan Expenses — Summary
The following table presents employee retirement plan expenses for the years ended (in thousands):
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Defined Benefit Plan | | $ | 5,506 | | | $ | 5,872 | | | $ | 6,006 | |
| Benefit Equalization Plan (defined benefit) | | | 2,059 | | | | 1,878 | | | | 1,908 | |
| Defined Contribution Plan and BEP Thrift | | | 1,772 | | | | 721 | | | | 1,346 | |
| Postretirement Health Benefit Plan | | | 1,017 | | | | 990 | | | | 2,377 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total retirement plan expenses | | $ | 10,354 | | | $ | 9,461 | | | $ | 11,637 | |
| | | | | | | | | | |
244
Federal Home Loan Bank of New York
Notes to Financial Statements
Benefit Equalization Plan (BEP)
The plan’s liability consisted of the accumulated compensation deferrals and accrued interest on the deferrals. There were no plan assets that have been designated for the BEP plan.
The accrued pension costs for the Bank’s BEP plan were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Accumulated benefit obligation | | $ | 16,103 | | | $ | 14,030 | |
| Effect of future salary increase | | | 3,289 | | | | 3,392 | |
| | | | | | | |
| Projected benefit obligation | | | 19,392 | | | | 17,422 | |
| Unrecognized prior service cost | | | 380 | | | | 523 | |
| Unrecognized net (loss) | | | (6,464 | ) | | | (6,158 | ) |
| | | | | | | |
| | | | | | | | | |
Accrued pension cost | | $ | 13,308 | | | $ | 11,787 | |
| | | | | | | |
Components of the projected benefit obligation for the Bank’s BEP plan were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
Projected benefit obligation at the beginning of the year | | $ | 17,422 | | | $ | 15,031 | |
| Service | | | 610 | | | | 614 | |
| Interest | | | 1,053 | | | | 944 | |
| Benefits paid | | | (537 | ) | | | (392 | ) |
| Actuarial loss | | | 844 | | | | 1,225 | |
| | | | | | | |
| | | | | | | | | |
Projected benefit obligation at the end of the year | | $ | 19,392 | | | $ | 17,422 | |
| | | | | | | |
The measurement date used to determine current period projected benefit obligation for the BEP plan was December 31, 2009.
Amounts recognized in the Statements of Condition for the Bank’s BEP plan were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Unrecognized (gain)/loss | | $ | 6,464 | | | $ | 6,158 | |
| Prior service cost | | | (380 | ) | | | (523 | ) |
| | | | | | | |
| | | | | | | | | |
Accumulated other comprehensive loss | | $ | 6,084 | | | $ | 5,635 | |
| | | | | | | |
Changes in the BEP plan assets were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Fair value of the plan assets at the beginning of the year | | $ | — | | | $ | — | |
| Employer contributions | | | 537 | | | | 392 | |
| Benefits paid | | | (537 | ) | | | (392 | ) |
| | | | | | | |
| | | | | | | | | |
Fair value of the plan assets at the end of the year | | $ | — | | | $ | — | |
| | | | | | | |
245
Federal Home Loan Bank of New York
Notes to Financial Statements
Components of the net periodic pension cost for the defined benefit component of the BEP, an unfunded plan, were as follows (in thousands):
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Service cost | | $ | 610 | | | $ | 614 | | | $ | 626 | |
| Interest cost | | | 1,053 | | | | 944 | | | | 880 | |
| Amortization of unrecognized prior service cost | | | (143 | ) | | | (143 | ) | | | (112 | ) |
| Amortization of unrecognized net loss | | | 539 | | | | 463 | | | | 514 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 2,059 | | | $ | 1,878 | | | $ | 1,908 | |
| | | | | | | | | | |
Other changes in benefit obligations recognized in AOCI were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Net loss (gain) | | $ | 845 | | | $ | 1,225 | |
| Prior service cost (benefit) | | | — | | | | — | |
| Amortization of net loss (gain) | | | (539 | ) | | | (463 | ) |
| Amortization of prior service cost (benefit) | | | 143 | | | | 143 | |
| Amortization of net obligation | | | — | | | | — | |
| | | | | | | |
| | | | | | | | | |
Total recognized in other comprehensive income | | $ | 449 | | | $ | 905 | |
| | | | | | | |
| | | | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive income | | $ | 2,508 | | | $ | 2,783 | |
| | | | | | | |
The net transition obligation (asset), prior service cost (credit), and the estimated net loss (gain) for the BEP plan that are expected to be amortized from AOCI into net periodic benefit cost over the next fiscal year are shown in the table below (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | | | |
| Expected amortization of net (gain)/loss | | $ | 578 | | | $ | 539 | |
| Expected amortization of prior service cost/(credit) | | $ | (67 | ) | | $ | (143 | ) |
| Expected amortization of transition obligation/(asset) | | $ | — | | | $ | — | |
Key assumptions and other information for the actuarial calculations to determine current year’s benefit obligations for the FHLBNY’s BEP plan were as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Discount rate * | | | 5.87 | % | | | 6.14 | % | | | 6.37 | % |
| Salary increases | | | 5.50 | % | | | 5.50 | % | | | 5.50 | % |
| Amortization period (years) | | | 8 | | | | 8 | | | | 8 | |
| Benefits paid during the year | | $ | (537 | ) | | $ | (392 | ) | | $ | (346 | ) |
| | | |
| * | | The discount rate was based on the Citigroup Pension Liability Index at December 31, 2009 and adjusted for duration. |
246
Federal Home Loan Bank of New York
Notes to Financial Statements
Future BEP plan benefits to be paid were estimated to be as follows (in thousands):
| | | | | |
| Years | | Payments | |
| | | | | |
| 2010 | | $ | 739 | |
| 2011 | | | 971 | |
| 2012 | | | 999 | |
| 2013 | | | 1,038 | |
| 2014 | | | 1,118 | |
| 2015-2019 | | | 6,370 | |
| | | | |
| | | | | |
Total | | $ | 11,235 | |
| | | | |
The net periodic benefit cost for 2010 is expected to be $2.3 million ($2.1 million in 2009).
Postretirement Health Benefit Plan
The FHLBNY has a postretirement health benefit plan for retirees called the Retiree Medical Benefit Plan. Assumptions used in determining the accumulated postretirement benefit obligation (“APBO”) included a discount rate of 6.14%. At December 31, 2009, the effect of a percentage point increase in the assumed healthcare trend rates would be an increase in postretirement benefit expense of $255.2 thousand ($230.5 thousand at December 31, 2008) and in APBO of $2.4 million ($2.1 million at December 31, 2008). At December 31, 2009, the effect of a percentage point decrease in the assumed healthcare trend rates would be a decrease in postretirement benefit expense of $208.4 thousand ($188.6 thousand at December 31, 2008) and in APBO of $2.0 million ($1.7 million at December 31, 2008). 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, 2009 and 2008 were (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
Accumulated postretirement benefit obligation at the beginning of the year | | $ | 14,357 | | | $ | 13,109 | |
| Service cost | | | 566 | | | | 505 | |
| Interest cost | | | 867 | | | | 820 | |
| Actuarial loss | | | (628 | ) | | | (184 | ) |
| Benefits paid, net of participants’ contributions | | | (410 | ) | | | (296 | ) |
| Change in plan assumptions | | | 1,089 | | | | 403 | |
| | | | | | | |
Accumulated postretirement benefit obligation at the end of the year | | | 15,841 | | | | 14,357 | |
| Unrecognized net gain | | | — | | | | — | |
| | | | | | | |
Accrued postretirement benefit cost | | $ | 15,841 | | | $ | 14,357 | |
| | | | | | | |
Changes in postretirement health benefit plan assets were (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
Fair value of plan assets at the beginning of the year | | $ | — | | | $ | — | |
| Employer contributions | | | 410 | | | | 296 | |
| Benefits paid, net of participants’ contributions and subsidy received | | | (410 | ) | | | (296 | ) |
| | | | | | | |
Fair value of plan assets at the end of the year | | $ | — | | | $ | — | |
| | | | | | | |
247
Federal Home Loan Bank of New York
Notes to Financial Statements
Amounts recognized in AOCI for the Bank’s postretirement benefit obligation were (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Prior service cost/(credit) | | $ | (2,835 | ) | | $ | (3,566 | ) |
| Net loss/(gain) | | | 4,628 | | | | 4,481 | |
| | | | | | | |
Accrued pension cost | | $ | 1,793 | | | $ | 915 | |
| | | | | | | |
The net transition obligation (asset), prior service cost (credit), and estimated net loss (gain) for the postretirement health benefit plan are expected to be amortized from AOCI into net periodic benefit cost over the next fiscal year are shown in the table below (in thousands);
| | | | | | | | | |
| | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | | | |
| Expected amortization of net (gain)/loss | | $ | 314 | | | $ | 312 | |
| Expected amortization of prior service cost/(credit) | | $ | (731 | ) | | $ | (731 | ) |
| Expected amortization of transition obligation/(asset) | | $ | — | | | $ | — | |
Components of the net periodic benefit cost for the postretirement health benefit plan were (in thousands):
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Service cost (benefits attributed to service during the period) | | $ | 566 | | | $ | 505 | | | $ | 727 | |
| Interest cost on accumulated postretirement health benefit obligation | | | 867 | | | | 820 | | | | 903 | |
| Amortization of loss | | | 315 | | | | 396 | | | | 319 | |
| Additional gain on recognition of plan amendment | | | — | | | | — | | | | 611 | |
| Amortization of prior service cost/(credit) | | | (731 | ) | | | (731 | ) | | | (183 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net periodic postretirement health benefit cost | | $ | 1,017 | | | $ | 990 | | | $ | 2,377 | |
| | | | | | | | | | |
Other changes in benefit obligations recognized in AOCI were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Net loss (gain) | | $ | 462 | | | $ | 218 | |
| Prior service cost (benefit) | | | — | | | | — | |
| Amortization of net loss (gain) | | | (315 | ) | | | (396 | ) |
| Amortization of prior service cost (benefit) | | | 731 | | | | 731 | |
| Amortization of net obligation | | | — | | | | — | |
| | | | | | | |
| | | | | | | | | |
Total recognized in other comprehensive income | | $ | 878 | | | $ | 553 | |
| | | | | | | |
| | | | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive income | | $ | 1,895 | | | $ | 1,543 | |
| | | | | | | |
The measurement date used to determine current year’s benefit obligation was December 31, 2009.
248
Federal Home Loan Bank of New York
Notes to Financial Statements
Key assumptions and other information to determine current year’s obligation for the FHLBNY’s postretirement health benefit plan were as follows:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Weighted average discount rate at the end of the year | | | 5.87 | % | | | 6.14 | % | | | 6.37 | % |
| | | | | | | | | | | | | |
| Health care cost trend rates: | | | | | | | | | | | | |
| Assumed for next year | | | 10.00 | % | | | 7.00 | % | | | 7.00 | % |
| Pre 65 Ultimate rate | | | 5.00 | % | | | 5.00 | % | | | 4.50 | % |
| Pre 65 Year that ultimate rate is reached | | | 2016 | | | | 2011 | | | | 2010 | |
| Post 65 Ultimate rate | | | 6.00 | % | | | 5.50 | % | | | 5.00 | % |
| Post 65 Year that ultimate rate is reached | | | 2016 | | | | 2016 | | | | 2016 | |
| Alternative amortization methods used to amortize | | | | | | | | | | | | |
| Prior service cost | | Straight - line | | | Straight - line | | | Straight - line | |
| Unrecognized net (gain) or loss | | Straight - line | | | Straight - line | | | Straight - line | |
The discount rate was based on the Citigroup Pension Liability Index at December 31, 2009 and adjusted for duration.
Future postretirement benefit plan expenses to be paid were estimated to be as follows (in thousands):
| | | | | |
| Years | | Payments | |
| | | | | |
| 2010 | | $ | 555 | |
| 2011 | | | 641 | |
| 2012 | | | 733 | |
| 2013 | | | 806 | |
| 2014 | | | 879 | |
| 2015-2019 | | | 5,484 | |
| | | | |
| |
Total | | $ | 9,098 | |
| | | | |
The Bank’s postretirement health benefit plan accrual for 2010 is expected to be $1.1 million ($1.0 million in 2009).
Note 17. Derivatives and hedging activities
General— The FHLBNY may enter into interest-rate swaps, swaptions, and interest-rate cap and floor agreements to manage its exposure to changes in interest rates. The FHLBNY may also use callable swaps to potentially adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The FHLBNY uses derivatives in three ways: by designating them as a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction that qualifies for hedge accounting treatment; by acting as an intermediary; or by designating the derivative as an asset-liability management hedge (i.e., an “economic hedge”). For example, the FHLBNY uses derivatives in its overall interest-rate risk management to adjust the interest-rate sensitivity of consolidated obligations to approximate more closely the interest-rate sensitivity of assets (both advances and investments), and/or to adjust the interest-rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest-rate sensitivity of liabilities. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, the FHLBNY also uses derivatives: to manage embedded options in assets and liabilities; to hedge the market value of existing assets and liabilities and anticipated transactions; to hedge the duration risk of prepayable instruments; and to reduce funding costs where possible.
249
Federal Home Loan Bank of New York
Notes to Financial Statements
In an economic hedge, a derivative hedges specific or non-specific underlying assets, liabilities or firm commitments, but the hedge does not qualify for hedge accounting under the accounting standards for derivatives and hedging; it is, however, an acceptable hedging strategy under the FHLBNY’s risk management program. These strategies also comply with the Finance Agency’s regulatory requirements prohibiting speculative use of derivatives. An economic hedge introduces the potential for earnings variability due to the changes in fair value recorded on the derivatives that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. The FHLBNY will execute an interest rate swap to match the terms of an asset or liability that is elected under the Fair Value Option and the swap is also considered as an economic hedge to mitigate the volatility of the FVO designated asset or liability due to change in the full fair value of the designated asset or liability. In the third quarter of 2008 and periodically thereafter, the FHLBNY elected the FVO for certain consolidated obligation bonds and executed interest rate swaps to offset the fair value changes of the bonds.
The FHLBNY, consistent with Finance Agency’s regulations, enters into derivatives to manage the market risk exposures inherent in otherwise unhedged assets and funding positions. The FHLBNY utilizes derivatives in the most cost efficient manner and may enter into derivatives as economic hedges that do not qualify for hedge accounting under the accounting standards for derivatives and hedging. As a result, when entering into such non-qualified hedges, the FHLBNY recognizes only the change in fair value of these derivatives in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities with no offsetting fair value adjustments for the hedged asset, liability, or firm commitment.
Hedging activities
Consolidated Obligations— The FHLBNY manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflows on the derivative with the cash outflow on the consolidated obligation. While consolidated obligations are the joint and several obligations of the FHLBanks, one or more FHLBanks may individually serve as counterparties to derivative agreements associated with specific debt issues. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for one or more FHLBanks, and each of those FHLBanks could simultaneously enter into a matching derivative in which the counterparty pays to the FHLBank fixed cash flows designed to mirror in timing and amount the cash outflows the FHLBank pays on the consolidated obligations. Such transactions are treated as fair value hedges under the accounting standards for derivatives and hedging. The FHLBNY has elected the Fair Value Option (“FVO”) for certain consolidated obligation bonds and these were measured under the accounting standards for fair value measurements. To mitigate the volatility resulting from changes in fair values of bonds designated under the FVO, the Bank has also executed interest rate swaps.
The FHLBNY had issued variable-rate consolidated obligations bonds indexed to 1 month-LIBOR, the U.S. Prime rate, or Federal funds rate and simultaneously execute interest-rate swaps (“basis swaps”) to hedge the basis risk of the variable rate debt to 3-month LIBOR, the FHLBNY’s preferred funding base. The interest rate basis swaps were accounted as economic hedges of the floating-rate bonds because the FHLBNY deemed that that the operational cost of designating the hedges under accounting standards for derivatives and hedge accounting would outweigh the accounting benefits.
The issuance of the consolidated obligation fixed-rate bonds to investors and the execution of interest rate swaps typically results in cash flow pattern in which the FHLBNY has effectively converted the bonds’ cash flows to variable cash flows that closely match the interest payments it receives on short-term or variable-rate advances. From time-to-time, this intermediation between the capital and swap markets has permitted the FHLBNY to raise funds at a lower cost than would otherwise be available through the issuance of simple fixed- or floating-rate consolidated obligations in the capital markets. The FHLBNY does not issue consolidated obligations denominated in currencies other than U.S. dollars.
250
Federal Home Loan Bank of New York
Notes to Financial Statements
Advances—With a putable advance borrowed by a member, the FHLBNY may purchase from the member a put option that enables the FHLBNY to effectively convert an advance from fixed-rate to floating-rate if interest rates increase by terminating the advance and extending additional credit on new terms. The FHLBNY may hedge a putable advance by entering into a cancelable interest rate swap in which the FHLBNY pays to the swap counterparty fixed-rate cash flows and receives variable-rate cash flows. This type of hedge is treated as a fair value hedge under the accounting standards for derivatives and hedging. The swap counterparty can cancel the swap on the put date, which would normally occur in a rising rate environment, and the FHLBNY can terminate the advance and extend additional credit to the member on new terms.
The optionality embedded in certain financial instruments held by the FHLBNY can create interest-rate risk. When a member prepays an advance, the FHLBNY could suffer lower future income if the principal portion of the prepaid advance were reinvested in lower-yielding assets that would continue to be funded by higher-cost debt. To protect against this risk, the FHLBNY generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. When the Bank offers advances (other than short-term) that members may prepay without a prepayment fee, it usually finances such advances with callable debt. The Bank has not elected the FVO for any advances.
Mortgage Loans— The FHLBNY invests in mortgage assets. The prepayment options embedded in mortgage assets can result in extensions or reductions in the expected maturities of these investments, depending on changes in estimated prepayment speeds. Finance Agency regulations limit this source of interest-rate risk by restricting the types of mortgage assets the Bank may own to those with limited average life changes under certain interest-rate shock scenarios and by establishing limitations on duration of equity and changes in market value of equity. The FHLBNY may manage against prepayment and duration risk by funding some mortgage assets with consolidated obligations that have call features. In addition, the FHLBNY may use derivatives to manage the prepayment and duration variability of mortgage assets. Net income could be reduced if the FHLBNY replaces the mortgages with lower yielding assets and if the Bank’s higher funding costs are not reduced concomitantly.
The FHLBNY manages the interest rate and prepayment risks associated with mortgages through debt issuance. The FHLBNY issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBNY analyzes the duration, convexity and earnings risk of the mortgage portfolio on a regular basis under various rate scenarios. The Bank has not elected the FVO for any mortgage loans.
Firm Commitment Strategies— Mortgage delivery commitments are considered derivatives under the accounting standards for derivatives and hedging, and the FHLBNY accounts for them as freestanding derivatives, and records the fair values of mortgage loan delivery commitments on the balance sheet with an offset to current period earnings. Fair values were de minimis for all periods reported.
The FHLBNY may also hedge a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be added to the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
251
Federal Home Loan Bank of New York
Notes to Financial Statements
If a hedged firm commitment no longer qualified as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings. There were no material amounts of gains and losses recognized due to disqualification of firm commitment hedges in 2009, 2008 and 2007.
Forward Settlements— There were no forward settled securities at December 31, 2009 or at December 31, 2008 that would settle outside the shortest period of time for the settlement of such securities.
Anticipated Debt Issuance— The FHLBNY enters into interest-rate swaps on the anticipated issuance of debt to “lock in” a spread between the earning asset and the cost of funding. The swap is terminated upon issuance of the debt instrument, and amounts reported in 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 derivatives market. The derivatives used in intermediary activities do not qualify for hedge accounting under the accounting standards for derivatives and hedging, and are separately marked-to-market through earnings. The net impact of the accounting for these derivatives does not significantly affect the operating results of the FHLBNY.
Derivative agreements in which the FHLBNY is an intermediary may arise when the FHLBNY: (1) enters into offsetting derivatives with members and other counterparties to meet the needs of its members, and (2) enters into derivatives to offset the economic effect of other derivative agreements that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate swaps in which the FHLBNY was an intermediary was $320.0 million and $300.0 million as of December 31, 2009 and 2008; fair values of the swaps sold to members net of the fair values of swaps purchased from derivative counterparties were not material at December 31, 2009 and 2008. Collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBNY as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBNY.
Economic hedges —At December 31, 2009, economic hedges comprised primarily of: (1) short- and medium-term interest rate swaps that hedged the basis risk (Prime rate, Fed fund rate, and the 1-month LIBOR index) of variable-rate bonds issued by the FHLBNY. These swaps were considered freestanding and changes in the fair values of the swaps were recorded through income. The FHLBNY believes the operational cost of designating the basis hedges in a qualifying hedge would outweigh the benefits of applying hedge accounting. (2) Interest rate caps acquired in the second quarter of 2008 to hedge balance sheet risk, primarily certain capped floating-rate investment securities, were considered freestanding derivatives with fair value changes recorded through Other income (loss) as a Net realized and unrealized gain or loss on derivatives and hedging activities. (3) Interest rate swaps hedging balance sheet risk. (4) Interest rate swaps that had previously qualified as hedges under the accounting standards for derivatives and hedging, but had been subsequently de-designated from hedge accounting as they were assessed as being not highly effective hedges. (5) Interest rate swaps executed to offset the fair value changes of bonds designated under the FVO.
The FHLBNY is not a derivatives dealer and does not trade derivatives for short-term profit.
252
Federal Home Loan Bank of New York
Notes to Financial Statements
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 FHLBNY is also subject to operational risks in the execution and servicing of derivative transactions. The degree of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The FHLBNY manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Board’s regulations. In determining credit risk, the FHLBNY considers accrued interest receivables and payables, and the legal right to offset assets and liabilities by counterparty.
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, but it does not measure the credit risk exposure of the FHLBNY, and the maximum credit exposure of the FHLBNY is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors (“derivatives”) if the counterparty defaults and the related collateral, if any, is of insufficient value to the FHLBNY.
The FHLBNY uses collateral agreements to mitigate counterparty credit risk in derivatives. When the FHLBNY has more than one derivative transaction outstanding with a counterparty, and a legally enforceable master netting agreement exists with the counterparty, the exposure, less collateral held, represents the appropriate measure of credit risk. Substantially all derivative contracts are subject to master netting agreements or other right of offset arrangements. At December 31, 2009 and 2008, the Bank’s credit risk, representing derivatives in a fair value gain position was approximately $8.3 million and $20.2 million after the recognition of any cash collateral held by the FHLBNY. The credit risk at December 31, 2009 and 2008 included $0.8 million and $0.7 million in net interest receivable.
Derivative counterparties are also exposed to credit losses resulting from potential nonperformance risk of FHLBNY with respect to derivative contracts. Exposure to counterparties is measured by derivatives in a fair value loss position from the FHLBNY’s perspective, which from the counterparties’ perspective is a gain. At December 31, 2009 and 2008, exposure to counterparties after offsetting cash collateral pledged by the FHLBNY was $746.2 million and $861.7 million. The FHLBNY had deposited $2.2 billion and $3.8 billion with derivative counterparties as cash collateral at December 31, 2009 and 2008. The FHLBNY is exposed to the risk of derivative counterparties defaulting on the terms of the derivative contracts and failing to return cash deposited with counterparties. If such an event were to occur, the FHLBNY would be forced to replace derivatives by executing similar derivative contracts with other counterparties. To the extent that the FHLBNY receives cash from the replacement trades that is less than the amount of cash deposited with the defaulting counterparty, the FHLBNY’s cash pledged is exposed to credit risk. Derivative counterparties holding the FHLBNY’s cash as pledged collateral were rated single-A and better at December 31, 2009, and based on credit analyses and collateral requirements, the management of the FHLBNY does not anticipate any credit losses on its derivative agreements.
253
Federal Home Loan Bank of New York
Notes to Financial Statements
Impact of the bankruptcy of Lehman Brothers
On September 15, 2008, Lehman Brothers Holdings, Inc. (“LBHI”), the parent company of Lehman Brothers Special Financing Inc. (“LBSF”) and a guarantor of LBSF’s obligations filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. LBSF was a counterparty to FHLBNY on multiple derivative transactions under International Swap Dealers Association, Inc. master agreements with a total notional amount of $16.5 billion at the time of termination of the FHLBanks’ derivative transactions with LBSF. The net amount that is due to the Bank after giving effect to obligations that are due LBSF was approximately $65 million, and the Bank has fully reserved the LBSF receivables as the bankruptcy of LBHI and LBSF make the timing and the amount of the recovery uncertain. The loss was reported as a charge to Other Income (loss) in the 2008 Statement of Income as a Provision for derivative counterparty credit losses. The FHLBNY filed on September 22, 2009 a proof of claim of $64.5 million as a creditor in connection with the bankruptcy proceedings. It is possible that, in the course of the bankruptcy proceedings, the FHLBNY may recover some amount in a future period. However, because the timing and the amount of such recovery remains uncertain, the FHLBNY has not recorded any estimated recovery in its financial statements. The amount, if any that the Bank actually recovers will ultimately be decided in the course of the bankruptcy proceedings.
The following tables represented outstanding notional balances and estimated fair values of the derivatives outstanding at December 31, 2009 and 2008 (in thousands):
| | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Notional Amount of | | | | | | | Derivative | |
| | | Derivatives | | | Derivative Assets | | | Liabilities | |
Fair value of derivatives instruments | | | | | | | | | | | | |
| Derivatives in fair value hedging relationships | | | | | | | | | | | | |
| Interest rate swaps | | $ | 98,776,447 | | | $ | 854,699 | | | $ | (3,974,207 | ) |
| | | | | | | | | | |
| Total derivatives in hedging relationships | | $ | 98,776,447 | | | $ | 854,699 | | | $ | (3,974,207 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| Interest rate swaps | | $ | 33,144,963 | | | $ | 147,239 | | | $ | (73,450 | ) |
| Interest rate caps or floors | | | 2,282,000 | | | | 77,999 | | | | (7,525 | ) |
| Mortgage delivery commitments | | | 4,210 | | | | — | | | | (39 | ) |
| Other* | | | 320,000 | | | | 1,316 | | | | (956 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total derivatives not designated as hedging instruments | | $ | 35,751,173 | | | $ | 226,554 | | | $ | (81,970 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total derivatives before netting and collateral adjustments | | $ | 134,527,620 | | | $ | 1,081,253 | | | $ | (4,056,177 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Netting adjustments | | | | | | $ | (1,072,973 | ) | | $ | 1,072,973 | |
| Cash collateral and related accrued interest | | | | | | | — | | | | 2,237,028 | |
| | | | | | | | | | | |
| Total collateral and netting adjustments | | | | | | $ | (1,072,973 | ) | | $ | 3,310,001 | |
| | | | | | | | | | | |
Total reported on the Statements of Condition | | | | | | $ | 8,280 | | | $ | (746,176 | ) |
| | | | | | | | | | | |
| | | |
| * | | Other: Comprised of swaps intermediated for members. |
254
Federal Home Loan Bank of New York
Notes to Financial Statements
| | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Notional Amount of | | | | | | | Derivative | |
| | | Derivatives | | | Derivative Assets | | | Liabilities | |
Fair value of derivatives instruments | | | | | | | | | | | | |
| Derivatives in fair value hedging relationships | | | | | | | | | | | | |
| Interest rate swaps | | $ | 84,582,796 | | | $ | 1,640,507 | | | $ | (6,117,173 | ) |
| | | | | | | | | | |
| Total derivatives in hedging relationships | | $ | 84,582,796 | | | $ | 1,640,507 | | | $ | (6,117,173 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| Interest rate swaps | | $ | 40,674,142 | | | $ | 222,615 | | | $ | (370,876 | ) |
| Interest rate caps or floors | | | 2,357,000 | | | | 16,318 | | | | (8,360 | ) |
| Mortgage delivery commitments | | | 10,395 | | | | 2 | | | | (110 | ) |
| Other* | | | 300,000 | | | | 10,186 | | | | (9,694 | ) |
| | | | | | | | | | |
| Total derivatives not designated as hedging instruments | | $ | 43,341,537 | | | $ | 249,121 | | | $ | (389,040 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Total derivatives before netting and collateral adjustments | | $ | 127,924,333 | | | $ | 1,889,628 | | | $ | (6,506,213 | ) |
| | | | | | | | | | |
| Netting adjustments | | | | | | $ | (1,808,183 | ) | | $ | 1,808,183 | |
| Cash collateral and related accrued interest | | | | | | | (61,209 | ) | | | 3,836,370 | |
| | | | | | | | | | | |
| Total collateral and netting adjustments | | | | | | $ | (1,869,392 | ) | | $ | 5,644,553 | |
| | | | | | | | | | | |
Total reported on the Statements of Condition | | | | | | $ | 20,236 | | | $ | (861,660 | ) |
| | | | | | | | | | | |
| | | |
| * | | Other: Comprised of swaps intermediated for members. |
The categories —“Fair value”, “Mortgage delivery commitment”, and “Cash Flow” hedges — represent derivative transactions in hedging relationships. If any such hedges do not qualify for hedge accounting under the accounting standards for derivatives and hedging, they are classified as “Economic” hedges. Changes in fair values of economic hedges are recorded through the income statement without the offset of corresponding changes in the fair value of the hedged item. Changes in fair values of qualifying derivative transactions designated in fair value hedges are recorded through the income statement with the offset of corresponding changes in the fair values of the hedged items. The effective portion of changes in the fair values of derivatives designated in a qualifying cash flow hedge is recorded in Accumulated other comprehensive income (loss).
Earnings impact of derivatives and hedging activities
Net realized and unrealized gain (loss) on derivatives and hedging activities
Gains and losses from hedging activities designated as fair value hedges are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income. Net ineffectiveness from fair value hedges was a gain of $21.1 million in 2009, a loss of $12.0 million in 2008 and a gain of $5.9 million in 2007. Ineffectiveness from hedges designated as cash flow hedges were not material for periods in this report.
Amortization of basis resulting from modified advance hedges amounted to gains of $0.4 million, $0.5 million and $1.0 million for the years ended December 31, 2009, 2008 and 2007.
