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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-51397
Federal Home Loan Bank of New York
(Exact name of registrant as specified in its charter)
Federal | | 13-6400946 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
| | |
101 Park Avenue, New York, New York | | 10178 |
(Address of principal executive offices) | | (Zip Code) |
(212) 681-6000
(Registrant’s telephone number, including area code)
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. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically 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 x No o
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. x
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):
Large accelerated filer o | | Accelerated filer o |
| | |
Non-accelerated filer x | | Smaller reporting company o |
(Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
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, 2012, the aggregate par value of the common stock held by members of the registrant was approximately $4,888,198,400. At February 28, 2013, 46,538,281 shares of common stock were outstanding.
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FEDERAL HOME LOAN BANK OF NEW YORK
2012 Annual Report on Form 10-K
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ITEM 1. BUSINESS.
General
The Federal Home Loan Bank of New York (“we,” “us,” “our,” “the Bank” or the “FHLBNY”) is a federally chartered corporation exempt from federal, state and local taxes except local 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. Our defined geographic district is New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. We provide a readily available, low-cost source of funds for our member institutions. We do not have any wholly or partially owned subsidiaries, nor do we have an equity position in any partnerships, corporations, or off-balance-sheet special purpose entities. We have a grantor trust related to employee benefits programs, more fully described in Note 15. Employee Retirement Plans to the audited financial statements included in this report.
We obtain our 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 funding are member deposits, other borrowings, and the issuance of capital stock. Deposits may be accepted from member financial institutions and federal instrumentalities.
We combine private capital and public sponsorship as a GSE to provide our member financial institutions with a reliable flow of credit and other services for housing and community development. By supplying additional liquidity to our members, we enhance the availability of residential mortgages and community investment credit.
The FHLBNY is managed to deliver balanced value to members, rather than to maximize profitability or advance volume through low pricing.
Our members must purchase FHLBNY stock according to regulatory requirements as a condition of membership. For more information, see Note 12. Capital Stock, Mandatorily Redeemable Capital Stock and Restricted Retained Earnings in the audited financial statements included in this Form 10-K. 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, our management operates the Bank 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.
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. With the passage of Housing Recovery Act of 2008, community development financial institutions (“CDFIs”) that have been certified by the CDFI Fund of the U.S. Treasury Department, including community development loan funds, community development venture capital funds, and state-chartered credit unions without federal insurance, are also eligible to become members of a FHLBank. The expanded membership became effective on February 4, 2010. One CDFI was eligible and was admitted to membership in 2012.
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 one of our members. Because we operate as a cooperative, we conduct business with related parties in the normal course of business and consider all members and non-member stockholders as related parties in addition to the other FHLBanks. For more information, see Note 19. Related Party Transactions in the audited financial statements included in this Form 10-K, and also Item 13. Certain Relationships and Related Transactions, and Director Independence in this Form 10-K.
Our primary business is making collateralized loans or advances to members and is also the principal factor that impacts our financial condition. We also serve the public through our mortgage programs, which enable our members to liquefy certain mortgage loans by selling them to the Bank. We also provide 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 prepay or mature.
As of July 2008, the FHLBNY is supervised and regulated by the Finance Agency, which is an independent agency in the executive branch of the U.S. government. The Finance Agency’s principal purpose as it relates to the FHLBanks is to ensure that the FHLBanks operate in a safe and sound manner, including maintenance of adequate capital and internal controls. In addition, the Finance Agency ensures that the operations and activities of each FHLBank foster liquid, efficient, competitive and resilient national housing finance markets; each FHLBank complies with the title and the rules, regulations, guidelines and orders issued under the Federal Housing Enterprises Financial Safety and Soundness Act (Safety and Soundness Act) and the Federal Home Loan Bank Act of 1932 (FHLBank Act); each FHLBank carries out its statutory mission only through activities that are authorized under and consistent with the Safety and Soundness Act and the FHLBank Act; and the activities of each FHLBank and
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the manner in which are operated is consistent with the public interest. The Finance Agency also ensures that the FHLBNY carries out its housing and community development mission, remains adequately capitalized and able to raise funds in the capital markets. 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.
Our website is www.fhlbny.com. We have adopted, and posted on our website, a Code of Business Conduct and Ethics applicable to all employees and directors.
Market Area
Our market area is the same as the membership district — New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. Institutions that are members of the FHLBNY must have their charter or principal places of business within this market area but may also operate elsewhere. We had 339 and 340 members at December 31, 2012 and 2011.
The most recent market analysis performed using September 30, 2012 data indicated that in our district, there are 30 banks and thrifts and 504 credit unions that have potentials for membership that have not joined. Of these, we consider approximately 49 as appropriate candidates for membership. An institution is deemed eligible if its charter is located within the membership district, they issue long-term mortgage loans, and meet the minimum 10 percent requirement of total assets invested in residential mortgage loans/mortgage related assets.
An appropriate candidate for membership is an institution that is likely to transact sufficient advance business with us within a reasonable period of time, so that the stock the potential member will likely be required to purchase under membership provisions 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 has experience with the FHLBanks during previous employment.
We actively market membership through personal contacts and promotional materials. We compete 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. Advances are an attractive source of liquidity because they permit members to pledge relatively non-liquid assets, such as 1-4 family, multifamily, home equity, and commercial real estate mortgages held in portfolio, to create liquidity for the member. Advances are attractively priced because of our access to capital markets as a GSE and our strategy of providing balanced value to members.
The following table summarizes our members by type of institution:
| | | | | | | | | | Community | | | |
| | | | | | | | | | Development | | | |
| | Commercial | | Thrift | | Credit | | Insurance | | Financial | | | |
| | Banks | | Institutions | | Unions | | Companies | | Institution | | Total | |
| | | | | | | | | | | | | |
December 31, 2012 | | 151 | | 101 | | 79 | | 7 | | 1 | | 339 | |
| | | | | | | | | | | | | |
December 31, 2011 | | 154 | | 106 | | 74 | | 6 | | — | | 340 | |
Business Segments
We manage our operations as a single business segment. Management and our Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance.
Our cooperative structure permits us 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, we collect fees that make us financially indifferent to the prepayment. Our operating expenses are low, about 6.0-11.0 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 we will be able to meet our financial obligations and continue to deliver balanced value to members, even if advance demand drops significantly or if membership declines.
Products and Services
We offer our members several correspondent banking services as well as safekeeping services. The fee income that is generated from these services is not significant. We also issue standby letters of credit on behalf of members for a fee. The total of income derived from all services was about $8.2 million in 2012, $5.7 million and $4.9 million in 2011 and 2010. On an infrequent basis, we may act as an intermediary to purchase derivative instruments for members.
We provide the Mortgage Partnership Finance® program to our members as another service. For more information, see Acquired Member Assets Programs in this report. However, we do not expect the program to become a significant factor in our operations. The interest revenues derived from this program were $65.9 million in 2012, $62.9 million and $65.4 million in 2011 and 2010. The revenues were not a significant source of interest income.
Our short-term investments may include certificates of deposit, Federal funds sold and interest-earning deposits placed with high-rated financial institutions. Such investments also provide immediate liquidity to satisfy members’
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needs for funds. Investments in mortgage-backed securities and housing finance agency bonds provide additional earnings to enhance dividend potential for members. As a cooperative, we strive to provide members a reasonable return on their investment in our capital stock. The interest income derived from investments were $313.4 million, $319.4 million and $398.4 million for the years ended December 31, 2012, 2011 and 2010 and represented 34.7%, 33.5% and 36.9% of total interest income for those years.
However, advances to members are the primary focus of our operations, and are also the principal factor that impacts our financial condition. Revenues from advances to members are the largest and the most significant element in our 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 our operations.
Advances
We offer a wide range of credit products to help members meet local credit needs, manage interest rate and liquidity risk and serve their communities. Our primary business is making secured loans, called advances, to 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 73.7% and 72.6% of our total assets of $103.0 billion and $97.7 billion at December 31, 2012 and 2011. In terms of revenues, interest income derived from advances was $524.2 million, $571.0 million and $616.6 million, representing 58.0%, 59.9% and 57.1% of total interest income for the years ended December 31, 2012, 2011 and 2010. Most of our critical functions are directed at supporting the borrowing needs of our 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 been substantial in the last 10 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, we price advances at minimal net spreads above the cost of our funding in order to deliver more value to members.
Our 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 we can perfect a security interest in that collateral. We also have 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 our members.
The Housing Act added secured loans for community development activities as collateral that we may accept from community financial institutions. The Housing Act defined Community financial institutions as FDIC-insured depository institutions having average total assets of less than $1,076 million, the total asset cap as of December 31, 2012. 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.
The following table summarizes pledged collateral at December 31, 2012 and 2011 (in thousands):
Collateral Supporting Indebtedness to Members
| | Indebtedness | | Collateral (a) | |
| | Advances (b) | | Other
Obligations (c) | | Total
Indebtedness | | Mortgage
Loans (d), (e) | | Securities and
Deposits (d) | | Total (d) | |
December 31, 2012 | | $ | 72,292,103 | | $ | 6,476,174 | | $ | 78,768,277 | | $ | 198,755,675 | | $ | 36,102,089 | | $ | 234,857,764 | |
December 31, 2011 | | $ | 66,988,902 | | $ | 2,865,788 | | $ | 69,854,690 | | $ | 152,236,826 | | $ | 40,912,212 | | $ | 193,149,038 | |
(a) 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 member 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.
(b) Par value.
(c) Standby financial letters of credit, derivatives and members’ credit enhancement guarantee amount (“MPFCE”).
(d) Estimated market value.
(e) The increase in total collateral is attributable to additional mortgage loans pledged by one member.
The following table shows the breakdown of collateral pledged by members between those that were specifically listed and those in the physical possession of the FHLBNY or that of its safekeeping agent (in thousands):
Location of Collateral Held
| | Estimated Market Values | |
| | Collateral in Physical
Possession | | Collateral Specifically
Listed | | Collateral Pledged
for
AHP (a) | | Total
Collateral Received | |
December 31, 2012 | | $ | 41,659,988 | | $ | 193,312,848 | | $ | (115,072 | ) | $ | 234,857,764 | |
December 31, 2011 | | $ | 46,773,857 | | $ | 146,485,001 | | $ | (109,820 | ) | $ | 193,149,038 | |
(a) Primarily pledged by non-members to cover potential recovery of AHP Subsidy in the event of non-compliance. This amount is included in the total collateral pledged, and the FHLBNY allocates to its AHP exposure.
Listing - Borrowers are required to provide detailed listing of all loans pledged as collateral to the FHLBNY.
At December 31, 2012, advances borrowed by insurance companies accounted for 23.8% of advances (See Note 20. Segment Information and Concentration in the audited financial statements). Lending to insurance companies poses a number of unique risks not present in lending to federally insured depository institutions. For example, there is no single federal regulator for insurance companies. They are supervised by state regulators and subject to state insurance codes and regulations. There is uncertainty about whether a state insurance commissioner would try to void FHLBNY’s claims on collateral in the event of an insurance company failure.
As with all members, insurance companies are also required to purchase our capital stock as a prerequisite to membership. We take a number of steps to mitigate the unique risk of lending to insurance companies. At the time of membership, we require an insurance company to be highly-rated, and we perform credit analysis of insurance borrowers quarterly. Our risk reward preference at this time is to accept an insurance company as a member if it operates in the life insurance segment of the insurance market. We also require our member insurance companies to pledge in our custody, highly-rated marketable securities to collateralize their borrowings. Appropriate haircut values are applied to the securities, and the haircuts are reviewed quarterly to adjust for price volatility.
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Letters of Credit
We may issue standby financial 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. Our underwriting and collateral requirements for securing letters of credit are the same as our requirements for securing advances.
Derivatives
To assist members in managing their interest rate and basis risks in both rising and falling interest-rate environments, we will act as an intermediary between the member and derivatives counterparty. We do not act as a dealer and view this as an additional service to our members. Amounts of such transactions have not been material. Participating members must comply with our documentation requirements and meet our 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, we purchase conforming fixed-rate mortgages originated or purchased by our members. Members are then paid a fee for assuming a portion of the credit risk of the mortgages we acquired. Members assume credit risk by providing a credit enhancement to us or providing and paying for a supplemental mortgage insurance policy insuring us 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. We assume the remainder of the credit risk along with the interest rate risk of holding the mortgages in the MPF loan portfolio.
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.
We also hold 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, and the outstanding balances of loans at December 31, 2012 and 2011 were not significant.
Mortgage Partnership Finance Program
Introduction — We invest in mortgage loans through the MPF Program, which is a secondary mortgage market structure under which eligible mortgage loans are purchased or funded from or through 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.” The FHLBank of Chicago (“MPF Provider”) developed the MPF Program in order to help fulfill the housing mission and to provide an additional source of liquidity to FHLBank members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolios. Finance Agency regulations define the acquisition of Acquired Member Assets (“AMA”) as a core mission activity of the FHLBanks. In order for MPF Loans to meet the AMA requirements, the purchase and funding are structured so that the credit risk associated with MPF Loans is shared with PFIs.
Mortgage Loans — We invest in mortgage loans through the MPF program, a secondary mortgage market structure developed by the FHLBank of Chicago to help fulfill the housing mission of the FHLBanks. Under the MPF program, we purchase or fund eligible mortgage loans (MPF loans) from or through PFIs. We may also acquire MPF loans through participations with other FHLBanks. MPF loans are conforming conventional or government-insured fixed rate mortgage loans secured by one-to-four family residential properties with maturities ranging from five to 30 years.
MPF Provider — The FHLBank of Chicago serves as the MPF Provider for the MPF program. In its role as MPF Provider, the FHLBank of Chicago provides the infrastructure and operational support for the MPF program and is responsible for publishing and maintaining the MPF Guides, which detail the requirements PFIs must follow in originating, selling, and servicing MPF loans. The MPF Provider is also responsible for establishing the base price of MPF loan products utilizing the agreed upon methodologies determined by the participating MPF FHLBanks. In exchange for providing these services, the MPF Provider receives a fee from each of the FHLBanks participating in
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the MPF program. The MPF Provider has engaged Wells Fargo Bank N.A. (Wells Fargo) as the master servicer for the MPF program.
MPF Governance Committee — The MPF program Governance Committee, which is comprised of representatives from each of the FHLBanks participating in the MPF program, is responsible for implementing strategic MPF program decisions, including, but not limited to, pricing methodology changes. Effective March 28, 2011, based on a decision of the MPF Governance Committee, participating MPF FHLBanks are now allowed to adjust the base price of MPF loan products established by the FHLBank of Chicago. As a result, beginning in the second quarter of 2011, we began to monitor daily market conditions and make price adjustments to our MPF loan products when necessary.
Participating Financial Institutions (“PFI”) - Our members and eligible housing associates must apply to become a PFI. Housing associates are defined as entities that (i) are approved mortgagees under Title II of the National Housing Act, (ii) are chartered under law and have succession, (iii) are subject to inspection and supervision by a governmental agency, (iv) lend their own funds as their principal activity in the mortgage field, and (v) have a financial condition such that advances may be safely made to that entity. We have eight housing associates that are PFIs, and the mortgage loans acquired from housing associates were immaterial in any periods in this report. In order to do MPF business with us, each member or eligible housing associate must meet certain eligibility standards and sign a PFI Agreement. The PFI Agreement provides the terms and conditions for the sale or funding of MPF loans, including the servicing of MPF loans. PFIs may either retain the servicing of MPF loans or sell the servicing to an approved third-party provider. If a PFI chooses to retain the servicing, it receives a servicing fee to manage the servicing activities. If a PFI chooses to sell the servicing rights to an approved third-party provider, the servicing is transferred concurrently with the sale of the MPF loans and a servicing fee is paid to the third-party provider. Throughout the servicing process, the master servicer monitors the PFI’s compliance with MPF program requirements and makes periodic reports to the MPF Provider.
PFI Eligibility—The FHLBNY reviews the general eligibility of the applicant, its servicing qualifications and ability to supply documents, data, and reports required to be delivered by PFIs under the MPF Program. The applicant and the FHLBNY 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, if any, and it 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 FHLBNY. The MPF Bank has the right under the PFI Agreement to request additional collateral to secure the PFI’s obligations. The MPF Guides, which are published on—line and may be accessed through a link on the MPF Program web site, contain the MPF Program origination, underwriting and servicing policies PFIs must follow in order to deliver mortgages under the MPF Program. The MPF Guides include policies on anti-predatory lending, PFI eligibility (such as insurance requirements and annual certification requirements) loan documentation and custodian requirements. PFI servicing duties and responsibilities for reporting, remittances, default management, and disposition of properties acquired by foreclosure or deed in lieu of foreclosure are also stated.
MPF Loan Types — There are five MPF loan products under the MPF program that we participate in: Original MPF, MPF 100, MPF 125, MPF Plus, MPF Government. While still held in our Statements of Condition, we currently do not offer the MPF 100 or MPF Plus loan products. The discussion below outlines characteristics of our MPF loans products.
Original MPF, MPF 125, MPF Plus, and MPF Government are closed loan products in which we purchase loans acquired or closed by the PFI. MPF 100 is a loan product in which we “table fund” MPF loans; that is, we provide the funds through the PFI as our agent to make the MPF loan to the borrower. We are considered the originator of the MPF loan for accounting purpose since the PFI is acting as our agent when originating the loan; however, we do not collect any origination fees.
The PFI performs all traditional retail loan origination functions on our MPF loan products.
We are responsible for managing the interest rate risk, including prepayment risk, and liquidity risk associated with the MPF loans we purchase and carry on our Statements of Condition. In order to limit our credit risk exposure to that of an investor in a MBS that is rated the equivalent of AA by a Nationally Recognized Statistical Rating Organization (NRSRO), we require a credit risk sharing arrangement with the PFI on all MPF loans at the time of purchase.
For additional discussion on our mortgage loans and their related credit risk, see Note 8. Mortgage Loans Held-for-Portfolio in the audited financial statements in this Form 10-K.
Correspondent Banking Services
We offer our 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 us. 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 our accounts at the Federal Reserve Bank as correspondent for members and passed through to our customers’ Overnight Investment Accounts with us. Through a third party, we offer customers a range of securities custodial services, such as settlement of book entry (electronically held) and physical securities. We encourage members to access these products through 1Linksm, an Internet-based delivery system we developed as a proprietary service. 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 1292.5 (“Community Investment Cash Advance Programs”) states in general that each FHLBank shall establish an Affordable Housing Program in accordance with Part 1291, and a Community Investment Program. As more fully discussed under the section “Assessments” in this Form 10-K, the 12 FHLBanks, including the FHLBNY, must annually 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”). We meet this requirement by allocating 10 percent of the previous year’s regulatory defined net income to our Affordable Housing Program each year. The Affordable Housing Program
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helps our members 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, we have 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.
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 as well as other activities that benefit low- and moderate-income households. Through the Community Investment Program, Rural Development Advance, and Urban Development Advance programs, we provide reduced interest rate advances to members for lending activity that meets the program requirements. We also provide 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 our market interest rates and fees represents an additional allocation of our income in support of affordable housing and community economic development efforts. In addition, overhead costs and administrative expenses associated with the implementation of our 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
We maintain portfolios of investments to provide additional earnings and for liquidity purposes. Investment income also bolsters our capacity to fund Affordable Housing Program projects, to cover operating expenditures, and up until June 30, 2011, to also satisfy the Resolution Funding Corporation (REFCORP) assessment. To help ensure the availability of funds to meet member credit needs, we maintain a portfolio of short-term investments issued by highly-rated financial institutions. The investments may include overnight Federal funds, term Federal funds, interest-bearing deposits, and certificates of deposit. We further enhance our 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. Our long-term investments also include 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”). We also have 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 us with higher returns than those available in the short-term money markets.
We are 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.
We also limit the book value of our investments in mortgage-backed securities (“MBS” or mortgage-backed securities) to not exceed 300 percent of our regulatory capital on the day we purchase the securities. At the time of purchase, all securities purchased must carry the highest rating assigned by Moody’s or S&P.
We are 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;
· Non-U.S. dollar-denominated securities.
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Debt Financing-Consolidated Obligations
Our primary source of funds 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 12 FHLBanks. Consolidated obligations are not obligations of the United States, and the United States does not guarantee them. 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. The Office of Finance (or the “OF”) has authority to issue joint and several debt on behalf of the FHLBanks.
Consolidated obligations are currently rated Aaa/P-1 by Moody’s and AA+/ A-1+ by S&P. On August 5, 2011, S&P lowered its long-term credit rating on the United States from AAA to AA+ with a negative outlook. S&P has indicated that its ratings of the FHLBanks and the FHLBank System are constrained by the long-term credit rating of the United States. On August 8, 2011, S&P downgraded the long-term credit ratings on the senior unsecured debt issues of the FHLBank System and 10 of the 12 FHLBanks from AAA to AA+. The FHLBanks of Chicago and Seattle were already rated AA+ prior to the United States downgrade. S&P’s outlook for the FHLBank System’s senior unsecured debt and all 12 FHLBanks is negative. However, S&P’s actions did not affect the short-term A-1+ ratings of the FHLBanks and the FHLBank System’s short-term debt issues. On August 2, 2011, following the raising of the U.S. statutory debt limit, Moody’s confirmed the Aaa bond rating of the U.S. government and changed the rating outlook of the U.S. government to negative. Moody’s also confirmed the long-term Aaa rating on the senior unsecured debt issues of the FHLBank System, the 12 FHLBanks, and other ratings Moody’s considers directly linked to the U.S. government. Additionally, in conjunction with the revision of the U.S. government outlook to negative, the rating outlook for the FHLBank System debt was also revised to negative. Investors should note that a rating issued by a rating agency is not a recommendation to buy, sell or hold securities, and the ratings may be revised or withdrawn by the rating agency at any time. Investors should evaluate the rating of each rating agency independently.
At December 31, 2012 and 2011, the par amounts of consolidated obligations outstanding, bonds and discount notes for all 12 FHLBanks aggregated was $0.7 trillion. In comparison, the FHLBNY’s consolidated obligations outstanding at December 31, 2012 and 2011 were $93.6 billion and $88.5 billion.
Although the FHLBNY is primarily liable for our portion of consolidated obligations (i.e. those issued on our behalf), we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on our behalf is not paid in full when due, the following rules apply: we may not pay dividends to, redeem or repurchase shares of stock from any member or non-member stockholder until the Finance Agency, the regulator of the FHLBanks, approves our consolidated obligation payment plan or other remedy and until we pay all the interest or principal currently due under all consolidated obligations. 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 any FHLBank would make 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:
· Cash;
· Obligations of, or fully guaranteed by, the United States;
· Secured advances;
· 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.
Consolidated obligations are distributed through dealers selected by the Office of Finance 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 is mandated by the Finance Agency to ensure that consolidated obligations are issued efficiently and at the lowest all-in cost of funds over time. If the Office of Finance determines that its action is consistent with its Finance Agency’s mandated policies, it may reject our issuance request, and the requests of other
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FHLBanks, to raise funds through the issuance of consolidated obligations on particular terms and conditions. We have never been denied access under this policy for all periods reported. The Office of Finance 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, and manages the FHLBanks’ relationship with the rating agencies with respect to the consolidated obligations.
Consolidated Obligation Liabilities
Each FHLBank independently determines its participation in each issuance of consolidated obligations based on (among other factors) its own funding and operating requirements, maturities, interest rates, and other terms available for consolidated obligations in the market place. The FHLBanks have emphasized diversification of funding sources and channels as the need for funding from the capital markets has grown.
Consolidated Obligations Bonds. Consolidated obligation bonds satisfy our long-term funding requirements. Typically, the maturity of securities issued in recent years range 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 two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP issue programs as described below. We participate in both programs.
The Global Debt Program - provides the FHLBanks with the ability to distribute debt into multiple primary markets across the globe. 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 Global Issuance Program, which is also conducted through the Office of Finance has 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.
The most common Global Debt Program structures are bullets, floaters and fixed-rate callable bonds with maturities of one to 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.
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 obligation 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 obligation bonds upon agreement of eight of the 12 FHLBanks. 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 may 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 we cannot use such complex coupons to match our assets, we enter 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 we may redeem in whole or in part at our discretion on predetermined call dates according to the terms of the bond offerings.
TAP Issue Program - 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. TAP Issues are simply generic bullet maturities that are created once a quarter (at market prices) and then reopened over 3-month periods, allowing the FHLBanks to consolidate small medium-term notes into large, liquid issues under a single CUSIP. TAP Issues have standard features, including semi-annual interest payments on 2/15 and 8/15 or 5/15 and 11/15. On-the-run TAP maturities include the 2-, 3-, 5-, and 7-year issuances. TAP Issues are brought to market once daily via a competitive auction process. A typical TAP cycle produces on-the-run TAP Issues of $1 billion to $4 billion in size. TAP Issue benefits include incremental growth, which avoids market disruption, daily auctions that provide liquidity through continuous supply, and price transparency with 15-20 firms generally eligible to bid. All on-the-run TAP Issues are included in all major bond indices, and interest on TAP Issues (like all FHLB securities) is exempt from state and local income tax. This Program is named after its funding method; the FHLBanks “tap” the markets over three month periods to obtain funding.
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Consolidated Obligation Discount Notes. Consolidated obligation discount notes provide us 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 between zero and 100 percent of the proceeds of the sale depending on: the time of the request; the maximum costs the FHLBank or other FHLBanks participating in the same issuance are willing to pay (if any); and the amount of orders 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, an FHLBank receives funding based on that FHLBank’s capital relative to the capital of other FHLBanks offering discount notes.
Regardless of the method of issuance, the Office of Finance can only issue consolidated obligations when a FHLBank provides a request for and agrees to accept the funds.
Deposits
The FHLBank Act allows us to accept deposits from its members, other FHLBanks and government instrumentalities. For us, member deposits are also a source of funding, but we do not rely on member deposits to meet our funding requirements. For members, deposits are a low-risk earning asset that may satisfy their regulatory liquidity requirements. We offer several types of deposit programs to our members, including demand and term deposits.
Retained Earnings and Dividends
Our 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 our assessment of the financial, economic and business risks inherent in our 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 our members’ investment with us.
We may pay dividends from retained earnings and current income. Our Board of Directors may declare and pay dividends in either cash or capital stock. Our dividends and our dividend policy 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, 2012, 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 our balance sheet was $532.5 million. At December 31, 2012, actual retained earnings were $893.8 million and losses in AOCI were $199.4 million. At December 31, 2011, the comparable retained earnings target was $481.3 million, and actual retained earnings was $746.2 million and losses in AOCI were $190.4 million. Management has not determined at this time our expected dividend payout ratios in 2013, and is also in the process of re-evaluating the retained earnings target for 2013, but expects to establish a higher target.
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The following table summarizes the impact of dividends on our retained earnings for the years ended December 31, 2012, 2011 and 2010 (in thousands):
| | December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Retained earnings, beginning of year | | $ | 746,237 | | $ | 712,091 | | $ | 688,874 | |
Net Income for the year | | 360,734 | | 244,486 | | 275,525 | |
| | 1,106,971 | | 956,577 | | 964,399 | |
Dividends paid in the year (a) | | (213,219 | ) | (210,340 | ) | (252,308 | ) |
| | | | | | | |
Retained earnings, end of year | | $ | 893,752 | | $ | 746,237 | | $ | 712,091 | |
(a) Dividends are paid in arrears in the second month after quarter end. Dividends are not accrued at quarter end.
Competition
Demand for advances is affected by (among other things) the availability and cost to members of alternate sources of liquidity, including retail deposits and wholesale funding options such as brokered deposits, repurchase agreements and Federal Funds. Historically, members have grown their assets at a faster pace than retail deposits and capital creating a funding gap. We compete with both secured and unsecured suppliers of wholesale funding to fill these potential funding gaps. Such other suppliers of funding may include Wall Street dealers, 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 lines of credit, wholesale CD programs, brokered CDs and sales of securities under agreements to repurchase. Large members may also have access to the national and global credit markets. 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.