255
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY reported the following net gains (losses) from derivatives and hedging activities (in thousands):
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | Gain (Loss) | | | Gain (Loss) | | | Gain (Loss) | |
Derivatives designated as hedging instruments | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | |
| Advances | | $ | (4,542 | ) | | $ | 31,838 | | | $ | 7,968 | |
| Consolidated obligations-bonds | | | 25,647 | | | | (43,530 | ) | | | (2,058 | ) |
| Consolidated obligations-discount notes | | | — | | | | (333 | ) | | | — | |
| | | | | | | | | | |
| Net gain (loss) related to fair value hedge ineffectiveness | | | 21,105 | | | | (12,025 | ) | | | 5,910 | |
| Net gain (loss) related to cash flow hedge ineffectiveness | | | — | | | | (9 | ) | | | 9 | |
| | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | |
Economic hedges | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | |
| Advances | | | 4,491 | | | | (20,833 | ) | | | 2 | |
| Consolidated obligations-bonds | | | 92,070 | | | | (38,763 | ) | | | 9,622 | |
| Consolidated obligations-discount notes | | | (9,643 | ) | | | 13,895 | | | | 52 | |
| Member intermediation | | | (132 | ) | | | 462 | | | | 19 | |
| Balance sheet-macro hedges swaps | | | 2,869 | | | | 18,029 | | | | — | |
| Accrued interest-swaps | | | (1,136 | ) | | | (126,551 | ) | | | 1,887 | |
| Accrued interest-intermediation | | | 85 | | | | 18 | | | | 7 | |
Caps and floors | | | | | | | | | | | | |
| Advances | | | (1,353 | ) | | | (2,050 | ) | | | (2,611 | ) |
| Balance sheet | | | 63,330 | | | | (38,723 | ) | | | — | |
| Accrued interest-options | | | (5,798 | ) | | | 101 | | | | 3,630 | |
Mortgage delivery commitments | | | (20 | ) | | | (3 | ) | | | (171 | ) |
Swaps matching instruments designated under FVO | | | | | | | | | | | | |
| Consolidated obligations-bonds | | | (10,330 | ) | | | 7,698 | | | | — | |
| Accrued interest on FVO swaps | | | 9,162 | | | | (505 | ) | | | — | |
| | | | | | | | | | |
| Net gain (loss) related to derivatives not designated as hedging instruments | | | 143,595 | | | | (187,225 | ) | | | 12,437 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net gain (loss) on derivatives and hedging activities | | $ | 164,700 | | | $ | (199,259 | ) | | $ | 18,356 | |
| | | | | | | | | | |
256
Federal Home Loan Bank of New York
Notes to Financial Statements
The components of hedging gains and losses for the year ended December 31, 2009 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | | | | | Effect of | |
| | | | | | | | | | | | | | | Derivatives on | |
| | | Gain (Loss) on | | | Gain (Loss) on | | | | | | | Net Interest | |
| | | Derivative | | | Hedged Item | | | Earnings Impact | | | Income1 | |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | | | | | |
| Advances | | $ | 2,147,467 | | | $ | (2,152,009 | ) | | $ | (4,542 | ) | | $ | (1,793,232 | ) |
| Consolidated obligations-bonds | | | (655,908 | ) | | | 681,555 | | | | 25,647 | | | | 559,647 | |
| Consolidated obligations-notes | | | — | | | | — | | | | — | | | | 474 | |
| | | | | | | | | | | | | |
| Fair value hedges — Net impact | | | 1,491,559 | | | $ | (1,470,454 | ) | | | 21,105 | | | | (1,233,111 | ) |
| Cash flow hedges ineffectiveness | | | — | | | | — | | | | — | | | | — | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | | | | | |
| Advances | | | 4,491 | | | | — | | | | 4,491 | | | | — | |
| Consolidated obligations-bonds | | | 92,070 | | | | — | | | | 92,070 | | | | — | |
| Consolidated obligations-notes | | | (9,643 | ) | | | — | | | | (9,643 | ) | | | — | |
| Member intermediation | | | (132 | ) | | | — | | | | (132 | ) | | | — | |
| Balance sheet-macro hedges swaps | | | 2,869 | | | | — | | | | 2,869 | | | | — | |
| Accrued interest-swaps | | | (1,136 | ) | | | — | | | | (1,136 | ) | | | — | |
| Accrued interest-intermediation | | | 85 | | | | — | | | | 85 | | | | — | |
Caps and floors | | | | | | | | | | | | | | | | |
| Advances | | | (1,353 | ) | | | — | | | | (1,353 | ) | | | — | |
| Member intermediation Balance sheet | | | 63,330 | | | | — | | | | 63,330 | | | | — | |
| Accrued interest-options | | | (5,798 | ) | | | — | | | | (5,798 | ) | | | — | |
Mortgage delivery commitments | | | (20 | ) | | | — | | | | (20 | ) | | | — | |
Swaps matching instruments designated under FVO | | | | | | | | | | | | | | | | |
| Advances | | | — | | | | — | | | | — | | | | — | |
| Consolidated obligations-bonds | | | (10,330 | ) | | | — | | | | (10,330 | ) | | | — | |
| Consolidated obligations — discount notes | | | — | | | | — | | | | — | | | | — | |
| Accrued interest on FVO swaps | | | 9,162 | | | | — | | | | 9,162 | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 1,635,154 | | | $ | (1,470,454 | ) | | $ | 164,700 | | | $ | (1,233,111 | ) |
| | | | | | | | | | | | | |
| | | |
| 1 | | Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged bonds, discount notes, and advances. |
257
Federal Home Loan Bank of New York
Notes to Financial Statements
The components of hedging gains and losses for the year ended December 31, 2008 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | | | | | | | | | | | | | Effect of | |
| | | | | | | | | | | | | | | Derivatives on | |
| | | Gain (Loss) on | | | Gain (Loss) on | | | | | | | Net Interest | |
| | | Derivative | | | Hedged Item | | | Earnings Impact | | | Income1 | |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | | | | | |
| Advances | | $ | (4,362,202 | ) | | $ | 4,394,040 | | | $ | 31,838 | | | $ | (455,652 | ) |
| Consolidated obligations-bonds | | | 963,271 | | | | (1,006,801 | ) | | | (43,530 | ) | | | 338,087 | |
| Consolidated obligations-notes | | | 29 | | | | (362 | ) | | | (333 | ) | | | 161 | |
| | | | | | | | | | | | | |
| Fair value hedges ineffectiveness | | | (3,398,902 | ) | | $ | 3,386,877 | | | | (12,025 | ) | | | (117,404 | ) |
| Cash flow hedges ineffectiveness | | | (9 | ) | | | — | | | | (9 | ) | | | — | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | | | | | |
| Advances | | | (20,833 | ) | | | — | | | | (20,833 | ) | | | — | |
| Consolidated obligations-bonds | | | (38,763 | ) | | | — | | | | (38,763 | ) | | | — | |
| Consolidated obligations-notes | | | 13,895 | | | | — | | | | 13,895 | | | | — | |
| Member intermediation | | | 462 | | | | — | | | | 462 | | | | — | |
| Balance sheet-macro hedges swaps | | | 18,029 | | | | — | | | | 18,029 | | | | — | |
| Accrued interest-swaps | | | (126,551 | ) | | | — | | | | (126,551 | ) | | | — | |
| Accrued interest-intermediation | | | 18 | | | | — | | | | 18 | | | | — | |
Caps and floors | | | | | | | | | | | | | | | | |
| Advances | | | (2,050 | ) | | | — | | | | (2,050 | ) | | | — | |
| Balance sheet | | | (38,723 | ) | | | — | | | | (38,723 | ) | | | — | |
| Accrued interest-options | | | 101 | | | | — | | | | 101 | | | | — | |
Mortgage delivery commitments | | | (3 | ) | | | — | | | | (3 | ) | | | — | |
Swaps matching instruments designated under FVO | | | | | | | | | | | | | | | | |
| Consolidated obligations-bonds | | | 7,698 | | | | — | | | | 7,698 | | | | — | |
| Accrued interest on FVO swaps | | | (505 | ) | | | — | | | | (505 | ) | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | (3,586,136 | ) | | $ | 3,386,877 | | | $ | (199,259 | ) | | $ | (117,404 | ) |
| | | | | | | | | | | | | |
| | | |
| 1 | | Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged bonds, discount notes, and advances. |
258
Federal Home Loan Bank of New York
Notes to Financial Statements
The components of hedging gains and losses for the year ended December 31, 2007 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, 2007 | |
| | | | | | | | | | | | | | | Effect of | |
| | | | | | | | | | | | | | | Derivatives on | |
| | | Gain (Loss) on | | | Gain (Loss) on | | | | | | | Net Interest | |
| | | Derivative | | | Hedged Item | | | Earnings Impact | | | Income1 | |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | | | | | |
| Advances | | $ | (1,488,421 | ) | | $ | 1,496,389 | | | $ | 7,968 | | | $ | 354,679 | |
| Consolidated obligations-bonds | | | 412,247 | | | | (414,305 | ) | | | (2,058 | ) | | | (174,102 | ) |
| Consolidated obligations-notes | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Fair value hedges ineffectiveness | | | (1,076,174 | ) | | $ | 1,082,084 | | | | 5,910 | | | | 180,577 | |
| Cash flow hedges ineffectiveness | | | 9 | | | | — | | | | 9 | | | | — | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | |
Interest rate swaps | | | | | | | | | | | | | | | | |
| Advances | | | 2 | | | | — | | | | 2 | | | | — | |
| Consolidated obligations-bonds | | | 9,622 | | | | — | | | | 9,622 | | | | — | |
| Consolidated obligations-notes | | | 52 | | | | — | | | | 52 | | | | — | |
| Member intermediation | | | 19 | | | | — | | | | 19 | | | | — | |
| Balance sheet-macro hedges swaps | | | — | | | | — | | | | — | | | | — | |
| Accrued interest-swaps | | | 1,887 | | | | — | | | | 1,887 | | | | — | |
| Accrued interest-intermediation | | | 7 | | | | — | | | | 7 | | | | — | |
Caps and floors | | | | | | | | | | | | | | | | |
| Advances | | | (2,611 | ) | | | — | | | | (2,611 | ) | | | — | |
| Balance sheet | | | — | | | | — | | | | — | | | | — | |
| Accrued interest-options | | | 3,630 | | | | — | | | | 3,630 | | | | — | |
Mortgage delivery commitments | | | (171 | ) | | | — | | | | (171 | ) | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | (1,063,728 | ) | | $ | 1,082,084 | | | $ | 18,356 | | | $ | 180,577 | |
| | | | | | | | | | | | | |
| | | |
| Note: The FHLBNY did not designate any hedged item under the FVO in 2007. |
| |
| 1 | | Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income and expense of the hedged bonds, discount notes, and advances. |
Cash Flow hedges
There were no material amounts in 2009, 2008 and 2007 that were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. The maximum length of time over which the Bank typically hedges its exposure to the variability in future cash flows for forecasted transactions is between three and six months. No cash flow hedges were outstanding at December 31, 2009 or 2008, although the Bank had executed cash flow hedges during 2008.
The effective portion of the gain or loss on swaps designated and qualifying as a cash flow hedging instrument is reported as a component of AOCI and reclassified into earnings in the same period during which the hedged forecasted bond expenses affect earnings. The balances in AOCI from terminated cash flow hedges represented net realized losses of $22.7 million and $30.2 million at December 31, 2009 and 2008. At December 31, 2009, it is expected that over the next 12 months about $6.9 million ($7.5 million at December 31, 2008) of net losses recorded in AOCI will be recognized as a charge to earnings as a yield adjustment to interest expense of consolidated bonds.
259
Federal Home Loan Bank of New York
Notes to Financial Statements
The effect of cash flow hedge related derivative instruments for the years ended December 31, 2009, 2008, and 2007 were as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | OCI | |
| | | Gains/(Losses) | |
| | | | | | | Location: | | Amount | | | Ineffectiveness | |
| | | Recognized | | | Reclassified to | | Reclassified to | | | Recognized in | |
| | | in OCI1 | | | Earnings1 | | Earnings1 | | | Earnings | |
The effect of cash flow hedge related to
Interest rate swaps | | | | | | | | | | | | | | |
| Advances | | $ | — | | | Interest Income | | $ | — | | | $ | — | |
| Consolidated obligations-bonds | | | — | | | Interest Expense | | | 7,508 | | | | — | |
| | | | | | | | | | | | |
Total | | $ | — | | | | | $ | 7,508 | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | OCI | |
| | | Gains/(Losses) | |
| | | | | | | Location: | | Amount | | | Ineffectiveness | |
| | | Recognized | | | Reclassified to | | Reclassified to | | | Recognized in | |
| | | in OCI 1, 2 | | | Earnings1 | | Earnings1 | | | Earnings | |
The effect of cash flow hedge related to
Interest rate swaps | | | | | | | | | | | | | | |
| Advances | | $ | — | | | Interest Income | | $ | — | | | $ | — | |
| Consolidated obligations-bonds | | | (6,109 | ) | | Interest Expense | | | 6,124 | | | | 9 | |
| | | | | | | | | | | | |
Total | | $ | (6,109 | ) | | | | $ | 6,124 | | | $ | 9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | December 31, 2007 | |
| | | OCI | |
| | | Gains/(Losses) | |
| | | | | | | Location: | | Amount | | | Ineffectiveness | |
| | | Recognized | | | Reclassified to | | Reclassified to | | | Recognized in | |
| | | in OCI1, 2 | | | Earnings 1 | | Earnings1 | | | Earnings | |
The effect of cash flow hedge related to
Interest rate swaps | | | | | | | | | | | | | | |
| Advances | | $ | — | | | Interest Income | | $ | — | | | $ | — | |
| Consolidated obligations-bonds | | | (26,105 | ) | | Interest Expense | | | 662 | | | | (9 | ) |
| | | | | | | | | | | | |
Total | | $ | (26,105 | ) | | | | $ | 662 | | | $ | (9 | ) |
| | | | | | | | | | | | |
| | | |
| 1 | | Effective portion |
| |
| 2 | | Represents effective portion of basis adjustments to AOCI in periods 2009, 2008, and 2007 from cash flowhedging transactions. |
260
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 18. Fair Values of financial instruments
Items Measured at Fair Value on a Recurring Basis
The following table presents for each hierarchy level (see note below), the FHLBNY’s assets and liabilities that were measured at fair value on its Statements of Condition at December 31, 2009 and 2008 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | | | | | | | | | Netting | |
| | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Adjustments | |
Assets | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | $ | 2,253,153 | | | $ | — | | | $ | 2,253,153 | | | $ | — | | | $ | — | |
Derivative assets(a) | | | 8,280 | | | | | | | | 1,081,253 | | | | | | | | (1,072,973 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 2,261,433 | | | $ | — | | | $ | 3,334,406 | | | $ | — | | | $ | (1,072,973 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | | | | | | | | | | | |
Bonds(b) | | $ | (6,035,741 | ) | | $ | — | | | $ | (6,035,741 | ) | | $ | — | | | $ | — | |
Derivative liabilities(a) | | | (746,176 | ) | | | — | | | | (4,056,177 | ) | | | — | | | | 3,310,001 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total liabilities at fair value | | $ | (6,781,917 | ) | | $ | — | | | $ | (10,091,918 | ) | | $ | — | | | $ | 3,310,001 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | | | | | | | | | | | | | | | | | Netting | |
| | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Adjustments | |
Assets | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | $ | 2,861,869 | | | $ | — | | | $ | 2,861,869 | | | $ | — | | | $ | — | |
Derivative assets(a) | | | 20,236 | | | | — | | | | 1,386,859 | | | | — | | | | (1,366,623 | ) |
| Other assets | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 2,882,105 | | | $ | — | | | $ | 4,248,728 | | | $ | — | | | $ | (1,366,623 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | | | | | | | | | | | |
Bonds(b) | | $ | (998,942 | ) | | $ | — | | | $ | (998,942 | ) | | $ | — | | | $ | — | |
Derivative liabilities(a) | | | (861,660 | ) | | | — | | | | (5,978,026 | ) | | | — | | | | 5,116,366 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total liabilities at fair value | | $ | (1,860,602 | ) | | $ | — | | | $ | (6,976,968 | ) | | $ | — | | | $ | 5,116,366 | |
| | | | | | | | | | | | | | | | |
| | | |
| | | Level 1 — Quoted prices in active markets for identical assets. |
| |
| | | Level 2 — Significant other observable inputs. |
| |
| | | Level 3 — Significant unobservable inputs. |
| |
| (a) | | Derivative assets and liabilities were interest-rate contracts, except for de minimis amount of mortgage delivery contracts. |
| |
| (b) | | Based on its analysis of the nature of risks of the FHLBNY’s debt measured at fair value, theFHLBNY has determined that presenting the debt as a single class is appropriate. |
261
Federal Home Loan Bank of New York
Notes to Financial Statements
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities would be measured at fair value on a nonrecurring basis, and for the FHLBNY, such items may include mortgage loans in foreclosure, or mortgage loans and held-to-maturity securities written down to fair value. At December 31, 2009, the Bank measured and recorded the fair values on a nonrecurring basis of held-to-maturity investment securities deemed to be OTTI; that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments in certain circumstances (for example, when there is evidence of other-than-temporary impairment — OTTI) in accordance with the guidance on recognition and presentation of other-than-temporary impairment. The nonrecurring measurement basis related to certain private-label held-to-maturity mortgage-backed securities that were determined to be OTTI. The held-to-maturity OTTI securities were recorded at their fair values of $42.9 million at December 31, 2009. For more information see Note 4 — Held-to-maturity securities.
No fair values were recorded on a non-recurring basis at December 31, 2008.
The following table summarizes the fair values of MBS for which a non-recurring change in fair value was recorded at December 31, 2009 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Credit Loss * | |
| | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2009 | |
| Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | |
| Private-label residential MBS | | $ | 42,922 | | | $ | — | | | $ | — | | | $ | 42,922 | | | $ | 20,816 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 42,922 | | | $ | — | | | $ | — | | | $ | 42,922 | | | $ | 20,816 | |
| | | | | | | | | | | | | | | | |
| | | |
| * | | Note: Cumulative credit losses of $20.8 million include credit losses on Held-to-maturity securities that were OTTI in previous quarters of 2009. For Held-to-maturity securities that were previously credit impaired but no additional credit impairment were deemed necessary at December 31, 2009, the securities were recorded at their carrying values and not re-adjusted to their fair values. At December 31, 2009, the FHLBNY also wrote down certain MBS to their fair values ($42.9 million) when it was determined that the securities were credit impaired at December 31, 2009, and their carrying values prior to write-down ($59.9 million) were in excess of their fair values. |
262
Federal Home Loan Bank of New York
Notes to Financial Statements
Estimated fair values — Summary Tables
The carrying value and estimated fair values of the FHLBNY’s financial instruments as of December 31, 2009 and 2008 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Carrying | | | Estimated | | | Carrying | | | Estimated | |
| Financial Instruments | | Value | | | Fair Value | | | Value | | | Fair Value | |
| Assets | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 2,189,252 | | | $ | 2,189,252 | | | $ | 18,899 | | | $ | 18,899 | |
| Interest-bearing deposits | | | — | | | | — | | | | 12,169,096 | | | | 12,170,681 | |
| | | | | | | | | | | | | | | | | |
| Federal funds sold | | | 3,450,000 | | | | 3,449,997 | | | | — | | | | — | |
| Available-for-sale securities | | | 2,253,153 | | | | 2,253,153 | | | | 2,861,869 | | | | 2,861,869 | |
| Held-to-maturity securities | | | | | | | | | | | | | | | | |
| Long-term securities | | | 10,519,282 | | | | 10,669,252 | | | | 10,130,543 | | | | 9,934,473 | |
| Certificates of deposit | | | — | | | | — | | | | 1,203,000 | | | | 1,203,328 | |
| Advances | | | 94,348,751 | | | | 94,624,708 | | | | 109,152,876 | | | | 109,421,358 | |
| Mortgage loans held-for-portfolio, net | | | 1,317,547 | | | | 1,366,538 | | | | 1,457,885 | | | | 1,496,329 | |
| Accrued interest receivable | | | 340,510 | | | | 340,510 | | | | 492,856 | | | | 492,856 | |
| Derivative assets | | | 8,280 | | | | 8,280 | | | | 20,236 | | | | 20,236 | |
| Other financial assets | | | 3,412 | | | | 3,412 | | | | 2,713 | | | | 2,713 | |
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Deposits | | | 2,630,511 | | | | 2,630,513 | | | | 1,451,978 | | | | 1,452,648 | |
| Consolidated obligations: | | | | | | | | | | | | | | | | |
| Bonds | | | 74,007,978 | | | | 74,279,737 | | | | 82,256,705 | | | | 82,533,048 | |
| Discount notes | | | 30,827,639 | | | | 30,831,201 | | | | 46,329,906 | | | | 46,408,907 | |
| Mandatorily redeemable capital stock | | | 126,294 | | | | 126,294 | | | | 143,121 | | | | 143,121 | |
| Accrued interest payable | | | 277,788 | | | | 277,788 | | | | 426,144 | | | | 426,144 | |
| Derivative liabilities | | | 746,176 | | | | 746,176 | | | | 861,660 | | | | 861,660 | |
| Other financial liabilities | | | 38,832 | | | | 38,832 | | | | 38,594 | | | | 38,594 | |
The following table summarizes the activity related to consolidated obligation bonds for which the Bank elected the fair value option (in thousands):
| | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | |
| Balance, beginning of the period | | $ | (998,942 | ) | | $ | — | |
| New transaction elected for fair value option | | | (10,100,000 | ) | | | (1,014,000 | ) |
| Maturities and terminations | | | 5,043,000 | | | | 31,000 | |
| Change in fair value | | | 15,523 | | | | (8,325 | ) |
| Change in accrued interest | | | 4,678 | | | | (7,617 | ) |
| | | | | | | |
| | | | | | | | | |
Balance, end of the period | | $ | (6,035,741 | ) | | $ | (998,942 | ) |
| | | | | | | |
The FHLBNY designated certain debt under the FVO for the first time in 2008.
263
Federal Home Loan Bank of New York
Notes to Financial Statements
The following table presents the change in fair value included in the Statements of Income for the consolidated obligation bonds designated in accordance with the accounting standards on the fair value option for financial assets and liabilities (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | |
| | | Interest expense on | | | Net gain(loss) due | | | Total change in fair value | | | Interest expense on | | | Net gain(loss) due | | | Total change in fair value | |
| | | consolidated | | | to changes in fair | | | included in current | | | consolidated | | | to changes in fair | | | included in current period | |
| | | obligation bonds | | | value | | | period earnings | | | obligation bonds | | | value | | | earnings | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated obligations-bonds | | $ | (10,869 | ) | | $ | 15,523 | | | $ | 4,654 | | | $ | (7,835 | ) | | $ | (8,325 | ) | | $ | (16,160 | ) |
| | | | | | | | | | | | | | | | | | | |
The following table compares the aggregate fair value and aggregate remaining contractual fair value and aggregate remaining contractual principal balance outstanding of consolidated obligation bonds for which the fair value option has been elected (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | | | | | Fair value | | | | | | | | | | | Fair value | |
| | | Principal Balance | | | Fair value | | | over/(under) | | | Principal Balance | | | Fair value | | | over/(under) | |
Consolidated obligations-bonds | | $ | 6,040,000 | | | $ | 6,035,741 | | | $ | (4,259 | ) | | $ | 983,000 | | | $ | 998,942 | | | $ | 15,942 | |
| | | | | | | | | | | | | | | | | | | |
Notes to Estimated Fair Values of financial instruments
The fair value of financial instruments that is an asset is defined as the price FHLBNY would receive to sell an asset in an orderly transaction between market participants at the measurement date. A financial liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair values are based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices are not available, valuation models and inputs are utilized. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or markets and the instruments’ complexity.
The fair values of financial assets and liabilities reported in the tables above are discussed below. For additional information also see Significant Accounting Policies and Estimates in Note 1. The Fair Value Summary Tables above do not represent an estimate of the overall market value of the FHLBNY as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
264
Federal Home Loan Bank of New York
Notes to Financial Statements
The estimated fair value amounts have been determined by the FHLBNY using procedures described below. Because an active secondary market does not exist for a portion of the FHLBNY’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change.
Cash and due from banks
The estimated fair value approximates the recorded book balance.
Interest-bearing deposits and Federal funds sold
The FHLBNY determines estimated fair values of certain short-term investments by calculating the present value of expected future cash flows from the investments. The discount rates used in these calculations are the current coupons of investments with similar terms.
Investment securities
The fair value of mortgage-backed investment securities is estimated by management using information from specialized pricing services that use pricing models or quoted prices of securities with similar characteristics. Inputs into the pricing models employed by pricing services for most of the Bank’s investments are market based and observable and are considered Level 2. The valuation techniques used by pricing services employ cash flow generators and option-adjusted spread models. Pricing spreads used as inputs in the models are based on new issue and secondary market transactions if securities that are traded in sufficient volumes in the secondary market. The valuation of the Bank’s private-label securities that are all designated as held-to-maturity may require pricing services to use significant inputs that are subjective and are generally considered to be Level 3 because the inputs may not be market based and observable. Beginning with the current year third quarter, the FHLBNY requests prices for all mortgage-backed securities from four specific third-party vendors. Prior to the change, the FHLBNY used three vendors. The adoption of the fourth pricing vendor had no material impact on the financial results, financial position or cash flows of the Bank. Depending on the number of prices received from the four vendors for each security, the FHLBNY selects a median or average price. The Bank’s pricing methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. In certain limited instances (i.e., prices are outside of variance thresholds or the third-party services do not provide a price), the FHLBNY will obtain a price from securities dealers that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants.
In accordance with the amended guidance under the accounting standards for investments in debt and equity securities, certain held-to-maturity private-label mortgage-backed securities were written down to their fair value as a result of a recognition of OTTI in 2009. The OTTI impaired securities are classified in the table of items measured at fair value on a nonrecurring basis as Level 3 financial instruments in accordance with the accounting standards for fair value measurements and disclosures, and valuation hierarchy as of December 31, 2009. This determination was made based on management’s view that the private-label instruments may not have an active market because of the specific vintage of the securities as well as inherent conditions surrounding the trading of private-label mortgage-backed securities. Fair values of these securities were determined by management using third party specialized vendor pricing services that made appropriate adjustments to observed prices of comparable securities that were being transacted in orderly market. Certain held-to-maturity private-label MBS deemed to be OTTI at December 31, 2009 were recorded at their fair values of $42.9 million.
The fair value of housing finance agency bonds is estimated by management using information primarily from specialized dealers.
265
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY routinely performs a comparison analysis of pricing to understand pricing trends and to establish a means of validating changes in pricing from period-to-period. In addition, the Bank runs pricing through prepayment models to test the reasonability of pricing relative to changes in the implied prepayment options of the bonds. Separately, the Bank performs comprehensive credit analysis, including the analysis of underlying cash flows and collateral. The FHLBNY believes such methodologies — valuation comparison, review of changes in valuation parameters, and credit analysis — mitigate the effects of the credit crisis, which has tended to reduce the availability of certain observable market pricing or has caused the widening of the bid/offer spread of certain securities.
Advances
The fair values of advances are computed using standard option valuation models. The most significant inputs to the valuation model are (1) consolidated obligation debt curve, published by the Office of Finance and available to the public, and (2) LIBOR swap curves and volatilities. The Bank considers both these inputs to be market based and observable as they can be directly corroborated by market participants.
Mortgage loans
The fair value of MPF loans and loans in the inactive CMA programs are priced using a valuation technique referred to as the “market approach”. Loans are aggregated into synthetic pass-through securities based on product type, loan origination year, gross coupon and loan term. Thereafter, these are compared against closing “TBA” prices extracted from independent sources. All significant inputs to the loan valuations are market based and observable.
Accrued interest receivable and payable
The estimated fair values approximate the recorded book value because of the relatively short period of time between their origination and expected realization.
Derivative assets and liabilities
The FHLBNY’s derivatives are traded in the over-the-counter market. Discounted cash flow analysis is the primary methodology employed by the FHLBNY’s valuation models to measure and record the fair values of its derivative positions. The valuation technique is considered as an “Income approach”. Derivatives are valued using industry-standard option adjusted valuation models that utilize market inputs, which can be corroborated, from widely accepted third-party sources. The Bank’s valuation model utilizes a modifiedBlack-Karasinskimodel that assumes that rates are distributed log normally. The log-normal model precludes interest rates turning negative in the model computations. Significant market based and observable inputs into the valuation model include volatilities and interest rates. These derivative positions are classified within Level 2 of the valuation hierarchy, and include interest rate swaps, swaptions, interest rate caps and floors, and mortgage delivery commitments.
The FHLBNY employs control processes to validate the fair value of its financial instruments, including those derived from valuation models. These control processes are designed to ensure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews of the pricing model’s theoretical soundness and appropriateness by specialists with relevant expertise who are independent from the trading desks or personnel who were involved in the design and selection of model inputs. Additionally, groups that are independent from the trading desk, or personnel involved in the design and selection of model inputs participate in the review and validation of the fair values generated from the valuation model. The FHLBNY maintains an ongoing review of its valuation models and has a formal model validation policy in addition to procedures for the approval and control of data inputs.
266
Federal Home Loan Bank of New York
Notes to Financial Statements
The valuation of derivative assets and liabilities reflect the value of the instrument including the values associated with counterparty risk and would also take into account the FHLBNY’s own credit standing and non-performance risk. The Bank has collateral agreements with all its derivative counterparties and enforces collateral exchanges at least weekly. The computed fair values of the FHLBNY’s derivatives took into consideration the effects of legally enforceable master netting agreements that allow the FHLBNY to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each derivative counterparty have bilateral collateral thresholds that take into account both the Bank’s and counterparty’s credit ratings. As a result of these practices and agreements and the FHLBNY’s assessment of any change in its own credit spread, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was sufficiently mitigated to an immaterial level that no credit adjustments were deemed necessary to the recorded fair value of derivative assets and derivative liabilities in the Statements of Condition at December 31, 2009 and 2008.
Deposits
The FHLBNY determines estimated fair values of deposits by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the current cost of deposits with similar terms.
Consolidated obligations
The FHLBNY estimates fair values based on the cost of raising comparable term debt and prices its bonds and discount notes off of the current consolidated obligations market curve, which has a daily active market. The fair values of consolidated obligation debt (bonds and discount notes) are computed using a standard option valuation model using market based and observable inputs: (1) consolidated obligation debt curve that is available to the public and published by the Office of Finance, and (2) LIBOR curve and volatilities. Model adjustments that are not “market-observable” are not considered significant.
Mandatorily redeemable capital stock
The FHLBNY considers the fair value of capital subject to mandatory redemption, as the redemption value of the stock, which is generally par plus accrued estimated dividend. The FHLBNY has a cooperative structure. Stock can only be acquired by members at par value and redeemed at par value. Stock is not traded publicly and no market mechanism exists for the exchange of stock outside the cooperative structure.
Note 19. Commitments and contingencies
The FHLBanks have joint and several liability for all the consolidated obligations issued on their behalf. Accordingly, should one or more of the FHLBanks be unable to repay their participation in the consolidated obligations, each of the other FHLBanks could be called upon to repay all or part of such obligations, as determined or approved by the Finance Agency. Neither the FHLBNY nor any other FHLBank has ever had to assume or pay the consolidated obligations of another FHLBank. The FHLBNY does not believe that it will be called upon to pay the consolidated obligations of another FHLBank in the future. Under the provisions of accounting standard for guarantees, the Bank would have been required to recognize the fair value of the FHLBNY’s joint and several liability for all the consolidated obligations, as discussed above. However, the FHLBNY considers the joint and several liabilities as similar to a related party guarantee, which meets the scope exception under the accounting standard for guarantees. Accordingly, the FHLBNY has not recognized the fair value of a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at December 31, 2009 and 2008. The par amount of the twelve FHLBanks’ outstanding consolidated obligations, including the FHLBNY’s, were approximately $0.9 trillion and $1.3 trillion at December 31, 2009 and 2008.
267
Federal Home Loan Bank of New York
Notes to Financial Statements
Standby letters of credit are executed for a fee on behalf of members to facilitate residential housing, community lending, and members’ asset/liability management or to provide liquidity. A standby letter of credit is a financing arrangement between the FHLBNY and its member. Members assume an unconditional obligation to reimburse the FHLBNY for value given by the FHLBNY to the beneficiary under the terms of the standby letter of credit. The FHLBNY may, in its discretion, permit the member to finance repayment of their obligation by receiving a collateralized advance. Outstanding standby letters of credit were approximately $697.9 million and $908.6 million as of December 31, 2009 and 2008, respectively and had original terms of up to 15 years, with a final expiration in 2019. Standby letters of credit are fully collateralized. Unearned fees on standby letters of credit were recorded in Other liabilities and were not significant as of December 31, 2009 and 2008. 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.
During the third quarter of 2008, each FHLBank, including the FHLBNY, entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (GSECF), as authorized by the Housing Act. The GSECF was designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF would be considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings would be agreed to at the time of issuance. Loans under the Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which consisted of FHLBank advances to members that had been collateralized in accordance with regulatory standards and mortgage-backed securities issued by Fannie Mae or Freddie Mac. Each FHLBank was required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible collateral updated on a weekly basis. As of December 31, 2009 and 2008, the FHLBNY had provided the U.S. Treasury listings of advance collateral amounting to $10.3 billion and $16.3 billion, which provided for maximum borrowings of $9.0 billion and $14.2 billion at December 31, 2009 and 2008. The amount of collateral can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of December 31, 2009, no FHLBank had drawn on this available source of liquidity. This temporary authorization expired on December 31, 2009.
Under the MPF program, the Bank was unconditionally obligated to purchase $4.2 million and $10.4 million in mortgage loans at December 31, 2009 and 2008. Commitments are generally for periods not to exceed 45 business days. Such commitments entered into after June 30, 2003 were recorded as derivatives at their fair value under the accounting standards for derivatives and hedging. In addition, the FHLBNY had entered into conditional agreements under “Master Commitments” with its members in the MPF program to purchase mortgage loans in aggregate of $484.6 million and $246.9 million as of December 31, 2009 and 2008.
268
Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY executes derivatives with major banks and broker-dealers and enters into bilateral collateral agreements. When counterparties are exposed, the Bank would typically pledge cash collateral to mitigate the counterparty’s credit exposure. To mitigate the counterparties’ exposures, the FHLBNY deposited $2.2 billion and $3.8 billion in cash with derivative counterparties as pledged collateral at December 31, 2009 and 2008, and these amounts were reported as a deduction to Derivative liabilities. At December 31, 2008, the FHLBNY was also 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 at December 31, 2009 was below the threshold agreements with derivative counterparties and no collateral was required to be pledged by counterparties. At December 31, 2008, the Bank’s credit exposure was reduced by cash collateral of $61.2 million delivered by derivatives counterparties and held by the Bank, and was recorded as a deduction to Derivative assets.
The FHLBNY charged to operating expenses net rental costs of approximately $3.4 million, $3.2 million, and $3.1 million for years ended December 31, 2009, 2008 and 2007. Lease agreements for FHLBNY premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBNY’s results of operations or financial condition.
The following table summarizes contractual obligations and contingencies as of December 31, 2009 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Payments due or expiration terms by period | |
| | | Less than | | | One year | | | Greater than three | | | Greater than | | | | |
| | | one year | | | to three years | | | years to five years | | | five years | | | Total | |
| Contractual Obligations | | | | | | | | | | | | | | | | | | | | |
Consolidated obligations-bonds at par1 | | $ | 40,896,550 | | | $ | 23,430,775 | | | $ | 6,091,550 | | | $ | 2,939,050 | | | $ | 73,357,925 | |
Mandatorily redeemable capital stock1 | | | 102,453 | | | | 16,766 | | | | 2,118 | | | | 4,957 | | | | 126,294 | |
Premises (lease obligations)2 | | | 3,060 | | | | 6,161 | | | | 5,413 | | | | 6,427 | | | | 21,061 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total contractual obligations | | | 41,002,063 | | | | 23,453,702 | | | | 6,099,081 | | | | 2,950,434 | | | | 73,505,280 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Other commitments | | | | | | | | | | | | | | | | | | | | |
| Standby letters of credit | | | 667,554 | | | | 9,139 | | | | 15,023 | | | | 6,199 | | | | 697,915 | |
| Consolidated obligations-bonds/ discount notes traded not settled | | | 2,145,000 | | | | — | | | | — | | | | — | | | | 2,145,000 | |
| Firm commitment-advances | | | 100,000 | | | | — | | | | — | | | | — | | | | 100,000 | |
| Open delivery commitments (MPF) | | | 4,210 | | | | — | | | | — | | | | — | | | | 4,210 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total other commitments | | | 2,916,764 | | | | 9,139 | | | | 15,023 | | | | 6,199 | | | | 2,947,125 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total obligations and commitments | | $ | 43,918,827 | | | $ | 23,462,841 | | | $ | 6,114,104 | | | $ | 2,956,633 | | | $ | 76,452,405 | |
| | | | | | | | | | | | | | | | |
| | | |
| 1 | | Callable bonds contain exercise date or a series of exercise dates that may result in a shorter redemption period. Mandatorily redeemable capital stock is categorized by the dates at which the corresponding advances outstanding mature. Excess capital stock is redeemed at that time, and hence, these dates better represent the related commitments than the put dates associated with capital stock, under which stock may not be redeemed until the later of five years from the date the member becomes a nonmember or the related advance matures. |
| |
| 2 | | Immaterial amount of commitments for equipment leases not included. |
The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses is required.
269
Federal Home Loan Bank of New York
Notes to Financial Statements
Note 20. Related party transactions
The FHLBNY is a cooperative and the members own almost all of the stock of the Bank. Stock that is not owned by members is held by former members. The majority of the members of the Board of Directors of the FHLBNY are elected by and from the membership. The FHLBNY conducts its advances business almost exclusively with members. The Bank considers its transactions with its members and non-member stockholders as related party transactions in addition to transactions with other FHLBanks, the Office of Finance, and the Finance Agency. All transactions with all members, including those whose officers may serve as directors of the FHLBNY, are at terms that are no more favorable than comparable transactions with other members. The FHLBNY may from time to time borrow or sell overnight and term Federal funds at market rates to members.
Debt Transfers
During 2009 and 2008, there was no transfer of consolidated obligation bonds to other FHLBanks. In 2007, the Bank transferred par amounts of $487.0 million, and recorded losses of $4.6 million. Amounts transferred were in exchange for a cash price that represented the fair market values of the bonds. No bonds were transferred to the FHLBNY from another FHLBank in 2009 and 2008.
At trade date, the transferring bank notifies the Office of Finance of a change in primary obligor for the transferred debt.
Advances sold or transferred
No advances were transferred/sold to the FHLBNY or from the FHLBNY to another FHLBank in 2009, 2008 and 2007.
MPF Program
In the MPF program, the FHLBNY may participate out certain portions of its purchases of mortgage loans from its members. Transactions are at market rates. The FHLBank of Chicago, the MPF provider’s cumulative share of interest in the FHLBNY’s MPF loans at December 31, 2009 was $101.2 million ($125.0 million at December 31, 2008) from inception of the program through mid-2004. Since 2004, the FHLBNY has not shared its purchases with the FHLBank of Chicago. Fees paid to the FHLBank of Chicago were $0.6 million in each of the years ended December 31, 2009, 2008 and 2007.
Mortgage-backed Securities
No mortgage-backed securities were acquired from other FHLBanks during the periods in this report.
Intermediation
Notional amounts of $320.0 million and $300.0 million were outstanding at December 31, 2009 and 2008 in which the FHLBNY acted as an intermediary to sell derivatives to members. These were offset by identical transactions with unrelated derivatives counterparties. Net fair value exposures of these transactions at December 31, 2009 and 2008 were not material. The intermediated derivative transactions were fully collateralized.
Loans to other Federal Home Loan Banks
In 2009, the FHLBNY extended two overnight loans for a total of $472.0 million to other FHLBanks. In 2008, the Bank made four overnight loans for a total of $661.0 million. Generally, loans made to other FHLBanks are uncollateralized. Interest income from such loans was $1.9 thousand , $31.0 thousand and $2.0 thousand for the years ended December 31, 2009, 2008 and 2007.
270
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 $0.4 million, $5.5 million and $3.0 million for the years ended December 31, 2009, 2008 and 2007. There were no borrowings outstanding as of December 31, 2009 and 2008. Interest expense for the years ended December 31, 2009, 2008 and 2007 was $0.4 thousand, $159.4 thousand and $146.0 thousand.
The following tables summarize outstanding balances with related parties at December 31, 2009 and 2008, and transactions for each of the years ended December 31, 2009, 2008 and 2007 (in thousands):
Related Party: Outstanding Assets, Liabilities and Capital
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Related | | | Unrelated | | | Related | | | Unrelated | |
Assets | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | — | | | $ | 2,189,252 | | | $ | — | | | $ | 18,899 | |
| Interest-bearing deposits | | | — | | | | — | | | | — | | | | 12,169,096 | |
| Federal funds sold | | | — | | | | 3,450,000 | | | | — | | | | — | |
| Available-for-sale securities | | | — | | | | 2,253,153 | | | | — | | | | 2,861,869 | |
| Held-to-maturity securities | | | | | | | | | | | | | | | | |
| Long-term securities | | | — | | | | 10,519,282 | | | | — | | | | 10,130,543 | |
| Certificates of deposit | | | — | | | | — | | | | — | | | | 1,203,000 | |
| Advances | | | 94,348,751 | | | | — | | | | 109,152,876 | | | | — | |
Mortgage loans 1 | | | — | | | | 1,317,547 | | | | — | | | | 1,457,885 | |
| Accrued interest receivable | | | 299,684 | | | | 40,826 | | | | 433,755 | | | | 59,101 | |
| Premises, software, and equipment | | | — | | | | 14,792 | | | | — | | | | 13,793 | |
Derivative assets2 | | | — | | | | 8,280 | | | | — | | | | 20,236 | |
Other assets3 | | | 179 | | | | 19,160 | | | | 153 | | | | 18,685 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total assets | | $ | 94,648,614 | | | $ | 19,812,292 | | | $ | 109,586,784 | | | $ | 27,953,107 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and capital | | | | | | | | | | | | | | | | |
| Deposits | | $ | 2,630,511 | | | $ | — | | | $ | 1,451,978 | | | $ | — | |
| Consolidated obligations | | | — | | | | 104,835,617 | | | | — | | | | 128,586,611 | |
| Mandatorily redeemable capital stock | | | 126,294 | | | | — | | | | 143,121 | | | | — | |
| Accrued interest payable | | | 16 | | | | 277,772 | | | | 814 | | | | 425,330 | |
Affordable Housing Program4 | | | 144,489 | | | | — | | | | 122,449 | | | | — | |
| Payable to REFCORP | | | — | | | | 24,234 | | | | — | | | | 4,780 | |
Derivative liabilities2 | | | — | | | | 746,176 | | | | — | | | | 861,660 | |
Other liabilities5 | | | 29,330 | | | | 43,176 | | | | 31,003 | | | | 44,750 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total liabilities | | $ | 2,930,640 | | | $ | 105,926,975 | | | $ | 1,749,365 | | | $ | 129,923,131 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Capital | | | 5,603,291 | | | | — | | | | 5,867,395 | | | | — | |
| | | | | | | | | | | | | |
Total liabilities and capital | | $ | 8,533,931 | | | $ | 105,926,975 | | | $ | 7,616,760 | | | $ | 129,923,131 | |
| | | | | | | | | | | | | |
| | | |
| 1 | | Includes insignificant amounts of mortgage loans purchased from members of another FHLBank. |
| |
| 2 | | Derivative assets and liabilities include insignificant fair values due to intermediation activities on behalf of members. |
| |
| 3 | | Includes insignificant amounts of miscellaneous assets that are considered related party. |
| |
| 4 | | Represents funds not yet disbursed to eligible programs. |
| |
| 5 | | Related column includes member pass-through reserves at the Federal Reserve Bank. |
271
Federal Home Loan Bank of New York
Notes to Financial Statements
Related Party: Income and Expense transactions
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | Related | | | Unrelated | | | Related | | | Unrelated | | | Related | | | Unrelated | |
| Interest income | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 1,270,643 | | | $ | — | | | $ | 3,030,799 | | | $ | — | | | $ | 3,495,312 | | | $ | — | |
Interest-bearing deposits 1 | | | — | | | | 19,865 | | | | — | | | | 28,012 | | | | — | | | | 3,333 | |
| Federal funds sold | | | — | | | | 3,238 | | | | — | | | | 77,976 | | | | — | | | | 192,845 | |
| Available-for-sale securities | | | — | | | | 28,842 | | | | — | | | | 80,746 | | | | — | | | | — | |
| Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term securities | | | — | | | | 461,491 | | | | — | | | | 531,151 | | | | — | | | | 596,761 | |
| Certificates of deposit | | | — | | | | 1,626 | | | | — | | | | 232,300 | | | | — | | | | 408,308 | |
Mortgage loans2 | | | — | | | | 71,980 | | | | — | | | | 77,862 | | | | — | | | | 78,937 | |
| Loans to other FHLBanks and other | | | 2 | | | | — | | | | 33 | | | | — | | | | 7 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 1,270,645 | | | $ | 587,042 | | | $ | 3,030,832 | | | $ | 1,028,047 | | | $ | 3,495,319 | | | $ | 1,280,186 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated obligations | | $ | — | | | $ | 1,147,011 | | | $ | — | | | $ | 3,318,160 | | | $ | — | | | $ | 4,153,094 | |
| Deposits | | | 2,512 | | | | — | | | | 36,193 | | | | — | | | | 106,777 | | | | — | |
| Mandatorily redeemable capital stock | | | 7,507 | | | | — | | | | 8,984 | | | | — | | | | 11,731 | | | | — | |
| Cash collateral held and other borrowings | | | — | | | | 49 | | | | 163 | | | | 881 | | | | 146 | | | | 4,370 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest expense | | $ | 10,019 | | | $ | 1,147,060 | | | $ | 45,340 | | | $ | 3,319,041 | | | $ | 118,654 | | | $ | 4,157,464 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Service fees | | $ | 4,165 | | | $ | — | | | $ | 3,357 | | | $ | — | | | $ | 3,324 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| 1 | | Includes de minimis amounts of interest income from MPF service provider. |
| |
| 2 | | Includes de minimis amounts of mortgage interest income from loans purchased from members of another FHLBank. |
Note 21. Segment information and concentration
The FHLBNY manages its operations as a single business segment. Management and the FHLBNY’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. Advances to large members constitute a significant percentage of FHLBNY’s advance portfolio and its source of revenues.
The FHLBNY has a unique cooperative structure and is owned by member institutions located within a defined geographic district. The Bank’s market is the same as its membership district which includes New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. Institutions that are members of the FHLBNY must have their principal places of business within this market, but may also operate elsewhere. The FHLBNY’s primary business is making low-cost, collateralized loans, known as “advances,” to its members. Members use advances as a source of funding to supplement their deposit-gathering activities. As a cooperative, the FHLBNY prices advances at minimal net spreads above the cost of its funding to deliver maximum value to members. Advances to large members constitute a significant percentage of FHLBNY’s advance portfolio and its source of revenues.
272
Federal Home Loan Bank of New York
Notes to Financial Statements
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.
273
Federal Home Loan Bank of New York
Notes to Financial Statements
The top ten advance holders at December 31, 2009, 2008 and 2007, and associated interest income for the years then ended are summarized as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | | | | | | Percentage of | | | | |
| | | | | | | Par | | | Total Par Value | | | | |
| | | City | | State | | Advances | | | of Advances | | | Interest Income | |
| | | | | | | | | | | | | | | | | |
| Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,275,000 | | | | 19.0 | % | | $ | 710,900 | |
| Metropolitan Life Insurance Company | | New York | | NY | | | 13,680,000 | | | | 15.1 | | | | 356,120 | |
| New York Community Bank* | | Westbury | | NY | | | 7,343,174 | | | | 8.1 | | | | 310,991 | |
| Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 5,005,641 | | | | 5.5 | | | | 97,628 | |
| The Prudential Insurance Company of America | | Newark | | NJ | | | 3,500,000 | | | | 3.9 | | | | 93,601 | |
| Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | | 3,000,000 | | | | 3.3 | | | | 120,870 | |
| Emigrant Bank | | New York | | NY | | | 2,475,000 | | | | 2.7 | | | | 64,131 | |
| Doral Bank | | San Juan | | PR | | | 2,473,420 | | | | 2.7 | | | | 86,389 | |
| MetLife Bank, N.A. | | Bridgewater | | NJ | | | 2,430,500 | | | | 2.7 | | �� | | 46,142 | |
| Valley National Bank | | Wayne | | NJ | | | 2,322,500 | | | | 2.6 | | | | 103,707 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 59,505,235 | | | | 65.6 | % | | $ | 1,990,479 | |
| | | | | | | | | | | | | | |
| | | |
| * | | Officer of member bank also served on the Board of Directors of the FHLBNY. |
| | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | | | | | | | | | Percentage of | | | | |
| | | | | | | Par | | | Total Par Value | | | | |
| | | City | | State | | Advances | | | of Advances | | | Interest Income | |
| | | | | | | | | | | | | | | | | |
| Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,525,000 | | | | 17.0 | % | | $ | 671,146 | |
| Metropolitan Life Insurance Company | | New York | | NY | | | 15,105,000 | | | | 14.6 | | | | 260,420 | |
| Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 7,999,689 | | | | 7.7 | | | | 257,649 | |
New York Community Bank* | | Westbury | | NY | | | 7,796,517 | | | | 7.5 | | | | 337,019 | |
| Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | | 3,738,000 | | | | 3.6 | | | | 151,066 | |
| The Prudential Insurance Company of America | | Newark | | NJ | | | 3,000,000 | | | | 2.9 | | | | 13,082 | |
| Merrill Lynch Bank & Trust Co., FSB | | New York | | NY | | | 2,972,000 | | | | 2.9 | | | | 68,625 | |
| Valley National Bank | | Wayne | | NJ | | | 2,646,500 | | | | 2.6 | | | | 103,918 | |
| Emigrant Bank | | New York | | NY | | | 2,525,000 | | | | 2.4 | | | | 64,116 | |
| Doral Bank | | San Juan | | PR | | | 2,412,500 | | | | 2.3 | | | | 89,643 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 65,720,206 | | | | 63.5 | % | | $ | 2,016,684 | |
| | | | | | | | | | | | | | |
| | | |
| * | | At December 31, 2008, officer of member bank also served on the Board of Directors of the FHLBNY. |
| | | | | | | | | | | | | | | | | |
| | | December 31, 2007 | |
| | | | | | | | | | | Percentage of | | | | |
| | | | | | | Par | | | Total Par Value | | | | |
| | | City | | State | | Advances | | | of Advances | | | Interest Income | |
| | | | | | | | | | | | | | | | | |
| Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 14,191,000 | | | | 17.6 | % | | $ | 461,568 | |
| New York Community Bank* | | Westbury | | NY | | | 8,138,625 | | | | 10.1 | | | | 326,012 | |
| Manufacturers and Traders Trust Company | | Buffalo | | NY | | | 6,505,625 | | | | 8.1 | | | | 247,104 | |
| HSBC Bank USA, National Association | | New York | | NY | | | 5,508,585 | | | | 6.8 | | | | 240,347 | |
| Metropolitan Life Insurance Company | | New York | | NY | | | 4,555,000 | | | | 5.7 | | | | 81,724 | |
| Astoria Federal Savings and Loan Assn.* | | Lake Success | | NY | | | 3,548,000 | | | | 4.4 | | | | 124,045 | |
| Valley National Bank | | Wayne | | NJ | | | 2,223,000 | | | | 2.8 | | | | 67,548 | |
| RBS Citizens, National Association | | Providence | | NJ | | | 1,750,000 | | | | 2.2 | | | | 87,266 | |
| Doral Bank | | San Juan | | PR | | | 1,422,500 | | | | 1.8 | | | | 57,686 | |
| R-G Premier Bank of Puerto Rico | | San Juan | | PR | | | 1,379,970 | | | | 1.6 | | | | 72,994 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 49,222,305 | | | | 61.1 | % | | $ | 1,766,294 | |
| | | | | | | | | | | | | | |
| | | |
| * | | At December 31, 2007, officer of member bank also served on the Board of Directors of the FHLBNY. |
274
Federal Home Loan Bank of New York
Notes to Financial Statements
The following table summarizes capital stock held by members who were beneficial owners of more than 5 percent of the FHLBNY’s outstanding capital stock as of February 28, 2010 and December 31, 2009 (shares in thousands):
| | | | | | | | | | | |
| | | | | Number | | | Percent | |
| | | February 28, 2010 | | of shares | | | of total | |
| Name of beneficial owner | | Principal Executive Office Address | | owned | | | capital stock | |
| | | | | | | | | | | |
| Hudson City Savings Bank * | | West 80 Century Road, Paramus, NJ 07652 | | | 8,748 | | | | 17.43 | % |
| Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | | 7,419 | | | | 14.78 | |
| New York Community Bank * | | 615 Merrick Avenue, Westbury, NY 11590 | | | 3,777 | | | | 7.53 | |
| Manufacturers and Traders Trust Company | | One M&T Plaza, Buffalo, NY 14203 | | | 2,934 | | | | 5.85 | |
| | | | | | | | | |
| | | | | | | | | | | |
| | | | | | 22,878 | | | | 45.59 | % |
| | | | | | | | | |
| | | | | | | | | | | |
| | | | | Number | | | Percent | |
| | | December 31, 2009 | | of shares | | | of total | |
| Name of beneficial owner | | Principal Executive Office Address | | owned | | | capital stock | |
| | | | | | | | | | | |
| Hudson City Savings Bank* | | West 80 Century Road, Paramus, NJ 07652 | | | 8,748 | | | | 16.87 | % |
| Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | | 7,419 | | | | 14.31 | |
| New York Community Bank* | | 615 Merrick Avenue, Westbury, NY 11590 | | | 3,777 | | | | 7.28 | |
| Manufacturers And Traders Trust Company | | One M&T Plaza, Buffalo, NY 14203 | | | 2,952 | | | | 5.69 | |
| | | | | | | | | |
| | | | | | | | | | | |
| | | | | | 22,896 | | | | 44.15 | % |
| | | | | | | | | |
| | | |
| * | | Officer of member bank also serves on the Board of Directors of the FHLBNY. |
Note 22. Subsequent events
Under the final guidance issued by the FASB in February 2010, subsequent events for the FHLBNY are events or transactions that occur after the balance sheet date but before financial statements are issued. There are two types of subsequent events:
a. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
b. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).
The FHLBNY has evaluated subsequent events through the date of this report and no significant subsequent events were identified.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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, 2009. Based on this evaluation, they concluded that as of December 31, 2009, 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. |
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| | (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. OTHER INFORMATION.
Pursuant to the answer to Question 6 of the SEC’s Compliance and Disclosure Interpretations published on January 20, 2010, the following information is provided below rather than in the “Submission of Matters to a Vote of Security Holders” Item, which was removed from Form 10-K as of February 28, 2010.
Submission Of Matters To A Vote Of Security Holders
Under the Federal Home Loan Bank Act, the only matter that is submitted to Federal Home Loan Bank shareholders for a vote is the annual election of FHLBank Directors. Consistent with the foregoing, the only matter involving a vote of Federal Home Loan Bank of New York (“FHLBNY”) shareholders in 2009 was an election of certain Independent Directors, which occurred in the last quarter of 2009. The FHLBNY conducted these elections in order to fill two Independent Director seats whose terms were set to expire on December 31, 2009. As a result, incumbent Independent Directors Mr. Michael M. Horn and Mr. Joseph J. Melone were elected by the eligible members of the FHLBNY on November 13, 2009 to serve as Independent Directors for, respectively, four and two-year terms commencing January 1, 2010. This election was conducted in accordance with Federal Housing Finance Agency (“FHFA” or “Finance Agency”) regulations governing the Director election process.
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Separately, the terms of three Member Director seats were set to expire on December 31, 2009. However, elections among the FHLBNY’s membership were not held to fill these seats. Instead, due to a lack of any other nominees to fill these seats and in accordance with FHFA regulations, incumbent Member Directors Mr. James W. Fulmer, Chairman, President and CEO, The Bank of Castile, Batavia, NY and Ms. Katherine J. Liseno, President and CEO, Metuchen Savings Bank, Metuchen, NJ were declared elected by the Bank on August 27, 2009 to serve as Member Directors representing, respectively, New York and New Jersey, for four-year terms commencing January 1, 2010. Further, due to a lack of any nominees to fill the Member Director seat representing Puerto Rico and the U.S. Virgin Islands, the FHLBNY’s Board, in accordance with FHFA regulations, designated incumbent Member Director Mr. José Ramon González on December 17, 2009 to fill this seat for a four year term commencing on January 1, 2010.
More detailed information about the Bank’s Director election process is set forth below.
Eligibility to Vote in Director Elections
Voting rights of shareholders with regard to the election of Directors are established through Finance Agency regulations. Specifically, holders of stock that were members of the FHLBNY as of the record date — December 31st of the year immediately preceding an election — are eligible to participate in the election process. Each eligible member is entitled to cast one vote for each share of stock that the member was required to hold as of the record date; however, the number of votes that each member may cast for each Directorship can not exceed the average number of shares of stock that were required to be held as of the record date by all members in the state where the member is located. The Director election process is conducted by mail; no in-person meetings of the members are held.
Member Directors
Eligible members may nominate persons who are officers or directors of FHLBNY members in their states to serve as Member Directors (formerly known as “elected directors” prior to the adoption of the Housing and Economic Recovery Act of 2008, or “HERA”, in 2008) on the FHLBNY’s Board of Directors. After the slate of nominees is finalized, eligible members (i.e., the members of the FHLBNY as of December 31st of the prior year) may then vote to fill the open director seats in the state in which their principal place of business is located.
The number of Member Directorships on the Board is allocated by state and such allocation is performed by the Finance Agency each year in accordance with provisions of the Federal Home Loan Bank Act located at 12 U.S.C. 1427. This allocation is based primarily on the number of shares of capital stock required to be held by the members in each state in the Bank’s district as of the end of the calendar year preceding the election. Throughout 2009, and continuing through the date of this Report on Form 10-K, the Bank had ten Member Director positions on its Board. Of these ten Member Director positions, five were allocated to New York, four to New Jersey and one to Puerto Rico and the U.S. Virgin Islands.
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The table below shows the total number of Member Directorships designated by the Finance Agency for each state in the Bank’s district for 2009 and for 2010, and the number of director positions that were required to be filled in the course of the Bank’s 2009 election of Member Directors:
| | | | | | | | | |
| | | Total Member | | | Member Directorships | |
| | | Directorships | | | Up For Election During | |
| State | | for 2009 and for 2010 | | | the 2009 Election Process | |
| New Jersey | | | 4 | | | | 1 | |
| New York | | | 5 | | | | 1 | |
| Puerto Rico & U.S. Virgin Islands | | | 1 | | | | 1 | |
| District Total | | | 10 | | | | 3 | |
2009 Member Director Election Results
In response to a call for nominations for Member Director seats with terms commencing on January 1, 2010, only one nomination each was received for the open Member Director seats representing, respectively, New York and New Jersey. Finance Agency regulations for the election of Directors provide that, if for any voting State, the number of nominees for the Member Directorships for that State is equal to or fewer than the number of such directorships to be filled in that year’s election, the Bank shall deliver a notice to the members in the affected voting State (in lieu of including any member directorship nominees on an election ballot for that State) indicating that such nominees shall be deemed elected without further action, due to an insufficient number of nominees to warrant balloting. Thereafter, the Bank shall declare elected all such eligible nominees. As such, incumbent Member Directors Mr. James W. Fulmer and Ms. Katherine J. Liseno were declared elected by the Bank on August 27, 2009 to serve as Member Directors representing, respectively, New York and New Jersey for four-year terms commencing January 1, 2010.
Further, during the course of the call for nominations for Member Director seats, the FHLBNY did not receive any nominations for the one open Member Director seat representing Puerto Rico and U.S. Virgin Islands members. The FHFA’s director election regulations provide that any Member Directorship that is not filled due to a lack of nominees shall be filled by the FHLBank’s Board of Directors. Therefore, on December 17, 2009, the FHLBNY’s Board designated incumbent Member Director Mr. José Ramon González to fill the Puerto Rico/U.S. Virgin Islands Member Directorship effective January 1, 2010.