We compete for funds raised through the issuance of unsecured debt in the national and global debt markets. Competitors include corporate, sovereign, and supranational entities, as well as Government Sponsored Enterprises including Federal National Mortgage Association (“Fannie Mae”), and Federal Home Loan Mortgage Corp. (“Freddie Mac”). 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 would otherwise be the case. In addition, the availability and 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 our members, there can be no assurance that this will continue to be the case indefinitely.
There is considerable competition among high credit quality issuers in the markets for callable debt and derivatives. 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 is an important determinant of our relative cost of funds. There can be no assurance that the current breadth and depth of these markets will be sustained. Also, as a result of Dodd-Frank legislation, the advent of mandatory derivative clearing in 2013 will marginally increase the cost of funds.
We compete for the purchase of mortgage loans held-for-sale. For single-family products, competition is primarily with Fannie Mae and Freddie Mac, principally on the basis of price, products, structures, and services offered.
Competition among the 12 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 our member institutions are subsidiaries of financial holding companies with multiple charters and FHLBank memberships. We do not believe, however, that the amount of advances borrowed by these entities, or the amount of capital stock held, is material in the context of its competitive environment. Certain large member financial institutions operating in our district may borrow unsecured Federal funds from other FHLBanks. We are not prohibited by regulation from purchasing short-term investments from our members, but the current practice prohibits members from borrowing unsecured funds from us.
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 considered as a non-member and cannot borrow additional funds from us. In addition, the non-member may not renew advances when they mature. Our former members, who attained non-member status by virtue of being acquired, had advances borrowed and outstanding of $427.3 million and $710.4 million at December 31, 2012 and 2011. A capital stock held by a former members is a non-member stock, which under Generally Accepted Accounting Principles in the United States (“GAAP”) is a liability. The outstanding balances of such stock were $23.1 million and $54.8 million at December 31, 2012 and 2011.
Oversight, Audits, and Examinations
We are supervised and regulated by the Federal Housing Finance Agency (“Finance Agency”), which was created on July 30, 2008, when the President signed the Housing and Economic Recovery Act of 2008 into law, which 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
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and community investment through safety and soundness oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
We carry out our 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, the 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, and our Board of Directors has an Audit Committee. An independent registered public accounting firm audits our annual financial statements. 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. We 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 our 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 Bank. The Comptroller General may also conduct his or her own audit of any of our financial statements.
Personnel
As of December 31, 2012, we had 269 full-time and 3 part-time employees. As of December 31, 2011, we had 273 full-time and 3 part-time employees. The employees are not represented by a collective bargaining unit, and we consider our relationship with employees to be good.
Tax Status
The FHLBanks, including the FHLBNY, are exempt from ordinary federal, state, and local taxation except for real property taxes.
Assessments
Resolution Funding Corporation (“REFCORP”) Assessments. — Up until June 30, 2011, the FHLBanks, including the FHLBNY, were required to make payments to REFCORP based on a percentage of Net Income. Each FHLBank was required to make payments to REFCORP until the total amount of payment actually made by all 12 FHLBanks was equivalent to a $300 million annual annuity, whose final maturity date was April 15, 2030. The Federal Housing Finance Agency has determined that the 12 FHLBanks have satisfied their obligation to REFCORP by the end of that period and no further payments will be necessary.
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 AHP the greater of $100 million or 10 percent of regulatory net income. Regulatory net income is defined as GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for Affordable Housing Program, and prior to June 30, 2011, after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency. We accrue the AHP expense monthly.
We charge the amount set aside for the Affordable Housing Program to income and recognize the amounts set aside as a liability. We relieve the AHP liability as members use subsidies. In periods where our regulatory income before Affordable Housing Program and REFCORP (prior to the termination of the REFCORP obligation on June 30, 2011) 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 to the sum of the income before Affordable Housing Program of the 12 FHLBanks. There was no shortfall in the years ended 2012, 2011 or 2010.
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ITEM 1A. RISK FACTORS.
The following discussion sets forth the material risk factors that could affect the FHLBNY’s financial condition and results of operations. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the FHLBNY.
Regulatory Risks
The FHLBanks are governed by federal laws and regulations, which could change or be applied in a manner detrimental to 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 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 our ability to conduct business or our cost of doing business.
Changes in regulatory or statutory requirements, or in their application, could result in, among other things, changes in: our cost of funds; retained earnings requirements; debt issuance; dividend payments; capital redemption and repurchases; permissible business activities; the size, scope, or nature of our lending, investment, or mortgage purchase programs; or our compliance costs. Changes that restrict dividend payments, the growth of our current business, or the creation of new products or services could negatively affect our 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 our capital stock or take advantage of our products and services.
As a result of these factors, the FHLBank System may have to pay a higher rate of interest on consolidated obligations. The resulting increase in the cost of issuing consolidated obligations could cause our advances to be less profitable and reduce our net interest margins (the difference between the interest rate received on advances and the interest rate paid on consolidated obligations). If we change the pricing of our advances, they may no longer be attractive to members and outstanding advances may decrease. In any case, the increased cost of issuing consolidated obligations could negatively affect our financial condition and results of operations.
Negative information about us, the FHLBanks or housing GSEs, in general, could adversely impact our cost and availability of financing. Negative information impacting us or any other FHLBank, such as material losses or increased risk of losses, could also adversely impact our cost of funds. More broadly, negative information about housing GSEs, in general, could adversely impact us. The housing GSEs — Fannie Mae, Freddie Mac, and the FHLBanks — issue highly rated agency debt to fund their operations. From time to time negative announcements by any of the housing GSEs concerning accounting problems, risk-management issues, and regulatory enforcement actions have created pressure on debt pricing for all GSEs, as investors have perceived such instruments as bearing increased risk. Similar announcements by the FHLBanks may contribute to this pressure on debt pricing. One possible source of information that impacts us could come from plans for housing GSE reform. Such plans were introduced on February 11, 2011 when the U.S. Treasury and HUD proposed certain recommendations for the reform of the housing GSEs. Although the focus of those recommendations is on Fannie Mae and Freddie Mac, the proposal includes certain recommendations for the FHLBanks. The recommendations or other plans could result in market uncertainty regarding the status of U.S. federal government support of housing GSEs, in general, including the FHLBanks, and our cost of financing could be adversely impacted as a result. For additional information about plans for housing GSE reform, see Legislative and Regulatory Developments in Item 7 in this MD&A. Any such negative information or other factors could result in the FHLBanks having to pay a higher rate of interest on COs to make them attractive to investors. If we maintain our existing pricing on our advances products and other services notwithstanding increases in CO interest rates the spreads we earn would fall and our results of operations would be adversely impacted. If, in response to this decrease in spreads, we change the pricing of our advances, the advances may be less attractive to members and the amount of new advances and our outstanding advance balances may decrease. In either case, the increased cost of issuing COs could adversely impact our financial condition and results of operations.
Loan modification programs could adversely impact the value of the FHLBNY’s mortgage-backed securities. Federal and state government authorities, as well as private entities such as financial institutions and the servicers of residential mortgage loans, have proposed, commenced, or promoted implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. Loan modification programs, as well as future legislative, regulatory or other actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of and the returns on our mortgage-backed securities.
Business Risks
A loss or change of business activities with large members could adversely affect the FHLBNY’s results of operations and financial condition. We have a high concentration of advances with three member institutions, and a loss or change of business activities with any of these institutions could adversely affect our results of operations and financial condition. Concentration risk for the FHLBNY is defined as the exposure to loss arising from a disproportionately large number of financial transactions with a limited number of individual customers, with a particular focus on members that have outstanding advances that account for more than 10 percent of advances by par value to the total par value of all advances outstanding as of a given date.
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Withdrawal of one or more large members from our membership could result in a reduction of our total assets, capital, and net income. If one or more of our large members were to prepay their 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 our total assets, capital, and net income. Although there were no material prepayments of advances in 2012 from members who accounted for 10 percent or more of advances, in prior years we have had large members make material prepayments. For example, Hudson City Savings Bank, FSB, a member which accounted for 22.1 percent of advances at December 31, 2010, prepaid $6.4 billion of advances in the first quarter of 2011 and $4.1 billion of advances in the fourth quarter of 2011. In 2013, based on public pronouncements by M&T Bank as the anticipated merger partner of Hudson City, which accounted for 8 percent of advances at December 31, 2012 will make extensive advance prepayments, and could cause our book of business to decline if the advances are not replaced by new borrowings from other member institutions. See Business Outlook under 2012 Highlights in the MD&A for a fuller understanding of the announced merger of Hudson City and M&T, two member institutions of the FHLBNY.
At December 31, 2012, three other members accounted for 46.9 percent of total advances - Metropolitan Life Insurance Company (18.7 percent), Citibank, N.A. (16.7 percent), and New York Community Bank (11.5 percent).
While our analysis of the impact of the merger of Hudson City and the probable termination of advances is not expected to have a material adverse impact on our business and results of operations, these are the types of events that we consider to be factors resulting from high concentration of advances. 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 our short- and long-term investments; and
· the extent to which consolidated obligations (funding) matured as the advances were prepaid or repaid.
At December 31, 2012, advances borrowed by insurance companies accounted for 23.8% of advances (See Note 20. Segment Information and Concentration in the audited financial statements). Lending to insurance companies poses a number of unique risks not present in lending to federally insured depository institutions. For example, there is no single federal regulator for insurance companies. They are supervised by state regulators and subject to state insurance codes and regulations. There is uncertainty about whether a state insurance commissioner would try to void FHLBNY’s claims on collateral in the event of an insurance company failure. Even if ultimately unsuccessful, such a legal challenge could result in a delay in the liquidation of collateral and a loss of market value.
The FHLBNY has geographic concentrations that may adversely impact its business operations and/or financial condition. By nature of our regulatory charter and our business operations, we are exposed to credit risk as the result of limited geographic diversity. Our advance lending is limited by charter to operations to the four areas — New Jersey, New York, Puerto Rico and the U.S. Virgin Islands. We employ conservative credit rating and collateral policies to limit exposure, but a decline in regional economic conditions could create an exposure to us in excess of collateral held.
We have concentrations of mortgage loans in some geographic areas based on our investments in MPF loans and private-label MBS and on the receipt of collateral pledged for advances. To the extent that any of these geographic areas experiences significant declines in the local housing markets, declining economic conditions, or a natural disaster, we could experience increased losses on our investments in the MPF loans or the related MBS or be exposed to a greater risk that the pledged collateral securing related advances would be inadequate in the event of default on such an advance.
The FHLBNY relies upon derivative instruments to reduce its interest-rate risk, and changes in our credit ratings may adversely affect our ability to enter into derivative instruments on acceptable terms. Our financial strategies are highly dependent on our ability to enter into derivative instruments on acceptable terms to reduce our interest-rate risk. Rating agencies may from time to time change a rating or issue negative reports, which may adversely affect our ability to enter into derivative instruments with acceptable parties on satisfactory terms in the quantities necessary to manage our interest-rate risk on consolidated obligations or other financial instruments. This could negatively affect our financial condition and results of operations.
The ongoing implementation of derivatives regulation under the Dodd-Frank Act could adversely impact the FHLBNY’s ability to execute derivatives to hedge interest rate risk, and would increase our compliance costs and negatively impact our results of operations. Derivatives regulations under the Dodd-Frank Act have impacted and will continue to substantially impact the derivatives markets by, among other things: (i) requiring extensive regulatory and public reporting of derivatives transactions; (ii) requiring a wide range of over-the-counter derivatives to be cleared through recognized clearing facilities and traded on exchanges or exchange-like facilities; (iii) requiring the collection and segregation of collateral for most uncleared derivatives; and (iv) significantly broadening limits on the size of positions that may be maintained in specified derivatives. These market structure reforms will make many derivatives products more costly to execute, may significantly reduce the liquidity of certain derivatives markets and could diminish customer demand for covered derivatives. These changes could negatively impact the FHLBNY’s ability to execute derivatives in cost efficient manner, which could have an adverse impact on its results of operations. Numerous aspects of the new derivatives regime require costly and extensive compliance systems to be put in place and maintained.
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 as well as it may adversely affect earnings. Our primary business is making advances to our members, and we compete with
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other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources, which may offer more favorable terms than the ones we offer on our advances, including more flexible credit or collateral standards. We 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, which could cause members to obtain financing from alternative sources. In addition, many of our competitors are not subject to the same regulations, which may enable those competitors to offer products and terms that we are not able to offer.
The availability of alternative funding sources that are more attractive to our members may significantly decrease the demand for our 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 our advances or a decrease in our profitability on advances could adversely affect our 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. We offer the MPF Program to our 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 we are able to purchase and, therefore, lower income from this part of its business.
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 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 our ability to have access to funding, reduce the amount of funding available to us, or increase the cost of funding available to us. Any of these effects could adversely affect our financial condition and results of operations.
Market and Economic Risks
The FHLBNY’s funding depends on its ability to access the capital markets. Our primary source of funds is the sale of consolidated obligations in the capital markets. Our ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, which are, for the most part, beyond our control. Accordingly, we may not be able to obtain funding on acceptable terms, if at all. If we cannot access funding when needed on acceptable terms, our ability to support and continue operations could be adversely affected, which could negatively affect our financial condition and results of operations. If additional reforms are legislated over money market funds, they may have an adverse impact on the FHLBank discount note pricing, given that the funds are significant sponsors of short-term FHLBank debt.
Changes in interest rates could significantly affect the FHLBNY’s financial condition and results of operations. We earn income primarily from the spread between interest earned on our outstanding advances, investments and shareholders’ capital, and interest paid on our consolidated obligations and other interest-bearing liabilities. Although we use various methods and procedures to monitor and manage our exposure to changes in interest rates, we may experience instances when either our interest-bearing liabilities will be more sensitive to changes in interest rates than our interest-earning assets, or vice versa. In either case, interest rate movements contrary to our position could negatively affect our 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 than expected at below market yields when interest rates increase.
Economic downturns and changes in federal monetary policy could have an adverse effect on the FHLBNY’s business and its results of operations. Our 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 we conduct our business. If any of these conditions deteriorate, our businesses and results of operations could be adversely affected. For example, a prolonged economic downturn could result in members needing fewer advances. In addition, our 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.
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Credit Risks
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 AA+/A-1+ ratings by Moody’s and S&P. The outlook for the FHLBank debt by both S&P and Moody’s is negative. 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 our financial condition and results of operations. Rating agency downgrades of the debt of the United States could also cause a downgrade in the rating of the FHLBanks.
The FHLBNY’s financial condition and results of operations could be adversely affected by FHLBNY’s exposure to credit risk. We have 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, we assume secured and unsecured credit risk exposure associated with the risk that a borrower or counterparty could default and we could suffer a loss if we could not fully recover amounts owed to us on a timely basis. A credit loss, if material, will have an adverse effect on the FHLBNY’s financial condition and results of operations.
We are subject to credit-risk exposures related to the loans that back our investments. Increased delinquency rates and credit losses beyond those currently expected could adversely impact the yield on or value of those investments. The carrying values of our private-label MBS were at $514.9 million at December 31, 2012. And since 2006, we have made no acquisitions of private-label MBS. These investments are primarily backed by prime, subprime mortgage loans, and many of these securities are projected to sustain credit losses under current assumptions, and have been downgraded by various NRSROs. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition Investments for a description of our portfolio of investments in these securities.
Credit losses in 2012 and 2011 were not significant, but if we were to experience high rates of delinquency and increase in loss severity trends on the loans underlying the private-label MBS, and face challenging macroeconomic factors, such as continuing high unemployment levels and higher than expected troubled residential mortgage loans, we may have to recognize additional credit losses.
We have also invested in securities issued by Housing Finance Agencies (“HFA”), which are held-to-maturity, with an amortized cost of $737.6 million as of December 31, 2012. Generally, the cash flows are based on the performance of the underlying loans, although these securities do include credit enhancements as well. At the time of purchase the HFA securities were rated double-A (or its equivalent rating), some have since been downgraded. Further, the fair values of some of our HFA securities have also fallen, and gross unrealized losses on these securities totaled $56.0 million at December 31, 2012. Although we have determined that none of these securities is other-than-temporarily impaired at December 31, 2012, should the underlying loans underperform our projections, we could realize credit losses from these securities. No purchases were made in 2012.
A rise in delinquency rates on our investments in MPF loans or related adverse trends could adversely impact our results of operation and financial condition. As discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition, our methodology for determining our allowance for loan losses is determined based on our investments in MPF loans and considers factors relevant to those investments. Important factors in determining this allowance are the collateral values supporting our investments in conventional mortgage loans. The allowance of $7.0 million at December 31, 2012 may prove insufficient if macroeconomic factors worsen, housing prices fall and collateral values decline. To the extent those risks are realized, we may determine to increase our allowance for loan losses, which would adversely impact our results of operations and financial condition.
Insufficient collateral protection could adversely affect the FHLBNY’s financial condition and results of operations. We require that all outstanding advances be fully collateralized. In addition, for mortgage loans that we purchased under the MPF Program, we require that members fully collateralize the outstanding credit enhancement obligations not covered through the purchase of supplemental mortgage insurance. We evaluate the types of collateral pledged by our members and assign borrowing capacities to the collateral based on the risks associated with that type of collateral. If we have insufficient collateral before or after an event of payment default by the member, or we are unable to liquidate the collateral for the value assigned to it in the event of a payment default by a member, we could experience a credit loss on advances, which could adversely affect our financial condition and results of operations.
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. We are jointly and severally liable along with the other FHLBanks for the consolidated obligations issued through the Office of Finance. Dividends on, redemption of, or repurchase of shares of our capital stock are not permitted 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 FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. As a result, our 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
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FHLBanks. However, no FHLBank has ever defaulted on its debt and no FHLBank has ever been asked to assume the debt payments of another FHLBank since the FHLB System was established in 1932.
Liquidity Risks
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. We seek to be in a position to meet our members’ credit and liquidity needs and pay our obligations without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. In addition, we maintain a contingent liquidity plan designed to enable us to meet our obligations and the liquidity needs of members in the event of operational disruptions or short-term disruptions in the capital markets. Our ability to manage our liquidity position or our contingent liquidity plan may not enable us to meet our obligations and the credit and liquidity needs of our members, which could have an adverse effect on our financial condition and results of operations.
Operational Risks
The FHLBNY relies heavily on information systems and other technology. We rely heavily on information systems and other technology to conduct and manage our business. We have implemented a business continuity plan that includes the maintenance of an alternate site for data processing and office functions. All critical systems are tested annually for recovery readiness and all business units update and test their respective disaster recovery plans annually. If we were to experience a failure or interruption in any of these systems or other technology and our disaster recovery capabilities were also impacted, it would affect our ability to conduct and manage our business effectively, including advance and hedging activities. This may adversely affect member relations, risk management, and negatively affect our financial condition and results of operations.
The FHLBNY’s operational systems and networks continue to be vulnerable to an increasing risk of continually evolving cybersecurity or other technological risks which could result in the disclosure of confidential client or customer information, damage to the FHLBNY’s reputation, additional costs to the FHLBNY, regulatory penalties and financial losses. A significant portion of FHLBNY’s operations relies heavily on the secure processing, storage and transmission of financial and other information. The FHLBNY’s computer systems, software and networks will continue to be vulnerable to unauthorized access, loss or destruction of data, unavailability of service, computer viruses or other malicious code, cyber attacks and other events. These threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. If one or more of these events occurs, it could result in the disclosure of confidential information, damage to FHLBNY’s reputation with its customers, additional costs to the FHLBNY (such as repairing systems or adding new personnel or protection technologies), regulatory penalties and financial losses, to the FHLBNY. Such events could also cause interruptions or malfunctions in the operations of the FHLBNY data systems (such as the lack of availability of FHLBNY’s online advance transaction system with members).
Deteriorating market conditions increase the risk that the FHLBNY’s models will produce unreliable results. We use market-based information as inputs to our financial models, which are used in making operational decisions and to derive estimates for use in our financial reporting processes. The downturn in the housing and mortgage markets created additional risk regarding the reliability of the models, particularly since the models are regularly adjusted in response to rapid changes in the actions of consumers and mortgagees to changes in economic conditions. This may increase the risk that our models could produce unreliable results or estimates that vary widely or prove to be inaccurate.
The inability to retain key personnel could adversely impact the Bank’s operations. We rely on key personnel for many of our functions. Our success in retaining such personnel is important to our ability to conduct our operations and measure and maintain risk and financial controls. The ability to retain key personnel could be challenged as the U.S. employment market improves. We maintain a succession planning program in which we attempt to identify and develop employees who can potentially replace key personnel in the event of their departure.
A natural disaster in the Bank’s region could adversely affect the Bank’s profitability and financial condition. A severe natural disaster could damage the Bank’s physical infrastructure and have an adverse effect on the FHLBNY’s business. Portions of the Bank’s region also are subject to risks from hurricanes, tornadoes, floods or other natural disasters. These natural disasters could damage or dislocate the facilities of the Bank’s members, may damage or destroy collateral that members have pledged to secure advances, may adversely affect the viability of the Bank’s mortgage purchase programs or the livelihood of borrowers of the Bank’s members, or otherwise could cause significant economic dislocation in the affected areas of the Bank’s region. These conditions could have an adverse effect on the Bank’s business.
As an example, on October 29th and 30th, 2012, Hurricane Sandy struck sections of the New York and New Jersey coast line, and our market area was significantly impacted by the storm which resulted in widespread flooding, wind damage, and power outages. The FHLBNY’s computer operations in Jersey City were moved to the New York headquarters due to the impact of Hurricane Sandy. In the interim, the FHLBNY operated with daily tape back-ups of its computer systems and data, and previously arranged back-up mechanisms with two other FHLBanks to provide support services if needed. Customer service, and specifically liquidity to FHLBNY’s members, continued uninterrupted through this period. The FHLBNY re-established a fully functioning back-up data center at a colocation facility in New Jersey in March 2013. The colocation facility provides space, power, cooling, and physical security for the server, storage, and networking equipment. The facility is shared with other firms, and is connected to a variety of telecommunications and network service providers.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We occupy approximately 41,000 square feet of leased office space at 101 Park Avenue, New York, New York. We also maintain 30,000 square feet of leased office space at 30 Montgomery Street, Jersey City, New Jersey, principally as an operations center. In the aftermath of hurricane, we leased temporary office space occupying approximately 16,000 square feet at 101 Park Avenue, New York, NY to accommodate Jersey City, New Jersey employees.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Bank is involved in disputes or regulatory inquiries that arise in the ordinary course of business. At the present time, except as noted below, there are no pending claims against the Bank that, if established, are reasonably likely to have a material effect on the Bank’s financial condition, results of operations or cash flows.
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 filed for protection under Chapter 11 in the same court on October 3, 2008. A Chapter 11 plan was confirmed in their bankruptcy cases by order of the Bankruptcy Court dated December 6, 2011 (the “Plan”). The Plan became effective on March 6, 2012.
LBSF was a counterparty to FHLBNY on multiple derivative transactions under an International Swap Dealers Association, Inc. master agreement with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF on September 18, 2008 (the “Early Termination Date”). The net amount that was due to the Bank after giving effect to obligations that were due LBSF and Bank collateral posted with and netted by LBSF was approximately $65 million. The Bank filed timely proofs of claim in the amount of approximately $65 million as creditors of LBSF and LBHI in connection with the bankruptcy proceedings. The Bank fully reserved the LBSF and LBHI receivables as the dispute with LBSF described below make the timing and the amount of any recoveries uncertain.
As previously reported, the Bank received a Derivatives ADR Notice from LBSF dated July 23, 2010 claiming that the Bank was liable to LBSF under the master agreement. Subsequently, in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court dated September 17, 2009 (“Order”), the Bank responded to LBSF on August 23, 2010, denying LBSF’s Demand. LBSF served a reply on September 7, 2010, effectively reiterating its position. A mediation conducted pursuant to the Order commenced on December 8, 2010 and concluded without settlement on March 17, 2011. LBSF claims that the Bank is liable to it in the principal amount of approximately $198 million plus interest on such principal amount from the Early Termination Date to December 1, 2008 at an interest rate equal to the average of the cost of funds of the Bank and LBSF on the Early Termination Date, and after December 1, 2008 at a default interest rate of LIBOR plus 13.5%. LBSF’s asserted claim as of December 6, 2010, including principal and interest, was approximately $268 million. Pursuant to the Order, positions taken by the parties in the ADR process are confidential.
While the Bank believes that LBSF’s position is without merit, the amount the Bank actually recovers or pays will ultimately be decided in the course of the bankruptcy proceedings.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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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 our members. Stock may also be held by former members as a result of having been acquired by a non-member institution. We conduct our business in advances and mortgages exclusively with stockholder members and housing associates(1). 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, 2012, we had 339 members, who held 47,974,566 shares of capital stock between them. Former members held 231,433 shares. At December 31, 2011, we had 340 members with 44,906,014 shares of capital stock between them and 548,273 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.
Our recent 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 be determined by our Board of Directors, at its discretion, and within the regulatory framework promulgated by the Finance Agency. Our 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(a) subsequent to the end of that calendar quarter as summarized below. Dividend payments reported below are on Class B Stock, which includes payments to non-members on capital stock reported as mandatorily redeemable capital stock in the Statements of Condition. (dollars in thousands):
| | 2012 | | | | 2011 | | | | 2010 | |
Month Paid | | Amount | | Dividend Rate | | Month Paid | | Amount | | Dividend Rate | | Month Paid | | Amount | | Dividend Rate | |
| | | | | | | | | | | | | | | | | |
November | | $ | 55,352 | | 4.50 | % | November | | $ | 47,198 | | 4.00 | % | November | | $ | 76,675 | | 6.50 | % |
August | | 51,505 | | 4.50 | | August | | 48,987 | | 4.50 | | August | | 55,225 | | 4.60 | |
May | | 50,394 | | 4.50 | | May | | 49,635 | | 4.50 | | May | | 52,792 | | 4.25 | |
February | | 58,124 | | 5.00 | | February | | 67,269 | | 5.80 | | January | | 73,024 | | 5.60 | |
| | | | | | | | | | | | | | | | | |
| | $ | 215,375 | (b) | | | | | $ | 213,089 | (b) | | | | | $ | 257,716 | (b) | | |
(a) The table above reports dividend on a paid basis and includes payments to former members as well as members. Dividends paid to former members were $1.8 million, $2.4 million and $4.3 million for the years ended December 31, 2012, 2011 and 2010.
(b) Includes dividend paid to non-member which is classified as interest expense for accounting purposes.
Dividends are accrued for former members, and recorded as interest expense on mandatorily redeemable capital stock held by former members, and is a charge to Net income. Dividends on capital stock held by members are not accrued. Dividends are paid in arrears in the second month after the quarter end in which the dividend is earned, and is a direct charge to Retained earnings.
Note 1: Housing associates are defined as entities that (i) are approved mortgagees under Title II of the National Housing Act, (ii) are chartered under law and have succession, (iii) are subject to inspection and supervision by a governmental agency, (iv) lend their own funds as their principal activity in the mortgage field, and (v) have a financial condition such that advances may be safely made to that entity. At December 31, 2012, we had eight housing associates as members. Advances made to Housing associates totaled $7.2 million, and the mortgage loans acquired from housing associates were immaterial in any periods in this report.
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, we are 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, we are also exempt from disclosure of securities repurchases by the issuer that otherwise would have been required under Item 703 of Regulation S-K.
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ITEM 6. SELECTED FINANCIAL DATA.