Other Information Regarding the Composition of the Member Directors During 2009 and 2010
Apart from the Member Directors named above, each of the following Member Directors served on the Board throughout 2009, their terms continued into 2010, and they remain on the Board as of the date of this Report on Form 10-K: Joseph R. Ficalora, Jay M. Ford, Ronald E. Hermance, Kevin J. Lynch, Thomas M. O’Brien, John M. Scarchilli and George Strayton.
Independent Directors
In addition to the aforementioned group of Member Directors, the remainder of the FHLBNY’s Directors consist of “Independent Directors”. These are Directors who are not an officer or a director of a member institution of the FHLBNY. All Independent Directors (other than the subset of Independent Directors known as “Public Interest” Directors described below) must have experience in, or knowledge of, one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk management practices, and the law. In addition, there is a subset of Independent Directorships known as “Public Interest” Directorships. Public Interest Directors must have more than four years experience representing consumer or community interests in banking services, credit needs, housing or consumer financial protection. Each FHLBank must have at least two Public Interest Directors on its Board. Unlike the Member Directors, the Independent Directors do not represent the interests of a particular state, and so the entire membership votes for them.
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Until the middle of 2008, the Board of Directors of a FHLBank submitted the names of potential ‘appointed’ directors (the former name of the Directors now known as Independent Directors) to the Federal Housing Finance Board (the predecessor of the Finance Agency) for the regulator’s consideration. The ultimate determination of whether a person was eligible to serve as an appointed director and the selection of the appointed directors remained solely within the discretion of the Federal Housing Finance Board. However, the enactment of HERA on July 30, 2008 resulted in (i) the renaming of appointed directors as ‘Independent Directors; (ii) the elimination of the ability of the FHLBank’s regulator to appoint any Director to the Board of a FHLBank, resulting in the FHLBank’s membership being given the power to elect all FHLBank Directors; and (iii) the imposition of a requirement that the Boards of each FHLBank, in consultation with their Affordable Housing Advisory Committees, and subject to the review of the Finance Agency, submit the names of Independent Director candidates to eligible Bank members for a vote.
2009 Independent Director Election Results
In the last quarter of 2009, the FHLBNY conducted elections in order to fill two Independent Director seats whose terms were set to expire on December 31, 2009. As a result, on November 13, 2009, the eligible members of the FHLBNY elected incumbent Independent Directors Mr. Michael M. Horn and Mr. Joseph J. Melone to serve as Independent Directors of the FHLBNY for, respectively, four and two-year terms commencing January 1, 2010. Mr. Horn received 7,952,648 votes and Mr. Melone received 7,015,289 votes, respectively. (Under FHFA regulations, Mr. Horn received the longer term as he received more votes.) There were no other candidates. 13,964,581 votes were not cast.
Other Information Regarding the Composition of the Independent Directors During 2009 and 2010
Apart from the Independent Directors described above, each of the following Independent Directors served on the Board throughout 2009, their terms continued into 2010, and they remain on the Board as of the date of this Report on Form 10-K: Anne Evans Estabrook, Richard S. Mroz, C. Cathleen Raffaeli, Edwin C. Reed and DeForest B. Soaries, Jr. (Ms. Estabrook and Mr. Reed are the Public Interest Directors on the Board.)
In accordance with the provisions of HERA, the FHLBNY is exempt from the filing of information and proxy statements.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
2009 and 2010 Board of Directors
The FHLBank Act, as amended by the Housing and Economic Recovery Act of 2008 (“HERA”), provides that an FHLBank’s board of directors is to comprise thirteen directors, or such other number as the Director of the Federal Housing Finance Agency determines appropriate. For 2009 and 2010, the FHFA Director designated seventeen directorships for the Bank, ten of which are Member Directorships and seven of which are Independent Directorships.
All individuals serving as Bank directors must be United States citizens. A majority of the directors serving on the Board must be Member Directors and at least two-fifths must be Independent Directors.
A Member Directorship may be held only by an officer or director of a member institution that is located within the Bank’s district and that meets all minimum regulatory capital requirements. There are no other qualification requirements. Member Directors are, generally speaking, elected by Bank stockholders in, respectively, New York, New Jersey, and Puerto Rico and the U.S. Virgin Islands. The Bank’s Board of Directors is, as a general rule, not permitted to nominate or elect Member Directors; however, the Board may appoint a director to fill a vacant Member Directorship in the event that no nominations are received from members in the course of the Member Director election process. Each member institution that is required to hold stock as of the record date, which is December 31 of the year prior to the year in which the election is held, may nominate and/or vote for representatives from member institutions in its respective state to fill open Member Directorships. The Finance Agency’s election regulation provides that no director, officer, employee, attorney or agent of the Bank, other than in a personal capacity, may support the nomination or election of a particular individual for a Member Directorship.
An Independent Directorship may be held, generally speaking, only by an individual who is a bona fide resident of the Bank’s district, who is not a director, officer, or employee of a member institution or of any person that receives advances from the Bank, and who is not an officer of any FHLBank. At least two Independent Directors must be “public interest” directors. Public interest directors, as defined by Finance Agency regulations, are Independent Directors who have at least four years of experience representing consumer or community interests in banking services, credit needs, housing or consumer financial protection. Pursuant to Finance Agency regulations, each Independent Director must either satisfy the aforementioned requirements to be a public interest director, or have knowledge or experience in one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk management practices, and the law.
Bank members are permitted to identify candidates to be considered by the Bank to be included on the Independent Director nominee slate. The Bank’s Board of Directors is then required by Finance Agency regulations to consult with the Bank’s Affordable Housing Advisory Council (“Advisory Council”) in establishing the nominee slate. (The Advisory Council is an advisory body consisting of fifteen persons residing in the Bank’s district appointed by the Bank’s Board, the members of which are drawn from community and not-for-profit organizations that are actively involved in providing or promoting low and moderate income housing or community lending. The Advisory Council provides advice on ways in which the Bank can better carry out its housing finance and community lending mission.) After the nominee slate is approved by the Board, the slate is then presented to the Bank’s membership for a district-wide vote. The election regulation permits the Bank’s directors, officers, attorneys, employees, agents, and Advisory Council to support the candidacy of the board of director’s nominees for Independent Directorships.
The following table sets forth information regarding each of the directors of the FHLBNY who served on the Board during the period from January 1, 2009 through the date of this annual report on Form 10-K. All persons in the below table served continuously on the Board from January 1, 2009 through the date of this annual report on Form 10-K. Footnotes are used to specifically identify those directors who served on the Board in 2009 and who were also elected to serve by Bank members, the Board or the Bank for a new term on the Board commencing January 1, 2010. The footnotes also provide additional information about the Directors who served as Chair and Vice Chair of the Board during the aforementioned time period. After the table is biographical information for each director.
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No director has any family relationship with any other director or executive officer of the Bank. In addition, no director or executive officer has an involvement in any legal proceeding required to be disclosed pursuant to Item 401(f) of Regulation S-K.
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| | | | | | | | | | | | | | | Expiration | | | | | |
| | | | | | | Bank | | | Start of | | | of Current | | | Represents | | |
| | | Age as of | | | Director | | | Current Term | | | Term | | | Bank | | Director |
| Director Name | | 3/25/2010 | | | Since | | | 1/1/ | | | 12/31/ | | | Members in | | Type |
| | | | | | | | | | | | | | | | | | | | | |
Michael M. Horn (Chair)a | | | 70 | | | | 4/2007 | | | | 2010 | | | | 2013 | | | 2nd District | | Independent |
José Ramon González (Vice Chair) b | | | 55 | | | | 1/2004 | | | | 2010 | | | | 2013 | | | PR & USVI | | Member |
| Anne Evans Estabrook | | | 65 | | | | 1/2004 | | | | 2008 | | | | 2010 | | | 2nd District | | Independent |
| Joseph R. Ficalora | | | 63 | | | | 1/2005 | | | | 2008 | | | | 2010 | | | NY | | Member |
| Jay M. Ford | | | 60 | | | | 6/2008 | | | | 2009 | | | | 2012 | | | NJ | | Member |
James W. Fulmer c | | | 58 | | | | 1/2007 | | | | 2010 | | | | 2013 | | | NY | | Member |
| Ronald E. Hermance, Jr. | | | 62 | | | | 1/2005 | | | | 2008 | | | | 2010 | | | NJ | | Member |
Katherine J. Liseno c | | | 65 | | | | 1/2004 | | | | 2010 | | | | 2013 | | | NJ | | Member |
| Kevin J. Lynch | | | 63 | | | | 1/2005 | | | | 2008 | | | | 2010 | | | NJ | | Member |
Joseph J. Melone d | | | 78 | | | | 4/2007 | | | | 2010 | | | | 2011 | | | 2nd District | | Independent |
| Richard S. Mroz | | | 48 | | | | 3/2002 | | | | 2008 | | | | 2010 | | | 2nd District | | Independent |
| Thomas M. O’Brien | | | 59 | | | | 4/2008 | | | | 2009 | | | | 2012 | | | NY | | Member |
| C. Cathleen Raffaeli | | | 53 | | | | 4/2007 | | | | 2009 | | | | 2012 | | | 2nd District | | Independent |
| Edwin C. Reed | | | 56 | | | | 4/2007 | | | | 2009 | | | | 2012 | | | 2nd District | | Independent |
| John M. Scarchilli | | | 58 | | | | 8/2006 | | | | 2008 | | | | 2010 | | | NY | | Member |
| DeForest B. Soaries, Jr. | | | 58 | | | | 1/2009 | | | | 2009 | | | | 2011 | | | 2nd District | | Independent |
| George Strayton | | | 66 | | | | 6/2006 | | | | 2009 | | | | 2011 | | | NY | | Member |
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| a | | Mr. Horn served on the Board as an Independent Director throughout 2009, and his term expired on December 31, 2009. On November 17, 2009, he was elected by the Bank’s membership to serve as an Independent Director for a new four year term commencing January 1, 2010. In addition, Mr. Horn became Board Chair on May 13, 2008, and this term expired on December 31, 2009. On December 17, 2009, the Board elected Mr. Horn to serve as Board Chair for a new two year term commencing January 1, 2010. |
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| b | | Mr. González served on the Board as a Member Director representing the interests of Puerto Rico and U.S. Virgin Island members throughout 2009, and his term expired on December 31, 2009. On December 17, 2009, he was elected by the Board to serve as a Member Director for a new four year term commencing January 1, 2010. As no nominations were received from the Bank’s members in Puerto Rico and the U.S. Virgin Islands during the course of the Bank’s 2009 Member Director election process, the Board had the authority under Finance Agency regulations to fill this position. Mr. Gonzalez’ current term as Vice Chair of the Board began on January 1, 2009 and continues through and until December 31, 2010. |
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| c | | Mr. Fulmer and Ms. Liseno served on the Board as Member Directors representing the interests of, respectively, New York and New Jersey members throughout 2009, and their terms expired on December 31, 2009. On August 27, 2009, they were declared elected by the Bank in accordance with Finance Agency regulations to serve as Member Directors for new four year terms commencing January 1, 2010. No Member Director election was held among the Bank’s membership in 2009 in, respectively, New York and New Jersey as no other nominations (except for those nominating Mr. Fulmer and Ms. Liseno) were received from the Bank’s members in those states during the course of the Bank’s 2009 director election process. |
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| d | | Mr. Melone served on the Board as an Independent Director throughout 2009, and his term expired on December 31, 2009. On November 17, 2009, he was elected by the Bank’s membership to serve as an Independent Director for a new two year term commencing January 1, 2010. |
Mr. Horn(Chair) has been a partner in the law firm of McCarter & English, LLP since 1990. He has served as the Commissioner of Banking for the State of New Jersey and as the New Jersey State Treasurer. He was also a member of the New Jersey State Assembly and served a member of the Assembly Banking Committee. In addition, Mr. Horn served on New Jersey’s Executive Commission on Ethical Standards as both as its Vice Chair and Chairman, was appointed as a State Advisory Member of the Federal Financial Institutions Examination Council, and was a member of the Municipal Securities Rulemaking Board. Mr. Horn is counsel to the New Jersey Bankers Association, chairman of the Bank Regulatory Committee of the Banking Law Section of the New Jersey State Bar Association, and a Fellow of the American Bar Foundation. He served as a director of Ryan Beck & Co. through February 27, 2007. Mr. Horn’s legal and regulatory experience, as indicated by his background, support his qualifications to serve on the Bank’s Board of Directors as an Independent Director.
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Mr. González(Vice Chair) was President and Chief Executive Officer of Santander BanCorp and Banco Santander Puerto Rico from October 2002 until August 2008. Since 2000, he has served as a Director of Santander BanCorp and he has served as a Director of Bank member Banco Santander Puerto Rico since 2002. Mr. González 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 was named President and Chief Operating Officer. Mr. González 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 the 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.
Ms. Estabrookhas been chief executive of Elberon Development Co. in Cranford, New Jersey since 1984. It, together with its affiliated companies, own approximately two million square feet of rental property. Most of the property is industrial with the remainder serving commercial and retail tenants. She is the past chairman of the New Jersey Chamber of Commerce and, until June 2007, served on its executive committee, and chaired its nominating committee. She previously served as a director on the board of New Brunswick Savings Bank. 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. Since 2005, Ms. Estabrook has served as a Director of New Jersey American Water Company, Inc. Ms. Estabrook is also currently a member and Secretary of the Board of Trustees of Catholic Charities, serves on its Executive Committee and its Audit Committee, and Chairs its Finance Committee and Building and Facilities Committees. She is on the Board of Overseers of the Weill Cornell Medical School, is a Trustee of St. Barnabas Corporation, and is also on the Board of Trustees of Monmouth Medical Center, where she serves on its Executive and Community Action Committees, and Chairs the Children’s Hospital Committee. Ms. Estabrook serves as a Member of the Liberty Hall Museum Board at Kean University in Union, NJ and serves on the Council of the New Jersey Performing Arts Center (NJPAC). Ms. Estabrook was serving on the Board as an Appointed Director and a public interest director designated by the Federal Housing Finance Board at the time of the adoption of HERA in mid-2008. Finance Agency rules provide that Appointed Directors are deemed to be Independent Directors while they serve out the remainder of their terms, and any persons who were designated as public interest directors prior to HERA may retain that status until their term expires.
Mr. Ficalorahas been President and Chief Executive Officer and a Director of New York Community Bancorp, Inc. since its inception on July 20, 1993 and President and Chief Executive Officer and a Director of its primary subsidiaries, Bank member New York Community Bank (“New York Community”) and Bank member New York Commercial Bank (“New York Commercial”), since January 1, 1994 and December 30, 2005, respectively. On January 1, 2007, he was appointed Chairman of New York Community Bancorp, Inc., New York Community and New York Commercial, a position he previously held at New York Community Bancorp, Inc. from July 20, 1993 through July 31, 2001 and at New York Community from May 20, 1997 through July 31, 2001. Since 1965, when he joined New York Community (formerly Queens County Savings Bank), Mr. Ficalora has held increasingly responsible positions, crossing all lines of operations. Prior to his appointment as President and Chief Executive Officer of New York Community in 1994, Mr. Ficalora served as President and Chief Operating Officer (beginning in October 1989); before that, he served as Executive Vice President, Comptroller and Secretary. A graduate of Pace University with a degree in business and finance, Mr. Ficalora provides leadership to several professional banking organizations. In addition to previously 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 and Chairman of its Metropolitan Area Division. Mr. Ficalora also serves as a member of the Board of Directors of the Thrift Institutions Advisory Council of the Federal Reserve Board in Washington, D.C., and previously served as a member of the Thrift Institutions Advisory Panel of the Federal Reserve Bank of New York. In addition, he is a member of the Board of Directors of the American Bankers Association, RSI Retirement Trust and also of Peter B. Cannell and Co., Inc., an investment advisory firm that became a subsidiary of New York Community in 2004. Mr. Ficalora has previously served as a director of Computhrift Corporation, Chairman and board member of the New York Savings Bank Life Insurance Fund, President and Director of the MSB Fund and President and Director of the Asset Management Fund Large Cap Equity Institutional Fund, Inc. Mr. Ficalora has been a member of the Board of Directors of the Queens Chamber of Commerce since 1990 and 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 New York Hall of Science, Flushing Cemetery, and on the Advisory Council of the Queens Museum of Art. He previously served on the Board of Trustees of the Queens College Foundation and the Queens Museum of Art.
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Mr. Fordhas been President and Chief Executive Officer of Bank member Crest Savings Bank, headquartered in Wildwood, New Jersey since 1993. He has worked in the financial services industry in southern New Jersey for over forty years. Mr. Ford served as the 2003-04 chairman of the New Jersey League of Community Bankers (“New Jersey League”), and has also served as a member of the New Jersey League’s Executive and Conference Committees, Committee on Examination and Supervision, and Association Political Election Committee. Mr. Ford served as Chairman of the Community Bank Council of the Federal Reserve Bank of Philadelphia in 1998-1999. He also served on the board of directors of America’s Community Bankers (“ACB”) and on ACB’s Audit, Finance & Investment, and Professional Development & Education Committees. Mr. Ford serves on the boards of the Cape Regional Medical Center Foundation, Main Street Wildwood and the Doo Wop Preservation League and has previously served as a director and treasurer of Habitat for Humanity, Cape May County from 1996 to 2001, and as Divisional Chairman of the March of Dimes for Atlantic and Cape May Counties from 1997 to 1999. In December 2000, he was appointed by Governor Christine Todd Whitman to the New Jersey Department of Banking & Insurance Study Commission. Mr. Ford is a graduate of Marquette University with a degree in accounting and is a member of the American Institute of Certified Public Accountants and the New Jersey Society of CPAs.
Mr. Fulmerhas been a director of Bank member The Bank of Castile since 1988, the Chairman since 1992, Chief Executive Officer since 1996, and President since 2002. Mr. Fulmer has also been Vice Chairman of Tompkins Financial Corporation, the parent company of The Bank of Castile, since 2007 and has served as President and a Director of Tompkins Financial Corporation since 2000. Since 2001, he has served as Chairman of the Board of Tompkins Insurance Agencies, Inc. and, since 2006, he has served as Chairman of AM&M Financial Services, Inc., both subsidiaries of Tompkins Financial Corporation. In addition, since 1999, Mr. Fulmer has served as director of Bank member Mahopac National Bank, which is also a subsidiary of Tompkins Financial Corporation. He served as the President and Chief Executive Officer of Letchworth Independent Bancshares Corporation from 1991 until its merger with Tompkins Financial Corporation in 1999. 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, Cherry Valley Insurance Company, United Memorial Medical Center in Batavia, New York, WXXI Public Broadcasting Council, and the Genesee County Economic Development Center. Mr. Fulmer is a former director of the Monroe Title Corporation and the Catholic Heath System of Western New York. He 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. Hermance, Chairman, President and Chief Executive Officer of Bank member Hudson City Savings Bank, Paramus, New Jersey, has over 20 years of service with that institution. 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. He serves as a member of the Thrift Institutions Advisory Panel of the Federal Reserve Bank of New York, and as a trustee of St. John Fisher College.
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Ms. Lisenohas been President and Chief Executive Officer of Bank member Metuchen Savings Bank since 1979, having begun her career with the bank in 1962. She currently serves on the New Jersey Bankers Association’s Government Relations Committee, and she also currently serves on the Board of the Thrift Institutions Community Investment Corp. (TICIC), a subsidiary of the New Jersey Bankers Association. Ms. Liseno is also a trustee of the Jersey Bankers Political Action Committee (JEBPAC), formerly known as the Savings Association Political Election Committee of the New Jersey Bankers Association (SAPEC-NJ). Ms. Liseno was a member of the Legislative and Regulatory Affairs Committee of the New Jersey League of Community Bankers (“New Jersey League”), the predecessor of the New Jersey Bankers Association; she also served on the New Jersey League’s Executive Committee and was the Chairman of the Board of Governors of the New Jersey League. Ms. Liseno also served on the Board of Bankers Cooperative Group, Inc. She is also past president of the Central Jersey Savings League.
Mr. Lynchhas been President and Chief Executive Officer of Bank member Oritani Bank, headquartered in the Township of Washington, New Jersey, since July 1, 1993. He has also been President and Chief Executive Officer of Oritani Financial Corporation, the holding company of Oritani Bank, since 1998. Mr. Lynch has also served as Chair of the two aforementioned entities since August of 2006; prior to that time, he served as a Director. Mr. Lynch is a former Chairman of the New Jersey League of Community Bankers and served as a member of its Board of Governors for several years and also served on the Board of its subsidiary, the Thrift Institutions Community Investment Corp. (TICIC). Mr. Lynch is a member of the Professional Development and Education Committees of the American Bankers Association. He has been a member of the Board of Directors of the Pentegra Defined Benefit Plan For Financial Institutions since 1997, was Chair of that Board in 2004 and 2005 and was Vice Chair in 2002 and 2003. He has also been a member of the Board of Pentegra Services, Inc. since 2007. He is 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 Bank in 1993, Mr. Lynch was Vice President and General Counsel of a leasing company and served as a director of Oritani 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. Melonehas been chairman emeritus of The Equitable Companies, Incorporated since April 1998. Prior to that, he was President and Chief Executive Officer of The Equitable Companies from 1996 until his retirement in April 1998 and, from 1990 until his retirement in April 1998, he was Chairman and Chief Executive Officer of its principal insurance subsidiary, The Equitable Life Assurance Society of the United States (“Equitable Life”). Prior to joining Equitable Life in 1990, Mr. Melone was president of The Prudential Insurance Company of America. He is a former Huebner Foundation fellow, and previously served as an associate professor of insurance at The Wharton School of the University of Pennsylvania and research director at The American College. Mr. Melone is a Chartered Life Underwriter, Chartered Financial Consultant and Chartered Property and Casualty Underwriter. He is currently Chairman of the Board of Horace Mann Educators, Inc., and also serves on the boards of Newark Museum, Newark, New Jersey, the Greater New York City Council of Boy Scouts, Auburn Theological Seminary, New York City, New York, and St. Barnabas Medical Center, Livingston, New Jersey. Until August of 2007, Mr. Melone served on the board of directors of BISYS; until December of 2007, he served on the board of directors of Foster Wheeler. Mr. Melone has held other leadership positions in a number of insurance industry associations, as well as numerous civic organizations. He received his bachelor’s, master’s and doctoral degrees from the University of Pennsylvania. Mr. Melone’s financial and other management experience, as indicated by his background described above, support his qualifications to serve on the Bank’s Board of Directors as an Independent Director.
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Mr. Mroz, of Haddonfield, New Jersey, is a government and public affairs consultant and lawyer. For six years, until December 31, 2006, Mr. Mroz was Of Counsel to the law firm of Stradley Ronon Stevens & Young, LLP. On January 1, 2007, he became president of Salmon Ventures, Ltd., which is a non-legal government, regulatory and public affairs consulting firm. Mr. Mroz represents clients in New Jersey and nationally in connection with legislative, regulatory and business development affairs. Mr. Mroz, as a governmental affairs agent, is an advocate for clients in the utility, real estate, insurance and banking industries for federal, state, and local regulatory, administrative, and legislative matters. He also became Of Counsel to the law firm of Gruccio, Pepper, DeSanto & Ruth on April 1, 2007. In his law practice he concentrates on real estate, corporate and regulatory issues. 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. Mr. Mroz currently serves as counsel to the New Jersey Conference of Mayors, and was former counsel to the Delaware River Bay Authority and to the Atlantic City Hotel and Lodging Association. He is also the solicitor for the Waterford Township, N.J., Planning Board. He has been a frequent commentator on Philadelphia radio and TV stations regarding election and political issues. Mr. Mroz was serving on the Board as an Appointed Director designated by the Federal Housing Finance Board at the time of the adoption of HERA in mid-2008. Finance Agency rules provide that Appointed Directors are deemed to continue as Independent Directors while they serve out the remainder of their terms.
Mr. O’Brienjoined Bank member State Bank of Long Island as President and CEO in November of 2006, following six years serving as the President and CEO of Atlantic Bank of New York. Since November of 2006, he has also served as a director of State Bancorp, Inc., the holding company of State Bank of Long Island. Mr. O’Brien has served as Vice Chairman of North Fork Bancorporation as well as Chairman of the Board, President and CEO of North Side Savings Bank. Mr. O’Brien is a past Chairman of the New York Bankers Association. He serves as an independent trustee of Prudential Insurance Company’s Mutual Fund Complex, a trustee of the Catholic Healthcare System of New York and Catholic Healthcare Foundation, and a trustee of Niagara University. He has been a trustee of Molloy College, a member of the National Advisory Board of Fannie Mae and an advisory board member for Neighboring Housing Services of New York City.
Ms. Raffaelihas been the President and Managing Director of the Hamilton White Group, LLC since 2002. The Hamilton White Group is an investment and advisory firm dedicated to assisting companies grow their businesses, pursue new markets and acquire capital. From 2004 to 2006, she was also the President and Chief Executive Officer of the Cardean Learning Group. Additionally, she served as the President and Chief Executive Officer of Proact Technologies, Inc. from 2000 to 2002 and Consumer Financial Network from 1998 to 2000. Ms. Raffaeli also served as the Executive Director of the Commercial Card Division of Citicorp and worked in executive positions in Citicorp’s Global Transaction Services and Mortgage Banking Divisions from 1994 to 1998. She has also held senior positions at Chemical Bank and Merrill Lynch. Ms. Raffaeli serves on the Board of Directors of E*Trade, American Home Mortgage Holdings, Inc., and Indecomm Global, a privately held company. Ms. Raffaeli’s financial and other management experience, as indicated by her background described above, support her qualifications to serve on the Bank’s Board of Directors as an Independent Director.
Rev. Reedis the founder and CEO of GGT Development LLC, a company which started in May of 2009. The strategic plan of the corporation focuses on the successful implementation of housing and community development projects, including affordable housing projects, schools, and multi-purpose facilities. He has been involved in development projects totaling more than $125 million. He formerly served as Chief Executive Officer of the Greater Allen Development Corporation from July 2007 through March 2009. The Greater Allen Development Corporation and its related development entities rehabilitated communities through its involvement in affordable housing projects, mixed use commercial/residential projects, and other development opportunities. Rev. Reed previously was the Chief Financial Officer of Greater Allen AME Cathedral, located in Jamaica, Queens, New York, from 1996 to July 2007. From 1986 to 1995, Rev. Reed served as the campaign manager and Chief of Staff for Congressman Floyd H. Flake. Prior to becoming involved in public policy, Rev. Reed managed the $6 billion liquid asset portfolio for General Motors and was a financial analyst for Chevrolet, Oldsmobile, Pontiac, Cadillac, Buick and GM of Canada. Rev. Reed gained his initial financial experience as a banker at First Tennessee Bank in Memphis, Tennessee. Rev. Reed earned a Masters of Business Administration from Harvard Business School, a Bachelor of Business Administration from Memphis State University and a Masters of Divinity at Virginia Union University. He currently serves on the following organizations in the following positions: Chairman of Audit Committee, Board of Trustees, Hofstra University; Chairman, Jamaica Business Resource Center; Secretary/Treasurer, Outreach Project; Board Member, JP Morgan Chase Bank National Community Advisory Board; and Board Member, Wheelchair Charities; and Director and Treasurer, New Directions Local Development Corp. Rev. Reed’s experience in representing community interests in housing, as indicated by his background described above, support his qualifications to serve on the Bank’s Board of Directors as a public interest director and Independent Director.
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Mr. Scarchillihas been President and Chief Executive Officer of Bank member Pioneer Savings Bank, headquartered in Troy, New York, since 1997 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 and serves as Chairman of the Board of PSB Financial Services, Inc., both wholly-owned subsidiaries of Pioneer Savings Bank. He is also a Director of the New York Bankers Association and was Chairman of that Association through February 9, 2009. He was a Director of the American Bankers Association, a national banking trade organization, in 2008. Mr. Scarchilli serves as a member of the Thrift Institutions Advisory Panel of the Federal Reserve Bank of New York, serves as a Director on the Banking Board of the New York State Banking Department, and also serves as a Director of the Independent Bankers Association of New York State. Through January 8, 2007, Mr. Scarchilli served as a Director of Asset Management Fund Large Cap Equity Fund Institutional Fund, Inc. In 2005, Mr. Scarchilli served as a trustee on the RSI Retirement Trust Board. Mr. Scarchilli also serves on numerous not-for-profit boards in the local community. He is a Director of the Center for Economic Growth and Co-Chair of Troy 20/20. Additionally, he serves as a member of the Audit and Compliance Committee of Ordway Research Institute.
Dr. Soarieshas been the Senior Pastor of the First Baptist Church of Lincoln Gardens in Somerset, New Jersey since November 1990. A pioneer of faith-based community development, Dr. Soaries has led First Baptist in the construction of a new $20 million church complex and the formation of many not-for-profit entities to serve the community surrounding the church. Highlights of Dr. Soaries’ ministry include recruiting 333 families to become foster parents to 531 children; helping 216 children find adoptive parents; constructing 145 new homes for low and moderate income residents to own; redeveloping 150,000 square feet of commercial real estate; operating a “green jobs” training program; serving hundreds of youth in an after school center and homework club; forming a youth entrepreneurship program; organizing a community development credit union; implementing a strategy to help 1,000 families become debt-free; and creating a program designed to help homeowners recover homes lost through foreclosure. From January 12, 1999 to January 15, 2002, Dr. Soaries served as New Jersey’s 30th Secretary of State. In 2004 he also served as the first chairman of the United States Election Assistance Commission, having been appointed by the President and confirmed by the United States Senate. Dr. Soaries’ project development experience, as indicated by his background described above, support his qualifications to serve on the Bank’s Board of Directors as an Independent Director.
Mr. Straytonhas been President, Chief Executive Officer and a Director of Bank member Provident Bank, an independent full service community bank with $3.0 billion in assets headquartered in Montebello, New York, since 1986. He is also President, Chief Executive Officer and a Director of Provident New York Bancorp, the holding company of Provident Bank, and of Provident Municipal Bank. Mr. Strayton is currently a director of the New York Bankers Association and a member of the Government Affairs Committee of the American Bankers Association. He also currently serves on the Thrift Institutions Advisory Panel of the Federal Reserve Bank of New York. Further, he serves as a director of Orange & Rockland Utilities and the New York Business Development Corporation. Mr. Strayton’s career includes chairmanships of the Community Bankers Association of New York State, St. Thomas Aquinas College, Rockland Business Association, Rockland County Boy Scouts of America, and Rockland United Way, among other local organizations.
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Executive Officers
The following sets forth the executive officers of the FHLBNY at December 31, 2009 and as of the date of this annual report on Form 10-K. The Bank has determined that its executive officers are those officers who are members of the Bank’s internal Management Committee. All Bank officers are “at will” employees and do not serve for a fixed term.
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Management | |
| | | | | Age as of | | | Employee of | | | Committee | |
| Executive officer | | Position held | | 3/27/2010 | | | Bank since | | | member since | |
| | | | | | | | | | | | | | | |
| Alfred A. DelliBovi | | President & Chief Executive Officer | | | 64 | | | | 11/30/92 | | | | 03/31/04 | |
| Eric P. Amig | | Senior Vice President & Director of Bank Relations | | | 51 | | | | 02/01/93 | | | | 01/01/09 | |
| G. Robert Fusco * | | Senior Vice President, CIO & Head of Enterprise Services | | | 51 | | | | 03/02/87 | | | | 05/01/09 | |
| Adam Goldstein | | Senior Vice President & Head of Marketing & Sales | | | 36 | | | | 07/14/97 | | | | 03/20/08 | |
| Robert R. Hans ** | | Senior Vice President & Head of Technology & Support Services | | | 60 | | | | 01/03/72 | | | | 03/31/04 | |
| Paul B. Héroux | | Senior Vice President & Head of Member Services | | | 51 | | | | 02/27/84 | | | | 03/31/04 | |
| Peter S. Leung | | Senior Vice President & Chief Risk Officer | | | 55 | | | | 01/20/04 | | | | 03/31/04 | |
| Patrick A. Morgan | | Senior Vice President & Chief Financial Officer | | | 69 | | | | 02/16/99 | | | | 03/31/04 | |
| Kevin M. Neylan | | Senior Vice President & Head of Strategy and Business Development | | | 52 | | | | 04/30/01 | | | | 03/31/04 | |
| Craig E. Reynolds | | Senior Vice President & Head of Asset Liability Management | | | 61 | | | | 06/27/94 | | | | 03/31/04 | |
| | | |
| * | | Left employment 1/8/93; rehired 5/10/93 |
| |
| ** | | Retired 4/30/09 |
Alfred A. DelliBoviwas 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 the Bank’s member-lenders. Since 2005, Mr. DelliBovi has been a member of the Board of Directors of the Pentegra Defined Contribution Plan for Financial Institutions; he previously served on this board from 1994 through 2000. Since October, 2009, he has served on the Board of Directors of the Pentegra Defined Benefit Plan for Financial Institutions; he previously served on this board from 2001 through 2003. In addition, Mr. DelliBovi was appointed by the U.S. Department of the Treasury in September 2006 to serve as a member of the Directorate of the Resolution Funding Corporation, and he was appointed Chairman in September 2007; he served on this board until October 2009. In November 2009, Mr. DelliBovi was appointed to serve as Chair of the Board of the Financing Corporation (“FICO”). Mr. DelliBovi previously served on the FICO Board as Chair from November 2002 through November 2003, and also served as Vice Chair of the FICO Board from November 1996 to November 1997. Prior to joining the Bank, 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.
Eric P. Amighas served as Director of Bank Relations since joining the Bank in February 1993. From 1985 through January 1993, he worked in the U.S. Department of Housing and Urban Development; during this time he served as Special Assistant to the Deputy Secretary from 1990-1993. Mr. Amig has also served as a legislative aide in the Pennsylvania State Senate and House of Representatives.
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Adam Goldsteinwas named Head of Marketing and Sales in March 2008; in this role, he leads the Sales, Marketing Communications and Business Research and Development efforts at the Bank. He joined the Bank in June 1997 and has held a number of key positions in the Bank’s sales and marketing areas. In addition to an undergraduate degree from the SUNY College at Oneonta and an M.B.A. in Financial Marketing from SUNY Binghamton University, Mr. Goldstein has received post-graduate program certifications in Business Excellence from Columbia University, in Management Development from Cornell University, and in Management Practices from New York University.
G. Robert Fuscowas named Chief Information Officer and Head of Technology and Support Services in May 2009, after the retirement of Robert R. Hans. In June 2009, he reorganized the Technology and Support Services area as Enterprise Services and he is now currently CIO and Head of Enterprise Services. Mr. Fusco is responsible for all of the Bank’s technology, telecommunications, records management, business continuity and facilities services. Mr. Fusco has been with the Bank since April, 1987. During his 22 years at the Bank, he has held various management positions in Information Technology, including IT Director starting in 2000, Chief Technology Officer starting in 2006, and CIO in 2008. Mr. Fusco received an undergraduate degree from the State University of New York at Stony Brook. He has earned numerous post-graduate technical and management certifications throughout his career, and is a graduate of the American Bankers Association National Graduate School of Banking. Prior to joining the Bank, Mr. Fusco held positions at Citicorp and the Federal Reserve Bank of New York.
Robert R. Hanswas named Head of Technology and Support Services in March 2004; in that role, he was, until his retirement from the Bank in April, 2009, responsible for the Bank’s Information Technology and Corporate Services areas. Mr. Hans was with the FHLBNY for more than 35 years, primarily working in management positions in bank operations and technology.
Paul B. Hérouxwas named Head of Member Services in March 2004; in this role, he oversees several functions at the Bank, including Credit and Correspondent Services, Collateral Services, Acquired Member Assets and Community Investment/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 received an undergraduate degree from St. Bonaventure University and is a graduate of the Columbia Senior Executive Program. Prior to joining the Bank, Mr. Héroux held positions at Merrill Lynch & Co. and E.F. Hutton & Co.
Peter S. Leungjoined the Bank as Chief Risk Officer in January 2004. Mr. Leung has more than twenty-three 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 for three years, and the Associate Director and then Deputy Director of the Office of Supervision of the Federal Housing Finance Board for a total of 11 years. He also served as an examiner with the Federal Home Loan Bank of Seattle and with the Office of Thrift Supervision for a total of four years in the 1980’s. Mr. Leung is a CPA and has an undergraduate degree from SUNY at Buffalo and an M.B.A. from City University, Seattle, Washington.
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Patrick A. Morganwas named the Chief Financial Officer in March 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 U.S. 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.
Kevin M. Neylanwas named Head of Strategy and Business Development in January 2009. He was previously Head of Strategy and Organizational Performance from January 2005 to December 2008, and was Director, Strategy and Organizational Performance from January 2004 to December 2004. Mr. Neylan is responsible for developing and monitoring the execution of the Bank’s business strategy. He is also responsible for overseeing the Bank’s Sales and Marketing, Human Resources and Legal functions. Mr. Neylan had approximately twenty years of experience in the financial services industry prior to joining the Bank in April 2001. He was a partner in the financial service consulting group of one of the Big Four accounting firms. He holds an M.S. in corporate strategy from the MIT Sloan School of Management.
Craig E. Reynoldswas named Head of Asset Liability Management in March 2004. Prior to this position, he served as 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, Saudi Arabia as the treasurer of a Saudi Arabian bank for over five years. He received an undergraduate degree from Manhattan College in the Bronx, New York.
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Section 16 (a) Beneficial Ownership Reporting Compliance
In accordance with correspondence from the Office of Chief Counsel of the Division of Corporation 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. For the period from January 1, 2009 through the date of the filing of this annual report on Form 10-K, the members of the Audit Committee included: Anne E. Estabrook (Chair), Katherine J. Liseno (Vice Chair), Joseph R. Ficalora, Jay M. Ford, José R. González, Michael M. Horn, Joseph J. Melone and John M. Scarchilli. As of the date of the filing of this annual report on Form 10-K, the members of the Audit Committee are: Anne Evans Estabrook (Chair), Katherine J. Liseno (Vice Chair), Joseph R. Ficalora, Jay M. Ford, José R. González, Michael M. Horn, Joseph J. Melone and John M. Scarchilli.
Audit Committee Financial Expert
The FHLBNY’s Board of Directors has determined that for the period from January 1, 2009 through the date of the filing of this annual report on Form 10-K, José R González of the FHLBNY’s Audit Committee qualified as an “audit committee financial expert” under Item 407 (d) of Regulation S-K but was not considered “independent” as the term is defined by 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. The FHLBNY intends to disclose any changes in or waivers from its Code of Business Conduct and Ethics by filing a Form 8-K or by posting such information on its website.
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ITEM 11. EXECUTIVE COMPENSATION.
Compensation Discussion and Analysis
Introduction
About the Bank’s Mission
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 its community-based member-lenders to serve their markets.
The Bank meets its mission by providing its members with access to economical wholesale credit and technical assistance through the provision of credit products, mortgage finance programs, housing and community development programs and correspondent services, all of which are intended to increase the availability of home finance to families of all incomes.
Achieving the Bank’s Mission
The Bank operates in a very competitive market for financial talent. Without the capability to attract, motivate and retain talented employees, the ability of the Bank to fulfill its mission would be in jeopardy. All employees, and particularly senior and middle management, are frequently required to perform multiple tasks requiring a variety of skills. The Bank’s employees not only have the appropriate talent and experience to execute the Bank’s mission, but they also possess skill sets that are difficult to find in the marketplace. In this regard, as of December 31, 2009, the Bank employed 258 employees, a relatively small workforce for a New York City-based financial institution that had, as of that date, $114.5 billion in assets.
Compensation and Human Resources Committee Oversight of Compensation
Compensation is a key element in attracting, motivating and retaining talent. In this regard, it is the role of the Compensation and Human Resource Committee (“C&HR Committee”) of the Bank’s Board of Directors (“Board”) 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; |
| | 4. | | review and approve annually the Bank’s Incentive Compensation Plan (“Incentive Plan”), year-end Plan results and Plan award payouts; |
| | 5. | | advise the Board on compensation, benefits and human resources matters affecting Bank employees; |
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| | 6. | | review and discuss with Bank management the Compensation Discussion and Analysis (“CD&A”) to be included in the Bank’s Form 10-K and determine whether to recommend to the Board that the CD&A be included in the Form 10-K; and |
| | 7. | | review and monitor compensation arrangements for the Bank’s executives so that the Bank continues to retain, attract, motivate and align quality management consistent with the investment rationale and performance objectives contained in the Bank’s annual business plan and budget, subject to the direction of the Board. |
The Board has delegated to the C&HR Committee the sole authority to retain and replace, and approve fees and other retention terms for: i) any compensation and benefits consultant to be used to assist in the evaluation of Chief Executive Officer’s compensation, and ii) any other advisors that it shall deem necessary to assist it in fulfilling its duties. The Charter of the C&HR Committee is available at the Corporate Governance section of the Bank’s web site located at www.fhlbny.com.
The role of Bank management (including executive officers) with respect to compensation is limited to administering Board-approved programs and providing proposals for the consideration of the C&HR Committee. No member of Bank management serves on the Board or any Board committee.
Finance Agency Oversight of Executive Compensation
Notwithstanding the role of the C&HR Committee discussed in this CD&A, Section 1113 of the Housing and Economic Recovery Act of 2008 (“HERA”) requires that the Director of the Federal Housing Finance Agency (“Finance Agency”) prohibit a FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In connection with the fulfillment of these responsibilities, the Finance Agency on October 1, 2008 directed the FHLBanks to submit all compensation actions involving an NEO to the Finance Agency for review at least four weeks in advance of any planned board of directors’ decision with respect to those actions.
Compensation decisions for all of the Bank’s NEOs require action of the C&HR Committee of the Board of Directors. However, for purposes of complying with the four-week review period required by the Finance Agency’s October 1, 2008 letter prior to the taking of final action by the C&HR Committee, the Bank submitted to the regulator on November 23, 2009 proposed 2009 merit-related base pay increases for 2010; further, the Bank submitted to the regulator on December 23, 2009, proposed 2009 incentive award payments to be paid in 2010. The aforementioned merit-related base pay increases were implemented and incentive award payments made after the expiration of the four-week period and following final approval by the Compensation and Human Resources Committee.
In addition, on October 28, 2009, the Finance Agency issued Advisory Bulletin 2009-AB-02, “Principles for Executive Compensation at the Federal Home Loan Banks and the Office of Finance.” The Advisory Bulletin contains a set of principles so that the Federal Home Loan Banks can understand the basis for whatever feedback the Federal Housing Finance Agency offers on compensation generally and incentive compensation in particular. The principles outlined in the Advisory Bulletin include the following:
| | 1. | | Executive compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions. |
| | 2. | | Executive incentive compensation should be consistent with sound risk management and preservation of the par value of the Bank’s capital stock. |
| | 3. | | A significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome-indicators. |
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| | 4. | | A significant percentage of an executive’s incentive-based compensation should be deferred and made contingent upon performance over several years. |
| | 5. | | The board of directors of each FHLBank and the OF should promote accountability and transparency in the process of setting compensation. |
How the Bank Stays Competitive in the Labor Market
The C&HR Committee-recommended and Board-approved Compensation Policy acknowledge and take into account the Bank’s business environment and factors the Bank takes into account to remain competitive in its labor market. The major components of the Compensation Policy, which is currently in effect, include the following:
| | • | | Maintenance of an overall greater emphasis on base salary and benefits (versus annual and long-term incentives) than would be typical of regional/commercial banks. |
| | • | | The use of regional/commercial banks (see the peer group list in Section I below) as the primary peer group for benchmarking at the 50th percentile of the peer group total compensation (a) cash compensation (i.e., base salary, and,for exempt employees, “variable” or “at risk” short-term incentive compensation); and (b) health and welfare programs and other benefits), discounted for purposes of establishing competitive pay levels by 15% to account for the incremental value provided by the Bank’s benefit programs. |
| | • | | A philosophical determination to match Bank officer positions one position level down versus commercial/regional banks. The rationale is that officer positions at commercial/regional banks are one level more significant than at the Bank because they may manage multiple business lines in multiple locations. In contrast, the Bank generally recruits senior level positions from a ‘divisional’ level at commercial/regional banks and not the higher ‘corporate’ level. |
| | • | | The targeting of cash compensation pay at the 75th percentile of the FHLBanks where regional/commercial bank data is not available. The 15% discount to account for the incremental value provided by the Bank’s benefit programs will not be applied to benchmark results from the other FHLBanks, as the other FHLBanks offer similar benefits. |
| | • | | A commitment to conduct detailed cash compensation benchmarking for approximately one-third of the Bank’s Officer positions each year. (In this regard, the Bank collects information regarding benchmarking from Aon as well as a variety of other reputable sources.) |
| | • | | A commitment to evaluate the value of total compensation delivered to employees including base pay, incentive compensation, retirement and health & welfare benefits in determining market competitiveness every third year. |
Additional factors that the Bank takes into account to remain competitive in its labor market include, but are not limited to:
| | • | | Geographical area — The New York Metropolitan area is a highly competitive market for talent in the financial disciplines; |
| | • | | Cost of living — The New York Metropolitan area has a high cost of living that may require compensation premiums for some positions, particularly at more junior levels; and |
| | • | | Availability of/demand for talent — Recruiting critical positions with high market demand typically requires a recruiting premium to entice an individual to change firms. |
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The Bank’s Total Compensation Program
In response to the challenging environment that the Bank operates in, compensation and benefits at the Bank consist of the following components: (a) cash compensation (i.e., base salary, and, for exempt employees, “variable” or “at risk” short-term incentive compensation); (b) retirement-related benefits (i.e., the Qualified Defined Benefit Plan; the Qualified Defined Contribution Plan; and the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan (“DB BEP”)) and (c) health and welfare programs and other benefits which are listed in Section IV C below. These components, along with certain benefits described in the next paragraph, comprised the Bank’s total compensation program for 2009, and are discussed in detailed in Section IV below.
In addition, in the category of retirement-related benefits, the Bank offered the Nonqualified Defined Contribution Portion of the Benefits Equalization Plan (“DC BEP”), a Nonqualified Deferred Compensation Plan (“NQDCP”) and a Nonqualified Profit Sharing Plan (“NQPSP”) through and until November 10, 2009. A discussion of these plans, and the reasons for their termination, can be found in Section IV of this CD&A.
This CD&A provides information related to the Bank’s total compensation program provided to its named executive officers (or “NEOs”) for 2009 — 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 total compensation program and the elements of compensation the Bank provides to its NEOs. These compensation programs are not exclusive to the NEOs; they also apply to all Bank employees as explained throughout the CD&A.
I. Objectives of the Bank’s total compensation program
The objectives of the Bank’s total compensation program (described above) are to help motivate employees to achieve consistent and superior results over a long period of time for the Bank, and to provide a program that allows the Bank to compete for and retain talent that otherwise might be lured away from the Bank.
2006 — 2007 Aon Compensation and Benefit Study
On June 29, 2006, the Committee engaged compensation specialists Aon Consulting, Inc., and its subsidiary, McLagan Partners, Inc., which focuses on executive compensation (collectively, “Aon”), to perform a broad and comprehensive review of all the Bank’s compensation and benefits programs for all employees, including NEOs. To assist the C&HR Committee’s review of the process behind, and the conclusions of the Aon’s study, the Committee engaged another compensation and benefits consultant, Pearl Meyers and Partners (“Pearl Meyers”), to serve as a ‘check and balance’ with regard to the process. (Aon Consulting, Inc. had, previous to this engagement, been retained by the Bank with regard to matters pertaining to retiree medical benefits reporting, and had also been involved with a review of actuarial assumptions and valuations used by the administrator of the Bank’s Defined Benefit and Benefit Equalizations Plans. McLagan Partners, Inc. had also been previously engaged by the Bank for compensation consulting purposes. Aon continued providing the services listed above to the Bank in 2009.)
Aon was specifically instructed by the C&HR Committee to: (i) determine how the Bank’s compensation and benefit programs and level of rewards were compared to and aligned with the market; (ii) ascertain the current and projected costs of each Bank benefit and identify ways to control these costs; (iii) determine the optimal mix of compensation and benefits for the Bank; and (iv) determine if there were alternative benefit structures that should be considered. Aon was informed of the Bank’s continued desire to attract, motivate and retain talented employees.
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A major undertaking for Aon during the review process was to identify the Bank’s peer group for “benchmarking” purposes (that is, for purposes of comparing levels of benefits and compensation). Aon weighed a number of factors in order to arrive at the selection of a peer group. Among the factors considered were firms that were either business competitors or labor market competitors (focusing attention on firms either headquartered or having major offices in the same or similar geographic markets), and firms similar in size (assets, revenues and employee population) to the Bank. Through Aon’s experience working with other Home Loan Banks and through direct interviews with the Bank’s senior management, Aon identified the current and future skill sets needed to meet the Bank’s business objectives and also noted that the Bank tended to hire employees from and lose employees to certain institutions.
While “Wall Street” firms were considered for use as benchmark peers, Aon recommended they not be used because of an inconsistency between business compensation models. The rationale was that these firms tend to base their compensation levels to a significant extent on activities that carry a high degree of risk and commensurate level of return. In contrast, the Bank, as a Federally-regulated provider of liquidity to financial institutions, operates using a low risk/return business model. Based on these considerations, Aon recommended that the Bank’s peer group should be regional and commercial banks.
In addition, Aon proposed that Bank officer positions be matched one position level down versus commercial/regional banks. Aon’s rationale was that officer positions at commercial/regional banks are one level more significant than at the Bank because they manage multiple business lines in multiple locations. In contrast, the Bank only has two locations and one main business segment. Therefore, the Bank generally recruits senior level positions from a “divisional” level at commercial/regional banks as opposed to the higher “corporate” level of such organizations. The C&HR Committee and the Board agreed with these recommendations.
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A representative list of the peer group that was used in the Aon study in 2007 is set forth in the table below. For the firms listed below that had multiple lines of business, the Bank benchmarked total compensation against the wholesale banking functions at those companies.
| | | | | | | |
| Australia & New | | Cargill | | GMAC | | Royal Bank of Canada |
| Zealand Banking | | CIBC World Markets | | HSBC Bank | | Royal Bank of |
| Group | | Citigroup | | HSBC Corporate, | | Scotland/Greenwich |
| ABN AMRO | | Citizens Bank | | Investment Banking | | Capital |
| Allied Irish Bank | | Commerzbank | | & Markets | | Societe Generale |
| The Bank of Nova | | Commonwealth Bank | | Hypo Vereinsbank | | Standard Chartered Bank |
| Scotia | | of Australia | | ING Bank | | Sumitomo Mitsui |
| Banco Santander | | DVB Bank | | JP Morgan Chase | | Banking Corporation |
| Bank of New | | DZ Bank | | KeyCorp | | SunTrust Banks |
| York/Mellon | | Deutsche Bank | | Lloyds TSB | | TD Securities |
| Bank of Tokyo — | | Dresdner Kleinwort | | M&T Bank | | Wachovia Corporation |
| Mitsubishi UFJ | | Wasserstein | | Corporation | | Wells Fargo Bank |
| Bank of America | | Fifth Third Bank | | Mizuho Corporate | | WestLB |
| BMO Financial | | Fortis Financial | | Bank, Ltd. | | Westpac Banking |
| Group | | Services LLC | | National Australia | | Corporation |
| BNP Paribas | | GE Commercial | | Bank | | |
| Brown Brothers | | Finance | | Rabobank Nederland | | |
| Harriman | | | | | | |
| The CIT Group | | | | | | |
Note: Benchmarking data from international banks only contained results from their New York operations.
Compensation and Benefits Study Results
Aon’s review was presented to the Board on August 3, 2007. The results of the study completed by Aon indicated that the Bank’s:
| | • | | cash compensation was generally below the Bank’s peer groups and heavily weighted towards base pay (Note: the Bank is prohibited by law from offering equity-based compensation, and the Bank does not offer long-term incentives); |
| | • | | added together, cash compensation and retirement-related benefits were slightly above the Bank’s peers(and heavily weighted towards benefits); |
| | • | | added together, cash compensation, retirement-related benefits and health & welfare benefits were generally above the Bank’s peers and heavily weighted towards benefits; and |
| | • | | the mix of compensation and benefits was consistent with the risk-averse culture of the Bank. |
Aon’s recommendations to the Board took into account the C&HR Committee’s direction to Aon that, to the extent possible:
| | • | | the dominant features of the Bank’s current compensation and benefits program which stressed fixed compensation over variable to support the Bank’s risk-averse culture should be retained; |
| | • | | greater weight on benefits vs. competitor peer group should be retained; and |
| | • | | heavier reliance on base pay vs. incentive pay should be retained. |
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To help better align the Bank’s total compensation program with its peer group, Aon recommended, and the Board approved, changes to the Bank’s retirement plan for certain active employees effective as of July 1, 2008, and changes to the Bank’s health and welfare plans effective as of January 1, 2008 for all active employees and certain employees who retired on or after January 1, 2008. Aon also recommended the establishment of a Nonqualified Profit Sharing Plan that became effective July 1, 2008 for certain Bank employees. The changes to the Bank plans made at that time as a result of the Aon study are discussed in more detail in section IV B.
Pearl Meyers stated during the aforementioned August 3, 2007 meeting that the Bank’s peer group had been correctly identified; that the level of compensation and all alternatives had been explored; and that the outcome was reasonable. Pearl Meyers was also of the view that the Committee appropriately exercised its fiduciary duties throughout the process.
While Aon interviewed members of management and conducted focus sessions with various employees at all levels to gather information during the course of the study, the C&HR Committee and the Board acted on Aon’s recommendations independently of the Bank’s management and employees.
II. The Bank’s total compensation program is designed to reward for performance and employee longevity, to balance risk and returns, and to compete with compensation programs offered by the Bank’s competitors
The Bank’s total compensation program is designed to attract, retain and motivate employees and to reward employees based on Bank overall performance achievement as compared to the Bank’s goals and individual employee performance. The Bank also strives to ensure that its employees are compensated fairly and consistent with employees in the Bank’s peer group.
All of the elements of the Bank’s total compensation program are available to all employees, including NEOs, except with respect to: 1) the Bank’s Incentive Plan; and 2) the Bank’s nonqualified plans. Participation in the Incentive Plan is offered to all exempt (non-hourly) employees. Exempt employees constituted 86% of all Bank employees as of year-end 2009.
Participation in the Benefit Equalization Plan is offered to employees at the rank of Vice President and above who exceed income limitations established by the Internal Revenue Code (“IRC”) for three out of five consecutive years and who are also approved for inclusion by the Bank’s Nonqualified Plan Committee.The Bank’s Thrift Plan Component of the BEP was terminated on November 10, 2009. Participation in the Bank’s Nonqualified Profit Sharing Plan, which was established on July 1, 2008, was (until the plan was terminated on November 10, 2009), offered to all Non-Grandfathered employees who had five years of Bank service and who were members of the Benefit Equalization Plan. Participation in the Bank’s Nonqualified Deferred Compensation Plan is offered to members of the Board and Bank employees at a rank of Assistant Vice President and higher. The Bank’s Nonqualified Deferred Compensation Plan was also terminated on November 10, 2009.
All exempt employees are eligible to receive annual incentive awards through participation in the Incentive 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, up to a predetermined limit. In addition, the better the employee’s performance, the greater the employee’s annual salary increase is likely to be, up to a predetermined limit.
The Bank is prohibited by law from offering equity-based compensation, and the Bank does not currently offer long-term incentives. However, many of the firms in the Bank’s peer group do offer these types of compensation. The Bank’s total compensation program takes into account the existence of these other types of compensation by offering a defined benefit and defined contribution plan to help the Bank effectively compete for talent. The Bank’s defined benefit and defined contribution plans are designed to reward employees for continued strong performance over their careers — that is, the longer an employee works at the Bank, the greater the benefit the employee is likely to accumulate. Senior and mid-level employees are generally long-tenured and would not want to endanger their pension benefits by inappropriately stretching rules to achieve a short-term financial gain.
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The Bank does not structure any of its compensation plans in a way that inappropriately encourages risk taking to achieve payment. As described in Section IV A 2 below, the rationale for having the equally-weighted Bankwide goals of Return and Risk within the Bank’s Incentive Plan is to motivate management to take a balanced approach to managing risks and returns in the course of managing the Bank’s business, while at the same time ensuring that the Bank fulfills its mission.
In addition, the Bank’s defined benefit and defined contribution plans are designed to reward employees for continued strong performance over their careers — that is, the longer an employee works at the Bank, the greater the benefit the employee is likely to accumulate. This combined with the Bank’s compensation philosophy and the structure of the Bank’s compensation programs helps to ensure that the compensation paid to employees at termination of employment from the Bank is aligned with the interest of the shareholders of the Bank.
III. The elements of total compensation
The Bank’s total compensation program consists of the following components: (a) cash compensation (i.e., base salary, and,for exempt employees, “variable” or “at risk” short-term incentive compensation); (b) retirement-related benefits (i.e., the Qualified Defined Benefit Plan; the Qualified Defined Contribution Plan; and the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan (“DB BEP”)) and (c) health and welfare programs and other benefits which are listed in Section IV C below. In addition, as mentioned in the Introduction section of this CD&A, in the category of retirement-related benefits, the Bank offered the Nonqualified Defined Contribution Portion of the Benefits Equalization Plan, a Nonqualified Deferred Compensation Plan and a Nonqualified Profit Sharing Plan through and until November 10, 2009. Together, these components comprised the Bank’s total compensation program for 2009, and they are discussed in detailed in Section IV below.
IV. Explanation of why the Bank chooses to provide each element of total compensation
The Bank’s Compensation Policy
As a result of the Aon study and recommendations described above, the Board approved a revised Compensation Policy in November 2007 designed to help ensure that the Bank provides competitive compensation necessary to retain and motivate current employees while attracting the talent needed to successfully execute the Bank’s current and future business plans. The major components of the revised Compensation Policy, which is currently in effect, include the following:
| | • | | Maintenance of an overall greater emphasis on base salary and benefits (versus annual and long-term incentives) than would be typical of regional/commercial banks. |
| | • | | The use of regional/commercial banks (see the peer group list in Section I above) as the primary peer group for benchmarking at the 50th percentile of the peer group total compensation (a) cash compensation (i.e., base salary, and,for exempt employees, “variable” or “at risk” short-term incentive compensation); and (b) health and welfare programs and other benefits), discounted for purposes of establishing competitive pay levels by 15% to account for the incremental value provided by the Bank’s benefit programs. |
| | • | | A philosophical determination to match Bank officer positions one position level down versus commercial/regional banks. The rationale is that officer positions at commercial/regional banks are one level more significant than at the Bank because they may manage multiple business lines in multiple locations. In contrast, the Bank generally recruits senior level positions from a ‘divisional’ level at commercial/regional banks and not the higher ‘corporate’ level. |
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| | • | | The targeting of cash compensation pay at the 75th percentile of the FHLBanks where regional/commercial bank data is not available. The 15% discount to account for the incremental value provided by the Bank’s benefit programs will not be applied to benchmark results from the other FHLBanks, as the other FHLBanks offer similar benefits. |
| | • | | A commitment to conduct detailed cash compensation benchmarking for approximately one-third of the Bank’s Officer positions each year. (In this regard, the Bank collects information regarding benchmarking from Aon as well as a variety of other reputable sources.) |
| | • | | A commitment to evaluate the value of total compensation delivered to employees including base pay, incentive compensation, retirement and health & welfare benefits in determining market competitiveness every third year. |
Additional factors that the Bank will take into account during the benchmarking process to ensure the Bank remains competitive in its labor market include:
| | • | | Geographical area — New York City is a highly competitive market. |
| | • | | Cost of living — The New York Metropolitan area has a high cost of living that may require compensation premiums for some positions, particularly at more junior levels. |
| | • | | Availability of/demand for talent — Recruiting critical positions with high market demand typically requires a recruiting premium to entice an individual to change firms. |
The next total compensation and benefits evaluation is scheduled to begin in 2011, three years after the date the Bank completed the final implementation of Board-approved total compensation program design changes — July 1, 2008. It should be noted that, due to the fact that the Bank conducts detailed benchmarking for only one-third of the Bank’s Officer positions on an annual basis (including the NEOs), the effectiveness of the benchmarking program of the Bank can be demonstrated only once every three years.