Statements of Condition | | Years ended December 31, | |
(dollars in millions) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | |
| | | | | | | | | | | |
Investments (a) | | $ | 17,459 | | $ | 14,236 | | $ | 16,739 | | $ | 16,222 | | $ | 14,195 | |
Interest-bearing balance at FRB (b) | | — | | — | | — | | — | | 12,169 | |
Advances | | 75,888 | | 70,864 | | 81,200 | | 94,349 | | 109,153 | |
Mortgage loans held-for-portfolio, net of allowance for credit losses (c) | | 1,843 | | 1,408 | | 1,266 | | 1,318 | | 1,458 | |
Total assets | | 102,989 | | 97,662 | | 100,212 | | 114,461 | | 137,540 | |
Deposits and borrowings | | 2,054 | | 2,101 | | 2,454 | | 2,631 | | 1,452 | |
Consolidated obligations, net | | | | | | | | | | | |
Bonds | | 64,784 | | 67,441 | | 71,743 | | 74,008 | | 82,257 | |
Discount notes | | 29,780 | | 22,123 | | 19,391 | | 30,828 | | 46,330 | |
Total consolidated obligations | | 94,564 | | 89,564 | | 91,134 | | 104,836 | | 128,587 | |
Mandatorily redeemable capital stock | | 23 | | 55 | | 63 | | 126 | | 143 | |
AHP liability | | 135 | | 127 | | 138 | | 144 | | 122 | |
REFCORP liability | | — | | — | | 22 | | 24 | | 5 | |
Capital | | | | | | | | | | | |
Capital stock | | 4,797 | | 4,491 | | 4,529 | | 5,059 | | 5,585 | |
Retained earnings | | | | | | | | | | | |
Unrestricted | | 798 | | 722 | | 712 | | 689 | | 383 | |
Restricted | | 96 | | 24 | | — | | — | | — | |
Total retained earnings | | 894 | | 746 | | 712 | | 689 | | 383 | |
Accumulated other comprehensive income (loss) | | (199 | ) | (191 | ) | (97 | ) | (145 | ) | (101 | ) |
Total capital | | 5,492 | | 5,046 | | 5,144 | | 5,603 | | 5,867 | |
Equity to asset ratio (d) | | 5.33 | % | 5.17 | % | 5.13 | % | 4.90 | % | 4.27 | % |
| | | | | | | | | | | | | | | | |
Statements of Condition | | Years ended December 31, | |
Averages (See note below; dollars in millions) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | |
| | | | | | | | | | | |
Investments (a) | | $ | 25,265 | | $ | 20,486 | | $ | 17,693 | | $ | 15,987 | | $ | 22,253 | |
Interest-bearing balance at FRB (b) | | — | | — | | — | | 6,046 | | 1,322 | |
Advances | | 72,720 | | 75,202 | | 85,908 | | 98,966 | | 92,617 | |
Mortgage loans held-for-portfolio, net of allowance for credit losses | | 1,624 | | 1,314 | | 1,281 | | 1,386 | | 1,465 | |
Total assets | | 102,821 | | 100,911 | | 108,100 | | 125,461 | | 119,710 | |
Interest-bearing deposits and other borrowings | | 2,246 | | 2,301 | | 4,650 | | 2,095 | | 2,003 | |
Consolidated obligations, net | | | | | | | | | | | |
Bonds | | 65,598 | | 68,028 | | 72,136 | | 71,860 | | 81,342 | |
Discount notes | | 26,113 | | 21,442 | | 21,728 | | 41,496 | | 28,349 | |
Total consolidated obligations | | 91,711 | | 89,470 | | 93,864 | | 113,356 | | 109,691 | |
Mandatorily redeemable capital stock | | 38 | | 58 | | 83 | | 137 | | 166 | |
AHP liability | | 131 | | 132 | | 142 | | 135 | | 122 | |
REFCORP liability | | — | | 5 | | 9 | | 21 | | 6 | |
Capital | | | | | | | | | | | |
Capital stock | | 4,634 | | 4,476 | | 4,699 | | 5,244 | | 4,923 | |
Retained earnings | | | | | | | | | | | |
Unrestricted | | 752 | | 707 | | 672 | | 558 | | 381 | |
Restricted | | 58 | | 4 | | — | | — | | — | |
Total retained earnings | | 810 | | 711 | | 672 | | 558 | | 381 | |
Accumulated other comprehensive income (loss) | | (200 | ) | (129 | ) | (116 | ) | (106 | ) | (74 | ) |
Total capital | | 5,244 | | 5,058 | | 5,255 | | 5,696 | | 5,230 | |
| | | | | | | | | | | | | | | | |
Note — Average balance calculation. For most components of the average balances, a daily weighted average balance is calculated for the period. When daily weighted average balance information is not available, a simple monthly average balance is calculated.
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Operating Results and Other Data
(dollars in millions) | | | | | | | | | | | |
(except earnings and dividends per | | December 31, | |
share, and headcount) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | |
Net income | | $ | 361 | | $ | 245 | | $ | 276 | | $ | 571 | | $ | 259 | |
Net interest income (e) | | 467 | | 509 | | 457 | | 701 | | 694 | |
Dividends paid in cash (f) | | 213 | | 210 | | 252 | | 265 | | 294 | |
AHP expense | | 40 | | 27 | | 31 | | 64 | | 30 | |
REFCORP expense | | — | | 31 | | 69 | | 143 | | 65 | |
Return on average equity (g) | | 6.88 | % | 4.83 | % | 5.24 | % | 10.02 | % | 4.95 | % |
Return on average assets | | 0.35 | % | 0.24 | % | 0.25 | % | 0.45 | % | 0.22 | % |
Net OTTI impairment losses | | (2 | ) | (6 | ) | (8 | ) | (21 | ) | — | |
Other non-interest income (loss) | | 33 | | (75 | ) | 23 | | 185 | | (267 | ) |
Total other income (loss) | | 31 | | (81 | ) | 15 | | 164 | | (267 | ) |
Operating expenses (h) | | 82 | | 109 | | 85 | | 76 | | 66 | |
Finance Agency and | | | | | | | | | | | |
Office of Finance expenses | | 14 | | 13 | | 10 | | 8 | | 7 | |
Total other expenses | | 96 | | 122 | | 95 | | 84 | | 73 | |
Operating expenses ratio (i) | | 0.08 | % | 0.11 | % | 0.08 | % | 0.06 | % | 0.06 | % |
Earnings per share | | $ | 7.78 | | $ | 5.46 | | $ | 5.86 | | $ | 10.88 | | $ | 5.26 | |
Dividends per share | | $ | 4.63 | | $ | 4.70 | | $ | 5.24 | | $ | 4.95 | | $ | 6.55 | |
Headcount (Full/part time) | | 272 | | 276 | | 271 | | 264 | | 251 | |
(a) Investments include held-to-maturity securities, available-for-sale securities, securities purchased under agreements to resell, Federal funds, loans to other FHLBanks, and other interest-bearing deposits.
(b) FRB program commenced in October 2008. On July 2, 2009, the Bank was no longer eligible to collect interest on excess balances.
(c) Allowances for credit losses were $7.0 million, $6.8 million, $5.8 million, $4.5 million, and $1.4 million for the years ended December 31, 2012, 2011, 2010, 2009 and 2008.
(d) Equity to asset ratio is capital stock plus retained earnings and Accumulated other comprehensive income (loss) as a percentage of total assets.
(e) Net interest income is net interest income before the provision for credit losses on mortgage loans.
(f) 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.
(g) 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).
(h) Operating expenses include Compensation and Benefits.
(i) Operating expenses as a percentage of total average assets.
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Supplementary financial data for each quarter for the years ended December 31, 2012 and 2011 are presented below (in thousands):
| | 2012 (unaudited) | |
| | 4th Quarter | | 3rd Quarter | | 2nd Quarter | | 1st Quarter | |
| | | | | | | | | |
Interest income | | $ | 210,431 | | $ | 229,157 | | $ | 231,818 | | $ | 232,138 | |
Interest expense | | 103,222 | | 111,661 | | 110,810 | | 110,983 | |
| | | | | | | | | |
Net interest income | | 107,209 | | 117,496 | | 121,008 | | 121,155 | |
| | | | | | | | | |
Provision for credit losses on mortgage loans | | 118 | | 234 | | (202 | ) | 861 | |
Other income (loss) | | 11,743 | | 3,098 | | (1,770 | ) | 18,264 | |
Other expenses and assessments | | 34,958 | | 31,919 | | 32,928 | | 36,653 | |
| | 23,333 | | 29,055 | | 34,496 | | 19,250 | |
| | | | | | | | | |
Net income | | $ | 83,876 | | $ | 88,441 | | $ | 86,512 | | $ | 101,905 | |
| | 2011 (unaudited) | |
| | 4th Quarter | | 3rd Quarter | | 2nd Quarter | | 1st Quarter | |
| | | | | | | | | |
Interest income | | $ | 269,976 | | $ | 207,277 | | $ | 216,771 | | $ | 259,318 | |
Interest expense | | 106,103 | | 104,503 | | 110,657 | | 123,316 | |
| | | | | | | | | |
Net interest income | | 163,873 | | 102,774 | | 106,114 | | 136,002 | |
| | | | | | | | | |
Provision for credit losses on mortgage loans | | 186 | | 765 | | 429 | | 1,773 | |
Other income (loss) | | (44,399 | ) | (40,394 | ) | (8,261 | ) | 12,374 | |
Other expenses and assessments | | 34,764 | | 25,945 | | 44,113 | | 75,622 | |
| | 79,349 | | 67,104 | | 52,803 | | 65,021 | |
| | | | | | | | | |
Net income | | $ | 84,524 | | $ | 35,670 | | $ | 53,311 | | $ | 70,981 | |
Interim period - Infrequently occurring items recognized.
2012 first quarter — Benefited from $7.2 million of gains recorded on debt instruments held at fair value under the FVO; derivatives and hedging gains were $24.2 million. These two factors were key contributors to increase in Net income in the 2012 first quarter.
2011 first quarter — $42.7 million was recorded in Interest income as prepayment fees. We early extinguished debt and took a charge of $51.7 million. We contributed $24.0 million to our Defined Benefit Pension and took a charge to the quarter’s earnings.
2011 fourth quarter — $53.6 million was recorded in Interest income as prepayment fees. We early extinguished debt and took a charge $31.3 million.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the Federal Home Loan Bank of New York (“we” “us,” “our,” “ the Bank” or the “FHLBNY”) 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, and include statements related to, among others, gains and losses on derivatives, plans to pay dividends and repurchase excess capital stock, future other-than-temporary impairment charges, future classification of securities, and reform legislation. 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;
· 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;
· 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;
· the availability of derivative financial instruments of the types and in the quantities needed for risk management purposes from acceptable counterparties;
· significant business disruptions resulting from natural or other disaster, acts of war or terrorism;
· the effect of new accounting standards, including the development of supporting systems;
· membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members;
· the soundness of other financial institutions, including Bank members, nonmember borrowers, other counterparties, and the other FHLBanks; and
· the willingness of the Bank’s members to do business with the Bank whether or not the Bank is paying dividends or repurchasing excess capital stock.
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 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.
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Organization of Management’s Discussion and Analysis (“MD&A”).
This MD&A is designed to provide information that will assist the readers in better understanding our financial statements, the changes in key items in our financial statements from year to year, the primary factors driving those changes as well as how accounting principles affect our financial statements. The MD&A is organized as follows:
MD&A TABLE REFERENCE
Table(s) | | Description | | Page(s) |
1.1 | | Market Interest Rates | | 31 |
2.1 - 2.3 | | Financial Condition | | 45-46 |
3.1 - 3.11 | | Advances | | 47-52 |
4.1 - 4.15 | | Investments | | 52-60 |
5.1 - 5.6 | | Mortgage Loans | | 61-62 |
6.1 - 6.10 | | Consolidated Obligations | | 65-69 |
6.11 | | FHLBNY Rating | | 69 |
7.1 - 7.3 | | Capital | | 70-71 |
8.1 - 8.7 | | Derivatives | | 72-75 |
9.1 - 9.4 | | Liquidity | | 77-79 |
9.5 | | Off-Balance Sheet Arrangements and Aggregate Contractual Obligations | | 80 |
9.6 - 9.7 | | Leverage Limits, Unpledged Asset Requirements, and MBS Limits | | 81 |
| | Operational Risk Management | | 81 |
10.1 - 10.15 | | Result of Operations | | 82-92 |
11.1 - 11.2 | | Assessments | | 92 |
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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, we seek to maintain a balance between our public policy mission and our ability to provide adequate returns on the capital supplied by our members. We achieve this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and also by paying a dividend on members’ capital stock. Our financial strategies are designed to enable us to expand and contract in response to member credit needs. By investing capital in high-quality, short- and medium-term financial instruments, we maintain sufficient liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. The dividends we pay are largely the result of earnings on invested member capital, net earnings on advances to members, mortgage loans and investments, offset in part by operating expenses and assessments. Our Board of Directors and Management determine the pricing of member credit and dividend policies based on the needs of our members and the cooperative.
Business segment. We manage our operations as a single business segment. Advances to members are our primary focus and the principal factor that impacts our operating results. We are exempt from ordinary federal, state and local taxation (except for local real property tax). Up until June 30, 2011, we were required to make payments to Resolution Funding Corporation (“REFCORP”). We are required to set aside a percentage of our income towards an Affordable Housing Program (“AHP”).
Explanation of the use of certain non-GAAP measures of Interest Income and Expense, Net Interest income and margin. The results of our operations are presented in accordance with U.S. generally accepted accounting principles. We have also presented certain information regarding our spread between Interest Income and Expense, Net Interest income spread and Return on Earning assets. This spread combines interest expense on debt with net interest exchanged with swap dealers on interest rate swaps associated with debt hedged on an economic basis. We believe these non-GAAP financial measures are useful to investors and members seeking to understand our operational performance and business and performance trends. Although we believe these non-GAAP financial measures enhance investor and members’ understanding of the Bank’s business and performance, they should not be considered an alternative to GAAP. We have provided GAAP measures in parallel whenever discussing non-GAAP measures.
Financial performance of the Federal Home Loan Bank of New York
| | December 31, | | Net change in dollar amount | |
(Dollars in millions, except per share data) | | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | |
| | | | | | | | | | | |
Net interest income before provision for credit losses | | $ | 467 | | $ | 509 | | $ | 457 | | $ | (42 | ) | $ | 52 | |
Provision for credit losses on mortgage loans | | 1 | | 3 | | 1 | | (2 | ) | 2 | |
| | | | | | | | | | | |
Net OTTI impairment losses | | (2 | ) | (6 | ) | (8 | ) | 4 | | 2 | |
Other non-interest income (loss) | | 33 | | (75 | ) | 23 | | 108 | | (98 | ) |
Total other income (loss) | | 31 | | (81 | ) | 15 | | 112 | | (96 | ) |
Operating expenses | | 27 | | 29 | | 27 | | (2 | ) | 2 | |
Compensation and benefits | | 55 | | 80 | | 58 | | (25 | ) | 22 | |
Net income | | $ | 361 | | $ | 245 | | $ | 276 | | $ | 116 | | $ | (31 | ) |
Earnings per share | | $ | 7.78 | | $ | 5.46 | | $ | 5.86 | | $ | 2.32 | | $ | (0.40 | ) |
Dividend per share | | $ | 4.63 | | $ | 4.70 | | $ | 5.24 | | $ | (0.07 | ) | $ | (0.54 | ) |
2012 Highlights
Results of Operations
We reported 2012 Net income of $360.7 million, or $7.78 per share, compared with 2011 Net income of $244.5 million, or $5.46 per share, and 2010 Net income of $275.5 million, or $5.86 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 6.88% in 2012, compared with 4.83% in 2011, and 5.24% in 2010.
2012 Net income benefited from lower Compensation and benefit expenses, lower debt retirement costs, and incurred no REFCORP expense, an 18% assessment charged to the 2011 Net Income in its first six months, and to the full year 2010 Net Income. REFCORP Assessment obligation was satisfied in June 2011, and funds previously paid to REFCORP are being set aside as Restricted Retained earnings that will further strengthen our balance sheet and the FHLBank system. Other primary factors are summarized below:
· Net interest income — Net interest income in 2012 was $466.9 million, compared to $508.8 million in 2011 and $457.6 million in 2010. The decline, relative to 2011, was in part due to tighter funding spreads in the current year, and in part due to declining yields from our investments and lower prepayment fees. A significant amount of our fixed-rate debt is swapped to floating-rate sub-LIBOR spreads, and as LIBOR declines, as it did in 2012 that spread narrowed on a swapped out basis, causing an increase in funding cost. Also, with the easing of the European credit crises in 2012, our debt may have returned to pre-crisis
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pricing. The impact of “flight to quality” had effectively driven down our cost of debt in 2011 and 2010, during the peak of the credit crises. Higher-yielding MBS have been paying down, and floating-rate MBS yielded lower coupons in parallel with the declining interest rate environment. Member initiated prepayments of advances were lower in 2012, and fee income generated was $16.6 million, compared to $109.2 million in 2011, and $13.1 million in 2010.
· Derivative and hedging gains — In 2012, derivative and hedging gains were $47.3 million, compared to $16.7 million and $25.0 million in 2011 and 2010. Net gains represented the income effects of hedging activities in a qualifying hedge (fair value effects of derivatives, net of the fair value effects of hedged items), and net gains on derivatives in an economic hedge that were not designated under hedge accounting rules (fair value changes of derivatives without the offsetting fair value changes of the hedged items).
· Instruments held at fair value — Consolidated obligation debt elected under the FVO reported fair value losses of $0.1 million in 2012, compared to losses of $10.5 million and $3.3 million in 2011 and 2010. Fair values have declined as the debt instruments were nearing their maturities. In the fourth quarter of 2012, we also elected the FVO for a floating-rate advance and a gain of $0.4 million was recognized.
· Debt buy back costs — Debt buy-back activity was modest in 2012, and expenses charged to earnings were $24.1 million in 2012, compared to $86.5 million in 2011, and $2.1 million in 2010.
· OTTI charges — Charges were $2.1 million in 2012, compared to $5.6 million in 2011, and $8.3 million in 2010, and we believe credit trends are continuing to improve for our investments in private-label MBS (“PLMBS”).
· Compensation and benefits — Compensation and benefits expenses were $55.3 million in 2012, down from $79.8 million in 2011 and $58.2 million in 2010. In 2012 we benefited from a pension relief measure under a bill enacted by Congress, referred to as MAP 21, which reduced defined benefit pension expense to $1.7 million in 2012. In contrast, we expensed $30.3 million in 2011 and $10.7 million in 2010. For a discussion about MAP-21, see Note 15. Employee Retirement Plans in the audited financial statements in this Form 10-K.
Cash dividends of $4.63 per share of capital stock were paid to stockholders in 2012, compared to $4.70 in 2011, and $5.24 per share in 2010.
Financial Condition
Our mission is to support the liquidity needs of our members. To meet this mission, our strategy is to keep our balance sheet in line with the rise and fall of amounts borrowed by members in the form of advances. Total assets were $103.0 billion at December 31, 2012, compared to $97.7 billion at December 31, 2011. At December 31, 2012, principal amounts of Advances to members increased by $5.3 billion, or 7.9%, to $72.3 billion primarily because of short- and medium-term borrowings by one large member.
Net cash generated from operating activities was in excess of Net income in 2012, 2011 and 2010. Our liquidity position remained in compliance with all regulatory requirements and we do not foresee any changes to that position. We also believe our cash flows from operations, available cash balances and our ability to generate cash through the issuance of consolidated obligation bonds and discount notes are sufficient to fund the FHLBNY’s operating liquidity needs. See discussions around Liquidity Management in this MD&A, specifically, Tables 9.1 - 9.4.
Our capital remains strong. At December 31, 2012, actual risk-based capital was $5.7 billion, compared to required risk-based capital of $0.5 billion. To support $103.0 billion of total assets at December 31, 2012, the required minimum regulatory capital was $4.1 billion, or 4.00% of assets. Our actual regulatory capital was $5.7 billion, exceeding required capital by $1.6 billion. Aggregate capital ratio was at 5.55% or 1.55% more than the 4.00% regulatory minimum. We have prudently increased retained earnings through the period of credit turmoil. Unrestricted Retained earnings have grown to $797.6 million as of December 31, 2012, up from $722.2 million at December 31, 2011, and $712.1 million at December 31, 2010. Restricted retained earnings have grown to $96.2 million at December 31, 2012. AOCI losses, a component of shareholders’ equity, were $199.4 million at December 31, 2012, compared to $190.4 million at December 31, 2011. The losses are unrealized, and largely represent adverse changes in the fair values of interest rate swaps designated as cash flow hedges of several discount note issuance programs that create long-term fixed-rate funding. Fluctuation in long-term swap rates will determine future changes in such balances in AOCI. We expect the long-term hedge programs to remain in place to their contractual maturities, and fair value losses will sum to zero over those periods.
Aside from advances, our primary long-term investment portfolios, comprise primarily of GSE issued MBS, a small portfolio of private-label MBS, bonds issued by state and local government housing agencies, and the MPF portfolio of mortgage loans. Such investments were classified as either held-to-maturity or as available-for-sale. We had no securities designated for trading. Investments in the held-to-maturity portfolio at December 31, 2012, comprised of MBS totaling $10.3 billion, of which 95.0% were GSE or U.S. government issued MBS, and 5.0% private-label MBS ($9.3 billion at December 31, 2011). Housing finance agency bonds in the held-to-maturity portfolio were $737.6 million at December 31, 2012 ($779.9 million at December 31, 2011). MBS investments in the available-for-sale portfolio were almost exclusively GSE issued securities and outstanding balances were $2.3 billion at December 31, 2012 ($3.1 billion at December 31, 2011). Market pricing of GSE-issued investment securities has improved at December 31, 2012, compared to December 31, 2011, as liquidity has gradually returned to the market, and fair values generally generated unrealized gains. Market pricing of our portfolio of private-label securities has generally improved or has remained stable at December 31, 2012, compared to December 31, 2011. For more information about unrealized gains and losses, or changes in balances outstanding and rating information, see Note 5. Held-to-Maturity Securities and Note 6. Available-for-Sale Securities in the audited financial statements in this Form 10-K.
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Our portfolio of mortgage loans was primarily comprised of investments in Mortgage Partnership Finance loans (“MPF” or “MPF Program”). We provide this product to members as another alternative for them to sell their mortgage production, and do not expect the MPF loans to increase substantially. Growth has been steady and moderate. We acquired $772.9 million of new loans in 2012, up from $394.7 million in 2011. Outstanding balances, net of paydowns, were $1.8 billion and $1.4 billion at December 31, 2012 and December 31, 2011, representing 1.8% and 1.4% of total assets at those dates.
We also invest in overnight and short-term federal funds with highly rated financial institutions, allowing us to warehouse and provide balance sheet liquidity to meet unexpected member borrowing demands. During 2012 and 2011, all investments in Federal funds sold were overnight. Table 4.13, in this Form 10-K, summarizes Federal funds sold to counterparties, the counterparty credit ratings, and the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks in the U.S..
We continue to report our on-going analysis of the impact to our business of S&P’s decision last year to lower our long-term credit rating from AAA to AA+. Moody’s has maintained our credit rating at AAA. Both rating agencies also lowered their outlook to negative. The pricing performance of the short- and intermediate-term FHLBank debt has remained stable and we have been able to issue debt to fund our balance sheet needs. We remain optimistic, but we cannot predict the long-term impact, if any, upon our funding costs or our ability to access the capital markets. The downgrade required us to post additional cash collateral starting in August 2011 under the provisions of certain credit support agreements with derivative counterparties because of the downgrade. However, credit support agreements with other derivative counterparties were not impacted because those agreements stipulate that so long, as we retain our GSE status, ratings downgrades would not result in the posting of additional collateral. In summary, the increased collateral posting was easily dealt with and did not impact our liquidity in any significant manner. There were no other significant contracts or covenants for any credit facility or other agreements that were impacted by the downgrade. We have substantial investments in mortgage-backed securities issued by other GSEs and a U.S. agency. The pricing of our portfolios of GSE securities has been stable and was substantially in net unrealized fair value gain positions at December 31, 2012, and the rating downgrade from AAA to AA+ had no material impact on the perceived creditworthiness of instruments issued, insured or guaranteed by institutions linked to the U.S. government. That perception could change, and pricing of MBS issued by the institutions could be correspondingly affected in future periods.
Hurricane Sandy
In our Form10-Q for the period ended September 30, 2012 filed on November 9, 2012, we had reported in Note 21. Subsequent Events that an estimate of the hurricane’s financial effect on the Bank, if any, would be made after an assessment was concluded. We are pleased to report that the hurricane did not impact our business, and we continued to serve our members through these difficult times for our communities in New Jersey and New York. The FHLBNY’s operation center in Jersey City was moved to the New York headquarters due to the impact of Hurricane Sandy. In the interim, we operated with daily tape back-ups of our computer systems and data, and previously arranged back-up mechanisms with two other FHLBanks to provide support services if needed. The FHLBNY re-established a fully functioning back-up data center at a colocation facility in New Jersey in March 2013. The colocation facility provides space, power, cooling, and physical security for the server, storage, and networking equipment. The facility is shared with other firms, and is connected to a variety of telecommunications and network service providers.
Business Outlook
The following forward-looking statements are based upon the current beliefs and expectations of the FHLBNY’s management and are subject to risks and uncertainties, which could cause our actual results to differ materially from those set forth in such forward-looking statements.
Outlook is for lower earnings in 2013 relative to 2012. We expect long-term asset yields to remain low, and we also do not expect yields from short-term assets to rise, given the possibility of further accommodation from the Federal Reserve Board (“FRB”) to lower interest rates. If the forward yield curve flattens any further in 2013, opportunities to invest in high-quality assets and earn a reasonable spread will be limited, constraining earnings. Our primary earning assets, advances and investments in MBS may yield lower interest margins in a low interest rate environment. The FRB has decided to increase policy accommodation by purchasing additional GSE issued mortgage-backed securities until the outlook for the labor market improves. We believe this could result in MBS pricing that may not meet our risk-reward MBS acquisition criteria, which may impact future earnings. The swap curve, an important indicator for us, has continued to decline, and this has the potential for further tightening of the FHLBank debt spreads and weaken our interest margins,
Advances — We are unable to predict the timing and extent of the expected recovery in the U.S. economy, particularly the recovery in the housing market, or whether to expect continued stability in the financial markets. Against that backdrop, we believe it is also difficult to predict member demand for advances, which is the primary focus of our operations and the principal factor that impacts our 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 of alternative funding sources that are more attractive (e.g. consumer deposits), the interest rate environment and the outlook for the economy. Members may choose to prepay advances, 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 investment in our stock. Members are required to invest in our capital stock in the form of membership stock. Members are also required to purchase activity stock 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 our members are acquired by members of another FHLBank or by a non-member, the former member no longer qualifies for
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membership in the FHLBNY. They 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. We expect limited demand for large intermediate-term advances because many members have adequate liquidity, and other members may be reluctant to borrow intermediate and long-term advances because of the expectation of an extended period of very low interest rates. Also, see Item 1A. Risk Factors in this Form 10-K for a discussion on concentration risk.
Pending merger — On August 27, 2012, Hudson City Bancorp, Inc. (“Hudson City Bancorp”), entered into an Agreement and Plan of Merger (“Merger Agreement”) with M&T Bank Corporation and Wilmington Trust Corporation (“WTC”), a wholly owned subsidiary of M&T Bank Corporation. The Merger Agreement provides that FHLBNY member Hudson City Savings Bank, a wholly owned subsidiary of Hudson City Bancorp, will merge with and into FHLBNY member Manufacturers and Traders Trust Company (“M&T Bank”), a wholly owned subsidiary of M&T Bank Corporation, with M&T Bank continuing as the surviving bank. The Merger Agreement is subject to, among other items, shareholder and regulatory approvals. The parties currently anticipate that the closing of the merger transactions will take place in the second quarter of 2013. At December 31, 2012, total advances borrowed by Hudson City Savings Bank were $6.0 billion, or 8.3% of total advances of the FHLBNY. Interest income earned from Hudson City Bancorp in 2012 was $302.6 million. The parties have indicated their intention to pay off these advances upon the closing of the merger transactions.
We do not expect the merger to have a significant adverse impact on our financial position, cash flows or earnings. When advances are early terminated by Hudson City, we expect to receive prepayment fees that will make us economically whole. However, prepayments may cause a decline in our book of business if the terminated advances are not replaced by new borrowings by other members. A lower volume of advances, which is the primary focus of our business, could result in lower net interest income and impact earnings in future periods.
For information about interest income generated from advances borrowed by Hudson City Bancorp, see Note 20. Segment Information and Concentration in the audited financial statements in this Form 10-K.
Earnings — The Federal Reserve Bank’s pledge to keep short-term interest rates low through late 2014 and the impact of a flatter yield curve, taken together have compressed short-term asset yields, substantially reducing the opportunity cost of holding cash. Additionally, as existing high-yielding fixed-rate MBS and some intermediate-term advances continue to pay down, mature or be prepaid, it is unlikely they will be replaced by equivalent high-yielding assets due to the prevailing low interest rates. This will tend to lower the overall yield on total assets. Amid a continuing weak economy and a particularly weak housing market, we do not expect advance demand from existing members to grow. In 2012, a large money-center bank with significant borrowing potential became a member. In the 2012 second quarter, the member’s intermediate-term borrowing benefited our advance business. We are unable to predict if that member’s borrowing will increase, or if the borrowings will be renewed at maturity.
We also earn income from investing our 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. These factors determine the potential earnings from deployed capital, and both factors are subject to change. We 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.
Credit impairment of mortgage-backed securities — OTTI charges have been insignificant thus far. Certain private-label MBS held in our portfolio, which had been rated Triple A at December 31, 2011, were downgraded in the fourth quarter of 2012. Although, our cash flow analysis did not identify OTTI, without continued 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, we could face additional credit losses.
Sovereign credit rating of the United States and impact on the FHLBanks — Rating agencies have stated that the U.S. long-term credit rating could be downgraded again if Congress is unable to work together to make any significant progress toward reducing the trend in the high debt to GDP ratio. If the U.S. long-term credit rating were downgraded, the GSEs would be expected to be downgraded as a result. This could have ramifications on FHLB debt issuance, and ultimately impact the cost of funding advances.
In 2011, Standard & Poor’s Rating Services (“S&P”) lowered its long-term sovereign credit rating on the U.S. to AA+ from AAA. S&P’s outlook on the long-term rating is negative. At the same time, S&P affirmed the A-1+ short-term rating on the U.S. The senior unsecured debt issues of the Federal Home Loan Bank System, and the 12 Federal Home Loan Banks are rated by S&P as AA+ (Long-term rating) with negative outlook. A rating being placed on negative outlook indicates a substantial likelihood of a risk of further downgrades within two years.
S&P, Moody’s and Fitch Ratings have all indicated that they would likely not raise the outlooks and ratings of the FHLB System and/or System Banks above the U.S. sovereign rating. If the ratings on the U.S. were lowered, the ratings on the FHLB System and System Banks whose ratings are equalized to the sovereign rating could also be lowered. We cannot predict with certainty the longer-term impact of these recent rating actions on the FHLBank debt or the consequence of any further rating actions on the cost of our debt. See Rating Actions and Table 6.11 in this MD&A with respect to most recent rating announcements and actions by S&P and Moody’s for the FHLBNY.
Credit ratings of major banks downgraded — Significant concern continues to exist overseas as the European debt crisis persists. The European Commission has recently said that the European economy could virtually “grind to a
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halt” in 2013 and cut its growth expectations for the European region from 1.0% to 0.1% in 2013. Other “euro area” countries such as Greece and Spain also remain in the headlines. A continuation of the Eurozone issues will benefit flight to quality assets, including FHLB debt.
In 2012, rating agencies cut their ratings on certain banking institutions in the United States and Europe. The rating actions did lift some uncertainty and allowed the market to interact with more confidence toward these organizations. The lower ratings raised the cost of capital for certain institutions. It is also important to recognize that many of these financial institutions are not overly reliant on short-term funding for their liquidity and thus changes in financing stemming from the downgrades may not manifest until larger funding needs develop as longer-term debt matures in the future.
Debt Ceiling Suspension Effect on FHLBank Debt — In January 2013, the President signed a bill into law that temporarily suspended the debt ceiling until May 19, 2013. Evidence that market concerns around the debt ceiling had calmed could be seen in FHLBank discount note (DN) indications/execution. Just prior to the enactment of the bill, investors remained concerned about the resolution of the debt ceiling and were less willing to take on assets maturing in the February time period. In mid-January, the FHLBanks indicated a 2-month DN rate of 0.137%—2.5 bps higher than the 3-month DN rate. The weighted average rate (“WAR”) on the 9-week DN was 0.123% versus the 13-week WAR of 0.105%. Even before the bill was signed, and the House proposal was in the works, the DN curve returned to a more normal, continuous upward slope.
Although concerns around the debt ceiling limit have been removed temporarily, continued disagreement in Washington as well as possible negative impacts on economic growth could drive investors back to the safety of Treasuries and out of riskier assets. This could impact FHLBank funding around March/April 2013 reducing dealer support and driving spreads to Treasuries wider.
Demand for FHLBank debt — Our primary source of funds is the sale of consolidated obligations in the capital markets, and our ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, which are beyond our control. If we cannot access funding when needed on acceptable terms, our ability to support and continue operations could be adversely affected, which could negatively affect financial condition and results of operations. The pricing of our longer-term debt remains at levels that are still higher than historical levels, relative to LIBOR. To the extent we receive sub-optimal funding, our member institutions in turn may experience higher costs for advance borrowings. To the extent the FHLBanks may not be able to issue long-term debt at economical spreads relative to the 3-month LIBOR, our members’ borrowing choices may also be limited.
Operation Twist expired at the end of 2012, and the FRB has announced that it will undertake additional quantitative easing. The FRB has also stated that it will link its accommodative monetary policy stance to economic targets such as the unemployment and inflation rates. As opposed to Operation Twist, which was balance sheet neutral due to offsetting sales of short-term securities that the FRB already held, in this round of quantitative easing, the Fed will increase the amount of securities on its balance sheet by undertaking outright purchases of Treasuries. Monthly purchases are estimated at $45 billion per month and will be in conjunction with ongoing purchases of Agency MBS on the order of $40 billion per month. Currently, both purchase programs are open-ended and adjustments to the amount and schedule of purchases will be based on economic conditions as indicated by the FRB.
The FRB’s most recent quantitative easing efforts include the outright purchase of $40 billion in agency MBS per month. This is in addition to the ongoing principal reinvestments that were part of earlier policy action, resulting in total FRB purchases of agency MBS of approximately $75 billion per month. A survey by a major international bank suggests there are currently $5.4 trillion in agency MBS outstanding with the FRB holding approximately $835 billion. The recent quantitative easing will add approximately $500 billion to the FRB’s holdings over the next 12 months in 2013. As the federal government is looking to shrink Fannie Mae and Freddie Mac’s housing finance footprint, the amount of new agency MBS supply may not grow, or issuances may decline. This combined with the FRB’s quantitative easing actions, which appears to more than double its monthly MBS purchases, would lead to higher MBS prices and push spreads even tighter.
For the FHLBanks, the combination of a stable to shrinking supply of Treasuries in the short end and decreasing net supply of Treasuries in the long end, plus additional cash added to the economy could be a near-term positive for funding, as it is likely that investor demand will grow for FHLBank issued debt.
BBA LIBOR rate setting controversy — Government agencies in the U.S., including the Department of Justice, the Commodity Futures Trading Commission, the SEC, and a consortium of state attorneys general, as well as agencies in other jurisdictions, are conducting investigations or making inquiries regarding submissions made by panel banks to bodies that publish various interbank offered rates and other benchmark rates, such as the London Inter-Bank Offered Rate (“LIBOR”). The FHLBanks, including the FHLBNY from time to time issue LIBOR-linked debt securities, and extend LIBOR-linked credit in the form of floating-rate instruments. While these instruments reference LIBOR rate from published sources, the FHLBNY is not a contributor to the published rates.
Impact of Home Affordable Refinance Program (“HARP”) — If a home value has fallen while the mortgage payment on the home has increased, and Fannie Mae or Freddie Mac owns or guarantees the home mortgage, the U.S. government’s Making Home Affordable program provides a refinance option for the home owner. Refinancing can help a homeowner by initiating a new mortgage loan with better terms to pay off and replace the current loan. HARP Refinancing is only available to financially stable borrowers who already have a Fannie Mae or a Freddie Mac mortgage and have been keeping it current for at least the past 12 months. Certain other conditions also apply.
Thus far, HARP has not had any significant impact on our members’ mortgage origination business, which potentially could have a direct impact on our advances or mortgage loan program under the MPF. We are unable to predict with certainty the future impact of this program, if any, on our members’ mortgage origination business.
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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 2012 and 2011 (rates in percent):
Table 1.1: Market Interest Rates
| | December 31, | |
| | 2012 | | 2011 | | 2012 | | 2011 | |
| | Average | | Average | | Ending Rate | | Ending Rate | |
Federal Funds Target Rate (a) | | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % |
Federal Funds Effective Rate (c) | | 0.14 | | 0.10 | | 0.09 | | 0.04 | |
3-Month LIBOR (a) | | 0.43 | | 0.34 | | 0.31 | | 0.58 | |
2-Year U.S.Treasury (a) | | 0.27 | | 0.44 | | 0.25 | | 0.24 | |
5-Year U.S.Treasury (a) | | 0.76 | | 1.51 | | 0.72 | | 0.83 | |
10-Year U.S.Treasury (a) | | 1.79 | | 2.76 | | 1.76 | | 1.88 | |
15-Year Residential Mortgage Note Rate (b) | | 3.15 | | 3.76 | | 2.86 | | 3.37 | |
30-Year Residential Mortgage Note Rate (b) | | 3.84 | | 4.53 | | 3.52 | | 4.07 | |
(a) Source: Office of Finance, Bloomberg L.L.P.
(b) Source: Office of Finance, Average rates calculated using Bloomberg.
(c) Source: Board of Governors Federal Reserve System.
Impact of general level of interest rates on the FHLBNY. The level of interest rates during a reporting period impact our 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, 2012 and 2011, investments, excluding mortgage-backed securities, state and local housing agency obligations, and mortgage loans in the MPF program, had stated maturities of less than one year. We also used derivatives to effectively change the repricing characteristics of a significant proportion of our advances and consolidated obligation debt to match shorter-term LIBOR rates that repriced at intervals of three-month or less. Consequently, the current level of short-term interest rates, as represented by the overnight Federal funds target rate and the 3-month LIBOR rate, has an impact on profitability.
The level of interest rates also directly affects our earnings on invested capital. Compared to other banking institutions, we operate at comparatively low net spreads between the yield we earn on assets and the cost of our liabilities. Therefore, we generate a relatively higher proportion of our 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 our profitability than they do on the profitability of other banking institutions.
In summary, our average asset yields and the returns on capital invested in these assets largely reflect the short-term interest rate environment because the maturities of our 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 profitability. The rate and price at which we are 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 our 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.
Recently Issued Accounting Standards and Interpretations, Change in Accounting Principle 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 2. Recently Issued Accounting Standards and Interpretations.
Change in Accounting Principle
Beginning with the fourth quarter of 2012, the FHLBNY has changed its presentation of the amortization of fair value hedge basis adjustments of modified advances.
From time to time, the FHLBNY will enter into an agreement with a member to modify the terms of an existing advance. If the FHLBNY determines the modification is minor, the subsequent advance is considered a modification of the original advance. If the modified advance is also hedged under a qualifying fair value hedge, the fair value basis adjustment at the modification date will be amortized over the life of the modified advance on a level-yield basis even if the modified advance was designated after modification in a fair value hedge relationship. Prior to the fourth quarter of 2012, the FHLBNY had previously made an accounting policy election to present the amortization of the hedge basis adjustment as a component of Interest income from advances. Beginning in the fourth quarter of 2012, the FHLBNY presented the amortization of fair value basis of the modified hedged advance in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The change
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in presentation is preferable as the Interest income from advances would not be impacted by the amortization if the advance is continuously hedged, and the total Interest income and Net interest income would more closely reflect the economics of the FHLBNY’s interest margin. The preferability of one acceptable method of accounting over another for hedge adjustments to an hedged item, which continues to be hedged when simultaneously dedesignated from one hedge relationship and redesignated into another hedge relationship, has not been addressed in any authoritative accounting literature. The change in presentation had no impact on Net income for any periods in this report since the change impacts only the presentation of the amortization of the hedge basis adjustment. The presentation reflects increases in reported Interest income from Advances within Net interest income by $88.3 million in 2012, $66.8 million in 2011, and $1.8 million in 2010 and corresponding decreases in Net realized and unrealized gains (losses) from derivatives and hedging actives in Other income. The FHLBNY has reclassified the appropriate line items in the Statements of Income for 2011 and 2010 to conform to the presentation adopted in 2012.
Significant Accounting Policies and Estimates
We have identified certain accounting policies that we believe 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, estimating fair values of certain assets and liabilities, evaluating the impairment of our 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. We have 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. Significant Accounting Policies and Estimates in the audited financial statements in this Form 10-K.
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 our 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. Our fair value measurement methodologies for assets and liabilities that are carried at fair value are more fully described in Note 17. Fair Values of Financial Instruments in the audited financial statements accompanying this report.
The FHLBNY complied with the accounting guidance on fair value measurements and disclosures and has established 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 independent sources. Unobservable inputs are inputs that reflect our 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.
Fair values of mortgage-backed securities - In an effort to achieve consistency among the FHLBanks’ pricing of investments of mortgage-backed securities, the 12 FHLBanks have a MBS Pricing Governance Committee (“Pricing Committee”), which is responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks would adopt. In its first guidance, the Pricing Committee established a standard pricing methodology that required the FHLBanks to use four pricing vendors. The adoption of the formulaic methodology in September 2009 enhanced consistency among the 12 FHLBanks.
Consistent with the guidance from the Pricing Committee, we request prices for all mortgage-backed securities from four specific third-party vendors. Depending on the number of prices received from the four vendors for each security, we select a median or average price as defined by the methodology. The methodologies also incorporated variance thresholds to assist in identifying median or average prices that may require our further review. When prices fall outside of variance thresholds, we analyze for reasonableness and incorporate other relevant factors that would be considered by market participants to arrive at a fair value estimate. The analysis may also include dealer price levels. In the fourth quarter of 2011, the pricing methodology was further refined by the Price Committee, and we adopted the change as of December 31, 2011, to introduce the concept of clustering pricing, and to predefine cluster tolerances. An outlier, under the methodology, is any vendor price that is outside of a defined cluster tolerance. A second refinement was the adoption of a formal process to examine yields as an additional method to
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validate prices of PLMBS. An implied yield is calculated for each PLMBS using estimated fair values derived from cash flows on a bond-by-bond basis. This yield is then compared to the implied yield for comparable securities according to price information from third-party MBS “market surveillance reports”.
Fair values of housing finance agency bonds - Fair values of such instruments were computed using third-party vendor prices, which is reviewed by management.
Fair values of mortgage loans in the MPF program - The FHLBNY calculates the fair value of the entire mortgage loan portfolio (held-for-portfolio) 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. The fair values are based on TBA rates (or agency commitment rates), and adjusted primarily for seasonality. The fair values of impaired MPF are also based on TBA rates and are adjusted for a haircut value on the underlying collateral value.
Hedged assets and liabilities - A significant percentage of fixed-rate advances and consolidated obligation debt are hedged to mitigate the risk of fair value changes that are attributable solely to changes in LIBOR, which is our designated benchmark interest rate, and are accounted in a fair value, qualifying hedge accounting. Certain debt and advances elected under the FVO are recorded at their fair values. We have also executed cash flow hedges under qualifying hedge relationships.
To the extent that our valuation models are used to calculate changes in the benchmark fair values of hedged items and to calculate debt and advances elected under the FVO, the inputs to models 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. Generally, we consider inputs for the valuation of our hedged advances and debt, and instruments elected under the FVO to be market based and observable, and Level 2 in the fair value hierarchy.
Our pricing models are subject to quarterly and annual validations, and we periodically review and refine, as appropriate, our assumptions and valuation methodologies to reflect market indications as closely as possible. We have the appropriate personnel, technology, and policies and procedures in place to value our financial instruments in a reasonable and consistent manner and in accordance with established accounting policies.
Fair values of other assets and liabilities - For more information about fair values of other assets and liabilities, see Note 17. Fair Values of Financial Instruments to the audited financial statements in this Form 10-K.
Amortization of Premiums and Accretion of Discounts —Investments and mortgage loans
We estimate 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, we periodically recalculate the effective yield to reflect actual prepayments to date. Adjustments of the effective yields for mortgage-backed securities are recorded on a retrospective basis, 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.
We use 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.
Other-than-temporary impairment (“OTTI”)
We regularly evaluate our investments for impairment and determine 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. 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 likely 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. 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.
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 51 private-label MBS (100 percent) at each quarter-end date in 2012 and 2011. These assumptions and performance measures were benchmarked by comparing to (1) performance parameters from “market consensus”, and for 50
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percent of the PLMBS portfolio to (2) the assumptions and parameters provided by the OTTI Committee. For more information about the techniques, methodologies and controls employed by the FHLBNY in its OTTI assessment, see Note 1. Significant Accounting Policies and Estimates.
OTTI FHLBank System Governance Committee — In 2009, the Finance Agency, the FHLBanks’ regulator, provided the FHLBanks with guidance on the process for determining OTTI with respect to the FHLBanks’ holdings of private-label MBS and for adoption of the guidance for recognition and presentation of OTTI. The goal of the guidance is to promote consistency among all FHLBanks in the process for determining and presenting OTTI for private-label MBS. 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 in 2009, and provides a formal process by which the FHLBanks can provide input on and approve the assumptions.
Role and Scope of the OTTI Governance Committee - The OTTI Committee adopted guidelines that each FHLBank should assess credit impairment by cash flow testing of 100 percent of private-label securities.
Of the 51 private-label MBS owned by the FHLBNY, approximately 50 percent of MBS backed by sub-prime loans, home equity loans, and manufactured housing loans were deemed to be outside the scope of the OTTI Committee because sufficient loan level collateral data was not available to determine the assumptions under the OTTI Committee’s approach described below. 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. There were no material differences between the OTTI Committee and the FHLBNY’s OTTI results.
Although the FHLBNY has engaged the two FHLBanks to perform the cash flow analysis, the FHLBNY is ultimately responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and performing the required present value calculations using appropriate historical cost bases and yields. 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.
A significant input employed by is 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. For more information about projected home price recovery assumptions used, see Table 4.9 in the MD&A.
For additional discussion regarding FHLBank impairment and pricing policies for mortgage-backed securities, see Note 1 to the audited financial statements accompanying this Form 10-K. Also, see Note 5. Held-to-Maturity Securities for information about credit losses due to OTTI.
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.
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. The methodology 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 and projects a “burn out” period.
· Adequate. Monolines determined to possess “adequate” claims paying ability are expected to provide full protection on their insured private-label mortgage-backed securities. Accordingly, bonds insured by monolines with adequate ability to cover written insurance are run with full financial guarantee set to “on” in the cashflow model.
· At Risk. For monolines with at risk coverage, further analysis is performed to establish an expected case regarding the time horizon of the monoline’s ability to fulfill its financial obligations and provide credit support. Accordingly, bonds insured by monolines in the at risk category are run with a partial financial guarantee in the cashflow model. This partial claim paying condition is expressed in the cashflow model by specifying a “coverage ignore” date. The ignore date is based on the “burnout period” calculation method.
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· 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 analysis, the Bank has classified bond insurer FSA (name changed in 2009 to Assured Guaranty Municipal Corp.) as “adequate”, and bond insurers MBIA and Ambac as “at risk”. The Bank’s monoline analysis for MBIA and Ambac at December 31, 2012 concluded that cash flow support for impaired bonds insured by MBIA and Ambac could be relied upon through March 31, 2013 (no-reliance after that date).
| | Burnout Period | |
| | Ambac | | MBIA | |
December 31, 2012 | | | | | |
Burnout period (months) | | — | | 3 | |
Coverage ignore date | | 3/31/2013 | | 3/31/2013 | |
| | | | | |
December 31, 2011 | | | | | |
Burnout period (months) | | — | | 3 | |
Coverage ignore date | | 12/31/2011 | | 3/31/2012 | |
The results of the insurer financial analysis (“monoline burn-out period”) are then incorporated in the third-party cash flow model, as a key input. If the cash flow model projected cash flow shortfalls (credit impairment) on an insured security, the monoline’s burnout period (an end date for credit support), is then input to the cash flow model. The end date, also referred to as the burnout date, provides the necessary information as an input to the cash flow model for the continuation of cash flows up until the burnout date. Any cash flow shortfall that occurs beyond the “burn-out” date is considered not recoverable and the insured security is then deemed credit impaired.
The FHLBNY believes that bond insurance could again become an inherent aspect of credit support within the structure of the security itself, and it is appropriate to include insurance in the FHLBNY’s evaluation of expected cash flows and determination of OTTI in future periods. The FHLBNY has also established that the terms of insurance enable the insurance to travel with the security if the security is sold in the future to support the assertion that bond insurance is a relevant consideration. If the FHLBNY’s monoline analysis determines that bond insurers, Ambac and MBIA, could be deemed fully capable of honoring their insurance pledges, the FHLBNY would renew its reliance on the two monoline insurers for cash flow shortfalls. 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.
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. These assumptions and judgments on our 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. We have policies and procedures in place to manage our credit risk effectively. Outlined below are the underlying assumptions that we use for evaluating our exposure to credit loss.
· Monitoring the creditworthiness and financial condition of the institutions to which we lend 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 our provision for losses on advances. For example, our 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 us to place a member on credit watch and require collateral to be delivered, adjust our current margin requirement, or provide for losses on advances.
The FHLBNY’s loan and collateral agreements give us a security interest in assets held by borrowers that is sufficient to cover their obligations to the FHLBNY. We may supplement this security interest by imposing additional reporting, segregation or delivery requirements on the borrower. We assign specific collateral
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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.
We have 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.
We are 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, and other real estate related assets. We have 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, 2012, 2011 and 2010. At those dates, we had the 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. We have policies and procedures in place to manage our 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.
We assign a mortgage loan a 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. We record 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 90 days or more, or are in bankruptcy status, are segregated from the aggregate pool. Conventional MPF loans (excludes Federal Housing Administration and Veterans Administration insured loans - “insured mortgage loans”), are analyzed under liquidation scenarios on a loan level basis and identified losses are fully reserved. Insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicer defaulting on their obligations. If adversely classified, insured mortgage loans 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. Our management identifies inherent losses through analysis of the conventional loans (loss analysis excludes insured mortgage 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 insured mortgage loans. When a mortgage loan is foreclosed, we 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.
For more information about allowance for credit losses, see Note 8. Mortgage Loans Held-for-portfolio in the audited financial statements in this Form 10-K.
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Accounting for Derivatives
We record and report our hedging activities in accordance with accounting standards for derivatives and hedging. In compliance with the standards, the accounting for derivatives requires us 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. Our 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.
We specifically identify the hedged asset or liability and the associated hedging strategy. Prior to execution of each transaction, we document the following items:
· Hedging strategy
· 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, we execute 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.
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 us to assume that the change in fair value of the hedged item attributable to the benchmark interest rates (LIBOR for us) equals the change in fair value of the derivative during the life of the hedge. We consider 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. Aside from meeting pre-defined criteria, we also believe the conditions of no ineffectiveness are met only if the fair value of the swap is zero on the date we commit to issue the consolidated obligation bond. For more information about the derivatives portfolio at December 31, 2012 and 2011, and the composition of short-cut, long-haul and economic hedges, see Tables 6.3 through 6.5 in this Form 10-K.
For a hedging relationship that does not qualify for the short-cut method, we measure 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. We design effectiveness testing criteria based on our knowledge of the hedged item and hedging instruments that were employed to create the hedging relationship. We use 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.
Hedge Discontinuance. When a hedging relationship fails the effectiveness test, we immediately discontinue hedge accounting. In addition, we discontinue 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. We treat 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. We record 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. We quantify and record 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 we have designated 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 due to nonperformance by counterparties. We are subject to credit risk as a result of nonperformance by counterparties to the derivative agreements. We enter 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 net unsecured credit exposure to these counterparties. We make judgments on each counterparty’s creditworthiness and estimates of collateral values in analyzing counterparty nonperformance credit risk. 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, we (or the derivative counterparty) are exposed to credit risk in the event of a default. Also, to
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the extent that the posted collateral does not equal the replacement fair values of open derivative positions in a scenario such as a default, we (or the derivative counterparty) are exposed to credit risk. All extensions of credit, including those associated with the purchase or sale of derivatives to our members, are fully secured by eligible collateral.
Legislative and Regulatory Developments
The legislative and regulatory environment in which the Bank operates continues to undergo rapid change driven principally by reforms under the Housing and Economic Reform Act of 2008, as amended (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The Bank expects HERA and the Dodd-Frank Act as well as plans for housing finance and GSE reform to result in still further changes to this environment. Business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.
Developments under the Dodd-Frank Act Impacting Derivatives Transactions
The Dodd-Frank Act provides for new statutory and regulatory requirements for derivatives transactions, including those utilized by the Bank to hedge its interest rate and other risks. As a result of these requirements, beginning on June 10, 2013, certain derivatives transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. Derivative transactions that are not required to be cleared will be subject to mandatory reporting, documentation, minimum margin and capital, and other requirements.
Mandatory Clearing. The Commodity Futures Trading Commission (CFTC) issued its first set of mandatory clearing determinations on November 29, 2012 (first mandatory clearing determination), which will subject four classes of interest rate swaps and two classes of credit default swaps to mandatory clearing beginning in the first quarter of 2013.
Certain of the interest rate swaps in which the Bank engages fall within the scope of the first mandatory clearing determination and, as such, the Bank will be required to clear any such swaps. Implementation of the first clearing determination will be phased in; the Bank is classified as a “category 2 entity” and therefore has to comply with the mandatory clearing requirement for the specified interest rate swaps that it executes on or after June 10, 2013. The CFTC is expected to issue additional mandatory clearing determinations in the future with respect to other types of derivatives transactions, which could include certain interest rate swaps entered into by the Bank that are not within the scope of the first mandatory clearing determination.
The CFTC has approved an end-user exception to mandatory clearing that would exempt derivatives transactions that we may enter into with our members that have $10 billion or less in assets; the exception applies only if the member uses the swaps to hedge or mitigate its commercial risk and the reporting counterparty for such swaps complies with certain additional reporting requirements. As a result, any such member swaps would not be subject to mandatory clearing, although such swaps may be subject to applicable new requirements for derivatives transactions that are not subject to mandatory clearing requirements (uncleared trades).
Collateral Requirements for Cleared Swaps. Cleared swaps will be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps may reduce counterparty credit risk, the margin requirements for cleared swaps have the potential of making derivative transactions more costly. In addition, mandatory clearing will require the Bank to enter into new relationships and accompanying documentation with clearing members and additional documentation with the Bank’s swap counterparties which the Bank is currently negotiating.
The CFTC has issued a final rule requiring that collateral posted by swap customers to a clearinghouse in connection with cleared swaps be legally segregated on a customer-by-customer basis (the LSOC Model). Pursuant to the LSOC Model, although customer collateral must be segregated on an individual customer basis on the books of a futures commission merchant (FCM) and derivatives clearing organization, it may be commingled with the collateral of other customers of the same FCM in one physical account. The LSOC model affords greater protection to collateral posted for cleared swaps than is currently afforded to collateral posted for futures contracts. However, because of operational and investment risks inherent in the LSOC Model, and because of certain provisions applicable to FCM insolvencies under the U.S. Bankruptcy Code, the LSOC Model does not afford complete protection to cleared swaps customer collateral in the event of an FCM insolvency. Accordingly, a major
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consideration in the Bank’s decision to establish and maintain a clearing relationship with an FCM is our assessment of the financial soundness of the FCM.
Definitions of Certain Terms under New Derivatives Requirements. The Dodd-Frank Act requires swap dealers and certain other large users of derivatives to register as “swap dealers” or “major swap participants,” as the case may be, with the CFTC and/or the SEC. Although the Bank has a substantial portfolio of derivatives transactions that are entered into for hedging purposes, and engages in some intermediated swaps with its members, based on the definitions in the final rules jointly issued by the CFTC and the SEC in April 2012, we do not expect to be required to register as either a major swap participant or as a swap dealer.