2009 Compensation Benchmarking Analysis
The Bank performed its annual benchmarking analysis in October 2009 of 24 Bank officer positions using compensation data (base pay and incentive compensation) from Aon. Aon reported that benchmarking compensation in 2009 in general was complicated as a result of an aberration in the poor performance of regional/commercial banks, the decreases in compensation in the financial market in general and the Bank’s strong financial results.
Aon reviewed the results with the view that the Bank’s conservative compensation philosophy limits the upside in incentive compensation by capping incentive pay as a percentage of base salary while bonuses provided by competitors of the Bank can be very high when times are good. Therefore, Aon believed it would seem inherently inconsistent to adjust employee compensation downward in an unprecedented “low watermark year” in the market while the Bank limits the amount of compensation increases when there are good years in the market.
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As a result, management decided to propose to the Committee that there be no adjustments for 2010 to the salaries of the officer positions that were benchmarked in 2009. The Committee agreed, and decided that if the information related to benchmarked compensation in 2010 was similar to the results of 2009, then the Bank’s compensation structure and benchmarking process should be reviewed and may need to change to reflect the market.
The following is an explanation of why the Bank chooses to provide each element of compensation.
A. Cash Compensation
1. Base Pay
The goal of offering competitive base pay is to make the Bank successful in attracting, motivating and retaining the talent needed to execute the Bank’s business strategies.
In addition to the benchmarking process provided for in the Bank’s Compensation Policy as described above, a performance-based merit increase program exists for all employees that has a direct impact on base pay. Generally, employees receive merit increases on an annual basis. Such merit increases are 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 employee performance during that year. In October of 2008, the C&HR Committee determined that merit-related officer base pay increases for 2009 would be 3.5% for officers rated ‘Meets Requirements’; 4.5% for officers rated ‘Exceeds Requirements’; and 5.5% for officers rated ‘Outstanding�� for their performance in 2008. In October of 2009, the C&HR Committee determined that merit-related officer base pay increases for 2010 would be 3.0% for officers rated ‘Meets Requirements’; 3.5% for officers rated ‘Exceeds Requirements’; and 4.5% for officers rated ‘Outstanding’ for their performance in 2009.
2. Incentive Plan
The objective of the Bank’s Incentive Plan is to motivate exempt employees to perform at a high level and take actions that: i) support the Bank’s strategies, ii) lead to the attainment of the Bank’s business plan, and iii) fulfill the Bank’s mission. Funding for the Bank’s Incentive Plan is approved by the Board as part of the annual business plan process. By including goals that seek to balance risk and return, the Bank’s Incentive Plan is designed to work in a variety of economic conditions.
Aon reported in the course of its 2006 study of the Bank’s compensation and benefit programs (described earlier in Section I above), that most firms in the Bank’s peer group provide their employees with annual short-term incentives. As such, 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, and also pose a challenge with respect to the retention of key employees.
There are two types of performance measures that impact upon Incentive Plan awards received by participants: i) Bankwide performance goals, and ii) individual performance goals (which can include work performed as part of a group) established and measured through the annual performance evaluation process.
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The Bankwide goals are designed to help management focus on what it needs to accomplish for the success of the cooperative. The 2009 Bankwide goals are organized into three broad categories:
| | | | | | | | | |
| Goals Category | | Weighting | | | Goal | | Goal Basis |
| Business Effectiveness | | | 80 | % | | Return | | Dividend Capacity as forecasted in the Bank’s 2009 business plan. (50% of the category) |
| | | | | | | | | |
| | | | | | | Risk | | Enterprise Risk Level in the Bank’s 2009 business plan balance sheet as measured by the methodology used to calculate the Bank’s retained earnings target. (50% of the category) |
| | | | | | | | | |
| Mission Effectiveness | | | 10 | % | | Mission | | The Bank’s achievements in specific areas of housing and community development activities. |
| | | | | | | | | |
| Growth Effectiveness | | | 10 | % | | New Members | | Number of new members and other activities during 2009 to position the Bank for future growth and mission fulfillment. |
The goal measures in the Business Effectiveness and Growth Effective goal categories were approved by the Board’s Compensation and Human Resources Committee in March 2009, and the goal measures in the Mission Effectiveness goal category was approved by the Board’s Housing Committee in March 2009;all of the goal measures were reported to the Board. A description of these goal categories is set forth below:
Business Effectiveness Goal Category
The Return and Risk Goals that make up the Business Effectiveness Goal are linked and create a beneficial tension through the tradeoffs in managing one versus the other. These goals are weighted exactly the same; this motivates management to act in ways that are aligned with the Board’s wishes as the Bank understands them, i.e., to have management achieve forecasted returns while managing risks to stay within the prescribed risk parameters. In addition, and again consistent with management’s understanding of the Board’s wishes, this set of goals will not motivate management to increase Dividend Capacity if doing such would require imprudently increasing the risk in the balance sheet.
Return Goal
Provide value to shareholders through the dividend. The Return Goal is based on Dividend Capacity.
Risk Goal
The Risk Goal is intended to encourage management to balance those actions taken to enhance earnings (i.e., Dividend Capacity) with actions that are needed to maintain appropriate risk levels in the business.
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Growth Effectiveness Goal Category
The Growth Effectiveness GoalCategory is intended to set the stage for future growth. The Bank believes that recruiting new members now will, over time, create additional advances usage.
Mission Effectiveness Goal Category
The Mission Effectiveness Goal Category is intended to help ensure the Bank’s achievement of mission-related community development activities.
Bankwide Goals — Weighting Based on Employee Rank
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. There are differences among the NEOs with regard to their individual performance goals; however, these differences do not have a material impact on the amount of incentive compensation payout.
When employees are individually evaluated, they receive one of five performance ratings: “Outstanding”; “Exceeds Requirements”; “Meets Requirements”; “Needs Improvement” or “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 a specified threshold rating within the “Meets Requirements” category on their individual performance evaluations and do not have any unresolved disciplinary matters in their record.
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.
The Incentive Plan is administered by the Chief Executive Officer, subject to any requirements for review and approval by the C&HR Committee that the Committee may establish. In all areas not specifically reserved by the Committee for its review and approval, the decisions of the Chief Executive Officer or his designee concerning the Incentive Plan are binding on the Bank and on all Incentive Plan participants
B. Retirement Benefits
Introduction
The Qualified Defined Benefit Plan; Qualified Defined Contribution Plan; Nonqualified Defined Benefit Portion of the Benefit Equalization Plan; Nonqualified Defined Contribution Portion of the Benefits Equalization Plan; Nonqualified Profit Sharing Plan; and Nonqualified Deferred Compensation Plan were elements of the Bank’s total compensation program in 2009 intended to help encourage the accumulation of wealth by qualified employees, including NEOs, over a long period of time.
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These benefits (in addition to the Health and Welfare Programs and Other Benefits noted in Section IV C below) were 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.
The Qualified Defined Benefit Plan was amended for eligible Bank employees as of July 1, 2008 and, as a consequence, the terms of the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan for certain Bank employees also changed as of that date, since the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan mirrors the structure of the Qualified Defined Benefit Plan.
On November 10, 2009, the Bank’s Board decided, upon recommendations by Aon Consulting, Inc., to terminate the Nonqualified Defined Contribution Portion of the Benefits Equalization Plan, the Nonqualified Deferred Compensation Plan and the Nonqualified Profit Sharing Plan. The termination of these plans was the result of several factors, i.e.: information from Aon that suggests a trend toward companies closing these plans; a belief that the benefits these plans were to provide to employees would be less valuable if taxes were higher in the future; and uncertainty as to whether these plans would be repudiated in the unlikely event of a conservatorship or receivership of the Bank. As can be seen in the financial reports included in this Annual Report on Form 10-K, the Bank remained financially healthy and performed very well during 2009. However, the potential for joint and several liability that exists among the FHLBanks also creates the potential, however remote, that if one or more of the Home Loan Banks were taken into conservatorship or receivership, then all of the remaining FHLBanks might be placed into conservatorship or receivership as well.
Regulations adopted pursuant to Section 409A of the IRC provide in general that the distribution of accrued vested balances can be made to participants starting twelve months after the termination of nonqualified plans such as those maintained by the Bank. As such, distributions will be paid on November 12, 2010 to the individuals who participated in the Nonqualified Defined Contribution Portion of the BEP, Nonqualified Profit Sharing Plan, and Nonqualified Deferred Compensation Plan.
The Bank’s Nonqualified Plan Committee administers various operational and ministerial matters pertaining to the Benefit Equalization Plan, the Nonqualified Profit Sharing Plan and Nonqualified Deferred Compensation Plan. These matters include, but are not limited to, approving employees as participants of the BEP and approving the payment method of benefits. The Nonqualified Plan Committee is chaired by the Chair of the C&HR Committee; other members include another Board Director who is a member of the C&HR Committee, the Bank’s Chief Financial Officer, and the Bank’s Director of Human Resources. The Nonqualified Plan Committee reports its actions to the C&HR Committee by submitting its meeting minutes to the C&HR Committee on a regular basis for its information.
i) Qualified Defined Benefit Plan
The Pentegra Qualified 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.
Bank participants, who as of July 1, 2008 had five years of DB Plan service and were age 50 years or older, are provided with 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 the annual Internal Revenue Code limit. These participants are identified herein as “Grandfathered”.
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For all other participants (identified herein as “Non-Grandfathered”), the DB Plan provides a benefit of 2.0% (as opposed to 2.5% provided to Grandfathered participants) of a participant’s highest consecutive 5-year average earnings (as opposed to consecutive 3-year average earnings as previously provided to Grandfathered participants), multiplied by the participant’s years of benefit service, not to exceed 30 years. The Normal Form of Payment is a life annuity (i.e., an annuity paid until the death of the participant), as opposed to a guaranteed twelve year payout as previously provided to Grandfathered participants. Also, cost of living adjustments (“COLAs”) are no longer provided on future accruals (as opposed to a 1% simple interest COLA beginning at age 66 as previously provided).
The table below summarizes the DB Plan changes affecting the Non-Grandfathered employees that went into effect on July 1, 2008. For purposes of the following table, please note the following definitions:
“Defined Benefit Plan”— An Internal Revenue Code qualified deferred compensation arrangement that pays an employee and his/her designated beneficiary upon retirement a lifetime annuity or the lump sum actuarial equivalent of that annuity.
Benefit Multiplier— The annuity paid from the Bank’s DB Plan is calculated on an employee’s years of service, up to a maximum of 30 years, multiplied by 2.5% per year. Beginning July 1, 2008, the Benefit Multiplier changed to 2.0% for Non-Grandfathered Employees.
Final Average Pay Period— Is that period of time that an employee’s salary is used in the calculation of that employee’s benefit. For Grandfathered Employees, the Benefit Multiplier, 2.5%, is multiplied by the average of the employee’s three highest consecutive years of salary multiplied by that employee’s years of service, not to exceed thirty years at the date of termination. For Non-Grandfathered Employees, benefits accrued before July 1, 2008, the Benefit Multiplier mirrored the Grandfathered Employees. After July 1, 2008 a Benefits Multiplier of 2% is multiplied by the employee’s years of service (total service not to exceed thirty years) multiplied by the average of the employee’s five highest consecutive years of salary is used
Normal Form of Payment— The DB Plan must state the form of the annuity to be paid to the retiring employee. For unmarried Grandfathered retirees, the Normal Form of Payment as a life annuity with a 12 year guaranteed payment (“Guaranteed 12 Year Payout”) which means that if the unmarried Grandfathered retiree dies prior to receiving 12 years of annuity payments, the retiree’s beneficiary will receive a lump sum equal to the remaining unpaid payments in the 12 year period. For married Grandfathered retirees, the Normal Form of Payment is a 50% joint and survivor annuity which provides a continuation of half of the monthly annuity to the surviving beneficiary. The initial 50% Joint and Survivor Annuity monthly payment is actuarially equivalent to the 12 year guarantee payment provided to single retirees under the formula. Effective July 1, 2008, the DB Plan provides single Non-Grandfathered retirees with a straight “Life Annuity” as the Normal Form of Payment, which means that, once a retiree dies, the annuity terminates. For married Non-Grandfathered retirees, the Normal Form of Payment will be a 50% Joint and Survivor Annuity that is actuarially equivalent to the straight Life Annuity.
Cost of Living Adjustments (or “COLAs”)— Once a Grandfathered Employee retiree reaches age 65, in each succeeding year he/she will receive an extra payment annually equal to one percent of the original benefit amount multiplied by the number of years in pay status after age 65. As of July 1, 2008, this adjustment is no longer offered to Non-Grandfathered Employees on benefits accruing after that date.
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Early Retirement Subsidy:
Grandfathered Employees
There is a subsidy or benefit enhancement for Grandfathered Employee retirees who retire prior to normal retirement age (65). 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, will realize a reduction of 1.5% to his/her early retirement benefit for each year benefits commence earlier than age 65. If that employee had not accumulated a total of 70 years, the reduction would be 3% for each year benefits commence earlier than age 65.
Non-Grandfathered Employees
Effective as of July 1, 2008, if an employee on the date of his/her retirement, before 65, had accumulated a total of 70 or more years, the reduction will be 3% every year between his/her age and age 65. However, if a Non-Grandfathered Employee on the date of his/her retirement, before 65, had not accumulated 70 or more years, the reduction will be the actuarial equivalent between his/her age and age 65. At early retirement, the new early retirement factors will apply to the Non-Grandfathered Employee’s total service benefit. The retiree will be entitled to receive the greater of this early retirement benefit or the early retirement benefit accrued as of July 1, 2008 under the old plan formula.
Vesting— Grandfathered Employees are entitled, starting with the second year of employment service, to 20% of his/her accumulated benefit per year. As a result, after the sixth year of employment service, an employee will be entitled to 100% of his/her accumulated benefit. Non-Grandfathered Employees who entered the DB Plan on or after July 1, 2008 will not receive such benefit until such employee has completed five years of employment service. At that point, the employee will be entitled to 100% of his/her accumulated benefit. The term “5 Year Cliff” is a reference to the foregoing provision. Grandfathered and Non-Grandfathered Employees already participating in the DB Plan prior to July 1, 2008 will vest at 20% per year starting with the second year through the fourth year of employment service and will be accelerated to 100% vesting after the fifth year.
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| | | | | |
| DEFINED BENEFIT PLAN | | GRANDFATHERED | | NON-GRANDFATHERED |
| PROVISIONS | | EMPLOYEES | | EMPLOYEES |
| | | | | |
| Benefit Multiplier | | 2.5% | | 2.0% |
| Final Average Pay Period | | High 3 Year | | High 5 Year |
| Normal Form of Payment | | Guaranteed 12 Year Payout | | Life Annuity |
| Cost of Living Adjustments | | 1% Per Year Cumulative Commencing at Age 66 | | None |
| Early Retirement Subsidy<65: | | | | |
| | | | | |
| a) Rule of 70 | | 1.5% Per Year | | 3% Per Year |
| | | | | |
| b) Rule of 70 Not Met | | 3% Per Year | | Actuarial Equivalent |
| *Vesting | | 20% Per Year Commencing | | 5 Year Cliff |
| | | Second Year of Employment | | |
| | | |
| * | | Greater of DB Plan Vesting or New Plan Vesting applied to employees participating in the DB Plan prior to July 1, 2008. |
Earnings under the Bank’s DB Plan continue to be defined as base salary plus short-term incentives, and overtime, subject to the annual IRC limit. The IRC limit on earnings for calculation of the DB Plan benefit for 2009 was $245,000.
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. Annual benefits provided under the DB Plan also are subject to IRC limits, which vary by age and benefit payment option selected.
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 IRC for three out of five consecutive years and who are also approved for inclusion by the Bank’s Nonqualified Plan 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 Nonqualified 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 IRC.
The Nonqualified 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.
The Nonqualified Defined Benefit Portion of the BEP is an unfunded arrangement. However, the Bank established grantor trusts to assist in financing the payment of benefits under these plans. The trust were approved by the Nonqualified Plan Committee in March of 2006 and established in June of 2007.
Although other nonqualified plans were terminated on November 10, 2009, the Nonqualified Defined Benefit Portion of the BEP was not terminated on that day, and remains in effect as of the date of this Annual Report on Form 10-K.
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iii) Qualified Defined Contribution Plan
Bank employees who have met the eligibility requirements contained in the Pentegra Qualified Defined Contribution Plan for Financial Institutions (“DC Plan”) can choose to contribute to the DC Plan, a retirement savings plan qualified under the IRC. 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.
An employee may contribute 1% to 19% of base salary into the DC Plan, up to IRC limitations. The IRC limit for 2009 was $16,500 for employees under the age of 50. An additional “catch up” contribution of $5,500 is permitted under IRC 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
Also an unfunded arrangement through a grantor trust, Employees who were 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 Nonqualified Plan Committee were eligible to participate in a Nonqualified Defined Contribution Portion of the Benefit Equalization Plan (which is a separate portion of the aforementioned BEP). The Nonqualified Defined Contribution Portion of the BEP ensured, among other things, that participants whose benefits under the DC Plan would otherwise be restricted under certain provisions of the IRC were 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.
As previously noted, the Nonqualified Defined Contribution Portion of the BEP was terminated as of November 10, 2009. All plan assets will be paid out to individual participants in a lump sum distribution on November 12, 2010. Most of the plan assets that will be paid out had been previously contributed by the participants.
In addition, as a result of this termination, the Board voted on January 21, 2010, based on a recommendation from Aon, to:
| | | |
| * | | Provide to the participants of the Nonqualified Defined Contribution Portion of the BEP as of November 10, 2009, with respect to 2009, an additional cash payment on the second payroll following the end of 2009 in an amount equal to 6% of base pay in excess of IRS limitations for 2009 less amounts included for the DC BEP for 2009; and |
| |
| * | | Beginning in 2010, provide to the participants of the Nonqualified Defined Contribution Portion of the BEP as of November 10, 2009, an additional annual cash payment on the first or second payroll following the end of a calendar year in an amount equal to 6% of base pay in excess of IRS limitations for such prior year. |
v) Nonqualified Profit Sharing Plan
The Bank’s Nonqualified Profit Sharing Plan was designed to address the compensation inequities that affected a group of highly compensated employees (including one NEO) who were negatively affected by the changes to the Bank’s Qualified Defined Benefit Plan formula and who would have been compensated less than employees in similar positions in the Bank’s peer group.
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All Non-Grandfathered employees who had five years of Bank service and were members of the BEP were entitled to participate in the Bank’s Nonqualified Profit Sharing Plan. The Nonqualified Profit Sharing Plan credited participants with 8% of salary (defined as base pay plus any Incentive Plan award) conditioned on the Bank achieving its threshold targets for certain Bank-wide performance goals used in the Bank’s Incentive Plan. The credit to participants into the Nonqualified Profit Sharing Plan will be held in a deferred account for participants and paid in a lump sum six months after termination of a participant’s employment. The Nonqualified Profit Sharing Plan was established on July 1, 2008 therefore only provided participants with a half of year of credit for 2008. 4% was allocated to the participants. This was an unfunded arrangement through the grantor trust.
As previously noted, the Nonqualified Profit Sharing Plan was terminated, which was based on a recommendation from Aon, as of November 10, 2009. All plan assets will be paid out to individual participants in a lump sum distribution on November 12, 2010. The accrued assets will include the calculation of the 2008 and 2009 plan years.
In addition, as a result of this termination, the Board voted on January 21, 2010 to provide annually to participants in the Nonqualified Profit Sharing Plan as of November 10, 2009, in 2010 and thereafter, an amount equal to 8% of the prior year’s base pay and short term incentive payment to the extent the requirements under the Bank’s Short Term Incentive Plan have been achieved. The 8% payment will not be used to calculate an employee’s pension amount.
vi) Nonqualified Deferred Compensation Plan
The Bank’s Board of Directors approved the establishment of a Nonqualified Deferred Compensation Plan, effective January 1, 2009, for the Board and Bank employees at a rank of Assistant Vice President and higher. A Nonqualified Deferred Compensation Plan is a vehicle that a corporation establishes for its Directors and employees for the purpose of enabling them to defer the present taxation of compensation to a date in the future — for example, when these individuals retire and would presumably be in a lower tax bracket. In addition, Directors and certain employees have the ability to have interest on their deferred compensation calculated based on the performance of investment vehicles of their own choosing, using a menu of investment choices similar to that of a 401(k) plan.
The Bank did not provide a match on these deferrals. All deferred monies were the property of the Bank until distribution to the Directors and employees and thus subject to claims of Bank creditors until distribution.
A grantor trust similar to those in operation for the BEP was established by the Nonqualified Plan Committee for the Nonqualified Deferred Compensation Plan in December 2008.
As previously noted, the Nonqualified Deferred Compensation Plan was terminated as of November 10, 2009. Any assets that were contributed by the participants will be paid out on November 12, 2010.
C. Health and Welfare Programs and Other Benefits
In addition to the foregoing, the Bank offers a comprehensive benefits package for all regular employees (including NEOs) which include the following significant benefits:
Medical and Dental
Employees can choose preferred provider, open access or managed care medical. All types of medical coverage include a prescription benefit. Dental plan choices include preferred provider or managed care. Employees contribute to cover a portion of the costs for these benefits.
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Retiree Medical
The Bank offers eligible employees medical coverage when they retire. Employees are eligible to participate in the Retiree Medical Benefits Plan if they are at least 55 years old with 10 years of Bank service when they retire from active service.
Under the Plan as in effect since May 1, 1995, retirees who retire before age 62 pay the full Bank premium for the coverage they had as employees until they attain age 62. Thereafter, they contribute a percentage of the Bank’s premium based on their total completed years of service (no adjustment is made for partial years of service) on a “Defined Benefit” basis, as defined below, as follows:
| | | | | |
| Completed | | | |
| Years of | | Percentage of Premium | |
| Service | | Paid by Retiree | |
| 10 | | | 50.0 | % |
| 11 | | | 47.5 | % |
| 12 | | | 45.0 | % |
| 13 | | | 42.5 | % |
| 14 | | | 40.0 | % |
| 15 | | | 37.5 | % |
| 16 | | | 35.0 | % |
| 17 | | | 32.5 | % |
| 18 | | | 30.0 | % |
| 19 | | | 27.5 | % |
| 20 or more | | | 25.0 | % |
The premium paid by retirees upon becoming Medicare-eligible (either at age 65 or prior thereto as a result of disability) is a premium reduced to take into account the status of Medicare as the primary payer of the medical benefits of Medicare-eligible retirees.
As a result of the Aon study described above and the recommendations that resulted from such study, the Board directed that certain changes in the Plan be made, effective January 1, 2008. Employees who, on December 31, 2007, had 5 years of service and were age 60 or older were not affected by this change. These employees are identified herein as “Grandfathered.” However, for all other employees, identified herein as “Non-Grandfathered,” the Plan premium-payment requirements beginning at age 62 were changed. From age 62 until the retiree or a covered dependent of the retiree becomes Medicare-eligible (usually at age 65 or earlier, if disabled), the Bank will contribute $45 per month toward the premium of a Non-Grandfathered retiree multiplied by the number of years of service earned by the retiree after age 45 and by the number of individuals (including the retiree, the retiree’s spouse, and each other dependent of the retiree) covered under the Plan.
After the retiree or a covered dependent of the retiree becomes Medicare-eligible, the Bank’s contribution toward the premium for the coverage of the Medicare-eligible individual will be reduced to $25 per month. The $45 and $25 amounts were fixed for the 2008 calendar year. Each year thereafter, these amounts will increase by a cost-of-living adjustment (“COLA”) factor not to exceed 3% and were $46.35 and $25.75 for 2009.
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The table below summarizes the Retiree Medical Benefits Plan changes that affect Non-Grandfathered employees who retire on or after January 1, 2008. For purposes of the following table and the preceding discussion on the Retiree Medical Benefits Plan, the following definitions have been used:
Defined Benefit— A medical plan in which the Bank provides medical coverage to a retired employee and collects from the retiree a monthly fixed dollar portion of the premium for the coverage elected by the employee.
Defined Dollar Plan— A medical plan in which the Bank provides medical coverage to a retired employee up to a fixed Bank cost for the coverage elected by the employee and the retiree assumes all costs above the Bank’s stated contribution.
| | | | | |
| | | Provisions for | | |
| | | Grandfathered | | Provisions for Non-Grandfathered |
| | | Retirees | | Retirees |
| Plan Type | | Defined Benefit | | Defined Dollar Plan |
| | | | | |
| Medical Plan Formula | | 1) Same coverage offered to active employees prior to age 65 | | 1) Retiree, (and covered individual), is eligible for $45/month x years of service after age 45, and has attainted the age of 62. There is a 3% Cost of Living Adjustment each year |
| | | | | |
| | | 2) Supplement Medicare coverage for retirees Age 65 and over | | 2) Retiree, (and covered individual), is eligible for $25/month x years of service after age 45 and after age 65. There is a 3% Cost of Living Adjustment each year |
| Employer | | | | |
| Cost Share Examples: | | 0% for Pre-62 | | $0 for Pre-62 Pre-65/Post-65 |
| 10 years of service after age 45 | | 50% for Post-62 | | $5400/$3000 |
| 15 years of service after age 45 | | 62.5% for Post-62 | | $8100/$4500 |
| 20 years of service after age 45 | | 75% for Post-62 | | $10800/$6000 |
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 other than taxation of coverage in excess of $50,000.
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Additional Life Insurance
Additional Life Insurance is provided to two NEOs (the Bank President and the Head of Member Services) who, in 2003, were participants in the Bank’s Split Dollar life insurance program, as consideration for their assigning to the Bank their portion of their Split Dollar life insurance policy with the Bank. The Bank’s Split Dollar life insurance program was terminated in 2003.
This Additional Life Insurance policy is paid by the Bank; however, each individual owns the policy. The Bank purchased these policies in 2003 for 15 years and locked in the premiums for the duration of the policies. When the policies expire in 2018, there is an option to renew, though the rate will be subject to change.
Retiree Life Insurance
Retiree Life Insurance provides a death benefit in relation to the amount of coverage one chooses at the time of retirement. The continued benefit is calculated by the insurance broker and is paid for by the retiree. Coverage can be chosen in $1000 increments up to a maximum of $20,000.
Business Travel Accident Insurance
Business Travel & Accident insurance provides a death benefit 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.
Supplemental Short Term Disability Coverage
The Bank provides for supplemental short term disability coverage at no cost to the employee. This coverage provides 66.67% (up to a maximum of $1000 per week) of a person’s salary while they are on disability leave. Once state disability coverage is confirmed, the Bank reduces any supplemental calculations by the amount payable from the Short Term Disability provider.
Flexible Spending Accounts
Flexible spending accounts in accordance with IRC rules are provided to employees to allow tax benefits for certain medical expenses, dependent medical expenses, mass transit expenses associated with commuting and parking expenses associated with commuting. The administrative costs for these accounts are paid by the Bank.
Employee Assistance Program
Employee assistance counseling is available at no cost to employees.
Educational Development Assistance
Educational Development Assistance provides tuition reimbursement, subject to the satisfaction of certain conditions.
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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 Club Reimbursement
Fitness club reimbursement, up to $350 per year, is available subject to the satisfaction of certain criteria.
Severance Plan
The Bank has a formal Board-approved Severance Plan available to all Bank employees who work twenty or more hours a week and have at least one year of employment.
Perquisites
Perquisites are as a benefit an insubstantial and insignificant amount of compensation totaling less than $10,000 for the year 2009 per NEO for all such expenditures.
Reimbursement for Financial Counseling Costs Incurred in 2010 for Participants in Terminated Plans
As a result of the termination as of November 10, 2009 of each of the Defined Contribution Portion of the Bank’s Benefit Equalization Plan, the Bank’s Nonqualified Deferred Compensation Plan, and the Bank’s Nonqualified Profit Sharing Plan, the Board voted on January 21, 2010 to authorize the Bank to reimburse participants receiving payments from these plans in 2010 in an amount up to $12,500 for financial counseling costs incurred by such participants in 2010. This offer of reimbursement, which was based on a recommendation from Aon, was believed to be appropriate due to the potentially significant sums that the plan participants might receive when monies from the terminated plans are distributed on November 12, 2010.
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 Committee believes it has developed a unified, coherent system of compensation.
The Bank’s compensation and benefits program consists of the following components: (a) cash compensation (i.e., base salary, and, for exempt employees, “variable” or “at risk” short-term incentive compensation); (b) retirement-related benefits (i.e., Qualified Defined Benefit Plan; Qualified Defined Contribution Plan; and Nonqualified Defined Benefit Portion of the Benefit Equalization Plan; and (c) health and welfare programs and other benefits which are listed in Section IV C above. In addition, in the category of retirement-related benefits, as discussed above, the Bank offered the Nonqualified Defined Contribution Portion of the Benefits Equalization Plan, a Nonqualified Deferred Compensation Plan and a Nonqualified Profit Sharing Plan through and until November 10, 2009. Together, these components comprised the Bank’s total compensation program for 2009, and they are discussed in detail in Section IV above.
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The Bank’s overall objective with regard to its compensation and benefits program is to motivate employees to achieve consistent and superior results over a long period of time for the Bank, and to provide a program 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 compensation and benefits program mix, the C&HR Committee considers the impact on the other elements of the mix. In this regard, the C&HR Committee strives to maintain programs that keep the Bank within the parameters of its Compensation Policy.
The Bank notes that differences in compensation levels that may exist among the NEOs are primarily attributable to the benchmarking process. The Board does have the power to adjust compensation from the results of the benchmarking process; however, this power is not normally exercised.
COMPENSATION COMMITTEE REPORT
The Compensation and Human Resources Committee (“Committee”) of the Board of Directors of the 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 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 2009.