Margin for Uncleared Derivatives Transactions. The Dodd-Frank Act will also change the regulatory landscape for derivatives transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to continue to enter into uncleared trades on a bilateral basis, such trades will be subject to new regulatory requirements, including mandatory reporting, documentation, minimum margin and capital, and other requirements. The CFTC, the FHFA and other federal bank regulators proposed margin requirements for uncleared trades in 2011. Under the proposed margin rules, the Bank would have to post both initial margin and variation margin to the Bank’s swap dealer and major swap participant counterparties, but may be eligible in both instances for modest unsecured thresholds as “low-risk financial end users.” Pursuant to additional FHFA provisions, the Bank would be required to collect both initial margin and variation margin from the Bank’s swap dealer counterparties, without any unsecured thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivatives transactions entered into by the Bank, making such trades more costly. Final margin rules are not expected until the second quarter of 2013 at the earliest and, accordingly, it is not likely that the Bank will have to comply with such requirements until the end of 2013.
Documentation for Uncleared Transactions. Certain of the CFTC’s final rules, once effective, will require the Bank to amend its existing bilateral swap documentation with swap dealers. To facilitate amendment of the agreements, the International Swap and Derivatives Association (ISDA) has initiated a protocol process, which allows multiple counterparty adherents to the same protocol to amend existing bilateral documentation with other adhering counterparties without having to negotiate changes to individual agreements. The first of these protocols is the August 2012 Protocol, which addressed documentation changes required by the CFTC’s adoption in February 2012 of final external business conduct standards and other requirements imposed on swap dealers and major swap participants when dealing with counterparties. The external business conduct standards rules prohibit certain abusive practices and require disclosure of certain material information to counterparties. In addition, swap dealers and major swap participants must conduct due diligence relating to their dealings with counterparties. In order to facilitate compliance with the external business conduct standards, swap dealers and major swap participants have sought to amend their existing swap documentation with counterparties. The original compliance date for swap dealers and major swap participants to comply with the external business standards was October 14, 2012, but that deadline has been extended twice and is now May 1, 2013. On November 14, 2012, the Bank submitted to ISDA its letter confirming the Bank’s adherence to the ISDA August 2012 Protocol which addresses the new documentation requirements under the external business conduct rules. The Bank expects to effect the necessary amendments to all agreements under that protocol in time to meet the deadline.
In September 2012 the CFTC finalized rules regarding certain new documentation requirements for uncleared trades, including requirements for new dispute resolution provisions, new portfolio valuation and reconciliation provisions, new representations regarding applicable insolvency regimes and possible changes to our existing credit support arrangements with our swap dealer counterparties. ISDA has published a second protocol in draft to address these new documentation requirements, and the Bank is currently evaluating the protocol’s provisions. Our swap documentation with swap dealers must comply with certain of the requirements contained in the September 2012 CFTC rules by July 1, 2013. The final rules also impose requirements with respect to when swap dealers and major swap participants must deliver acknowledgments of, and execute confirmations for, uncleared trades with us. These timing requirements will be phased in between December 31, 2012 and March 1, 2014.
Additional changes to our swap documentation are expected to be required by additional Dodd-Frank Act rules that have not yet been finalized, including the margin requirements for uncleared swaps. We will consider adhering to future ISDA protocols to address the foregoing requirements.
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Recordkeeping and Reporting. Compliance dates for the new recordkeeping and reporting requirements for all of our cleared and uncleared swaps have now been established. We currently comply with recordkeeping requirements for our swaps that were in effect on or after July 21, 2010 and, beginning on April 10, 2013, we will have to comply with new record-keeping requirements for swaps entered into on or after April 10, 2013. For interest rate swaps that we enter into with swap dealers, the swap dealers are currently required to comply with reporting requirements applicable to such swaps, including real-time reporting requirements. We will be required to comply with reporting requirements, including real-time reporting requirements, for any swaps that we may intermediate for our members beginning on April 10, 2013.
We, together with the other FHLBanks, will continue to monitor the Dodd-Frank Act rulemakings and the overall regulatory process to implement the derivatives reforms prescribed by that legislation. We will also continue to work with the other FHLBs to implement the processes and documentation necessary to comply with the Dodd-Frank Act’s new requirements for derivatives. In addition, as the regulatory regime for derivatives transactions created by the Dodd-Frank Act takes shape, the Bank may elect to hedge some or all of its interest rate and other risks by utilizing derivatives transactions that are not subject to regulation under the Dodd-Frank Act, such as futures contracts.
Developments Impacting Systemically Important Nonbank Financial Companies
Final Rule and Guidance on the Supervision and Regulation of Certain Nonbank Financial Companies. The Financial Stability Oversight Council (the Oversight Council) issued a final rule and guidance effective May 11, 2012 on the standards and procedures the Oversight Council employs in determining whether to designate a nonbank financial company for supervision by the Federal Reserve and to be subject to certain, prudential standards. The guidance issued with this final rule provides that the Oversight Council expects to use process in making its determinations consisting of:
· A first stage that will identify those nonbank financial companies that have $50 billion or more of total consolidated assets (as of December 31, 2012, the Bank had $103 billion in total assets) and exceed any one of five threshold indicators of interconnectedness or susceptibility to material financial distress, including whether a company has $20 billion or more in total debt outstanding. As of December 31, 2012, the Bank had $95 billion in total outstanding consolidated obligations, the Bank’s principal form of outstanding debt;
· A second stage involving a robust analysis of the potential threat that the subject nonbank financial company could pose to U.S. financial stability based on additional quantitative and qualitative factors that are both industry and company specific; and
· A third stage analyzing the subject nonbank financial company using information collected directly from it.
The final rule provides that, in making its determinations, the Oversight Council will consider as one factor whether the nonbank financial company is subject to oversight by a primary financial regulatory agency (for the Bank, the Finance Agency). A nonbank financial company that the Oversight Council proposes to designate for additional supervision (for example, periodic stress testing) and prudential standards (such as heightened liquidity or capital requirements) under this rule has the opportunity to contest the designation. If the Bank is designated by the Oversight Council for supervision by the Federal Reserve and subject to additional Federal Reserve prudential standards, then the Bank’s operations and business could be adversely impacted by any resulting additional costs, liquidity or capital requirements, and/or restrictions on business activities.
Oversight Council Recommendations Regarding Money Market Mutual Fund (MMF) Reform. The Oversight Council requested comments with a comment deadline of February 15, 2013 on certain proposed recommendations for structural reforms of MMFs. The Oversight Council has stated that such reforms are intended to address the structural vulnerabilities of MMFs. The demand for System COs may be impacted by the structural reform ultimately adopted. Accordingly, such reforms could cause our funding costs to rise or otherwise adversely impact market access and, in turn, adversely impact our results of operations.
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Significant Finance Agency Developments
Final Rules
Finance Agency Final Rule on Prudential Management and Operations Standards. On June 8, 2012, the Finance Agency issued a final rule, as required by HERA, regarding prudential standards for the operation and management of the FHLBanks, including among other things, internal controls and information systems, internal audit systems, market and interest rate risks, liquidity, asset growth, investments, credit and counterparty risk management, and records maintenance. The rule requires an FHLBank that fails to meet a standard to file a corrective action plan with the Finance Agency within 30 calendar days or such other time period as the Finance Agency establishes. If an acceptable corrective action plan is not submitted by the deadline or the terms of such a plan are not complied within material respects, the Director of the Finance Agency can impose sanctions, such as limits on asset growth, increases in the level of retained earnings, and prohibitions on dividends or the redemption or repurchase of capital stock. The final rule became effective August 7, 2012.
Proposed Rules
Proposed Guidance on Collateralization of Advances and Other Credit Products Provided to Insurance Company Members. On October 5, 2012, the Finance Agency published a notice requesting comments with a comment deadline of December 4, 2012 on a proposed Advisory Bulletin which set forth standards to guide the Finance Agency in its supervision of secured lending to insurance company members by the FHLBanks. The Finance Agency’s notice provides that lending to insurance company members exposes FHLBanks to risks that are not associated with advances to the insured depository institution members, arising from the different states’ statutory and regulatory regimes and the statutory accounting principles and reporting practices applicable to insurance companies. The proposed standards include consideration of, among other things:
· the level of an FHLBank’s exposure to insurance companies in relation to its capital structure and retained earnings;
· an FHLBank’s control of pledged securities collateral and ensuring it has a first-priority perfected security interest;
· the use of funding agreements between an FHLBank and an insurance company member to document advances and whether such an FHLBank would be recognized as a secured creditor with a first priority security interest in the collateral; and
· the FHLBank’s documented framework, procedures, methodologies and standards to evaluate an insurance company member’s creditworthiness and financial condition, the FHLBank valuation of the pledged collateral and whether an FHLBank has a written plan for the liquidation of insurance company member collateral.
Advance Notice of Proposed Rulemaking on Stress-Testing Requirements. On October 5, 2012, the Finance Agency issued a notice of proposed rulemaking with a comment deadline of December 4, 2012 that would implement a provision in the Dodd-Frank Act that requires all financial companies with assets over $10 billion to conduct annual stress tests, which will be used to evaluate an institution’s capital adequacy under various economic conditions and financial conditions. The Finance Agency proposes to issue annual guidance to describe the baseline, adverse and severely adverse scenarios and methodologies that the FHLBanks must follow in conducting their stress tests, which, as required by the Dodd-Frank Act, would be generally consistent and comparable to those established by the Federal Reserve. An FHLBank would be required to provide an annual report on the results of the stress tests to the Finance Agency and the Federal Reserve and to then publicly disclose a summary of such report within 90 days.
Other Matters
Updates to Strategic Plans Regarding Core Mission Assets. The FHLBanks have been informed by the Finance Agency that they will be required to submit to the Agency by October 31, 2013 an addendum to each of their strategic plans defining core mission assets, identifying core mission asset benchmarks, including outstanding
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advance levels as a percentage of assets, and establishing limits on AMA balances. These addenda will include action steps and time frames for achieving these goals. We cannot say at this time what impact, if any, the implementation of actions in this addendum may have on the Bank’s product offerings, earnings, and financial condition.
Other Significant Developments
Consumer Financial Protection Bureau (CFPB) Final Qualified Mortgage Rule. The CFPB issued a final rule with an effective date of January 14, 2014 establishing new standards for mortgage lenders to follow during the loan approval process to determine whether a borrower can afford to repay the mortgage. Lenders are now required to consider whether a borrower has the ability to repay certain loans such as home equity lines of credit, timeshare plans, reverse mortgages, and temporary loans. The final rule provides for a rebuttable safe harbor from consumer claims that a lender did not adequately consider whether a consumer can afford to repay the lender’s mortgage, provided that the mortgage meets the requirements to be considered a Qualified Mortgage loan (“QM”). QMs are home loans that are either eligible for Fannie Mae or Freddie Mac to purchase or otherwise satisfy certain underwriting standards. The standards require lenders to consider, among other factors, the borrower’s current income, current employment status, credit history, monthly payment for mortgage, monthly payment for other loan obligations, and the borrower’s total debt-to-income ratio. Further, the underwriting standards for a QM prohibit loans with excessive points and fees, interest-only or negative-amortization features (subject to limited exceptions), or terms greater than 30 years. On the same date as it issued the final Ability to Repay/final QM standards, the CFPB also issued a proposal that would allow small creditors (generally those with assets under $2 billion) in rural or underserved areas to treat first lien balloon mortgage loans that they offer as QM mortgages. Comments were due February 25, 2013.
The safe harbor from liability for QMs could incent lenders, including the Bank’s members, to limit their mortgage lending to QMs or otherwise reduce their origination of mortgage loans that are not QMs. This could reduce the overall level of members’ mortgage loan lending and, in turn, reduce demand for FHLBank advances. Additionally, the value and marketability of mortgage loans that are not QMs, including those pledged as collateral to secure member advances, may be adversely affected.
Basel Committee on Banking Supervision —Liquidity Framework. On January 6, 2013 the Basel Committee announced amendments to the Basel liquidity standards, including the Liquidity Coverage Ratio (LCR). The amendment includes the following: 1) revisions to the definition of high quality liquid assets (HQLA) and net cash outflows; 2) a timetable for phase-in of the standard; 3) a reaffirmation of the usability of the stock of liquid assets in periods of stress, including during the transition period; and 4) an agreement for the Basel Committee to conduct further work on the interaction between the LCR and the provision of central bank facilities. Under the amendment, the LCR buffer could rest at 60% of outflows over a 30-day period when the rule becomes effective in 2015, and then increase steadily until reaching 100% four years later. The definition of HQLA has been amended to expand the eligible assets, including residential mortgage assets. In late February, it was reported that the U.S. banking regulators expect to customize the BASEL III liquidity rules and expect to issue their final rules later in 2013.
Basel Committee on Banking Supervision Capital Framework. In September 2010, the Basel Committee on Banking Supervision (the Basel Committee) approved a new capital framework for internationally active banks. Banks subject to the new framework will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses.
On June 7, 2012, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the Agencies) concurrently published three joint notices of proposed rulemaking (the NPRs) seeking comments on comprehensive revisions to the Agencies’ capital framework to incorporate the Basel Committee’s new capital framework. These revisions, among other things, would have:
implemented the Basel Committee’s capital standards related to minimum requirements, regulatory capital, and
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additional capital buffers;
revised the methodologies for calculating risk-weighted assets in the general risk-based capital rules, including residential mortgage assets; and
revised the approach by which large banks determine their capital adequacy.
On November 9, 2012, the federal banking regulators announced that they were indefinitely delaying the effective date for the implementation of the Basel III capital requirements.
National Credit Union Administration (NCUA) Proposed Rule on Access to Emergency Liquidity. On July 30, 2012, the NCUA published a proposed rule with a comment deadline of September 28, 2012, requiring, among other things, that federally-insured credit unions of $100 million or larger must maintain access to at least one federal liquidity source for use in times of financial emergency and distressed circumstances. This access must be demonstrated through direct or indirect membership in the Central Liquidity Facility (a U.S. government corporation created to improve the general financial stability of credit unions by serving as a liquidity lender to credit unions) or by establishing access to the Federal Reserve’s discount window. The proposed rule does not include FHLBank membership as an emergency liquidity source. If the rule is issued as proposed, it may adversely impact the Bank’s results of operations if it causes the Bank’s federally-insured credit union members to favor these federal liquidity sources over FHLBank membership or advances.
HARP, HAMP and Other Foreclosure Prevention Efforts. In 2012, the Finance Agency, Fannie Mae, and Freddie Mac announced a series of changes that were intended to assist more eligible borrowers who can benefit from refinancing their home mortgages. The changes include lowering or eliminating certain risk-based fees, removing the current 125 percent loan-to-value ceiling on fixed-rate mortgages that are purchased by Fannie Mae and Freddie Mac, waiving certain representations and warranties, eliminating the need for a new property appraisal and extending the end date for the program until December 31, 2013 for loans originally sold to Fannie Mae and Freddie Mac on or before May 31, 2009.
Other federal agencies have also implemented other programs during the past few years intended to prevent foreclosure. These programs focus on lowering a home owner’s monthly payments through mortgage modifications or refinancings, providing temporary reductions or suspensions of mortgage payments, and helping homeowners transition to more affordable housing. Other proposals such as expansive principal writedowns or principal forgiveness (including new short-sale/deed in lieu of foreclosure programs recently discussed), or converting delinquent borrowers into renters and conveying the properties to investors, have gained some popularity as well. If the Finance Agency requires us to offer a similar refinancing option for our investments in mortgage loans, our income from those investments could decline.
Further, settlements announced in 2013 and 2012 with the banking regulators, the federal government and the nation’s largest mortgage servicers and states attorneys’ general are also likely to focus on loan modifications and principal write-downs. In late January, 2013 the Treasury department announced that it is expanding refinancing programs for homeowners whose mortgages are greater than their home value to include mortgages underlying PLMBS. These programs, proposals and settlements could ultimately impact investments in MBS, including the timing and amount of cash flows the Bank realizes from those investments. The Bank monitors these developments and assesses the potential impact of relevant developments on investments, including private-label MBS as well as on the Bank’s securities and loan collateral and on the creditworthiness of any members that could be impacted by these issues. The Bank continues to update models, including the models the Bank uses to analyze investments in private label MBS, based on these types of developments. Additional developments could result in further increases to loss projections from these investments.
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Additionally, these developments could result in a significant number of prepayments on mortgage loans underlying investments in Agency MBS. If that should occur, these investments would be paid off in advance of original expectations subjecting the Bank to resulting premium acceleration and reinvestment risk.
Housing Finance and Housing GSE Reform. The new Congress is expected to continue consideration of possible reforms to the secondary mortgage market, including the resolution of Fannie Mae and Freddie Mac (together, the Enterprises). During the last Congress, at least ten separate bills were introduced in the House of Representatives that would have affected the Enterprises in a variety of significant ways. While none of the bills would have directly impacted the FHLBanks, it is expected the that legislation to reform housing finance and housing GSEs (including the FHLBanks and the Enterprises) will again be a high priority in the House Financial Services Committee and the Senate Banking Committee. Any changes to the U.S. housing finance system could have consequences for the FHLBanks as we seek to provide access to liquidity for our members.
Outside of Congress, several Federal agencies have taken action over the past year to lay the groundwork for a new U.S. housing finance structure. In February 2012, the Finance Agency announced a Strategic Plan that declared the Enterprises are no longer “financially viable” and unveiled plans to create a single securitization platform and establish national standards for mortgage securitization. In the summer of 2012, the U.S. Treasury Department (Treasury Department) announced a set of modifications to the preferred stock purchase agreements between the Treasury Department and the Finance Agency as conservator of Fannie Mae and Freddie Mac to help expedite the wind down of the Enterprises. The changes required all future earnings from the Enterprises to be turned over to the Treasury Department and require the accelerated wind down of their retained mortgage portfolios. By not allowing the Enterprises to retain any profits, these changes effectively ensure that the Enterprises will never be allowed to re-capitalize themselves and return to the market in their previous structure. While it is unclear how quickly the Enterprises might be wound down, it is apparent from these actions that changes to the U.S. mortgage finance system could occur in the not too distant future. However, it is impossible to determine at this time whether or when Congress or the Administration may act on housing GSE or housing finance reform. The ultimate effects of these efforts on the FHLBanks are unknown and will depend on the legislation or other changes, if any, that ultimately are implemented.
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Financial Condition (dollars in thousands):
Table 2.1: Statements of Condition — Year-Over-Year Comparison
| | | | | | Net change in | | Net change in | |
(Dollars in thousands) | | December 31, 2012 | | December 31, 2011 | | dollar amount | | percentage | |
Assets | | | | | | | | | |
Cash and due from banks | | $ | 7,553,188 | | $ | 10,877,790 | | $ | (3,324,602 | ) | (30.56 | )% |
Federal funds sold | | 4,091,000 | | 970,000 | | 3,121,000 | | NM | |
Available-for-sale securities | | 2,308,774 | | 3,142,636 | | (833,862 | ) | (26.53 | ) |
Held-to-maturity securities | | 11,058,764 | | 10,123,805 | | 934,959 | | 9.24 | |
Advances | | 75,888,001 | | 70,863,777 | | 5,024,224 | | 7.09 | |
Mortgage loans held-for-portfolio | | 1,842,816 | | 1,408,460 | | 434,356 | | 30.84 | |
Derivative assets | | 41,894 | | 25,131 | | 16,763 | | 66.70 | |
Other assets | | 204,363 | | 250,741 | | (46,378 | ) | (18.50 | ) |
Total assets | | $ | 102,988,800 | | $ | 97,662,340 | | $ | 5,326,460 | | 5.45 | % |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Deposits | | | | | | | | | |
Interest-bearing demand | | $ | 1,994,974 | | $ | 2,066,598 | | $ | (71,624 | ) | (3.47 | )% |
Non-interest-bearing demand | | 19,537 | | 12,450 | | 7,087 | | 56.92 | |
Term | | 40,000 | | 22,000 | | 18,000 | | 81.82 | |
Total deposits | | 2,054,511 | | 2,101,048 | | (46,537 | ) | (2.21 | ) |
| | | | | | | | | |
Consolidated obligations | | | | | | | | | |
Bonds | | 64,784,321 | | 67,440,522 | | (2,656,201 | ) | (3.94 | ) |
Discount notes | | 29,779,947 | | 22,123,325 | | 7,656,622 | | 34.61 | |
Total consolidated obligations | | 94,564,268 | | 89,563,847 | | 5,000,421 | | 5.58 | |
| | | | | | | | | |
Mandatorily redeemable capital stock | | 23,143 | | 54,827 | | (31,684 | ) | (57.79 | ) |
| | | | | | | | | |
Derivative liabilities | | 426,788 | | 486,166 | | (59,378 | ) | (12.21 | ) |
Other liabilities | | 428,261 | | 410,041 | | 18,220 | | 4.44 | |
Total liabilities | | 97,496,971 | | 92,615,929 | | 4,881,042 | | 5.27 | |
Capital | | 5,491,829 | | 5,046,411 | | 445,418 | | 8.83 | |
Total liabilities and capital | | $ | 102,988,800 | | $ | 97,662,340 | | $ | 5,326,460 | | 5.45 | % |
Balance sheet overview 2012 compared to 2011
Our mission is to support the liquidity needs of our members. To meet this mission, our balance sheet strategy is to keep our balance sheet in line with the rise and fall of amounts borrowed by members in the form of advances. Total assets were $103.0 billion at December 31, 2012, compared to $97.7 billion at December 31, 2011. Principal amounts of Advances to members increased to $72.3 billion, compared to $67.0 billion at December 31, 2011. Aside from advances, our primary earning assets were investment portfolios, comprising primarily of GSE-issued mortgage-backed securities, and overnight Federal funds sold. We also hold small portfolios of private-label MBS, bonds issued by state and local government housing agencies, and mortgage loans in the MPF program.
Advances — Advances have increased at December 31, 2012, compared to December 31, 2011, primarily because of short- and intermediate-term borrowing by one large member in the second quarter of 2012.
Table 2.2: Advance Trends
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Investments — Our investment strategies were limited to investments in mortgage-backed securities (“MBS”) issued by GSEs and U.S. government agencies. Acquisitions even in such securities were made only when they met our risk-reward preferences.
The rating downgrade in 2011 of the U.S. and government-related organizations, including Fannie Mae and Freddie Mac, had no adverse impact on the fair values of our investments in GSE issued MBS, and valuations were substantially in net unrealized fair value gain positions at December 31, 2012. Future downgrades could alter the perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government, and securities issued by the institutions could also be correspondingly affected by such a downgrade. Instruments of this nature are key assets on our balance sheet, and credit downgrades may also adversely affect the market value of such instruments.
Fair values of the private-label MBS (“PLMBS”) have also been stable, and unrealized holding losses have steadily declined through December 31, 2012, compared to December 31, 2011. OTTI has been insignificant in 2012. All PLMBS are held-to-maturity investments, and their fair values are not recorded on the balance sheet on a recurring basis. When a security is determined to be OTTI, and if its carrying value is written down to its fair value, the security’s carrying value will be recorded on the balance sheet at its fair value on a non-recurring basis. For more information about fair values of AFS and HTM securities, see Note 17. Fair Values of Financial Instruments in the audited financial statements in this Form 10-K.
Leverage — At December 31, 2012, balance sheet leverage was 18.8 times shareholders’ equity, a little lower than 19.4 at December 31, 2011. Our balance sheet management strategy is to keep the balance sheet change in line with the changes in member demand for advances, although from time to time, we may maintain excess liquidity in highly liquid investments or cash balances at the FRB to meet unexpected member demand for funds. Increases or decreases in investments have a direct impact on leverage, but generally growth in or shrinkage of advances does not significantly impact balance sheet leverage under existing capital stock management practices. 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 our existing capital management practices, members are required to purchase capital stock to support their borrowings from us, and when capital stock is in excess of the amount that is required to support advance borrowings, we redeem the excess capital stock immediately. Therefore, stockholders’ capital increases and decreases with members’ advance borrowings, and the capital to asset ratios remain relatively unchanged.
Debt — Our primary source of funds continued to be through the 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.
Our ability to access the capital markets and other sources of funding, which has a direct impact on our cost of funds, are dependent to a degree on our credit ratings from the major ratings organizations. In 2011, S&P lowered the long-term rating of the senior unsecured debt issues of the Federal Home Loan Bank System to “AA+” from “AAA”, and also revised the rating outlook of the debt to negative. A rating being placed on negative outlook indicates a substantial likelihood of a risk of further downgrades within two years. Although the FHLBank debt performance has withstood the impact of the rating downgrade, and investor preference for the high quality of our debt has in fact grown stronger, we cannot say with certainty the long-term impact of such actions on our liquidity position, which could be adversely affected by many causes both internal and external to our business. For more information, see Business Outlook in the MD&A in this report.
Liquidity and Short-term Debt — The following table summarizes our short-term debt (in thousands). Also see Tables 9.1 — 9.4 for additional information.
Table 2.3: Short—term Debt
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Consolidated obligations-discount notes (a) | | $ | 29,779,947 | | $ | 22,123,325 | |
Consolidated obligations-bonds with original maturities of one year or less (b) | | $ | 15,600,000 | | $ | 15,125,000 | |
(a) Outstanding at end of the period - carrying value
(b) Outstanding at end of the period - par value
Our liquid assets included cash at the FRB, Federal funds sold, and a portfolio of highly-rated GSE securities that are available-for-sale. Our GSE status enables the FHLBanks to fund our consolidated obligation debt at tight margins to U.S. Treasury. These are discussed in more detail under “Debt Financing Activity and Consolidated Obligations” in this MD&A. Our liquidity position remains strong and in compliance with all regulatory requirements, and we do not foresee any changes to that position.
Among other liquidity measures, we are required to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. The first scenario assumes that we cannot access capital markets for 15 days and that during that period, members do not renew their maturing, prepaid and called advances. The second scenario assumes that we cannot access the capital markets for five days, and during that period, members renew maturing and “put” advances. We were in compliance with regulations under both scenarios.
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We also have other liquidity measures in place — Deposit Liquidity and Operational Liquidity, both of which indicated that our liquidity buffers were in excess of required reserves. For more information about our liquidity measures, please see section “Liquidity, Cash Flows, Short-Term Borrowings and Short-Term Debt” in this MD&A.
Advances
Our primary business is making collateralized loans to members, referred to as advances. Generally, the growth or decline in advances is reflective of demand by members for both short-term liquidity and term funding. This demand is driven by economic factors such as availability of alternative funding sources that are more attractive, or by the interest rate environment and the outlook for the economy. Members may choose to prepay advances (which may generate prepayment penalty fees) based on their expectations of interest rate changes and demand for liquidity. Advance volume is also influenced by merger activity, where members are either acquired by non-members or acquired by members of another FHLBank. When our members are acquired by members of another FHLBank or by non-members, these former members no longer qualify for membership and we may not offer renewals or additional advances to the former members. Subsequent to the merger, maturing advances will not be replaced, which has an immediate impact on short-term and overnight lending if the former member borrowed short-term and overnight advances.
At December 31, 2012, par amounts of advances were $72.3 billion, up $5.3 billion from the balances at December 31, 2011. The increase is primarily because of short-term borrowing by a large-member in the second quarter of 2012. That same member borrowed another $500.0 million in the fourth quarter of 2012. Most of the borrowings by the large member will mature by the third quarter in 2013, and remaining advances borrowed by the large member will mature by the second quarter of 2014.
Prepayments by members totaled $1.6 billion in 2012, compared to $12.3 billion on 2011. Prepayment fees recorded in Interest income, net of the settlement values of prepaid advances, were $16.6 million in 2012, down from $109.2 million in 2011.
Advances — Product Types
The following table summarizes par values of advances by product type (dollars in thousands):
Table 3.1: Advances by Product Type
| | December 31, 2012 | | December 31, 2011 | |
| | | | Percentage | | | | Percentage | |
| | Amounts | | of Total | | Amounts | | of Total | |
| | | | | | | | | |
Adjustable Rate Credit - ARCs | | $ | 14,960,800 | | 20.69 | % | $ | 6,270,500 | | 9.36 | % |
Fixed Rate Advances | | 47,067,640 | | 65.11 | | 53,561,735 | | 79.96 | |
Short-Term Advances | | 6,062,000 | | 8.39 | | 4,202,360 | | 6.27 | |
Mortgage Matched Advances | | 369,925 | | 0.51 | | 438,033 | | 0.65 | |
Overnight & Line of Credit (OLOC) Advances | | 2,332,740 | | 3.23 | | 1,480,075 | | 2.21 | |
All other categories | | 1,498,998 | | 2.07 | | 1,036,199 | | 1.55 | |
| | | | | | | | | |
Total par value | | 72,292,103 | | 100.00 | % | 66,988,902 | | 100.00 | % |
| | | | | | | | | |
Discount on AHP Advances | | — | | | | (15 | ) | | |
Hedge value basis adjustments | | 3,595,396 | | | | 3,874,890 | | | |
Fair value option valuation adjustments and accrued interest | | 502 | | | | — | | | |
| | | | | | | | | |
Total | | $ | 75,888,001 | | | | $ | 70,863,777 | | | |
Member demand for advance products
The majority of members are staying short with their borrowing preference primarily because of interest-rate uncertainties. Other members appear to be taking advantage of prevailing low interest rates and borrowing advances with longer maturities.
Adjustable Rate Advances (“ARC Advances”) — One large member’s borrowing in 2012 accounted for the increase in this category, and until then ARC advances had remained relatively stable, with members renewing maturing advances. The new ARC borrowings will mature primarily in the third quarter of 2013, unless modified earlier.
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, remain the largest category of advances.
Member demand for fixed-rate advances has remained soft in 2012, and has declined from the amounts outstanding at December 31, 2011. On aggregate, when maturing and prepaid fixed-rate advances have been replaced, members have borrowed short- and medium-term advances, as members remain uncertain about locking into long-term advances, perhaps because of unfavorable pricing of longer-term advances, an uncertain outlook on the direction and timing of interest rate changes, or lukewarm demand from members’ customer base for longer-term fixed-rate loans.
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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. A significant composition of Fixed-rate advances consists of advances with a “put” option feature (“putable advance”). Historically, Fixed-rate putable advances have been more competitively priced relative to fixed-rate “bullet” advances (without put option) because of the “put” feature that we have purchased from the member, driving down the coupon on the advance. The price advantage of a putable advance increases with the numbers of puts sold and the length of the term of a putable advance. With a putable advance, we have the right to exercise the put option and terminate the advance at predetermined exercise date(s). We would normally exercise this option when interest rates rise, and the borrower may then apply for a new advance at the then-prevailing coupon and terms. In the present interest rate environment, the price advantage has not been significant because of constraints in offering longer-term-advances. Maturing and prepaid putable advances were either not replaced or replaced by bullet advances (without the put feature), and outstanding balances have declined steadily in each of the quarters in 2012, and stood at $16.2 billion at December 31, 2012, compared to $18.3 billion at December 31, 2011.
Short-term Advances — Borrowing activity has been uneven in the four quarters in 2012. Outstanding amounts were $6.1 billion at December 31, 2012, down from $7.6 billion at September 30, 2012, and up from $5.3 billion at June 30, 2012 and $4.2 billion at December 31, 2011. At March 31, 2012, balances had grown to $7.1 billion mainly because one large member’s borrowing activity in the first quarter of 2012, which, as anticipated, was paid down at maturity in the second quarter of 2012. Members have generally borrowed short-term advances to take advantage of the current low coupons to replace maturing medium- and intermediate-term advances.
Overnight advances — Overnight borrowings have been steadily increasing during most of 2012, relative to the balances at December 31, 2011. Member demand for the overnight Advances reflects the seasonal needs of certain member banks for their short-term liquidity requirements. Some large members also use overnight advances to adjust their balance sheet in line with their own leverage targets. The overnight advances program gives members a short-term, flexible, readily accessible revolving line of credit for immediate liquidity needs. Overnight Advances mature on the next business day, at which time the advance is repaid.
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 a 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.
The following table summarizes merger activity, including the impact of voluntary terminations (dollars in thousands):
Table 3.2: Merger Activity/Voluntary terminations
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Number of Non-Members (a) | | 2 | | 3 | |
| | | | | |
Total number of Non-Members at period end | | 5 | | 8 | |
| | | | | |
Total Advances outstanding to Non-Members at period end | | $ | 427,334 | | $ | 710,430 | |
| | | | | | | |
(a) Members who became Non-Members because of mergers and voluntary/involuntary terminations within the periods then ended.
Prepayment of Advances
Prepayment initiated by members or former members is another important factor that impacts advances. We charge a prepayment fee when the member or a former member prepays certain advances before the original maturity.
The following table summarizes prepayment activity (in thousands):
Table 3.3: Prepayment Activity
| | Years ended December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Advances pre-paid at par | | $ | 1,562,724 | | $ | 12,336,163 | |
| | | | | |
Prepayment fees (a) | | $ | 16,615 | | $ | 109,194 | |
(a) Amount represents fees received from members minus the fair value basis of hedged advances at the prepayment dates. For advances that are prepaid and hedged under hedge accounting rules, we generally terminate the hedging relationship upon prepayment and adjust the prepayment fees received for the associated fair value basis of the hedged prepaid advance.
Advance modifications
At members’ request we may modify advances if the modified terms are considered minor and qualify as a modification under applicable accounting provisions for loan modification. See Significant Accounting Policies and Estimates in Note 1 in the audited financial statements in this Form 10-K for a more complete discussion of the accounting provisions that guide loan modifications. Member initiated modification requests totaled $3.7 billion in 2012, compared to $4.6 billion in 2011. All modifications were assessed contemporaneously at the time of modification, and were minor, as defined under accounting standards for modification, and were not considered to
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be termination. The majority of the requests from members were made in the 4th quarter of 2012, and we modified $3.5 billion of advances in that quarter.
Advances — Interest Rate Terms
The following table summarizes interest-rate payment terms for advances (dollars in thousands):
Table 3.4: Advances by Interest-Rate Payment Terms
| | December 31, 2012 | | December 31, 2011 | |
| | | | Percentage | | | | Percentage | |
| | Amount | | of Total | | Amount | | of Total | |
| | | | | | | | | |
Fixed-rate (a) | | $ | 57,331,303 | | 79.31 | % | $ | 60,718,402 | | 90.64 | % |
| | | | | | | | | |
Variable-rate (b) | | 14,952,800 | | 20.68 | | 6,262,500 | | 9.35 | |
Variable-rate capped (c) | | 8,000 | | 0.01 | | 8,000 | | 0.01 | |
| | | | | | | | | |
Total par value | | 72,292,103 | | 100.00 | % | 66,988,902 | | 100.00 | % |
| | | | | | | | | |
Discount on AHP Advances | | — | | | | (15 | ) | | |
Hedge value basis adjustments | | 3,595,396 | | | | 3,874,890 | | | |
Fair value option valuation adjustments and accrued interest | | 502 | | | | — | | | |
| | | | | | | | | |
Total | | $ | 75,888,001 | | | | $ | 70,863,777 | | | |
(a) Fixed-rate borrowings remained popular with members, compared to variable-rate borrowings. The overall category declined at December 31, 2012 relative to December 31, 2011, as members appeared to be reluctant to lock-in fixed-rate long-term borrowings in view of the continued low interest rate environment for short-term borrowings. Within the fixed-rate borrowings, amounts increased for short-term, fixed-rate advances.
(b) Adjustable-rate LIBOR-based advance has increased primarily due to the borrowing by one large member in 2012. Other than the one large member’s borrowing actions, other members have not increased their borrowing in this category, despite the low prevailing rates. The FHLBNY’s larger members are generally borrowers of variable-rate advances, and they have remained on the side-lines in a weak economy, and have sufficient liquidity in the form of customer deposits.
(c) Typically, capped ARCs are in demand by members in a rising rate environment, as members would purchase cap options to limit their interest rate exposure. With a capped variable rate advance, we purchase cap options that mirror the terms of the caps sold to members, offsetting our exposure on the advance.
The following table summarizes variable-rate advances by reference-index type (in thousands):
Table 3.5: Variable-Rate Advances
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
LIBOR indexed (a) | | $ | 14,960,800 | | $ | 6,270,500 | |
| | | | | | | |
(a) LIBOR indexed advances are typically ARC advances and one large member’s borrowing accounts for the increase.
The following table summarizes maturity and yield characteristics of par amounts of advances (dollars in thousands):
Table 3.6: Advances by Maturity and Yield Type
| | December 31, 2012 | | December 31, 2011 | |
| | | | Percentage | | | | Percentage | |
| | Amount | | of Total | | Amount | | of Total | |
| | | | | | | | | |
Fixed-rate | | | | | | | | | |
Due in one year or less | | $ | 17,057,874 | | 23.60 | % | $ | 17,949,321 | | 26.79 | % |
Due after one year | | 40,273,429 | | 55.71 | | 42,769,081 | | 63.85 | |
| | | | | | | | | |
Total Fixed-rate | | 57,331,303 | | 79.31 | | 60,718,402 | | 90.64 | |
| | | | | | | | | |
Variable-rate | | | | | | | | | |
Due in one year or less | | 9,899,000 | | 13.69 | | 2,468,500 | | 3.68 | |
Due after one year | | 5,061,800 | | 7.00 | | 3,802,000 | | 5.68 | |
| | | | | | | | | |
Total Variable-rate | | 14,960,800 | | 20.69 | | 6,270,500 | | 9.36 | |
Total par value | | 72,292,103 | | 100.00 | % | 66,988,902 | | 100.00 | % |
Discount on AHP Advances | | — | | | | (15 | ) | | |
Hedge value basis adjustments | | 3,595,396 | | | | 3,874,890 | | | |
Fair value option valuation adjustments and accrued interest | | 502 | | | | — | | | |
Total | | $ | 75,888,001 | | | | $ | 70,863,777 | | | |
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Impact of Derivatives and hedging activities to the balance sheet carrying values of Advances
The carrying values of Advances include fair value basis adjustments (“LIBOR benchmark hedging adjustments”) for those advances recorded under hedge accounting provisions, or at full fair value for those advances elected under the FVO. When medium- and long-term interest rates rise or fall, the fair values of fixed-rate advances move in the opposite direction, and valuation basis adjustments decline or rise. Such basis adjustments were $3.6 billion at December 31, 2012, and $3.9 billion at December 31, 2011.
We hedge certain advances using both cancellable and non-cancellable interest rate swaps. These qualify as fair value hedges under the derivatives and hedge accounting rules. We hedge the risk of changes in the benchmark rate, which we have adopted as LIBOR. The benchmark rate is also the discounting basis for computing changes in fair values of hedged advances. Recorded fair value basis adjustments to advances in the Statements of Condition were a result of these hedging activities. 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 on our income is discussed in this MD&A under “Results of Operations”.
Fair value basis adjustments, as measured under the hedging rules, are impacted by hedge volume, the interest rate environment, and the volatility of the interest rates.
Hedge volume — We primarily hedge putable advances and certain “bullet” fixed-rate advances under the hedging accounting provisions when they qualify under those standards, and as economic hedges when the hedge accounting provisions are operationally difficult to establish or a high degree of hedge effectiveness cannot be asserted.
The following table summarizes hedged advances by type of option features (in thousands):
Table 3.7: Hedged Advances by Type
Par Amount | | December 31, 2012 | | December 31, 2011 | |
Qualifying Hedges | | | | | |
Fixed-rate bullets (a) | | $ | 29,406,073 | | $ | 32,733,909 | |
Fixed-rate putable (b) | | 15,605,412 | | 17,439,412 | |
Fixed-rate callable | | — | | 325,000 | |
Total Qualifying Hedges | | $ | 45,011,485 | | $ | 50,498,321 | |
| | | | | |
Aggregate par amount of advances hedged (c) | | $ | 45,190,497 | | $ | 50,617,650 | |
Fair value basis (Qualifying hedging adjustments) | | $ | 3,595,396 | | $ | 3,874,890 | |
(a) In 2012, we elected to decrease the volume of hedging of fixed-rate non-callable advances, primarily due to the shorter-term nature of the advances. The hedges effectively convert the fixed-rate exposure of the bonds to a variable-rate exposure, generally indexed to 3-month LIBOR.
(b) Members have generally not replaced maturing putable advances, and outstanding balances have declined, and since almost all advances with put or call features are hedged, the decline in hedged advances was consistent with the contraction of fixed-rate putable advances.
(c) Except for an insignificant amount of derivatives that were designated as economic hedges of advances, hedged advances were in a qualifying hedging relationship. (See Tables 8.1 — 8.7). We typically hedge fixed-rate advances in order to convert fixed-rate cash flows to LIBOR-indexed cash flows with interest rate swaps.
Advances elected under the FVO — In the fourth quarter of 2012, we elected the FVO designation at inception of a floating-rate advance indexed to LIBOR. By electing the FVO for an asset instrument, the objective is to offset some of the volatility in earnings due to the designation of debt (liability) under the FVO. We recorded changes in the full fair values of the advance through earnings, and the fair value basis adjustment was recorded on the balance sheet so that the advance’s carrying value was its fair value.
The following table summarizes par amounts of advances elected under the FVO (in thousands):
Table 3.8: Advances under the Fair Value Option (FVO)
| | Advances | |
Par Amount | | December 31, 2012 | |
Advances designated under FVO | | $ | 500,000 | |
| | | | |
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Fair value basis adjustments — The basis adjustments primarily represent the LIBOR benchmark fair values of advances hedged under a qualifying benchmark hedge. The carrying values of our advances included $3.6 billion and $3.9 billion of fair value basis gains at December 31, 2012 and 2011. The unrealized fair value basis gains were consistent with the higher contractual coupons of long- and medium-term fixed-rate hedged advances at the two balance sheet dates, compared to current advance pricing at the two measurement dates. The hedged advances had been issued in prior years at the then-prevailing higher interest rate environment. In the current lower interest rate environment, fixed-rate advances will exhibit net unrealized fair value basis gains. Decline in outstanding hedged advances resulted in a decline in fair value basis (volume effect). The forward swap curve has steadily flattened through 2012, and rates have declined through the four quarters in 2012 along almost the entire length of the yield curve relative to December 31, 2011, causing fair values of advances to increase (interest rate effect) and partly offset the volume effects. Taken together, the fair value basis adjustment to the carrying value of hedged advances remained materially unchanged.
The following graph compares the swap curves at December 31, 2012 and 2011.
Table 3.9: LIBOR Swap Curve - Graph
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 our hedging objectives of mitigating fair value basis risk.
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 we control. Put dates are organized by date of first put (dollars in thousands):
Table 3.10: Advances by Put Date/Call Date (a)
| | December 31, 2012 | | December 31, 2011 | |
| | Amount | | Percentage of
Total | | Amount | | Percentage of
Total | |
| | | | | | | | | |
Due or putable\callable in one year or less (b) | | $ | 38,332,536 | | 53.03 | % | $ | 36,896,233 | | 55.07 | % |
Due or putable after one year through two years | | 7,836,276 | | 10.84 | | 6,689,684 | | 9.99 | |
Due or putable after two years through three years | | 7,944,130 | | 10.99 | | 6,540,378 | | 9.76 | |
Due or putable after three years through four years | | 9,061,189 | | 12.53 | | 5,906,310 | | 8.82 | |
Due or putable after four years through five years | | 4,659,154 | | 6.44 | | 7,432,042 | | 11.09 | |
Due or putable after five years through six years | | 1,871,277 | | 2.59 | | 1,524,143 | | 2.28 | |
Thereafter | | 2,587,541 | | 3.58 | | 2,000,112 | | 2.99 | |
| | | | | | | | | |
Total par value | | 72,292,103 | | 100.00 | % | 66,988,902 | | 100.00 | % |
| | | | | | | | | |
Discount on AHP advances | | — | | | | (15 | ) | | |
Hedge value basis adjustments | | 3,595,396 | | | | 3,874,890 | | | |
Fair value option valuation adjustments and accrued interest | | 502 | | | | — | | | |
| | | | | | | | | |
Total | | $ | 75,888,001 | | | | $ | 70,863,777 | | | |
(a) | Contrasting advances by contractual maturity dates (See Table 3.10) with potential put dates illustrates the impact of hedging on the effective duration of our advances. Advances borrowed by members included a significant amount of putable advances in which we purchased from members the option to terminate advances at agreed-upon dates. 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. When the swap counterparty exercises its right to call the cancellable swap, we would typically also exercise our 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 our current hedge strategy. This is best illustrated by the fact that on a contractual maturity basis, 14.4% of advances would mature after five years, while on a put basis, the percentage declined to 6.2% at December 31, 2012. |
(b) | There were no callable advances at December 31, 2012. With a callable advance, borrowers have purchased the option to terminate advances at par at predetermined dates. |
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The following table summarizes notional amounts of advances that were still putable or callable (one or more pre-determined option exercise dates remaining) (in thousands):
Table 3.11: Putable and Callable Advances
| | December 31, 2012 (a) | | December 31, 2011 (a) | |
Putable | | $ | 16,175,412 | | $ | 18,324,162 | |
No-longer putable | | $ | 2,072,500 | | $ | 2,217,500 | |
Callable | | $ | — | | $ | 325,000 | |
(a) Par value
Member borrowings have been weak for putable advances, which are typically medium- and long-term. Maturing advances with put features have been replaced by plain vanilla advances.
Investments
We maintain investments for our liquidity purpose, including to fund stock repurchases and redemptions, provide additional earnings, and ensure the availability of funds to meet the credit needs of our members. We also maintain longer-term investment portfolios, which are principally mortgage-backed securities issued by GSEs, a smaller portfolio of MBS issued by private enterprises, and securities issued by state or local housing finance agencies.
Investments —Policies and Practices
The Finance Agency issued a final rule, effective June 20, 2011, that incorporates the existing 300 percent of capital and other policy limitations on the FHLBanks’ purchase of mortgage-backed securities and their use of derivatives. In addition, the rule clarifies that a FHLBank is not required to divest securities solely to bring the level of its holdings into compliance with the 300 percent limit, provided that the original purchase of the securities complied with the limits.
It is our practice not to lend unsecured funds to members, including overnight Federal funds and certificates of deposit. Unsecured lending to members is not prohibited by Finance Agency regulations or Board of Directors’ policy. We are prohibited from purchasing a consolidated obligation issued directly from another FHLBank, but may acquire consolidated obligations for investment in the secondary market after the bond settles. We made no investments in consolidated obligations during the periods in this report.
The following table summarizes changes in investments by categories (including held-to-maturity securities, available-for-sale securities, and money market investments) (dollars in thousands):
Table 4.1: Investments by Categories
| | December 31, | | Dollar | | Percentage | |
| | 2012 | | 2011 | | Variance | | Variance | |
| | | | | | | | | |
State and local housing finance agency obligations (a) | | $ | 737,600 | | $ | 779,911 | | $ | (42,311 | ) | (5.43 | )% |
Mortgage-backed securities | | | | | | | | | |
Available-for-sale securities, at fair value | | 2,299,141 | | 3,133,469 | | (834,328 | ) | (26.63 | ) |
Held-to-maturity securities, at carrying value | | 10,321,164 | | 9,343,894 | | 977,270 | | 10.46 | |
Total securities | | 13,357,905 | | 13,257,274 | | 100,631 | | 0.76 | |
| | | | | | | | | |
Grantor trust (b) | | 9,633 | | 9,167 | | 466 | | 5.08 | |
Federal funds sold | | 4,091,000 | | 970,000 | | 3,121,000 | | NM | |
| | | | | | | | | |
Total investments | | $ | 17,458,538 | | $ | 14,236,441 | | $ | 3,222,097 | | 22.63 | % |
(a) Classified as held-to-maturity securities, at carrying value, which for an HTM security is amortized cost if the security is not OTTI. If the security is OTTI, carrying value is amortized cost less total OTTI and other adjustments. The carrying value of an investment classified as AFS is its fair value. No AFS security was OTTI in 2012 or 2011.
(b) 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 trust.
Long-Term Investments
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 Held-to-maturity or as Available-for-sale. We own a grantor trust to fund current and potential future payments to retirees for supplemental pension plan obligations. The trust is classified as available-for-sale and is invested in fixed-income and equity funds.
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Mortgage-Backed Securities — By Issuer
Issuer composition of held-to-maturity mortgage-backed securities was as follows (carrying values; dollars in thousands):
Table 4.2: Held-to-Maturity Mortgage-Backed Securities — By Issuer
| | | | Percentage | | | | Percentage | |
| | December 31, 2012 | | of Total | | December 31, 2011 | | of Total | |
| | | | | | | | | |
U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 5,679,038 | | 55.02 | % | $ | 6,305,018 | | 67.47 | % |
U.S. agency residential mortgage-backed securities | | 64,681 | | 0.63 | | 89,586 | | 0.96 | |
U.S. government sponsored enterprise commercial mortgage-backed securities | | 4,059,543 | | 39.33 | | 2,262,016 | | 24.21 | |
U.S. agency commercial mortgage-backed securities | | 2,969 | | 0.03 | | 34,447 | | 0.37 | |
Private-label issued securities backed by home equity loans | | 277,325 | | 2.69 | | 313,849 | | 3.36 | |
Private-label issued residential mortgage-backed securities | | 105,057 | | 1.02 | | 185,097 | | 1.98 | |
Private-label issued securities backed by manufactured housing loans | | 132,551 | | 1.28 | | 153,881 | | 1.65 | |
Total Held-to-maturity securities-mortgage-backed securities | | $ | 10,321,164 | | 100.00 | % | $ | 9,343,894 | | 100.00 | % |
Held-to-maturity mortgage- and asset-backed securities (“MBS”) — Our conservative purchasing practices over the years are evidenced by the high concentration of MBS issued by the GSEs. Privately issued mortgage-backed securities made up the remaining 5.0% and 7.0% at December 31, 2012 and December 31, 2011. In 2012, we acquired $3.4 billion of GSE or U.S agency issued MBS, primarily pass-through CMOs and CMBS. Pay downs were $2.4 billion in 2012. In 2011, we acquired $4.7 billion of GSE and U.S. agency MBS. We have not purchased a private label MBS since 2006.
In 2012, pricing of agency MBS were generally not in line with our risk reward preference, and acquisitions were limited, and made only when spreads met our target. The FRB has continued to purchase GSE issued MBS in addition to its on-going program to reinvest principal paydowns. These actions have been part of successive quantitative easing programs, and have resulted in historical tight spreads for GSE issued MBS. At the same time, new GSE MBS issuances have been modest. The two factors taken together have resulted in pricing that often did not meet our risk/reward parameters, limiting acquisitions.
Local and housing finance agency bonds — We have 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 HFA bonds help to fund mortgages that finance low- and moderate-income housing. In 2012, pay downs totalled $42.6 million and no securities were purchased. In 2011, we purchased $69.0 million of securities.
At December 31, 2012, the amortized cost basis of HFA bonds was $737.6 million, and included $557.7 million of bonds issued by NYC Housing Development Corporation (76% of total), and $46.6 million of bonds issued by NJ Housing and Mortgage Finance Agency (6% of total).
Available-for-sale securities — Any investment we might sell before maturity is classified as available-for-sale (“AFS”). We carry such investments at fair value. Fair value changes are recorded in AOCI until the security is sold or is anticipated to be sold. In 2012 and 2011, we opted not to designate any MBS acquisitions as AFS and allowed the portfolio to shrink in line with paydowns. All investments in the AFS portfolio are GSE or U.S. agency issued MBS, and a small portfolio of mutual and bond funds in a grantor trust owned by the FHLBNY.
The composition of the FHLBNY’s available-for-sale securities was as follows (dollars in thousands):
Table 4.3: Available-for-Sale Securities Composition
| | | | Percentage | | | | Percentage | |
| | December 31, 2012 | | of Total | | December 31, 2011 | | of Total | |
| | | | | | | | | |
Fannie Mae | | $ | 1,436,757 | | 62.49 | % | $ | 1,942,230 | | 61.99 | % |
Freddie Mac | | 809,726 | | 35.22 | | 1,125,609 | | 35.92 | |
Ginnie Mae | | 52,658 | | 2.29 | | 65,630 | | 2.09 | |
Total AFS mortgage-backed securities | | 2,299,141 | | 100.00 | % | 3,133,469 | | 100.00 | % |
Grantor Trust - Mutual funds | | 9,633 | | | | 9,167 | | | |
Total AFS portfolio | | $ | 2,308,774 | | | | $ | 3,142,636 | | | |
Funds in the grantor trust are invested in fixed-income and equity registered mutual funds.
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External rating information of the held-to-maturity portfolio was as follows (carrying values; in thousands):
Table 4.4: External Rating of the Held-to-Maturity Portfolio
| | December 31, 2012 | |
| | AAA-rated (a) | | AA-rated (b) | | A-rated | | BBB-rated | | Below
Investment
Grade | | Total | |
| | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 6,687 | | $ | 10,045,933 | | $ | 78,709 | | $ | 57,346 | | $ | 132,489 | | $ | 10,321,164 | |
State and local housing finance agency obligations | | 65,000 | | 627,270 | | — | | 45,330 | | — | | 737,600 | |
| | | | | | | | | | | | | |
Total Long-term securities | | $ | 71,687 | | $ | 10,673,203 | | $ | 78,709 | | $ | 102,676 | | $ | 132,489 | | $ | 11,058,764 | |
| | December 31, 2011 | |
| | AAA-rated (a) | | AA-rated (b) | | A-rated | | BBB-rated | | Below
Investment
Grade | | Total | |
| | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 100,639 | | $ | 8,933,445 | | $ | 70,925 | | $ | 76,205 | | $ | 162,680 | | $ | 9,343,894 | |
State and local housing finance agency obligations | | 69,741 | | 663,540 | | — | | 46,630 | | — | | 779,911 | |
| | | | | | | | | | | | | |
Total Long-term securities | | $ | 170,380 | | $ | 9,596,985 | | $ | 70,925 | | $ | 122,835 | | $ | 162,680 | | $ | 10,123,805 | |
(a) Certain PLMBS and housing finance bonds are rated triple-A by S&P and Moody’s. At December 31, 2012, Fitch and S&P downgraded certain previously rated triple-A bonds to Double-A and Single-A. When split rating exists, the lowest rating is recognized. The fair values of the downgraded bonds exceeded the amortized cost, and cash flow analysis was performed on all PLMBS and no OTTI was identified for the bonds downgraded.
(b) GSE issued MBS have been classified in the table above as double- A, the credit rating assigned to the GSEs. Fannie Mae, Freddie Mac and U.S. Agency issued MBS held by us are rated double-A (Based on S&P’s rating of AA+/Negative for the GSEs and Double-A for the U.S sovereign; Moody’s affirmed the triple-A status of the two GSEs and the U.S. sovereign rating).
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 4.5: External Rating of the Available-for-Sale Portfolio
| | December 31, 2012 | |
| | AAA-rated (a) | | AA-rated (a) | | A-rated | | BBB-rated | | Unrated | | Total | |
| | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | — | | $ | 2,299,141 | | $ | — | | $ | — | | $ | — | | $ | 2,299,141 | |
Other - Grantor trust | | — | | — | | — | | — | | 9,633 | | 9,633 | |
| | | | | | | | | | | | | |
Total Available-for-sale securities | | $ | — | | $ | 2,299,141 | | $ | — | | $ | — | | $ | 9,633 | | $ | 2,308,774 | |
| | December 31, 2011 | |
| | AAA-rated (a) | | AA-rated (a) | | A-rated | | BBB-rated | | Unrated | | Total | |
| | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | — | | $ | 3,133,469 | | $ | — | | $ | — | | $ | — | | $ | 3,133,469 | |
Other - Grantor trust | | — | | — | | — | | — | | 9,167 | | 9,167 | |
| | | | | | | | | | | | | |
Total Available-for-sale securities | | $ | — | | $ | 3,133,469 | | $ | — | | $ | — | | $ | 9,167 | | $ | 3,142,636 | |
(a) All MBS are GSE/U.S. Agency issued securities and the ratings are based on issuer credit ratings. Fannie Mae, Freddie Mac and U.S. Agency issued MBS held by us are rated double-A (Based on S&P’s rating of AA+/Negative for the GSEs and Double-A for the U.S sovereign; Moody’s affirmed the triple-A status of the two GSEs and the U.S. sovereign rating).