THE COMPENSATION AND HUMAN RESOURCES COMMITTEE
C. Cathleen Raffaeli, Chair
James W. Fulmer
José R. González
Katherine J. Liseno
Kevin J. Lynch
Richard S. Mroz
Thomas M. O’Brien
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Executive Compensation
The table below summarizes the total compensation earned by each of the Named Executive Officers for the years ended December 31, 2009, December 31, 2008 and December 31, 2007 (in whole dollars):
Summary Compensation Table for Fiscal Years 2009, 2008 and 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Change in | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Non-Equity | | | Pension Value | | | All Other | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Incentive | | | and Nonqualified | | | Compensation | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Plan | | | Deferred | | | (4,5,6,7,8,9,10,11) | | | | |
| | | | | | | | | | | | | | | Stock | | | Option | | | Compensation | | | Compensation | | | (D,E,F,G,H, I,J) | | | | |
| Name and PrincipalPosition | | Year | | | Salary (13) (14) | | | Bonus | | | Awards | | | Awards | | | (1)(A)(a) | | | (2,3) (B,C) (b,c) | | | (d,e,f,g,h,i,j) | | | Total | |
| | |
| Alfred A. DelliBovi | | | 2009 | | | $ | 649,494 | | | | — | | | | — | | | | — | | | $ | 503,592 | | | $ | 1,010,379 | | | $ | 72,917 | | | $ | 2,236,382 | |
| President & | | | 2008 | | | $ | 615,634 | | | | — | | | | — | | | | — | | | $ | 379,938 | | | $ | 1,092,000 | | | $ | 76,328 | | | $ | 2,163,900 | |
| Chief Executive Officer (PEO) | | | 2007 | | | $ | 583,539 | | | | — | | | | — | | | | — | | | $ | 421,964 | | | $ | 479,000 | | | $ | 75,855 | | | $ | 1,560,358 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Peter S. Leung | | | 2009 | | | $ | 423,294 | | | | — | | | | — | | | | — | | | $ | 239,805 | | | $ | 323,067 | | | $ | 41,095 | | | $ | 1,027,261 | |
| Senior Vice President, | | | 2008 | | | $ | 405,066 | | | | — | | | | — | | | | — | | | $ | 181,414 | | | $ | 328,000 | | | $ | 49,045 | | | $ | 963,525 | |
| Chief Risk Officer | | | 2007 | | | $ | 387,623 | | | | — | | | | — | | | | — | | | $ | 204,407 | | | $ | 499,000 | | | $ | 46,917 | | | $ | 1,137,947 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Paul B. Héroux | | | 2009 | | | $ | 300,980 | | | | — | | | | — | | | | — | | | $ | 170,511 | | | $ | 282,434 | | | $ | 45,464 | | | $ | 799,389 | |
| Senior Vice President, | | | 2008 | | | $ | 288,019 | | | | — | | | | — | | | | — | | | $ | 128,993 | | | $ | 400,000 | | | $ | 57,200 | | | $ | 874,212 | |
| Head of Member Services | | | 2007 | | | $ | 275,616 | | | | — | | | | — | | | | — | | | $ | 145,342 | | | $ | 171,000 | | | $ | 43,425 | | | $ | 635,383 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Patrick A. Morgan | | | 2009 | | | $ | 319,154 | | | | — | | | | — | | | | — | | | $ | 180,807 | | | $ | 172,000 | | | $ | 34,552 | | | $ | 706,513 | |
| Senior Vice President, | | | 2008 | | | $ | 305,411 | | | | — | | | | — | | | | — | | | $ | 136,782 | | | $ | 268,000 | | | $ | 36,933 | | | $ | 747,126 | |
| Chief Financial Officer (PFO) | | | 2007 | | | $ | 292,259 | | | | — | | | | — | | | | — | | | $ | 154,118 | | | $ | 279,000 | | | $ | 31,184 | | | $ | 756,561 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Kevin M. Neylan(12) | | | 2009 | | | $ | 310,415 | | | | — | | | | — | | | | — | | | $ | 175,856 | | | $ | 185,411 | | | $ | 41,596 | | | $ | 713,278 | |
Senior Vice President,
Head of Strategy & Business Development | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Footnotes for Summary Compensation Table for the Year Ending December 31, 2009
| | | |
| 1 | | Bonuses are not provided by the Bank. However, the non-equity incentive plan compensation in the above table may be considered by some to be deemed a “bonus”. |
| |
| 2 | | Change in Pension Value for the Pentegra Defined Benefit Plan for Financial Institutions: |
A. DelliBovi — $224,000
P. Leung — $143,000
P. Morgan — $104,000
P. Héroux — $192,000
K. Neylan — $91,000
| | | |
| 3 | | Change in Pension Value for the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan: |
A. DelliBovi — $575,000
P. Leung — $145,000
P. Morgan — $60,000
P. Héroux — $60,000
K. Neylan — $57,000
| | | |
| 4 | | Change in Nonqualified Deferred Compensation Earnings: |
A. DelliBovi — $211,379
P. Leung — $35,067
P. Morgan — $8,000
P. Héroux — $30,434
K. Neylan — $37,411
| | | |
| 5 | | 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 dental insurance premium, payment of vision insurance premium and payment of employee assistance program premium. |
| |
| 6 | | 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 $21,999, for P. Leung $15,526, for P. Morgan $9,724, for Paul Heroux $1,722 and for K. Neylan $6,715). |
| |
| 7 | | For A. DelliBovi, includes value of leased automobile ($8,100). |
| |
| 8 | | For Paul Heroux, includes payment of this item paid by the Bank for all eligible employees: Years of Service Award. |
| |
| 9 | | For P. Leung, P. Heroux, and K. Neylan, includes payment of this item paid by the Bank for all eligible officers: officer physical examination. |
| |
| 10 | | For A. DelliBovi and P. Héroux, includes this item paid by the Bank for all eligible officers: payment of term life insurance premium. |
| |
| 11 | | For P. Heroux and for K. Neylan, includes payment of this item paid by the Bank for all employees: fitness center reimbursement. |
| |
| 12 | | K. Neylan is a new NEO in 2009. |
| |
| 13 | | Figures represent salaries approved by the Bank’s Board of Directors for the year 2009. |
Footnotes for Summary Compensation Table for the Year Ending December 31, 2008
| | | |
| A | | Bonuses are not provided by the Bank. However, the non-equity incentive plan compensation in the above table may be considered by some to be deemed a “bonus”. |
| |
| B | | Change in Pension Value for the Pentegra Defined Benefit Plan for Financial Institutions: |
A. DelliBovi — $151,000
P. Morgan — $74,000
P. Leung — $105,000
P. Héroux — $156,000
| | | |
| C | | Change in Pension Value for the Nonqualified Defined Benefit Portion of the Bank’s Benefit Equalization Plan: |
A. DelliBovi — $941,000
P. Morgan — $194,000
P. Leung — $223,000
P. Héroux — $244,000
| | | |
| D | | 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, payment of vision insurance premium and payment of employee assistance program premium. |
315
| | | |
| E | | For A. DelliBovi, P. Morgan, and P. Leung, 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 $23,407, for P. Morgan $9,908 and for P. Leung $17,016). |
| |
| F | | For A. DelliBovi, includes value of leased automobile ($8,100). |
| |
| G | | For A. DelliBovi, includes payment of this item paid by the Bank for all eligible employees: Years of Service Award. |
| |
| H | | For A. DelliBovi, includes payment of this item paid by the Bank for all eligible officers: officer physical examination. |
| |
| I | | For A. DelliBovi and P. Héroux, includes this item paid by the Bank for all eligible officers: payment of term life insurance premium. |
| |
| j | | For P. Heroux, includes payment of this item paid by the Bank for all eligible employees: Nonqualified Profit Sharing Plan. |
| |
| 14 | | Figures represent salaries approved by the Bank’s Board of Directors for the year 2008. Figures previously reported in the Bank’s 10-K for 2008 used information reflecting actual salaries received in the year 2008. |
Footnotes for Summary Compensation Table for the Year Ending December 31, 2007
| | | |
| a | | Bonuses are not provided by the Bank. However, the non-equity incentive plan compensation in the above table may be considered by some to be deemed a “bonus”. |
| |
| b | | Change in Pension Value for the Pentegra Defined Benefit Plan for Financial Institutions: |
A. DelliBovi — $126,000
P. Morgan — $91,000
P. Leung — $51,000
P. Héroux — $67,000
| | | |
| c | | Change in Pension Value for the Nonqualified Defined Benefit Portion of the Bank’s Benefit Equalization Plan: |
A. DelliBovi — $353,000
P. Morgan — $188,000
P. Leung — $448,000
P. Héroux — $104,000
| | | |
| d | | 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. |
| |
| e | | For A. DelliBovi, P. Leung, and P. Héroux , 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 $22,839, for P. Leung $15,994 and for P. Héroux $4,732). |
| |
| f | | For A. DelliBovi, P. Leung, and P. Morgan, includes this item paid by the Bank for all participating employees: payment of vision insurance premium. |
| |
| g | | For A. DelliBovi, includes value of leased automobile ($11,856). |
| |
| h | | For P. Héroux, includes payment of this item paid by the Bank for all eligible officers: officer physical examination. |
| |
| i | | For A. DelliBovi,and P. Héroux, includes this item paid by the Bank for all eligible officers: payment of term life insurance premium. |
| |
| j | �� | For P. Héroux, includes payment of this item paid by the Bank for all eligible employees: fitness center membership reimbursement. |
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The following table sets forth information regarding all incentive plan award opportunities made available to Named Executive Officers for the fiscal year 2009 (in whole dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grants of Plan-Based Awards for Fiscal Year 2009 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All Other | | | All Other | | | Exercise | | | Grant | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock | | | Option | | | or | | | Date | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Awards: | | | Awards: | | | Base | | | Fair Value | |
| | | | | | | Estimated Future Payouts | | | Estimated Future Payouts | | | Number of | | | Number of | | | Price of | | | of Stock | |
| | | | | | | Under Non-Equity Incentive | | | Under Equity Incentive | | | Shares of | | | Securities | | | Option | | | and Option | |
| | | Grant | | | Plan Awards (2) (3) | | | Plan Awards | | | Stock | | | Underlying | | | Awards | | | Awards | |
| Name | | Date (1) | | | Threshold | | | Target | | | Maximum | | | Threshold | | | Target | | | Maximum | | | or Units | | | Options | | | ($/Sh) | | | ($/Sh) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Alfred A. DelliBovi | | | 03/18/09 | | | $ | 142,889 | | | $ | 259,798 | | | $ | 493,615 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Peter S. Leung | | | 03/18/09 | | | $ | 69,844 | | | $ | 126,988 | | | $ | 241,278 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Paul B. Héroux | | | 03/18/09 | | | $ | 49,662 | | | $ | 90,294 | | | $ | 171,559 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Patrick A. Morgan | | | 03/18/09 | | | $ | 52,660 | | | $ | 95,746 | | | $ | 181,918 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Kevin M. Neylan | | | 03/18/09 | | | $ | 51,218 | | | $ | 93,125 | | | $ | 176,937 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | |
| 1 | | On this date, the Board of Directors’ Compensation and Human Resources Committee approved the 2009 Incentive Compensation Plan (“ICP”). Approval of the ICP does not mean a payout is guaranteed. |
| |
| 2 | | Figures represent an assumed rating attained by the NEO of at least a specified threshold rating within the “Meets Requirements” category for the Named Executive Officers with respect to their individual performance. |
| |
| 3 | | Amounts represent potential awards under the 2009 Incentive Compensation Plan; actual amounts awarded are reflected in the Summary Compensation Table above. |
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, “variable” or “at risk” short-term incentive compensation); (b) retirement-related benefits (i.e., Qualified Defined Benefit Plan; Qualified Defined Contribution Plan; and Nonqualified Defined Benefit Portion of the Benefit Equalization Plan; and (c) health and welfare programs and other benefits. In addition, in the category of retirement-related benefits, the Bank offered the Nonqualified Defined Contribution Portion of the Benefits Equalization Plan, a Nonqualified Deferred Compensation Plan and a Nonqualified Profit Sharing Plan through and until November 10, 2009. 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, fitness club reimbursement and severance pay. An additional benefit offered to all officers, age 40 or greater, or who are at Vice President rank or above, is a physical examination every 18 months.
The annual base salaries for the Named Executive Officers are as follows (whole dollars):
| | | | | | | | | |
| | | 2009
(1) | | | 2010
(2) | |
| | | | | | | | | |
| Alfred A. DelliBovi | | $ | 649,494 | | | $ | 678,721 | |
| Patrick A. Morgan | | | 319,154 | | | | 330,324 | |
| Peter S. Leung | | | 423,294 | | | | 438,109 | |
| Paul B. Héroux | | | 300,980 | | | | 311,514 | |
| Kevin M. Neylan | | | 310,415 | | | | 321,280 | |
The 2010 increases in the base salaries of the NEOs from 2009 were based on their 2009 performance.
1 Figures represent salaries approved by the Bank’s Board of Directors for the year 2009.
2 Figures represent salaries approved by the Bank’s Board of Directors for the year 2010.
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A performance-based merit increase program exists for all employees that has an impact on base pay. Generally, employees receive merit increases on an annual basis. Such merit increases are 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 employee performance during that year. In October of 2008, the C&HR Committee determined that merit-related officer base pay increases for 2009 would be 3.5% for officers rated ‘Meets Requirements’; 4.5% for officers rated ‘Exceeds Requirements’; and 5.5% for officers rated ‘Outstanding’ for their performance in 2008. In October of 2009, the C&HR Committee determined that merit-related officer base pay increases for 2010 would be 3.0% for officers rated ‘Meets Requirements’; 3.5% for officers rated ‘Exceeds Requirements’; and 4.5% for officers rated ‘Outstanding’ for their performance in 2009.
See the “Grant of Plan-Based Awards” table for 2009 incentive compensation opportunity information.
Short-Term Incentive Compensation Plan (“Incentive Plan”)
The objective of the Bank’s Incentive Plan is to motivate exempt employees to perform at a high level and take actions that: i) support the Bank’s strategies, ii) lead to the attainment of the Bank’s business plan, and iii) fulfill the Bank’s mission. Funding for the Bank’s Incentive Plan is approved by the Board as part of the annual business plan process. By including goals that seek to balance risk and return, the Bank’s Incentive Plan is designed to work in a variety of economic conditions.
Aon reported in the course of its 2006 study of the Bank’s compensation and benefit programs (described earlier in Section I of the above Compensation Discussion and Analysis), that most firms in the Bank’s peer group provide their employees with annual short-term incentives. As such, 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, and also pose a challenge with respect to the retention of key employees.
There are two types of performance measures that impact upon Incentive Plan awards received by participants: i) Bankwide performance goals, and ii) individual performance goals (which can include work performed as part of a group) established and measured through the annual performance evaluation process.
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The Bankwide goals are designed to help management focus on what it needs to accomplish for the success of the cooperative. The 2009 Bankwide goals were organized into three broad categories:
| | | | | | | | | |
| GoalsCategory | | Weighting | | Goal | | Goal Basis |
| Business Effectiveness | | | 80 | % | | Return | | Dividend Capacity as forecasted in the Bank’s 2009 business plan. (50% of the category) |
| | | | | | | | | |
| | | | | | | Risk | | Enterprise Risk Level in the Bank’s 2009 business plan balance sheet as measured by the methodology used to calculate the Bank’s retained earnings target. (50% of the category) |
| | | | | | | | | |
| Mission Effectiveness | | | 10 | % | | Mission | | The Bank’s achievements in specific areas of housing and community development activities. |
| | | | | | | | | |
| Growth Effectiveness | | | 10 | % | | New Members | | Number of new members and other activities during 2009 to position the Bank for future growth and mission fulfillment. |
The goal measures in the Business Effectiveness and Growth Effective goal categories were approved by the Board’s Compensation and Human Resources Committee in March 2009. The goal measures in the Mission Effectiveness goal category was approved by the Board’s Housing Committee in March 2009. All of the goal measures were reported to the Board. A description of these goal categories is set forth below:
Business Effectiveness Goal Category
The Return and Risk Goals that make up the Business Effectiveness Goal are linked and create a beneficial tension through the tradeoffs in managing one versus the other. These goals are weighted exactly the same. This motivates management to act in ways that are aligned with the Board’s wishes as the Bank understands them (i.e., to have management achieve forecasted returns while managing risks to stay within the prescribed risk parameters). In addition, and again consistent with management’s understanding of the Board’s wishes, this set of goals will not motivate Bank management to increase Dividend Capacity if doing such would require imprudently increasing the risk in the Bank’s balance sheet.
Return Goal
Provide value to shareholders through the dividend. The Return Goal is based on Dividend Capacity.
Risk Goal
The Risk Goal is intended to encourage management to balance those actions taken to enhance earnings (i.e., Dividend Capacity) with actions that are needed to maintain appropriate risk levels in the business.
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Growth Effectiveness Goal Category
The Growth Effectiveness Goal Category is intended to set the stage for future growth. The Bank believes that recruiting new members now will, over time, create additional advances usage.
Mission Effectiveness Goal Category
The Mission Effectiveness Goal Category is intended to help ensure the Bank’s achievement of mission-related community development activities.
Bankwide Goals — Weighting Based on Employee Rank
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. There are differences among the NEOs with regard to their individual performance goals. However, these differences do not have a material impact on the amount of incentive compensation payout.
When employees are individually evaluated, they receive one of five performance ratings: “Outstanding”; “Exceeds Requirements”; “Meets Requirements”; “Needs Improvement” or “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 a specified threshold rating within the “Meets Requirements” category on their individual performance evaluations and do not have any unresolved disciplinary matters in their record.
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.
The Incentive Plan is administered by the Chief Executive Officer, subject to any requirements for review and approval by the C&HR Committee that the Committee may establish. In all areas not specifically reserved by the Committee for its review and approval, the decisions of the Chief Executive Officer or his designee concerning the Incentive Plan are binding on the Bank and on all Incentive Plan participants.
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Qualified Defined Contribution Plan
Bank employees who have met the eligibility requirements contained in the Pentegra Qualified Defined Contribution Plan for Financial Institutions (“DC Plan”) can choose to contribute to the DC Plan, a retirement savings plan qualified under the IRC. 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.
An employee may contribute 1% to 19% of base salary into the DC Plan, up to IRC limitations. The IRC limit for 2009 was $16,500 for employees under the age of 50. An additional “catch up” contribution of $5,500 is permitted under IRC 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 the discussions immediately following the below pension and compensation tables.
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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):
| | | | | | | | | | | | | | | |
| | | Pension Benefits for Fiscal Year 2009 | |
| | | | | Number of | | | Present Value | | | Payment During | |
| | | Plan | | Years Credited | | | of Accumulated | | | Last | |
| Name | | Name | | Service [1] | | | Benefit [2] | | Fiscal Year | |
| | | | | | | | | | | | | | | |
| Alfred A. DelliBovi | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | | 16.75 | | | $ | 1,156,000 | | | | — | |
| | | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | | 16.75 | | | $ | 3,823,000 | | | | — | |
| | | | | | | | | | | | | | | |
| Peter S. Leung | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | | 12.50 | | | $ | 560,000 | | | | — | |
| | | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan (3) | | | 12.50 | | | $ | 816,000 | | | | — | |
| | | | | | | | | | | | | | | |
| Paul B. Héroux | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | | 25.50 | | | $ | 832,000 | | | | — | |
| | | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | | 25.50 | | | $ | 699,000 | | | | — | |
| | | | | | | | | | | | | | | |
| Patrick A. Morgan | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | | 10.50 | | | $ | 734,000 | | | | — | |
| | | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | | 10.50 | | | $ | 672,000 | | | | — | |
| | | | | | | | | | | | | | | |
| Kevin M. Neylan | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | | 8.33 | | | $ | 303,000 | | | | — | |
| | | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | | 8.33 | | | $ | 246,000 | | | | — | |
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| | | |
| 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 12/31/2009. |
| |
| 3 | | Mr. Leung’s 12.5 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 5.9 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 Qualified 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.
Bank participants, who as of July 1, 2008 had five years of DB Plan service and were age 50 years or older, are provided with 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 the annual Internal Revenue Code limit. These participants are identified herein as “Grandfathered”
For all other participants (identified herein as “Non-Grandfathered”), the DB Plan provides a benefit of 2.0% (as opposed to 2.5% provided to Grandfathered participants) of a participant’s highest consecutive 5-year average earnings (as opposed to consecutive 3-year average earnings as previously provided to Grandfathered participants), multiplied by the participant’s years of benefit service, not to exceed 30 years. The Normal Form of Payment is a life annuity (i.e., an annuity paid until the death of the participant), as opposed to a guaranteed twelve year payout as previously provided to Grandfathered participants. Also, cost of living adjustments (“COLAs”) are no longer provided on future accruals (as opposed to a 1% simple interest COLA beginning at age 66 as previously provided).
The table below summarizes the DB Plan changes affecting the Non-Grandfathered employees that went into effect on July 1, 2008. For purposes of the following table, please note the following definitions:
“Defined Benefit Plan”— An Internal Revenue Code qualified deferred compensation arrangement that pays an employee and his/her designated beneficiary upon retirement a lifetime annuity or the lump sum actuarial equivalent of that annuity.
Benefit Multiplier— The annuity paid from the Bank’s DB Plan is calculated on an employee’s years of service, up to a maximum of 30 years, multiplied by 2.5% per year. Beginning July 1, 2008, the Benefit Multiplier changed to 2.0 for Non-Grandfathered Employees.
Final Average Pay Period— Is that period of time that an employee’s salary is used in the calculation of that employee’s benefit. For Grandfathered Employees, the Benefit Multiplier, 2.5%, is multiplied by the average of the employee’s three highest consecutive years of salary multiplied by that employee’s years of service, not to exceed thirty years at the date of termination. For Non-Grandfathered Employees, benefits accrued before July 1, 2008, the Benefit Multiplier mirrored the Grandfathered Employees. After July 1, 2008 a Benefits Multiplier of 2% is multiplied by the employee’s years of service (total service not to exceed thirty years) multiplied by the average of the employee’s five highest consecutive years of salary is used.
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Normal Form of Payment— The DB Plan must state the form of the annuity to be paid to the retiring employee. For unmarried Grandfathered retirees, the Normal Form of Payment as a life annuity with a 12 year guaranteed payment (“Guaranteed 12 Year Payout”) which means that if the unmarried Grandfathered retiree dies prior to receiving 12 years of annuity payments, the retiree’s beneficiary will receive a lump sum equal to the remaining unpaid payments in the 12 year period. For married Grandfathered retirees, the Normal Form of Payment is a 50% joint and survivor annuity which provides a continuation of half of the monthly annuity to the surviving beneficiary. The initial 50% Joint and Survivor Annuity monthly payment is actuarially equivalent to the 12 year guarantee payment provided to single retirees under the formula. Effective July 1, 2008, the DB Plan provides single Non-Grandfathered retirees with a straight “Life Annuity” as the Normal Form of Payment, which means that, once a retiree dies, the annuity terminates. For married Non-Grandfathered retirees, the Normal Form of Payment will be a 50% Joint and Survivor Annuity that is actuarially equivalent to the straight Life Annuity.
Cost of Living Adjustments (or “COLAs”)— Once a Grandfathered Employee retiree reaches age 65, in each succeeding year he/she will receive an extra payment annually equal to one percent of the original benefit amount multiplied by the number of years in pay status after age 65. As of July 1, 2008, this adjustment is no longer offered to Non-Grandfathered Employees on benefits accruing after that date.
Early Retirement Subsidy:
Grandfathered Employees
There is a subsidy or benefit enhancement for Grandfathered Employee retirees who retire prior to normal retirement age (65). 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, will realize a reduction of 1.5% to his/her early retirement benefit for each year benefits commence earlier than age 65. If that employee had not accumulated a total of 70 years, the reduction would be 3% for each year benefits commence earlier than age 65.
Non-Grandfathered Employees
Effective as of July 1, 2008, if an employee on the date of his/her retirement, before 65, had accumulated a total of 70 or more years, the reduction will be 3% every year between his/her age and age 65. However, if a Non-Grandfathered Employee on the date of his/her retirement, before 65, had not accumulated 70 or more years, the reduction will be the actuarial equivalent between his/her age and age 65. At early retirement, the new early retirement factors will apply to the Non-Grandfathered Employee’s total service benefit. The retiree will be entitled to receive the greater of this early retirement benefit or the early retirement benefit accrued as of July 1, 2008 under the old plan formula.
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Vesting— Grandfathered Employees are entitled, starting with the second year of employment service, to 20% of his/her accumulated benefit per year. As a result, after the sixth year of employment service, an employee will be entitled to 100% of his/her accumulated benefit. Non-Grandfathered Employees who entered the DB Plan on or after July 1, 2008 will not receive such benefit until such employee has completed five years of employment service. At that point, the employee will be entitled to 100% of his/her accumulated benefit. The term “5 Year Cliff” is a reference to the foregoing provision. Grandfathered and Non-Grandfathered Employees already participating in the DB Plan prior to July 1, 2008 will vest at 20% per year starting with the second year through the fourth year of employment service and will be accelerated to 100% vesting after the fifth year.
| | | | | |
| DEFINED BENEFIT PLAN | | GRANDFATHERED | | NON-GRANDFATHERED |
| PROVISIONS | | EMPLOYEES | | EMPLOYEES |
| | | | | |
| Benefit Multiplier | | 2.5% | | 2.0% |
| Final Average Pay Period | | High 3 Year | | High 5 Year |
| Normal Form of Payment | | Guaranteed 12 Year Payout | | Life Annuity |
| Cost of Living Adjustments | | 1% Per Year Cumulative
Commencing at Age 66 | | None |
| Early Retirement Subsidy<65: | | | | |
| | | | | |
| a) Rule of 70 | | 1.5% Per Year | | 3% Per Year |
| | |
| b) Rule of 70 Not Met | | 3% Per Year | | Actuarial Equivalent |
| *Vesting | | 20% Per Year Commencing
Second Year of Employment | | 5 Year Cliff |
| | | |
| * | | Greater of DB Plan Vesting or New Plan Vesting applied to employees participating in the DB Plan prior to July 1, 2008. |
Earnings under the Bank’s DB Plan continue to be defined as base salary plus short-term incentives, and overtime, subject to the annual IRC limit. The IRC limit on earnings for calculation of the DB Plan benefit for 2009 was $245,000.
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. Annual benefits provided under the DB Plan also are subject to IRC limits, which vary by age and benefit payment option selected.
325
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 IRC for three out of five consecutive years and who are also approved for inclusion by the Bank’s Nonqualified Plan 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 Nonqualified 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 IRC.
The Nonqualified 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.
The Nonqualified Defined Benefit Portion of the BEP is an unfunded arrangement. However, the Bank established grantor trusts to assist in financing the payment of benefits under these plans. The trust were approved by the Nonqualified Plan Committee in March of 2006 and established in June of 2007.
Although other nonqualified plans were terminated on November 10, 2009, the Nonqualified Defined Benefit Portion of the BEP was not terminated on that day, and remains in effect as of the date of this Annual Report on Form 10-K.
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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):
| | | | | | | | | | | | | | | | | | | | | |
| | | Nonqualified Deferred Compensation for Fiscal Year 2009 | |
| | | Executive | | | Registrant | | | Aggregate | | | Aggregate | | | Aggregate | |
| | | Contributions in | | | Contributions in | | | Earnings in | | | Withdrawals/ | | | Balance at | |
| Name | | Last FY (1) | | | Last FY (2) | | | Last FY | | | Distributions | | | Last FYE | |
| | | | | | | | | | | | | | | | | | | | | |
| Alfred A. DelliBovi | | $ | 11,016 | | | $ | 21,999 | | | $ | 211,379 | | | | — | | | $ | 1,124,656 | |
| | | | | | | | | | | | | | | | | | | | | |
| Patrick A. Morgan | | $ | 33,144 | | | $ | 9,724 | | | $ | 8,000 | | | | — | | | $ | 86,209 | |
| | | | | | | | | | | | | | | | | | | | | |
| Paul B. Héroux | | $ | 1,479 | | | $ | 1,722 | | | $ | 30,434 | | | | — | | | $ | 173,805 | |
| | | | | | | | | | | | | | | | | | | | | |
| Peter S. Leung | | $ | 51,138 | | | $ | 15,526 | | | $ | 35,067 | | | | — | | | $ | 199,552 | |
| | | | | | | | | | | | | | | | | | | | | |
| Kevin M. Neylan | | $ | 17,425 | | | $ | 6,715 | | | $ | 37,411 | | | | — | | | $ | 232,271 | |
| | | |
| 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 Defined Contribution portion of the Benefit Equalization Plan. |
| |
| 2 | | These totals are also included in the “All Other Compensation” column of the Summary Compensation Table. |
Nonqualified Defined Contribution Portion of the Benefit Equalization Plan
Also an unfunded arrangement through a grantor trust, employees who were 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 Nonqualified Plan Committee were eligible to participate in a Nonqualified Defined Contribution Portion of the Benefit Equalization Plan (which is a separate portion of the aforementioned BEP). The Nonqualified Defined Contribution Portion of the BEP ensured, among other things, that participants whose benefits under the DC Plan would otherwise be restricted under certain provisions of the IRC were 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.
As previously noted in the Compensation Discussion and Analysis, the Nonqualified Defined Contribution Portion of the BEP was terminated as of November 10, 2009. All plan assets will be paid out to individual participants in a lump sum distribution on November 12, 2010. Most of the plan assets that will be paid out had been previously contributed by the participants.
In addition, as a result of this termination, the Board voted on January 21, 2010, based on a recommendation from Aon, to:
| | | |
| * | | Provide to the participants of the Nonqualified Defined Contribution Portion of the BEP as of November 10, 2009, with respect to 2009, an additional cash payment on the second payroll following the end of 2009 in an amount equal to 6% of base pay in excess of IRS limitations for 2009 less amounts included for the DC BEP for 2009; and |
| |
| * | | Beginning in 2010, provide to the participants of the Nonqualified Defined Contribution Portion of the BEP as of November 10, 2009, an additional annual cash payment on the first or second payroll following the end of a calendar year in an amount equal to 6% of base pay in excess of IRS limitations for such prior year. |
327
Nonqualified Profit Sharing Plan
The Bank’s Nonqualified Profit Sharing Plan was designed to address the compensation inequities that affected a group of highly compensated employees (including one NEO) who were negatively affected by the changes to the Bank’s Qualified Defined Benefit Plan formula and who would have been compensated less than employees in similar positions in the Bank’s peer group.
All Non-Grandfathered employees who had five years of Bank service and were members of the BEP were entitled to participate in the Bank’s Nonqualified Profit Sharing Plan. The Nonqualified Profit Sharing Plan credited participants with 8% of salary (defined as base pay plus any Incentive Plan award) conditioned on the Bank achieving its threshold targets for certain Bank-wide performance goals used in the Bank’s Incentive Plan. The credit to participants into the Nonqualified Profit Sharing Plan will be held in a deferred account for participants and paid in a lump sum six months after termination of a participant’s employment. The Nonqualified Profit Sharing Plan was established on July 1, 2008 therefore only provided participants with a half of year of credit for 2008. 4% was allocated to the participants. This was an unfunded arrangement through the grantor trust.
As previously noted in the Compensation Discussion and Analysis, the Nonqualified Profit Sharing Plan was terminated, which was based on a recommendation from Aon, as of November 10, 2009. All plan assets will be paid out to individual participants in a lump sum distribution on November 12, 2010. The accrued assets will include the calculation of the 2008 and 2009 plan years.
In addition, as a result of this termination, the Board voted on January 21, 2010 to provide annually to participants in the Nonqualified Profit Sharing Plan as of November 10, 2009. In 2010 and thereafter, an amount equal to 8% of the prior year’s base pay and short term incentive payment to the extent the requirements under the Bank’s Short Term Incentive Plan have been achieved. The 8% payment will not be used to calculate an employee’s pension amount.
Nonqualified Deferred Compensation Plan
The Bank’s Board of Directors approved the establishment of a Nonqualified Deferred Compensation Plan, effective January 1, 2009, for the Board and Bank employees at a rank of Assistant Vice President and higher. A Nonqualified Deferred Compensation Plan is a vehicle that a corporation establishes for its Directors and employees for the purpose of enabling them to defer the present taxation of compensation to a date in the future — for example, when these individuals retire and would presumably be in a lower tax bracket. In addition, Directors and certain employees have the ability to have interest on their deferred compensation calculated based on the performance of investment vehicles of their own choosing, using a menu of investment choices similar to that of a 401(k) plan.
The Bank did not provide a match on these deferrals. All deferred monies were the property of the Bank until distribution to the Directors and employees and thus subject to claims of Bank creditors until distribution.
A grantor trust similar to those in operation for the BEP was established by the Nonqualified Plan Committee for the Nonqualified Deferred Compensation Plan in December 2008.
As previously noted in the Compensation Discussion and Analysis, the Nonqualified Deferred Compensation Plan was terminated as of November 10, 2009. Any assets that were contributed by the participants will be paid out on November 12, 2010.
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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.
An Officer of the Bank shall be eligible for two (2) weeks of severance benefits for each six month period of service with the Bank, but not less than six (6) weeks of severance benefits. Non-officers are eligible for severance benefits in accordance with different formulas.
An Officer is eligible to receive severance benefits, in the aggregate for all six month periods of service, whether or not continuous, totaling more than the lesser of (i) thirty-six (36) weeks or (ii) two (2) times the lesser of (a) the sum of the employee’s annualized compensation based upon his or her annual rate of pay for services as an employee for the year preceding the year in which the employment of the employee by the Bank terminated (adjusted for any increase during that year that was expected to continue indefinitely if the employment of the employee had not terminated) or (b) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the IRC for the year in which the employment of the employee terminated.
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.
The following table describes estimated severance payout information for each NEO assuming that severance would have occurred on December 31, 2009:
| | | | | | | | | | | | | |
| | | Number of weeks Used to | | | 2009 Annual | | | | |
| | | Calculate Severance Amount | | | Base Salary | | | Severance Amount | |
| | | | | | | | | | | | | |
| Alfred A. DelliBovi | | | 36 | | | $ | 649,494 | | | $ | 449,650 | |
| Peter S. Leung | | | 24 | | | $ | 423,294 | | | $ | 195,366 | |
| Patrick A. Morgan | | | 36 | | | $ | 319,154 | | | $ | 220,953 | |
| Paul B. Héroux | | | 36 | | | $ | 300,980 | | | $ | 208,371 | |
| Kevin M. Neylan | | | 36 | | | $ | 310,415 | | | $ | 214,903 | |
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The severance benefits payable under the Severance Plan shall be paid as salary, coinciding with the normal payroll cycle, for a period of time equal to the number of weeks of severance benefits for which the employee is eligible, commencing with the first payroll period following the termination of employment of the employee and the receipt by the Bank of an agreement signed by the employee, and shall be subject to withholding of Federal and State income taxes and other employment taxes based upon the number of withholding allowances.
Notwithstanding the foregoing, benefits under the severance plan may be paid from time to time through methods other then the payment method described above.
In addition, former employees receiving severance benefits also receive, if applicable, life insurance for the severance period and, if the former employee elects to purchase health insurance continuation coverage through the Bank, reimbursement during the severance period covering the difference between (i) the cost to the former employee of such health insurance continuation coverage and (ii) what the cost of such health insurance coverage would have been had the former employee remained employed with the Bank. Reimbursements are made monthly coinciding with the monthly invoice processing and upon receipt of payment by the employee receiving severance.
Life insurance premiums paid on behalf of employees on severance are paid monthly by the Bank, coinciding with the monthly invoice processing.
Other Potential Post-Employment Payments
The Bank maintains no arrangements which contain “change in control” provisions.
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DIRECTOR COMPENSATION
The following table summarizes the compensation paid by the Bank to each of its Directors for the year ended December 31, 2009 (whole dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Change in Pension | | | | | | | |
| | | | | | | | | | | | | | | | | | | Value and | | | | | | | |
| | | | | | | | | | | | | | | | | | | Nonqualified | | | | | | | |
| | | Fees | | | | | | | | | | | Non-Equity | | | Deferred | | | All | | | | |
| | | Earned or | | | Stock | | | Option | | | Incentive Plan | | | Compensation | | | Other | | | | |
| Name | | Paid in Cash | | | Awards | | | Awards | | | Compensation | | | Earnings | | | Compensation | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Michael M. Horn | | $ | 60,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 60,000 | |
| José R. González | | | 55,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 55,000 | |
| Anne E. Estabrook | | | 50,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 50,000 | |
| Joseph R. Ficalora | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| Jay M. Ford | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| James W. Fulmer | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| Ronald E. Hermance, Jr. | | | 50,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 50,000 | |
| Katherine J. Liseno | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| Kevin J. Lynch | | | 50,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 50,000 | |
| Joseph J. Melone | | | 11,250 | | | | — | | | | — | | | | — | | | | 33,750 | | | | — | | | | 45,000 | |
| Richard S. Mroz | | | 50,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 50,000 | |
| Thomas M. O’Brien | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| C. Cathleen Raffaeli | | | 50,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 50,000 | |
| Edwin C. Reed | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| John M. Scarchilli | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| DeForest B. Soaries, Jr. | | | 45,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45,000 | |
| George Strayton | | | 50,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 50,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 786,250 | | | $ | — | | | $ | — | | | $ | — | | | $ | 33,750 | | | $ | — | | | $ | 820,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
Director Compensation Policy: Director Fees
The Board establishes on an annual basis a Director Compensation Policy governing compensation for Board meeting attendance. This policy is established in accordance with the provisions of the Federal Home Loan Bank Act (“Bank Act”) and related Federal Housing Finance Agency regulations. The Bank Act previously provided for strict annual limits on the total amount of compensation that could be paid to directors. However, as a result of the enactment of the Housing and Economic Recovery Act of 2008, these statutory annual limits were removed, thus leaving the determination of director compensation limits up to each FHLBank’s Board of Directors beginning in 2009.
In connection with setting director compensation for 2009, the Bank participated in an FHLB System review of director compensation which included a director compensation study prepared by McLagan Partners. The McLagan study included a separate analysis of director compensation for small asset size commercial banks, Farm Credit Banks and S&P 1500 firms. The study recommended setting payments at the lower end of the commercial bank benchmarks, with additional payments for the Chair, Vice Chair and Committee Chair positions. The Board concurred with these recommendations. In revisiting the matter of setting Director compensation in late 2009, the Board determined that no changes to the annual Director compensation limits were merited for 2010.
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Below are tables summarizing the Director fees established by the Board and the annual compensation limits that were set by the Board for 2009. Following these tables are additional tables summarizing the Director fees established by the Board and the annual compensation limits set by the Board for 2010.
Director Fees — 2009 (in whole dollars)
| | | | | |
| | | Fees For Board Service | |
| | | (Paid Quarterly | |
| Position | | in Arrears) | |
| Chairman | | $ | 15,000 | |
| Vice Chairman | | $ | 13,750 | |
| Committee Chair * | | $ | 12,500 | |
| All Other Directors | | $ | 11,250 | |
Director Annual Compensation Limits — 2009 (in whole dollars)
| | | | | |
| Position | | Annual Limit | |
| Chairman | | $ | 60,000 | |
| Vice Chairman | | $ | 55,000 | |
| Committee Chair | | $ | 50,000 | |
| All Other Directors | | $ | 45,000 | |
Director Fees — 2010 (in whole dollars)
| | | | | |
| | | Fees For Each Board | |
| | | Meeting Attended | |
| | | (Paid Quarterly | |
| Position | | in Arrears) | |
| Chairman | | $ | 6,000 | |
| Vice Chairman | | $ | 5,500 | |
| Committee Chair * | | $ | 5,000 | |
| All Other Directors | | $ | 4,500 | |
Director Annual Compensation Limits — 2010 (in whole dollars)
| | | | | |
| Position | | Annual Limit | |
| Chairman | | $ | 60,000 | |
| Vice Chairman | | $ | 55,000 | |
| Committee Chair | | $ | 50,000 | |
| All Other Directors | | $ | 45,000 | |
| | | |
| * | | A Committee Chair does not receive any additional payment if he or she serves as the Chair of more than one Board Committee. In addition, the Board Chair and Board Vice Chair does not receive any additional compensation if they serve as a Chair of one or more Board Committees. |
332
In 2009, the Directors were able to participate in the Nonqualified Deferred Compensation Plan described in more detail above under the heading “Nonqualified Deferred Compensation Plan”. As described earlier in Item 11, this Plan was terminated effective as of November 10, 2009.
Director Compensation Policy: Director Expenses
The Director Compensation Policy also authorizes the FHLBNY to reimburse 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 can include:
| • | | Meetings of the Board and Board Committees |
| • | | Meetings requested by the Federal Housing Finance Agency |
| • | | Meetings of Federal Home Loan Bank System committees |
| • | | Federal Home Loan Bank System director orientation meetings |
| • | | Meetings of the Council of Federal Home Loan Banks and Council 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 FHFA regulations, includes information about reimbursed expenses for 2009 (whole dollars):
| | | | | |
| | | Directors’ Expenses | |
| | | Reimbursed | |
| Name | | (Paid in Cash) | |
| | | | | |
| Michael M. Horn | | $ | 3,908 | |
| José R. González | | | 17,801 | |
| Anne E. Estabrook | | | 4,121 | |
| Joseph R. Ficalora | | | 420 | |
| Jay M. Ford | | | 3,207 | |
| James W. Fulmer | | | 5,678 | |
| Ronald E. Hermance, Jr. | | | — | |
| Katherine J. Liseno | | | 2,759 | |
| Kevin J. Lynch | | | 2,955 | |
| Joseph J. Melone | | | 2,359 | |
| Richard S. Mroz | | | 3,793 | |
| Thomas M. O’Brien | | | 1,160 | |
| C. Cathleen Raffaeli | | | — | |
| Edwin C. Reed | | | 1,868 | |
| John M. Scarchilli | | | 1,332 | |
| DeForest B. Soaries, Jr. | | | — | |
| George Strayton | | | 1,156 | |
| | | | |
| | | $ | 52,517 | |
| | | | |
Total expenses incurred by the FHLBNY for Board expenses, including amounts reimbursed in cash to Directors, totaled $134,000, $124,000, and $183,000 in 2009, 2008 and 2007, respectively.
333
RISKS ARISING FROM COMPENSATION PRACTICES
The Bank does not believe that risks arising from the Bank’s compensation policies with respect to its employees are reasonably likely to have a material adverse effect on the Bank. The Bank does not structure any of its compensation plans in a way that inappropriately encourages risk taking to achieve payment.
As an example, all exempt employees are eligible to receive annual incentive awards through participation in the Bank’s incentive compensation plan. Incentive plans are often the type of compensation awards which promote risk. At the Bank, 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, up to a predetermined limit. Therefore, individual risk taking will not reward the employee if the Bank, as a whole, does not perform at a high level. This encourages cooperative, risk-averse activity. Further, as described in Section IV A 2 of the above Compensation Discussion and Analysis, the rationale for having the equally-weighted Bankwide goals of Return and Risk within the Bank’s incentive plan is to motivate management to take a balanced approach to managing risks and returns in the course of managing the Bank’s business, while at the same time ensuring that the Bank fulfills its mission.
In addition, the Bank is prohibited by law from offering equity-based compensation, and the Bank does not currently offer long-term incentives. However, many of the firms in the Bank’s peer group do offer these types of compensation. The Bank’s total compensation program takes into account the existence of these other types of compensation by offering defined benefit and defined contribution plans to help the Bank effectively compete for talent. The Bank’s defined benefit and defined contribution plans are designed to reward employees for continued strong performance over the course of their careers — that is, the longer an employee works at the Bank, the greater the benefit the employee is likely to accumulate. Senior and mid-level employees are generally long-tenured and the Bank believes that these employees would not want to endanger their pension benefits by inappropriately stretching rules to achieve a short-term financial gain.
Thus, the general risk-averse culture of the Bank, which is reflected in the Bank’s compensation policies, leads the Bank to believe that any risks arising from the Bank’s compensation policies with respect to its employees are not reasonably likely to have a material adverse effect on the Bank.
Compensation Committee Interlocks and Insider Participation
The following persons served on the Board’s Compensation and Human Resources Committee during all or some of the period from January 1, 2009 through the date of this annual report on Form 10-K: James W. Fulmer, José R. González, Katherine J. Liseno, Kevin J. Lynch, Richard Mroz, Thomas O’Brien and C. Cathleen Raffaeli. During this period, no interlocking relationships existed 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 did any such interlocking relationship existed in the past. Further, no member of the Compensation and Human Resources Committee listed above is or was formerly an officer or an employee of the Bank.
334
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 more than 5% of the FHLBNY’s outstanding capital stock (shares in thousands) as of:
| | | | | | | | | | | |
| | | | | Number | | | Percent | |
| | | February 28, 2010 | | of shares | | | of total | |
| Name of beneficial owner | | Principal Executive Office Address | | owned | | | capital stock | |
| | | | | | | | | | | |
| Hudson City Savings Bank * | | West 80 Century Road, Paramus, NJ 07652 | | | 8,748 | | | | 17.43 | % |
| Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | | 7,419 | | | | 14.78 | |
| New York Community Bank * | | 615 Merrick Avenue, Westbury, NY 11590 | | | 3,777 | | | | 7.53 | |
| Manufacturers and Traders Trust Company | | One M&T Plaza, Buffalo, NY 14203 | | | 2,934 | | | | 5.85 | |
| | | | | | | | | |
| | | | | | | | | | | |
| | | | | | 22,878 | | | | 45.59 | % |
| | | | | | | | | |
| | | | | | | | | | | |
| | | | | Number | | | Percent | |
| | | December 31, 2009 | | of shares | | | of total | |
| Name of beneficial owner | | Principal Executive Office Address | | owned | | | capital stock | |
| | | | | | | | | | | |
| Hudson City Savings Bank * | | West 80 Century Road, Paramus, NJ 07652 | | | 8,748 | | | | 16.87 | % |
| Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | | 7,419 | | | | 14.31 | |
| New York Community Bank * | | 615 Merrick Avenue, Westbury, NY 11590 | | | 3,777 | | | | 7.28 | |
| Manufacturers And Traders Trust Company | | One M&T Plaza, Buffalo, NY 14203 | | | 2,952 | | | | 5.69 | |
| | | | | | | | | |
| | | | | | | | | | | |
| | | | | | 22,896 | | | | 44.15 | % |
| | | | | | | | | |
| | | |
| * | | Officer of member bank also serves on the Board of Directors of the FHLBNY. |
335
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, 2009, the most practicable date for the information provided (shares in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | Number | | | Percent | |
| | | | | | | | | of shares | | | of total | |
| Name | | Director | | City | | State | | owned | | | capital stock | |
| | | | | | | | | | | | | | | |
| Hudson City Savings Bank | | Ronald E. Hermance, Jr. | | Paramus | | New Jersey | | | 8,748 | | | | 16.87 | % |
| New York Community Bank | | Joseph R. Ficalora | | Westbury | | New York | | | 3,777 | | | | 7.28 | |
| Banco Santander Puerto Rico | | José R. González | | San Juan | | Puerto Rico | | | 554 | | | | 1.07 | |
| Provident Bank | | George Strayton | | Montebello | | New York | | | 278 | | | | 0.54 | |
| Oritani Bank | | Kevin J. Lynch | | Township of Washington | | New Jersey | | | 255 | | | | 0.49 | |
| State Bank of Long Island | | Thomas M. O’Brien | | Jericho | | New York | | | 39 | | | | 0.08 | |
| Crest Savings Bank | | Jay M. Ford | | Wildwood | | New Jersey | | | 27 | | | | 0.05 | |
| The Bank of Castile | | James W. Fulmer | | Batavia | | New York | | | 27 | | | | 0.05 | |
| Metuchen Savings Bank | | Katherine J. Liseno | | Metuchen | | New Jersey | | | 19 | | | | 0.04 | |
| Pioneer Savings Bank | | John M. Scarchilli | | Troy | | New York | | | 17 | | | | 0.03 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | 13,741 | | | | 26.50 | % |
| | | | | | | | | | | | | |
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.
336
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
The FHLBNY is a cooperative and its customers own the entity’s capital stock. 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 Member Directors (i.e., directors elected by the Bank’s members who are officers or directors of Bank members). The remaining members of the Board are Independent Directors (i.e., directors elected by the Bank’s members who arenot officers or directors of Bank members). 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 at 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. Under the provisions of Section 7(j) of the FHLBank Act (12 U.S.C. § 1427(j)), the Bank’s Board is required to administer the business of the Bank with its members without discrimination in favor of or against any member. For more information about transactions with stockholders, see Note 20 — Related Party Transactions, in the notes to the audited financial statements included in this Form 10-K.)
The review and approval of transactions with related persons is governed by the Bank’s written Code of Ethics and Business Conduct (“Code”), which is posted on the Corporate Governance Section of the FHLBNY’s website at http://www.fhlbny.com. Under the Code, each director is required to disclose to the Board of Directors all actual or apparent conflicts of interest, including any personal financial interest that he or she has, as well as such interests of any immediate family member or business associate of the director known to the director, in any matter to be considered by the Board of Directors or in which another person does, or proposes to do, business with the Bank. Following such disclosure, the Board of Directors is empowered to determine whether an actual conflict exists. In the event the Board of Directors determines the existence of a conflict with respect to any matter, the affected director must recuse himself or herself from all further considerations relating to that matter. Issues under the Code regarding conflicts of interests involving directors are administered by the Board or, in the Board’s discretion, the Board’s Corporate Governance Committee.
The Code also provides that, subject to certain limited exceptions for, among other items, interests arising through ownership of mutual funds and certain financial interests acquired prior to employment by the Bank, no Bank employee may have a financial interest in any Bank member. Extensions of credit from members to employees are acceptable that are entered into or established in the ordinary, normal course of business, so long as the terms are no more favorable than would be available in like circumstances to persons who are not employees of the Bank. Employees provide disclosures regarding financial interests and financial relationships on a periodic basis. These disclosures are provided to and reviewed by the Director of Human Resources, who is one of the Bank’s two Ethics Officers; the Ethics Officers have responsibility for enforcing the Code of Ethics with respect to employees on a day-to-day basis.
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Director Independence
In General
During the period from January 1, 2009 through and including the date of this annual report on Form 10-K, the Bank had a total of 17 directors serving on its Board, 10 of whom were Member Directors (i.e., directors elected by the Bank’s members who are officers or directors of Bank members) and 7 of whom were Independent Directors (i.e., directors who were, until the enactment of the Housing and Economic Recovery Act of 2008, appointed by the Bank’s former safety and soundness regulator, the Federal Housing Finance Board, and who are now subject to election by the Bank’s members andnot officers or directors of Bank members). All of the Bank’s directors were independent of management from the standpoint that they were not, and could not serve as, Bank employees or officers. Also, all individuals, including the Bank’s directors, are prohibited by law 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, Federal Housing Finance Agency (“Finance Agency”) regulations establish independence criteria for directors who serve as members of the Audit Committee of the Board of Directors. Second, the Securities and Exchange Commission’s (“SEC”) regulations 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 Agency Regulations Regarding Independence
The Finance Agency 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. Under Finance Agency regulations, disqualifying relationships can include, but are not limited to: 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 Agency’s independence standards, regardless of whether they serve on the Audit Committee. From January 1, 2009 through and including the date of this Annual Report on Form 10-K, all of the persons who served as a director of the Bank, including all directors who served as members of the Audit Committee, were independent under these criteria.
NYSE Rules Regarding Independence
In addition, pursuant to SEC regulations, the Board has adopted the independence standards of the New York Stock Exchange (“NYSE”) to determine which of its directors are independent and which members of its Audit Committee are not independent.
After applying the NYSE independence standards, the Board has determined that all of the Bank’s Independent Directors who served at any time during the period from January 1, 2009 through and including the date of this annual report on Form 10-K (i.e., Anne Evans Estabrook, Michael M. Horn, Joseph J. Melone, Richard S. Mroz, C. Cathleen Raffaeli, Edwin C. Reed and DeForest B. Soaries, Jr.) were independent.
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Separately, the Board was unable to affirmatively determine that there were no material relationships (as defined in the NYSE rules) between the Bank and its Member Directors, and has therefore concluded that none of the Bank’s Member Directors who served at any time during the aforementioned period (i.e., Joseph R. Ficalora, Jay M. Ford, James W. Fulmer, Ronald E. Hermance, Katherine J. Liseno, Kevin J. Lynch, José R. González, Thomas M. O’Brien, John M. Scarchilli and George Strayton) were 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 Member 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 Member Director’s institution. It is possible that a Member Director could satisfy this test on a particular day. However, because the amount of business conducted by a Member 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 Member Directors based solely upon the amount of business conducted with the Bank by any director’s institution at a specific time.
Notwithstanding the foregoing, the Board believes that it functions as a governing body that can and does act with good judgment with respect to the corporate governance and business affairs of the Bank. The Board is aware of its statutory responsibilities under Section 7(j) of the Federal Home Loan Bank Act, which specifically provides that the Board of Directors of a Federal Home Loan Bank must administer the affairs of the Home Loan Bank fairly and impartially and without discrimination in favor of or against any member borrower.
The Board has a standing Audit Committee. For the reasons noted above, the Board has determined that none of the Member Directors who served at any time as members of the Bank’s Audit Committee during the period from January 1, 2009 through and including the date of this annual report on Form 10-K (Joseph R. Ficalora, Jay M. Ford, José R. González, Katherine J. Liseno, and John M. Scarchilli) were independent under the NYSE standards for audit committee members. The Board also determined that the Independent Directors who served at any time as members of the Bank’s Audit Committee during the period from January 1, 2009 through and including the date of this annual report on Form 10-K (Anne Evans Estabrook, Michael M. Horn and Joseph J. Melone) were independent under the NYSE independence standards for audit committee members.
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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, 2009, 2008 and 2007 (in thousands):
| | | | | | | | | | | | | |
| | | 20091 | | | 20081 | | | 2007 | |
| | | | | | | | | | | | | |
| Audit Fees | | $ | 1,139 | | | $ | 1,341 | | | $ | 1,163 | |
| Audit-related Fees | | | 54 | | | | 56 | | | | 33 | |
| Tax Fees | | | 57 | | | | — | | | | — | |
| All Other Fees | | | 2 | | | | 2 | | | | 18 | |
| | | | | | | | | | |
| | | $ | 1,252 | | | $ | 1,399 | | | $ | 1,214 | |
| | | | | | | | | | |
| | | |
| 1 | | The 2009 and 2008 amounts in the table do not include the assessment from the Office of Finance (“OF”) for the Bank’s share of the audit fees of approximately $83 thousand and $36 thousand incurred in connection with the audit of the combined financial statements published by the OF. |
Audit Fees
Audit fees relate to professional services rendered in connection with the audit of the FHLBNY’s annual financial statements, and review of interim financial statements included in quarterly reports on Form 10-Q.
Audit-Related Fees
Audit-related fees primarily relate to consultation services provided in connection with respect to certain accounting and reporting standards.
Tax Fees
Tax fees relate to consultation services provided primarily with respect to tax withholding matters.
All Other Fees
These other fees relate to PwC’s attendance at FHLBank 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.
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PART IV
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 Statements and Supplementary Data.”
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| | | | | | | | | | | | | |
| Exhibit | | | | Filed with | | | | | | |
| No. | | Description | | this Form 10-K | | Form | | File No. | | Date Filed |
| | | | | | | | | | | | | |
| | 3.01 | | | Restated Organization Certificate of the Federal Home Loan Bank of New York (“Bank”) | | | | 8-K | | 000-51397 | | 12/1/2005 |
| | 3.02 | | | Bylaws of the Bank | | | | 8-K | | 000-51397 | | 9/23/2009 |
| | 4.01 | | | Amended and Restated Capital Plan of the Bank | | | | 10-K | | 000-51397 | | 4/1/2009 |
| | 10.01 | | | Bank 2008 Incentive Compensation Plan*a | | | | 10-Q | | 000-51397 | | 5/14/2008 |
| | 10.02 | | | Bank 2009 Incentive Compensation Plan*a | | | | 10-Q | | 000-51397 | | 5/15/2009 |
| | 10.03 | | | 2008 Director Compensation Policya | | | | 10-Q | | 000-51397 | | 5/14/2008 |
| | 10.04 | | | 2009 Director Compensation Policya | | | | 10-Q | | 000-51397 | | 5/15/2009 |
| | 10.05 | | | 2010 Director Compensation Policya | | X | | | | | | |
| | 10.06 | | | Bank Severance Pay Plana | | | | 10-K | | 000-51397 | | 3/28/2008 |
| | 10.07 | | | Qualified Defined Benefit Plan a | | X | | | | | | |
| | 10.08 | | | Qualified Defined Contribution Plan a | | X | | | | | | |
| | 10.09 | | | Bank Benefit Equalization Plana | | X | | | | | | |
| | 10.10 | | | Nonqualified Profit Sharing Plana | | X | | | | | | |
| | 10.11 | | | Nonqualified Deferred Compensation Plana | | X | | | | | | |
| | 10.12 | | | Compensatory Arrangements for Named Executive Officersa | | X | | | | | | |
| | 10.13 | | | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement | | | | 8-K | | 000-51397 | | 6/27/2006 |
| | 10.14 | | | Lending Facility with United States Treasury | | | | 8-K | | 000-51397 | | 9/9/2008 |
| | 12.01 | | | Computation of Ratio of Earnings to Fixed Charges | | X | | | | | | |
| | 31.01 | | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the President and Chief Executive Officer | | X | | | | | | |
| | 31.02 | | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Senior Vice President and Chief Financial Officer | | X | | | | | | |
| | 32.01 | | | Certification by the President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
| | 32.02 | | | Certification by the Senior Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
| | 99.01 | | | Audit Committee Report | | X | | | | | | |
| | 99.02 | | | Audit Committee Charter | | X | | | | | | |
Notes:
| | | |
| * | | Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
| |
| a | | This exhibit includes a management contract, compensatory plan or arrangement required to be noted herein. |
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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.
| | | | | |
| | Federal Home Loan Bank of New York
| |
| | By: | /s/ Alfred A. DelliBovi | |
| | | Alfred A. DelliBovi | |
| | | President and Chief Executive Officer
(Principal Executive Officer) | |
Date: March 25, 2010
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:
| | | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ Alfred A. DelliBovi Alfred A. DelliBovi | | President and Chief Executive Officer | | March 25, 2010 |
| (Principal Executive Officer) | | | | |
| | | | | |
/s/ Patrick A. Morgan Patrick A. Morgan | | Senior Vice President and Chief Financial Officer | | March 25, 2010 |
| (Principal Financial Officer) | | | | |
| | | | | |
/s/ Backer Ali Backer Ali | | Vice President and Controller | | March 25, 2010 |
| (Principal Accounting Officer) | | | | |
| | | | | |
/s/ Michael M. Horn Michael M. Horn | | Chairman of the Board of Directors | | March 25, 2010 |
| | | | | |
/s/ José R. González José R. González | | Vice Chairman of the Board of Directors | | March 25, 2010 |
| | | | | |
/s/ Anne Evans Estabrook Anne Evans Estabrook | | Director | | March 25, 2010 |
| | | | | |
/s/ Joseph R. Ficalora Joseph R. Ficalora | | Director | | March 25, 2010 |
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| | | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ Jay M. Ford Jay M. Ford | | Director | | March 25, 2010 |
| | | | | |
/s/ James W. Fulmer James W. Fulmer | | Director | | March 25, 2010 |
| | | | | |
/s/ Ronald E. Hermance, Jr. Ronald E. Hermance, Jr. | | Director | | March 25, 2010 |
| | | | | |
/s/ Katherine J. Liseno Katherine J. Liseno | | Director | | March 25, 2010 |
| | | | | |
/s/ Kevin J. Lynch Kevin J. Lynch | | Director | | March 25, 2010 |
| | | | | |
/s/ Joseph J. Melone Joseph J. Melone | | Director | | March 25, 2010 |
| | | | | |
/s/ Richard S. Mroz Richard S. Mroz | | Director | | March 25, 2010 |
| | | | | |
/s/ Thomas M. O’Brien Thomas M. O’Brien | | Director | | March 25, 2010 |
| | | | | |
/s/ C. Cathleen Raffaeli C. Cathleen Raffaeli | | Director | | March 25, 2010 |
| | | | | |
/s/ Edwin C. Reed Edwin C. Reed | | Director | | March 25, 2010 |
| | | | | |
/s/ John M. Scarchilli John M. Scarchilli | | Director | | March 25, 2010 |
| | | | | |
/s/ DeForest B. Soaries, Jr. DeForest B. Soaries, Jr. | | Director | | March 25, 2010 |
| | | | | |
/s/ George Strayton George Strayton | | Director | | March 25, 2010 |
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