The following table summarizes our investment securities issuer concentration (dollars in thousands):
Table 4.6: Investment Securities Issuer Concentration
| | | | | | Carrying value as a | |
| | Carrying (b) | | | | Percentage | |
Long Term Investment as of December 31, 2012 | | Value | | Fair Value | | of Capital | |
| | | | | | | |
MBS | | | | | | | |
Fannie Mae | | $ | 5,428,870 | | $ | 5,520,801 | | 98.85 | % |
Freddie Mac | | 6,556,194 | | 6,859,275 | | 119.38 | |
Ginnie Mae | | 120,308 | | 121,189 | | 2.19 | |
All Others - PLMBS | | 514,933 | | 570,760 | | 9.38 | |
Non-MBS (a) | | 747,233 | | 693,305 | | 13.61 | |
| | | | | | | |
Total Investment Securities | | $ | 13,367,538 | | $ | 13,765,330 | | 243.41 | % |
| | | | | | | |
Categorized as: | | | | | | | |
| | | | | | | |
Available-for-Sale Securities | | $ | 2,308,774 | | $ | 2,308,774 | | | |
| | | | | | | |
Held-to-Maturity Securities | | $ | 11,058,764 | | $ | 11,456,556 | | | |
(a) Non-MBS consist of HFA and Grantor Trust.
(b) Carrying value includes fair value for AFS securities.
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Fair values of investment securities
In an effort to achieve consistency among the FHLBanks’ pricing of investments of mortgage-backed securities, the 12 FHLBanks have formed the MBS Pricing Governance Committee (“Pricing Committee”), which is responsible for developing a fair value methodology for mortgage-backed securities that all FHLBanks could adopt. The Pricing Committee has established a standard pricing methodology and required the FHLBanks to use four pricing vendors. The adoption of the formulaic methodology has enhanced consistency among the 12 FHLBanks. However, we are ultimately responsible for the analysis and review, and appropriateness of underlying assumptions employed by pricing vendors. To compute fair values at December 31, 2012 and 2011, four vendor prices were received for substantially all of our MBS holdings and substantially all of those prices fell within the specified thresholds.
Except for a small portfolio of private-label MBS and housing finance agency bonds, our portfolio of MBS were issued by GSEs and U.S. agency and the relative proximity of the prices received supported our conclusion that the final computed prices were reasonable estimates of fair value. GSE securities priced under such a valuation technique using the market approach are typically classified within Level 2 of the valuation hierarchy.
The valuation of our private-label mortgage-backed securities, all designated as held-to-maturity, may require pricing services to use significant inputs that are subjective and may be considered to be Level 3 of the fair value hierarchy. Consistent with the classification of held-to-maturity portfolio, private-label mortgage-backed securities were recorded in the balance sheet at their carrying values, which 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. At December 31, 2012, the carrying values of one held-to-maturity security determined to be OTTI was written down to $7.0 million, its fair value, and was classified on a non-recurring basis within the Level 3 valuation hierarchy. Fair values of housing finance agency bonds were based on vendor prices, and were deemed to be Level 3, as pricing vendors may have used significant inputs that are subjective. For a comparison of carrying values and fair values of investment securities, see Notes 5 and 6 in the audited financial statements in this Form 10-K. For more information about the corroboration and other analytical procedures performed, see Note 17. Fair Values of Financial instruments in the audited financial statements in this Form 10-K.
Weighted average rates — Mortgage-backed securities (HTM and AFS)
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 in parallel with changes in the LIBOR rate (dollars in thousands):
Table 4.7: Mortgage-Backed Securities Weighted Average Rates by Contractual Maturities
| | December 31, 2012 | | December 31, 2011 | |
| | Amortized | | Weighted | | Amortized | | Weighted | |
| | Cost | | Average Rate | | Cost | | Average Rate | |
Mortgage-backed securities | | | | | | | | | |
Due after one year through five years | | $ | 156,317 | | 2.81 | % | $ | 972 | | 6.25 | % |
Due after five years through ten years | | 4,266,593 | | 2.99 | | 2,886,147 | | 3.67 | |
Due after ten years | | 8,239,224 | | 1.46 | | 9,649,520 | | 1.94 | |
| | | | | | | | | |
Total mortgage-backed securities | | $ | 12,662,134 | | 1.99 | % | $ | 12,536,639 | | 2.34 | % |
OTTI - Adverse Case Scenario
We evaluated our OTTI private-label MBS under a base case (or best estimate) scenario, and also performed a cash flow analysis for each of those securities under assumptions that forecasted increased credit default rates or loss severities, or both. The stress test scenario and associated results do not represent our current expectations and therefore should not be construed as a prediction of future results, market conditions or the actual performance of these securities. The results of the adverse case scenario are presented below alongside our expected outcome for the credit impaired securities (the base case) at the OTTI measurement dates (in thousands):
Table 4.8: Base and Adverse Case Stress Scenarios (a)
| | December 31, 2012 | |
| | Actual Results - Base Case Scenario | | Adverse Case Scenario | |
| | UPB | | OTTI Related to Credit
Loss (b) | | UPB | | OTTI Related to Credit
Loss | |
RMBS Prime | | $ | 7,788 | | $ | 110 | | $ | 7,788 | | $ | 327 | |
| | | | | | | | | |
| | December 31, 2011 | |
| | Actual Results - Base Case Scenario | | Adverse Case Scenario | |
| | UPB | | OTTI Related to Credit
Loss (b) | | UPB | | OTTI Related to Credit
Loss | |
RMBS Prime | | $ | 14,917 | | $ | 60 | | $ | 14,917 | | $ | 845 | |
HEL Subprime | | 23,326 | | 3,963 | | 23,326 | | 4,664 | |
Total Securities | | $ | 38,243 | | $ | 4,023 | | $ | 38,243 | | $ | 5,509 | |
(a) Generally, the Adverse Case is computed by stressing Credit Default Rate and Loss Severity.
(b) Credit OTTI recognized in the fourth quarter of 2012 (December 31, 2012).
In instances where forecasted credit OTTI would exceed fair values, we have capped the recognition of credit OTTI in the base case and in the adverse case to the bond’s amortized cost. Amounts capped in the determination of OTTI charges were not significant in any periods in this report.
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FHLBank OTTI Committee Common Platform - Consistent with the guidelines provided by the OTTI Committee, the FHLBNY has contracted with the FHLBanks of San Francisco and Chicago to perform cash-flow analyses for the securities within the scope of the OTTI Committee as a means of benchmarking the FHLBNY’s own cash flow analysis. At December 31, 2012 and 2011, FHLBanks of San Francisco and Chicago cash flow tested approximately 50 percent of the FHLBNY’s private-label MBS. Projected recovery of home prices was a critical assumption employed by in the Common Platform to calculate OTTI. The table below presents projected home price recovery under a base case and an adverse case at December 31, 2012.
Table 4.9: Projected Home Price Recovery by Months
| | December 31, 2012 | |
| | Base Case | | Adverse Case | |
Months | | Recovery Range % (a) | | Recovery Range % (a) | |
1- 6 | | 0.0 - 2.8 | | 0.0 - 1.9 | |
7- 12 | | 0.0 - 3.0 | | 0.0 - 2.0 | |
13- 18 | | 1.0 - 3.0 | | 0.7 - 2.0 | |
19- 30 | | 2.0 - 4.0 | | 1.3 - 2.7 | |
31- 42 | | 2.8 - 5.0 | | 1.9 - 3.4 | |
43- 66 | | 2.8 - 6.0 | | 1.9 - 4.0 | |
Thereafter | | 2.8 - 5.6 | | 1.9 - 3.8 | |
(a) Annualized Rates
Non-Agency Private label mortgage — and asset-backed securities
Our investments in privately-issued MBS are summarized below. All private-label MBS were classified as held-to-maturity (unpaid principal balance (a); in thousands):
Table 4.10: Non-Agency Private Label Mortgage — and Asset-Backed Securities
| | December 31, 2012 | | December 31, 2011 | |
Private-label MBS | | Fixed Rate | | Variable
Rate | | Total | | Fixed Rate | | Variable
Rate | | Total | |
Private-label RMBS | | | | | | | | | | | | | |
Prime | | $ | 97,668 | | $ | 3,420 | | $ | 101,088 | | $ | 177,687 | | $ | 3,621 | | $ | 181,308 | |
Alt-A | | 4,133 | | 2,582 | | 6,715 | | 4,794 | | 2,931 | | 7,725 | |
Total private-label RMBS | | 101,801 | | 6,002 | | 107,803 | | 182,481 | | 6,552 | | 189,033 | |
| | | | | | | | | | | | | |
Home Equity Loans | | | | | | | | | | | | | |
Subprime | | 314,998 | | 60,648 | | 375,646 | | 352,836 | | 69,283 | | 422,119 | |
| | | | | | | | | | | | | |
Manufactured Housing Loans | | | | | | | | | | | | | |
Subprime | | 132,566 | | — | | 132,566 | | 153,898 | | — | | 153,898 | |
Total UPB of private-label MBS (b) | | $ | 549,365 | | $ | 66,650 | | $ | 616,015 | | $ | 689,215 | | $ | 75,835 | | $ | 765,050 | |
(a) Unpaid principal balance (UPB) is also known as the current face or par amount of a mortgage-backed security.
(b) Paydowns of PLMBS have reduced outstanding unpaid principal balances. No acquisitions of PLMBS have been made for past several years.
The following tables present additional information of the fair values and gross unrealized losses of PLMBS by year of securitization and external rating (in thousands):
Table 4.11: PLMBS by Year of Securitization and External Rating
| | December 31, 2012 | | | | | | | | | |
| | Unpaid Principal Balance | | | | | | | | Total | |
Private-label MBS | | Ratings
Subtotal | | Triple-A | | Double-A | | Single-A | | Triple-B | | Below
Investment
Grade | | Amortized
Cost | | Gross
Unrealized
(Losses) | | Fair Value | | Credit and
Non-Credit OTTI
Losses (a) | |
RMBS | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | |
2006 | | $ | 16,927 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 16,927 | | $ | 16,175 | | $ | (123 | ) | $ | 16,210 | | $ | (281 | ) |
2005 | | 20,611 | | — | | — | | — | | — | | 20,611 | | 19,800 | | — | | 20,770 | | — | |
2004 and earlier | | 63,550 | | — | | 21,473 | | 21,695 | | 20,382 | | — | | 63,373 | | (174 | ) | 64,465 | | — | |
Total RMBS Prime | | 101,088 | | — | | 21,473 | | 21,695 | | 20,382 | | 37,538 | | 99,348 | | (297 | ) | 101,445 | | (281 | ) |
Alt-A | | | | | | | | | | | | | | | | | | | | | |
2004 and earlier | | 6,715 | | 6,329 | | 386 | | — | | — | | — | | 6,715 | | (363 | ) | 6,411 | | — | |
Total RMBS | | 107,803 | | 6,329 | | 21,859 | | 21,695 | | 20,382 | | 37,538 | | 106,063 | | (660 | ) | 107,856 | | (281 | ) |
HEL | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | |
2004 and earlier | | 375,646 | | 358 | | 85,421 | | 65,340 | | 50,793 | | 173,734 | | 339,790 | | (17,332 | ) | 330,632 | | (370 | ) |
Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | |
2004 and earlier | | 132,566 | | — | | 132,566 | | — | | — | | — | | 132,551 | | (1,810 | ) | 132,272 | | — | |
Total PLMBS | | $ | 616,015 | | $ | 6,687 | | $ | 239,846 | | $ | 87,035 | | $ | 71,175 | | $ | 211,272 | | $ | 578,404 | | $ | (19,802 | ) | $ | 570,760 | | $ | (651 | ) |
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| | December 31, 2011 | | | | | | | | | |
| | Unpaid Principal Balance | | | | | | | | Total | |
Private-label MBS | | Ratings
Subtotal | | Triple-A | | Double-A | | Single-A | | Triple-B | | Below
Investment
Grade | | Amortized
Cost | | Gross
Unrealized
(Losses) | | Fair Value | | Credit and
Non-Credit OTTI
Losses (a) | |
RMBS | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | |
2006 | | $ | 24,960 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 24,960 | | $ | 24,401 | | $ | (260 | ) | $ | 24,141 | | $ | (315 | ) |
2005 | | 39,469 | | — | | — | | — | | 10,062 | | 29,407 | | 38,267 | | (494 | ) | 37,822 | | — | |
2004 and earlier | | 116,879 | | 77,299 | | 3,621 | | — | | 32,203 | | 3,756 | | 116,411 | | (439 | ) | 117,885 | | — | |
Total RMBS Prime | | 181,308 | | 77,299 | | 3,621 | | — | | 42,265 | | 58,123 | | 179,079 | | (1,193 | ) | 179,848 | | (315 | ) |
Alt-A | | | | | | | | | | | | | | | | | | | | | |
2004 and earlier | | 7,725 | | 7,725 | | — | | — | | — | | — | | 7,726 | | (904 | ) | 6,831 | | — | |
Total RMBS | | 189,033 | | 85,024 | | 3,621 | | — | | 42,265 | | 58,123 | | 186,805 | | (2,097 | ) | 186,679 | | (315 | ) |
HEL | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | |
2004 and earlier | | 422,119 | | 16,086 | | 84,886 | | 80,392 | | 50,743 | | 190,012 | | 387,990 | | (51,415 | ) | 338,378 | | (476 | ) |
Manufactured Housing Loans | | | | | | | | | | | | | | | | | | | | | |
Subprime | | | | | | | | | | | | | | | | | | | | | |
2004 and earlier | | 153,898 | | — | | 153,898 | | — | | — | | — | | 153,881 | | (8,387 | ) | 145,494 | | — | |
Total PLMBS | | $ | 765,050 | | $ | 101,110 | | $ | 242,405 | | $ | 80,392 | | $ | 93,008 | | $ | 248,135 | | $ | 728,676 | | $ | (61,899 | ) | $ | 670,551 | | $ | (791 | ) |
(a) Credit-related OTTI was offset by reclassification of non-credit OTTI to Net income.
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Table 4.12: Weighted-Average Market Price Percentage Analysis of MBS
| | December 31, 2012 | |
Private-label MBS | | Original
Weighted-
Average Credit
Support % (a) | | Weighted-
Average Credit
Support % (b) | | Weighted-Average
Collateral
Delinquency % (c) | |
RMBS | | | | | | | |
Prime | | | | | | | |
2006 | | 4.11 | % | 4.07 | % | 15.60 | % |
2005 | | 2.34 | | 5.61 | | 5.14 | |
2004 and earlier | | 1.67 | | 5.27 | | 2.62 | |
Total RMBS Prime | | 2.22 | | 5.14 | | 5.31 | |
Alt-A | | | | | | | |
2004 and earlier | | 12.71 | | 36.21 | | 8.97 | |
Total RMBS | | 2.87 | | 7.07 | | 5.54 | |
HEL | | | | | | | |
Subprime | | | | | | | |
2004 and earlier | | 58.22 | | 31.92 | | 16.96 | |
Manufactured Housing Loans | | | | | | | |
Subprime | | | | | | | |
2004 and earlier | | 100.00 | | 28.55 | | 3.34 | |
Total Private-label MBS | | 57.53 | % | 26.85 | % | 12.03 | % |
| | | | | | | |
| | December 31, 2011 | |
Private-label MBS | | Original
Weighted-
Average Credit
Support % (a) | | Weighted-
Average Credit
Support % (b) | | Weighted-Average
Collateral
Delinquency % (c) | |
RMBS | | | | | | | |
Prime | | | | | | | |
2006 | | 3.81 | % | 4.91 | % | 10.46 | % |
2005 | | 2.39 | | 4.55 | | 3.55 | |
2004 and earlier | | 1.57 | | 4.30 | | 1.51 | |
Total RMBS Prime | | 2.06 | | 4.44 | | 3.19 | |
Alt-A | | | | | | | |
2004 and earlier | | 11.73 | | 34.33 | | 9.90 | |
Total RMBS | | 2.45 | | 5.66 | | 3.46 | |
HEL | | | | | | | |
Subprime | | | | | | | |
2004 and earlier | | 58.08 | | 30.99 | | 16.90 | |
Manufactured Housing Loans | | | | | | | |
Subprime | | | | | | | |
2004 and earlier | | 100.00 | | 27.70 | | 3.19 | |
Total Private-label MBS | | 52.77 | % | 24.07 | % | 10.82 | % |
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.
Definitions:
(a) Original Weighted-Average Credit Support Percentage represents the average 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.
(b) Weighted-Average Credit Support Percentage represents the average 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.
(c) Weighted-Average Collateral Delinquency Percentage represents the average 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.
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Short-term investments
We typically maintain substantial investments in high quality short- and intermediate-term financial instruments such as certificates of deposit, unsecured overnight and term Federal funds sold to highly rated financial institutions, and secured overnight transactions, under securities purchased with agreement to resell. 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. We may also invest in certificates of deposit with maturities not exceeding 270 days, issued by major financial institutions, and would be designated as held-to-maturity and recorded at amortized cost.
Securities purchased with agreement to resell — As part of FHLBNY’s banking activities with counterparties, the FHLBNY has entered into secured financing transactions that mature overnight, and can be extended only at the discretion of the FHLBNY. These transactions involve the lending of cash, against which securities are taken as collateral. There were no balances outstanding at December 31, 2012. Average amount of lending was $42.1 million in 2012. In the third quarter of 2012, we executed secured financing agreements with certain highly-rated counterparties that involved the lending of cash, against which securities are taken as collateral. The amount of cash loaned against the securities collateral is a function of the liquidity and quality of the collateral as well as the credit quality of the counterparty. The collateral is typically in the form of a highly-rated marketable security, and the FHLBNY has the ability to call for additional collateral if the value of the securities falls below a pre-defined threshold. The FHLBNY can terminate the transaction and liquidate the collateral if the counterparty fails to post the additional margin. The FHLBNY does not have the right to repledge the securities received. Securities purchased under agreements to resell (reverse repos) generally do not constitute a sale for accounting purposes of the underlying securities and so are treated as collateralized financing transactions.
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.
Overnight and short-term federal funds allows us to warehouse and provide balance sheet liquidity to meet unexpected member borrowing demands. During 2012 and 2011, all investments in Federal funds sold were overnight.
We actively monitor our credit exposures and the credit quality of our counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, and sovereign support as well as related market signals. As a result of these monitoring activities, we limit or suspend existing exposures, as appropriate. In addition, we are required to manage our unsecured portfolio subject to regulatory limits, prescribed by the FHFA, our regulator. The FHFA regulations include limits on the amount of unsecured credit that may be extended to a counterparty, or a group of affiliated counterparties, based upon a percentage of eligible regulatory capital and the counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of the FHLBNY’s regulatory capital or the eligible amount of regulatory capital of the counterparty determined in accordance with FHFA regulation. The eligible amount of regulatory capital is then multiplied by a stated percentage. The stated percentage that the FHLBNY may offer for term extensions, which are comprised of on- and off-balance sheet and derivative transactions, of unsecured credit ranges from 1% to 15% based on the counterparty’s credit rating.
FHFA regulation also permits the FHLBanks to extend additional unsecured credit, which could be comprised of overnight extensions and sales of Federal funds subject to continuing contract (we have no continuing arrangements). Our total unsecured overnight exposure to a counterparty may not exceed twice the regulatory limit for term exposures, resulting in a total exposure limit to a counterparty of 2% to 30% of the eligible amount of regulatory capital based on the counterparty’s credit rating. The FHLBNY was in compliance with the regulatory limits established for unsecured credit in all periods in this Form 10-K.
The FHLBNY is prohibited by FHFA regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. The FHLBNY’s unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks, includes the risk that these counterparties have extended credit to non-U.S. counterparties and foreign sovereign governments. The FHLBNY’s unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks includes the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. During any periods in this report, the FHLBNY did not own any financial instruments issued by foreign sovereign governments, including those countries that are members of the European Union.
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The table below presents Federal funds sold, the counterparty credit ratings, and the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks in the U.S. (in thousands):
Table 4.13: Federal Funds Sold by Domicile of the Counterparty
| | December 31, 2012 | | December 31, 2011 | | Year ended December 31, 2012 | | Year ended December 31, 2011 | |
Foreign
Counterparties | | S&P
Rating | | Moody’s
Rating | | S&P
Rating | | Moody’s
Rating | | Daily Average
Balance | | Balance at period
end | | Daily Average
Balance | | Balance at period
end | |
| | | | | | | | | | | | | | | | | |
Australia | | AA- | | AA2 | | AA- | | AA2 | | $ | 1,645,254 | | $ | 1,548,000 | | $ | 1,002,466 | | $ | — | |
Canada | | A to AA- | | A1 to AA1 | | A to AA- | | AA3 to AAA | | 3,270,126 | | 995,000 | | 2,692,626 | | — | |
Finland | | AA- | | AA3 | | AA- | | AA3 | | 664,962 | | — | | 479,356 | | — | |
France | | A to A+ | | A2 | | A to AA- | | A2 | | — | | — | | 1,076,986 | | — | |
Germany | | A+ | | A2 | | A+ | | A2 | | 653,128 | | — | | 621,959 | | — | |
Netherlands | | AA- | | AA2 | | AA | | AA2 | | 1,305,486 | | 1,548,000 | | 738,671 | | 970,000 | |
Norway | | A+ | | A1 | | A+ | | A1 | | 935,484 | | — | | — | | — | |
Sweden | | AA- | | AA3 | | AA- | | AA3 | | 1,330,456 | | — | | 710,575 | | — | |
UK | | A | | A3 | | A | | A3 | | — | | — | | 241,370 | | — | |
| | | | | | | | | | | | | | | | | |
Subtotal | | | | | | | | | | 9,804,896 | | 4,091,000 | | 7,564,009 | | 970,000 | |
| | | | | | | | | | | | | | | | | |
USA | | A to AA- | | A2 to AA1 | | A to AA- | | A2 to AA1 | | 1,559,522 | | — | | 935,088 | | — | |
Total | | | | | | | | | | $ | 11,364,418 | | $ | 4,091,000 | | $ | 8,499,097 | | $ | 970,000 | |
Table 4.14: Federal Funds Sold Quarterly Balances
The following table summarizes average balances and outstanding balances of Federal funds sold in each of the quarters in 2012 and 2011 (in millions):
| | Federal Funds Sold (In millions) | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
Year | | Daily
Average
Balance | | Balance at
period end | | Daily
Average
Balance | | Balance at
period end | | Daily
Average
Balance | | Balance at
period end | | Daily
Average
Balance | | Balance at
period end | |
| | | | | | | | | | | | | | | | | |
2012 | | $ | 10,559 | | $ | 7,575 | | $ | 12,071 | | $ | 7,439 | | $ | 12,199 | | $ | 9,946 | | $ | 10,627 | | $ | 4,091 | |
2011 | | $ | 7,347 | | $ | 5,093 | | $ | 8,502 | | $ | 4,475 | | $ | 9,506 | | $ | 4,964 | | $ | 8,617 | | $ | 970 | |
Table 4.15: Cash Balances at the Federal Reserve Banks
In addition, we maintained liquidity at the Federal Reserve Banks (“FRB”). The following table summarizes average balances and outstanding balances at the FRB in each of the quarters in 2012 and 2011 (in millions):
| | Cash Balances with Federal Reserve Banks (In millions) | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
Year | | Daily
Average
Balance | | Balance at
period end | | Daily
Average
Balance | | Balance at
period end | | Daily
Average
Balance | | Balance at
period end | | Daily
Average
Balance | | Balance at
period end | |
| | | | | | | | | | | | | | | | | |
2012 | | $ | 374 | | $ | 389 | | $ | 113 | | $ | 910 | | $ | 194 | | $ | 2,895 | | $ | 676 | | $ | 7,551 | |
2011 | | $ | 97 | | $ | 2,950 | | $ | 132 | | $ | 5,541 | | $ | 588 | | $ | 4,737 | | $ | 2,296 | | $ | 10,870 | |
At December 31, 2012 and 2011, we deposited our excess liquidity at the FRB rather than to lend on an unsecured basis to a financial institution over the year-end.
Cash collateral pledged — All cash posted as pledged collateral to derivative counterparties is reported as a deduction to Derivative liabilities in the Statements of Condition. Cash posted in excess of required collateral is reported as a component of Derivative assets. We generally execute derivatives with major financial institutions and enter into bilateral collateral agreements. When our derivatives are in a net unrealized loss position, as a liability from our perspective, counterparties are exposed and we are required to post 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. Typically, such cash deposit pledges earn interest at the overnight Federal funds rate. At December 31, 2012 and December 31, 2011, we had deposited $2.5 and $2.6 billion in interest-earning cash as pledged collateral to derivative counterparties. For more information, see Tables 8.1 — 8.7.
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Mortgage Loans Held-for-Portfolio
The portfolio of mortgage loans was primarily comprised of investments in Mortgage Partnership Finance loans (“MPF” or “MPF Program”). We provide this product to members as another alternative for them to sell their mortgage production, and do not expect the MPF loans to increase substantially. Growth has been steady and moderate.
The following table summarizes MPF loan by product types (par values, in thousands):
Table 5.1: MPF by Loss Layers
| | December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Original MPF (a) | | $ | 444,339 | | $ | 382,504 | | $ | 343,925 | |
MPF 100 (b) | | 11,237 | | 16,399 | | 23,591 | |
MPF 125 (c) | | 988,061 | | 582,153 | | 392,780 | |
MPF 125 Plus (d) | | 299,431 | | 394,052 | | 494,917 | |
Other | | 69,458 | | 24,753 | | 9,408 | |
Total Par MPF Loans | | $ | 1,812,526 | | $ | 1,399,861 | | $ | 1,264,621 | |
(a) | Original MPF — The first layer of losses is applied to the First Loss Account. We are responsible for the first layer of losses. The member then provides a credit enhancement up to “AA” rating equivalent. We would absorb any credit losses beyond the first two layers, though the possibility of any such losses is remote. |
(b) | MPF 100 — The first layer of losses is applied to the First Loss Account. We are responsible for the first layer of losses. 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. We absorb any losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses). We would absorb any credit losses beyond the first two layers. |
(c) | MPF 125 — The first layer of losses is applied to the First Loss Account. We are responsible for the first layer of losses. 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. We absorb any losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses). We would absorb any credit losses beyond the first two layers. |
(d) | MPF 125 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. We absorb any losses incurred in the FLA that are not recovered through credit enhancement fees (should the pool liquidate prior to repayment of losses). 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. We would absorb losses that exceeded the Credit Enhancement obligation, though such losses are a remote possibility. |
Mortgage loans — Conventional and Insured Loans
The following table classifies mortgage loans between conventional loans and loans insured by FHA/VA (in thousands):
Table 5.2: Mortgage Loans — Conventional and Insured Loans
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Federal Housing Administration and Veteran Administration insured loans | | $ | 69,302 | | $ | 24,507 | |
Conventional loans | | 1,743,068 | | 1,375,108 | |
Others | | 156 | | 246 | |
| | | | | |
Total par value | | $ | 1,812,526 | | $ | 1,399,861 | |
Mortgage Loans - Credit Enhancement
In the credit enhancement waterfall, we are responsible for the first loss layer. The second loss layer is that amount of credit obligation that the PFI has taken on, which will equate the loan to a double-A rating. We assume all residual risk.
The amount of the credit enhancement is computed with the use of S&P’s model for determining 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 taking on the credit enhancement obligation, we pay to the PFI a credit enhancement fee. 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 being deferred for 12 months.
The portion of the credit enhancement that is an obligation of the 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 PFI/member or housing associate (at this time, we have no housing associates as a PFI) that participates in the MPF program must meet our established financial performance criteria. In addition, we perform financial reviews of each approved PFI annually. Housing Associate are entities that (i) are approved mortgagees under Title II of the National Housing Act, (ii) chartered under law and have succession, (iii) subject to inspection and supervision by a governmental agency, and (iv) lend their own funds as their principal activity in the mortgage field.
The FHLBNY computes the provision for credit losses without considering the credit enhancement features (except the “First Loss Account”) accompanying the MPF loans to provide credit assurance to the FHLBNY. CE Fees are
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paid on a pool level, and if the pool runs down, the amount of future CE fees would shrink in line. For more information, see Note 8. Mortgage Loans Held-for-Portfolio.
Loan concentration was in New York State, which is to be expected since the largest PFIs are located in New York. Below is our MPF loan concentration:
Table 5.3: Concentration of MPF Loans
| | December 31, 2012 | | December 31, 2011 | | December 31, 2010 | |
| | Number of
loans % | | Amounts
outstanding % | | Number of
loans % | | Amounts
outstanding % | | Number of
loans % | | Amounts
outstanding % | |
| | | | | | | | | | | | | |
New York State | | 69.7 | % | 59.4 | % | 71.6 | % | 62.9 | % | 73.3 | % | 67.7 | % |
Table 5.4: Top Five Participating Financial Institutions — Concentration (par values, dollars in thousands)
| | December 31, 2012 | |
| | Mortgage | | Percent of Total | |
| | Loans | | Mortgage Loans | |
| | | | | |
Manufacturers and Traders Trust Company | | $ | 300,153 | | 16.56 | % |
Astoria Federal Savings and Loan Association | | 289,318 | | 15.96 | |
Investors Bank | | 168,881 | | 9.32 | |
Elmira Savings Bank | | 88,845 | | 4.90 | |
First Choice Bank | | 85,344 | | 4.71 | |
All Others | | 879,829 | | 48.55 | |
| | | | | |
Total (a) | | $ | 1,812,370 | | 100.00 | % |
| | | | | |
| | December 31, 2011 | |
| | Mortgage | | Percent of Total | |
| | Loans | | Mortgage Loans | |
| | | | | |
Manufacturers and Traders Trust Company | | $ | 394,865 | | 28.21 | % |
Astoria Federal Savings and Loan Association | | 241,727 | | 17.27 | |
Investors Bank | | 87,935 | | 6.28 | |
OceanFirst Bank | | 69,199 | | 4.95 | |
Watertown Savings Bank | | 54,287 | | 3.88 | |
All Others | | 551,602 | | 39.41 | |
| | | | | |
Total (a) | | $ | 1,399,615 | | 100.00 | % |
(a) Totals do not include CMA loans.
Table 5.5: Roll-Forward First Loss Account (in thousands)
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Beginning balance | | $ | 13,622 | | $ | 11,961 | | $ | 13,934 | |
| | | | | | | |
Additions | | 5,685 | | 2,784 | | 850 | |
Resets(a) | | (7 | ) | (715 | ) | (2,600 | ) |
Charge-offs | | (864 | ) | (408 | ) | (223 | ) |
Ending balance | | $ | 18,436 | | $ | 13,622 | | $ | 11,961 | |
(a) For the Original MPF, MPF 100, MPF 125 and MPF Plus products, the Credit Enhancement is periodically recalculated. If the recalculated Credit Enhancement would result in a PFI Credit Enhancement obligation lower than the remaining obligation, the PFI’s Credit Enhancement obligation will be reset to the new, lower level.
Table 5.6: Second Losses and SMI Coverage (in thousands)
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Second Loss Position (a) | | $ | 56,449 | | $ | 35,862 | | $ | 24,574 | |
| | | | | | | |
SMI Coverage - NY share only (b) | | $ | 17,593 | | $ | 17,593 | | $ | 17,593 | |
| | | | | | | |
SMI Coverage - portfolio (b) | | $ | 17,958 | | $ | 17,958 | | $ | 17,958 | |
(a) Increase due to increase in overall outstanding of MPF.
(b) SMI coverage has reminded unchanged because no new master commitments have been added under the MPF Plus Program.
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Troubled Debt Restructurings (“TDRs”) and MPF modification — The MPF program’s temporary loan payment modification plan for participating PFIs was initially available until December 31, 2011 and has been extended through December 31, 2013. This modification plan is available to homeowners currently in default or imminent danger of default. The modification plan states specific eligibility requirements that have to be met and procedures the PFIs have to follow to participate in the modification plan. As of December 31, 2012, only 4 MPF loans had been modified under this plan. No loans were modified in 2012.
Beginning with the fourth quarter of 2012, we consider loans discharged from bankruptcy as TDR, and the amount outstanding at December 31, 2012 was $8.8 million. If a loan discharged from bankruptcy was past due 90 days or more, the loan was assessed for impairment on an individual basis, and a credit allowance was recorded if the recoverable collateral values, net of costs, were less than recorded investment in such a loan. The aggregate amount of loans that was past due 90 days or more was $0.6 million, and the associated credit losses were not material.
For more information about TDR loans, see Note 8. Mortgage Loans Held-for-portfolio in the audited financial statements in this Form 10-K.
Accrued interest receivable
Other assets
Accrued interest receivable was $179.0 million at December 31, 2012, compared to $223.8 million at December 31, 2011. Accrued interest receivable was comprised primarily from advances and investments. Other assets included prepayments and miscellaneous receivables, and were $13.7 million at December 31, 2012, compared to $13.4 million at December 31, 2011.
Deposit Liabilities and Other Borrowings
Deposit liabilities consisted of member deposits, and from time to time may also include deposits from governmental institutions. Member deposits do not represent a significant source of liquidity.
Member deposits — We operate deposit programs for the benefit of our members. Deposits are primarily short-term in nature, with the majority maintained in demand accounts that reprice daily based upon rates prevailing in the overnight Federal funds market. Members’ liquidity preferences are the primary determinant of the level of deposits. Total deposits were $2.1 billion at December 31, 2012, almost unchanged from the balance at December 31, 2011, although deposit balances have fluctuated during 2012. Deposits at March 31, 2012 had increased to $3.5 billion, due to one member that had maintained a deposit of $1.4 billion to collateralize short-term transactions.
Borrowings from other FHLBanks — We may borrow from other FHLBanks, generally for a period of one day and at market terms. There were no significant borrowings in any periods in this report.
Debt Financing Activity and Consolidated Obligations
Consolidated obligations, which consist of consolidated bonds and consolidated discount notes, are the joint and several obligations of the FHLBanks and the principal funding source for our operations. 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. A FHLBank’s ability to access the capital markets to issue debt, as well as our cost of funds, is dependent on our credit ratings from major ratings organizations. Please see Table 6.11 for our credit ratings.
Consolidated Obligation Liabilities
Our primary source of funds continued to be the issuance of consolidated bonds and discount notes. Consolidated obligation debt outstanding at December 31, 2012 has increased, relative to December 31, 2011, in parallel with higher balance sheet assets.
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 we are primarily liable for our portion of consolidated obligations (i.e. those issued on our behalf), we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. The two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP issue programs. We participate in both programs. For more information about these programs, see Item 1. Business in this Form 10-K.
Highlights — Performance of FHLBank debt
The FHLBank debt remained in demand by investors at reasonable pricing, and has withstood the general concerns about the debt ceiling in the U.S., the rating agency downgrades and the generally fragile conditions in the bond markets. In general, swap spreads to our consolidated bonds were tight, resulting in increased cost of funding in 2012. Similar to bonds, funding costs of discount notes were also higher.
The lower 3-month LIBOR has compressed margins for our debt and specifically for our short-term debt. Typically, we execute interest rate swaps to convert fixed-rate debt to a sub-LIBOR spread, but when the LIBOR rate is low, there is very little room for achieving a sub-LIBOR spread that would be ascribed to the high-quality FHLBank consolidated obligation bonds. As we make extensive use of derivatives to restructure fixed rates on consolidated bonds to sub-LIBOR floating rate, the relationship between swaps rates and bond and discount note
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yields is an important economic indicator. The 3-month LIBOR, a key index in the intermediation between swap rates and debt yields, has been steadily declining during 2012. The 3-month LIBOR was 31 basis points at December 31, 2012, compared to 59 basis points at December 31, 2011. As a result, on a LIBOR swapped funding level, the low LIBOR rate has effectively driven up the cost of FHLBank consolidated obligation bonds. Longer-term bond pricing remained prohibitively expensive, as investors were reluctant to take the risk of locking in long-term investments without a step-up option, which would protect their investment yields when rates eventually rise.
FHLBank Consolidated obligation bonds performance — Summarized below are certain significant performance indicators of the FHLBank consolidated bonds at each quarter end of 2012. We believe a quarter end presentation provides a better assessment of debt issuance conditions in 2012.
Fourth quarter - December 2012 — As the 3-month LIBOR moved lower, swap spreads tightened significantly to Treasuries. Costs improved for negotiated bullet bonds and swapped callables, but increased for all other bond products. The 2-year swap spread has tightened over the last three months and FHLBank funding levels versus LIBOR suffered commensurately from this spread compression, and costs continued to deteriorate to the worst overall bond funding levels relative to theoretical 3-month LIBOR in more than two years. The FHLBank 2-year Global bullet bond was priced in December - the first new Global since August 2012 - at 3-month LIBOR minus 2.7 bps which was the most expensive LIBOR pricing on a new 2-year Global since March 2010.
The December TAP volume rose from the previous month and the weighted average cost for TAPs in December was relatively stable at 3-month LIBOR minus 0.4 bps. Negotiated bullet issuance volume in December rose from November and overall costs improved slightly from November’s 2012 peak to 3-month LIBOR minus 13.3 bps.
Swapped callable volume rose from the previous month, and was the only category with improved funding levels during December 2012. Auctioned callable bond volume decreased compared to November and costs averaged 3-month LIBOR minus 11.2 bps during the month, and was 0.4 bps higher than the previous month, although cost improved toward the end of the month. Funding costs for callables with lockouts between 3-and 9-months improved slightly to 3-month LIBOR minus 14 bps in December, versus 3-month LIBOR minus 13 bps in the previous month.
Simple floaters, primarily indexed to LIBOR, were the largest source of FHLBank bond funding in December 2012.
Third quarter - September 2012 — The weighted average cost of new issuance of TAPs in September 2012 increased by 7.6 bps from August’s level to 3-month LIBOR minus 5.3 bps, the highest level in twelve months. Negotiated bullet with maturities of 1-year or less improved by 2.1 bps from August’s recent high level to 3-month LIBOR minus 16.0 bps.
Callable FHLBank bonds were in demand. Certain callable bonds are issued and swapped contemporaneously with a cancellable swap. For such bonds, their aggregate funding levels increased by 9.7 bps from August’s level to 3-month LIBOR minus 20.0 bps, versus minus 32 bps in August, the highest monthly average since June 2011. The callable bonds are typically issued with very short lock-out periods, and the investor acquires the bond with the expectation that the bonds get called and the investor would have made a yield pick-up relative to a lower yielding equivalent maturity discount note. Callable bonds are also offered through the standard auction program, and costs averaged 3-month LIBOR minus 12.2 bps during September, an 8.4 bps increase, compared to August and the highest monthly average since June 2012.
Second quarter - June 2012 — Funding costs increased for all bond types. The aggregate pricing levels of FHLBank issued consolidated bonds, on a LIBOR basis, was around 3-month LIBOR minus 26.2 bps, and aggregate funding levels for FHLBank “bullet” bonds with maturities in the 1- and 2-year sector increased by as much as 5 bps in all maturity buckets, from the previous month. The weighted average cost for TAPs in June 2012 was 3-month LIBOR minus 10.2 bps. The cost of negotiated bullet increased also increased to 3-month LIBOR minus 21.7 bps.
Aggregate funding levels for swapped callable bonds improved to 3-month LIBOR minus 37.1 bps. Callables with 1-month lockouts were in demand, and the funding costs averaged 3-month LIBOR minus 37 bps. Funding cost for bonds with lockouts between 3- and 9-months was 3-month LIBOR minus 23 bps. Cost of bonds with lockouts of 1-year or greater increased to a weighted average spread of 3-month LIBOR minus 2 basis points in June 2012 from 3-month LIBOR minus 11 bps in May 2012.
First quarter - March 2012 — TAP bond performance continued to benefit from the flight to quality trend driven by global credit events, particularly the European debt crisis. Investors appeared to have diversified into the U.S. bond market, particularly Treasuries and to lesser extent, agency issued bonds. The FHLBank bonds benefited as investors eager for diversification amongst agency issuers bid up prices of smaller volume FHLBank bonds because of declining issuances by FHLBanks due to declining FHLBank balance sheets. Price performance of the FHLBank’s shorter-term TAP issuance was in line with other agency “benchmark” security issuance. However, TAPs of 5-year and longer outperformed the other agency benchmarks of similar maturities. As a result, yields declined, and spread to 3-month LIBOR improved. The improvements were particularly significant in the March quarter for short maturity bullet funding costs versus 3-month LIBOR, although we saw a slight reversal of the positive trends in funding levels at the end of the March quarter. In the early part of the first quarter, 1-year bullets funded near 3-month LIBOR minus 30 basis points, comparable to levels achieved during the initial flight to quality during the European credit crisis in 2010. With investors demanding higher rates for discount notes, spreads compressed for FHLBank discount notes, and funding increased for alternatives to discount notes, such as short lockout callables and step-up callable bonds. Auctioned callable spreads to 3-month LIBOR were close to their widest in March 2012 over the preceding eleven months. FHLBank floaters indexed to LIBOR (3-month LIBOR and 1-month LIBOR) and to the Federal Funds Effective rate were priced better from the FHLBank’s perspective, and spreads were also better in March 2012 over the preceding 11 months. Investor demand for the simple 3-month
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LIBOR floaters continued to be relatively low, and issuance was mainly made up of bonds indexed to Fed Funds. The impact of the FRB’s “Maturity Extension Program” (Operations Twist) launched in September 2011 had its desired impact on longer-dated FHLBank bonds, driving rates down for maturities of 7 years and out, and rates up, albeit slightly, in the short-end of the FHLBank bond yield curve.
Consolidated obligation discount notes performance — Over the course of 2012, discount note spreads to LIBOR have exhibited a fairly consistent narrowing trend across the money market curve. Treasury bill issuance and Repo rate patterns are a major factor in pricing and thus have had a strong impact on investor demand for FHLB discount notes. First, dealers use Repo as a financing vehicle, so they are less likely to underwrite securities, like discount notes, that would create a negative carrying cost to the dealer. In addition, as FHLBank discount notes compete with Repo for investor dollars, the low yields from FHLBank issued discount notes make it harder to attract investor participation.
Summarized below are certain significant performance indicators of the FHLBank discount notes at each quarter end of 2012. We believe a quarter end presentation provides a better assessment of debt issuance conditions in 2012.
Fourth quarter - December 2012 — In December, the Fed funds effective rate was 0.16% on average. As a result, the overnight spread to the unsecured interbank rates remained healthy, ranging from -11 to -15 bps throughout the month. The 3-month DN auction achieved an average spread of 3-month LIBOR minus 20 basis points in December. The 9- and 13-week sectors saw sub-LIBOR spreads improve close to 2 bps to minus 17.5 bps and minus 20.6 bps, compared to November. The 26-week maturity offering achieved marginally better execution than in November.
Third quarter - September 2012 — Despite elevated repo levels, investor orders for overnight maturity discount notes remained healthy, and given the strong demand, the FHLBank issued discount notes in the overnight bucket at the lowest possible price of 0.001% re-offer on the majority of issuances through the FHLBank discount note window program. Funding levels were also attractive in the 1- to 3-week categories as quarter-end spurred investor demand for short-term paper. Issuance was concentrated in the 2- to 4-month sectors; spreads were tighter compared to August 2012. In general, however, FHLBank discount note spreads to LIBOR deteriorated across all other sectors and the cost of funding was higher in September.
Second quarter - June 2012 — Spreads to LIBOR in the 2- and 3-month discount note maturities deteriorated throughout the month of June as a result of multiple factors. Auction sizes rose, spreads deteriorated due to large size of the auctions, elevated repo levels, competitive rates, and dealer quarter-end balance sheet constraints, all of which tended to put pressure on increased yields and increased cost of funds. Repo rates are generally considered a market benchmark, and a competing investment product to FHLBank issued discount notes. Overnight Treasury repo rates averaged about 25 basis points. This impacted mostly the 3- to 12-month maturities, and dealers and investors preferred to buy maturities 1-month and in rolling overnight issuances.
First quarter - March 2012 — Early in the first quarter of 2012, the increased Treasury bill supply pushed repo rates steadily higher, and was a significant factor in the higher rates demanded by investors for discount notes. As a result, discount note 3-month auction execution versus LIBOR deteriorated as the U.S. Treasury increased bill issuance. That factor, together with lower 3-month LIBOR rates contributed to tightening of the sub-LIBOR spread. The higher Treasury bill issuance was probably seasonal and bill supplies were expected to fall to normal levels, which would push overnight repo rates down and discount note rates lower.
Consolidated obligation bonds
The following summarizes types of bonds issued and outstanding (dollars in thousands):
Table 6.1: Consolidated Obligation Bonds by Type
| | December 31, 2012 | | December 31, 2011 | |
| | Amount | | Percentage of
Total | | Amount | | Percentage of
Total | |
| | | | | | | | | |
Fixed-rate, non-callable | | $ | 48,184,085 | | 75.49 | % | $ | 47,108,685 | | 71.02 | % |
Fixed-rate, callable | | 2,685,000 | | 4.21 | | 1,935,610 | | 2.92 | |
Step Up, callable | | 1,221,000 | | 1.91 | | 950,000 | | 1.43 | |
Single-index floating rate | | 11,735,000 | | 18.39 | | 16,335,000 | | 24.63 | |
| | | | | | | | | |
Total par value | | 63,825,085 | | 100.00 | % | 66,329,295 | | 100.00 | % |
| | | | | | | | | |
Bond premiums | | 102,225 | | | | 145,869 | | | |
Bond discounts | | (23,566 | ) | | | (26,459 | ) | | |
Hedge basis adjustments | | 804,174 | | | | 979,013 | | | |
Hedge basis adjustments on terminated hedges | | 63,520 | | | | 201 | | | |
Fair value option valuation adjustments and accrued interest | | 12,883 | | | | 12,603 | | | |
| | | | | | | | | |
Total Consolidated obligation-bonds | | $ | 64,784,321 | | | | $ | 67,440,522 | | | |
Fair value basis of terminated hedges: $63.5 million — In the 2012 third quarter we terminated long-term hedges of certain fixed-rate bonds, and the fair value basis adjustments at the termination dates are being amortized as a yield adjustment on the unhedged bonds.
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Funding strategies — Consolidated obligation bonds
The principal tactical funding strategy changes employed in executing issuances of FHLBank bonds are outlined below:
· Floating rate bonds — We have judiciously issued floating-rate bonds indexed to the 1-month LIBOR, the Prime rate and Federal funds rate and by swapping them back to 3-month LIBOR, we have created synthetic LIBOR funding at relatively attractive spreads. Such floating bonds were generally for terms 3 years or less. Maturing floating rate bonds were replaced by fixed-rate non-callable bonds and the category declined at December 31, 2012, compared to December 31, 2011. Outstanding floating-rate bonds at December 31, 2012, were primarily indexed to the Federal funds rate.
· Callable-bonds — FHLBank longer-term fixed-rate callable bonds have not been an attractive investment asset for investors over the last several years, and have been under price pressure. With a callable bond, we purchase a call option from the investor and the option allows us to terminate the bond at predetermined call dates at par. When we purchase the call option from investors, it typically improves the yield to the investor, who has traditionally been receptive to callable-bond yields.
· Non-callable bonds — Non-callable fixed-rate bonds were our primary funding vehicle. Issuances are predicated partly on pricing of such debt and investor demand, and partly on the need to achieve asset/liability management goals. As issuance of floating-rate bonds declined, issuance of fixed-rate bonds increased at December 31, 2012, relative to December 31, 2011.
Debt extinguishment — The following table summarizes debt transferred to or from another FHLBank and debt retired by the FHLBNY (carrying values, in thousands):
Table 6.2: Transferred and Retired Debt
| | Years ended December 31, | |
| | 2012 | | 2011 | |
Debt transferred to another FHLBank | | $ | — | | $ | 150,049 | |
Debt extinguished | | $ | 268,631 | | $ | 623,921 | |
Debt retired resulted in a charge of $24.1 million to earnings in 2012, compared to $86.5 million in 2011, and $2.1 million in 2010.
The FHLBNY typically retires debt to reduce future debt costs when the associated asset is either prepaid or terminated early, and less frequently from unscheduled prepayments of mortgage-backed securities. When assets are prepaid ahead of their expected or contractual maturities, the FHLBNY 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. The FHLBNY typically receives prepayment fees when assets are prepaid, making us economically whole. When debt is retired by transferring to another FHLBank, the re-purchases are also at negotiated market rates. Debt extinguished other than through a transfer (to another FHLBank) is re-purchased from investors through bond dealers.
Impact of hedging fixed-rates consolidated obligation bonds
The most significant element that impacts balance sheet reporting of debt is the recording of fair value basis and valuation adjustments. We adjust 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. The discounting basis for computing changes in fair values basis for hedges of debt in a fair value hedge is LIBOR for the FHLBNY. When a hedge is terminated before its stated maturity, we compute the fair values of the debt at the hedge termination date, and we amortize the basis on a level yield method to Interest expense. Carrying values of bonds elected under the FVO include valuation adjustments to recognize changes in fair values. The discounting basis for computing changes in fair values of bonds elected under the FVO is the observed FHLBank bond yield curve.
Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates, the value and implied volatility of call options of callable bonds, and from the growth or decline in hedge volume.
Fair value basis and valuation adjustments — The carrying values of our consolidated obligation bonds included $804.2 million and $979.0 million of fair value hedging basis losses at December 31, 2012 and December 31, 2011, and were consistent with the higher contractual coupons of long- and intermediate-term fixed-rate hedged bonds, compared to FHLBank debt pricing at the two balance sheet dates. In 2012, we partially terminated a hedge of a long-term bond, which resulted in the recognition of $63.5 million of valuation adjustment, which is being amortized over the contractual maturity of the debt. Valuation adjustments for bonds elected under the FVO were also exhibiting fair value losses due to declining yields of equivalent maturity consolidated bonds offered in the bond markets. Most of our existing hedged bonds were fixed-rate, and had been issued in prior years at the then prevailing higher interest rate environment. In a lower interest rate environment in 2012 and 2011, these fixed-rate bonds exhibited unrealized fair value basis losses. Fair value basis losses were not significant, relative to their par values, because the terms to maturity of the hedged bonds were, on average, short- and medium-term. The period-over-period net fair value basis losses of hedged bonds have declined somewhat because the valuation adjustments, in a low interest rate environment, have been relatively less sensitive, and maturing and called short-term and medium-term hedged bonds have been replaced with equivalent term bonds.
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Hedge volume — Tables 6.3 - 6.5 provide information with respect to par amounts of bonds based on accounting designation: (1) under hedge qualifying rules, (2) under the FVO, and (3) as an economic hedge (in thousands):
Table 6.3: Bonds Hedged under Qualifying Hedges (in thousands)
| | Consolidated Obligation Bonds | |
Par Amount | | December 31, 2012 | | December 31, 2011 | |
Qualifying Hedges (a) | | | | | |
Fixed-rate bullet bonds (b) | | $ | 28,587,050 | | $ | 30,217,830 | |
Fixed-rate callable bonds (c) | | 3,246,000 | | 1,380,610 | |
| | $ | 31,833,050 | | $ | 31,598,440 | |
(a) Qualified under hedge accounting rules. The hedges effectively convert the fixed-rate exposure of the bonds to a variable-rate exposure, generally indexed to 3-month LIBOR.
(b) In 2012, the volume of hedges qualifying for hedge accounting declined, in part due to the shorter-term nature of the debt being issued, and in part due to increased usage of discount notes as a funding vehicle. Maturing bonds were replaced by discount notes.
(c) Callable bonds designated as eligible for hedge accounting increased as we opted to reduce the election under the FVO for new issuances, and also reduce electing to apply economic hedges, on the basis that hedge accounting provides the lease impact to earnings volatility.
Bonds elected under the FVO — If, at inception of a hedge, we do not believe that the hedge would be highly effective in offsetting fair value changes between the derivative and the debt (hedged item), we may designate the debt under the FVO if operationally practical, and record changes to the full fair values of both the derivative and debt through earnings. The recorded balance sheet value of debt under the FVO would include the fair value basis adjustments so that the debt’s balance sheet carrying values would be its fair value.
The following table summarizes par amounts of bonds under the FVO (in thousands):
Table 6.4: Bonds under the Fair Value Option (FVO)
| | Consolidated Obligation Bonds | |
Par Amount | | December 31, 2012 | | December 31, 2011 | |
Bonds designated under FVO | | $ | 12,728,000 | | $ | 12,530,000 | |
| | | | | | | |
Bonds designated under the FVO were generally economically hedged by interest rate swaps. We have elected not to increase the level of consolidated obligation bonds elected under the FVO in order to reduce potential fair value volatility caused by changes in the basis between the consolidated obligation debt yield curve and the swap yield curve. The swap curve is the basis for valuing the swap in a hedging relationship, while the debt curve is the basis for valuing the debt. The hedge is classified as an economic hedge.
Economically hedged bonds — We may also decide that the operational cost of designating debt under the FVO (or qualifying fair value hedge accounting) outweighs the accounting benefits. To mitigate the economic risk, we would then opt to hedge the debt on an economic basis. In that scenario, the balance sheet carrying value of the debt would not include fair value basis since the debt would then be recorded at amortized cost.
Table 6.5: Economically Hedged Bonds (in thousands)
| | Consolidated Obligation Bonds | |
Par Amount | | December 31, 2012 | | December 31, 2011 | |
Bonds designated as economically hedged | | | | | |
Floating-rate bonds (a) | | $ | 7,345,000 | | $ | 13,570,000 | |
Fixed-rate bonds (b) | | 910,000 | | 50,000 | |
| | $ | 8,255,000 | | $ | 13,620,000 | |
(a) Floating-rate debt — We have allowed the portfolio of floating-rate bonds to decline. Maturing floaters were replaced by fixed-rate bonds or discount notes. Floating rate bonds were generally indexed to the Federal funds effective rate and the 1-month LIBOR. The bonds were economically hedged to 3-month LIBOR by the execution of swap agreements with derivative counterparties that synthetically converted the floating rate debt cash flows to 3-month LIBOR. The hedge objective was to reduce the basis risk from any asymmetrical changes between 3-month LIBOR and the Federal funds rate, or the 1-month LIBOR. The swaps were designated as stand-alone derivatives because the operational cost of designating the swaps in a hedge qualifying relationship outweighed the accounting benefits.
(b) Fixed-rate debt — These primarily represent debt that may have fallen out of effectiveness. We do not consider this to be significant and the fair values were also not significant.
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Consolidated obligation bonds — maturity or next call date (a)
Swapped, callable bonds contain an exercise date or a series of exercise dates that may result in a shorter redemption period. The following table summarizes consolidated bonds outstanding by years to maturity or next call date (dollars in thousands):
Table 6.6: Consolidated Obligation Bonds — Maturity or Next Call Date
| | December 31, 2012 | | December 31, 2011 | |
| | Amount | | Percentage of
Total | | Amount | | Percentage of
Total | |
Year of maturity or next call date | | | | | | | | | |
Due or callable in one year or less | | $ | 45,720,800 | | 71.63 | % | $ | 35,799,485 | | 53.97 | % |
Due or callable after one year through two years | | 8,358,630 | | 13.10 | | 20,516,800 | | 30.93 | |
Due or callable after two years through three years | | 4,441,280 | | 6.96 | | 3,511,280 | | 5.29 | |
Due or callable after three years through four years | | 1,010,010 | | 1.58 | | 3,227,190 | | 4.87 | |
Due or callable after four years through five years | | 1,315,570 | | 2.06 | | 796,735 | | 1.20 | |
Due or callable after five years through six years | | 617,420 | | 0.97 | | 728,470 | | 1.10 | |
Thereafter | | 2,361,375 | | 3.70 | | 1,749,335 | | 2.64 | |
| | | | | | | | | |
Total par value | | 63,825,085 | | 100.00 | % | 66,329,295 | | 100.00 | % |
| | | | | | | | | |
Bond premiums | | 102,225 | | | | 145,869 | | | |
Bond discounts | | (23,566 | ) | | | (26,459 | ) | | |
Hedge value basis adjustments | | 804,174 | | | | 979,013 | | | |
Hedge basis adjustments on terminated hedges | | 63,520 | | | | 201 | | | |
Fair value option valuation adjustments and accrued interest | | 12,883 | | | | 12,603 | | | |
| | | | | | | | | |
Total bonds | | $ | 64,784,321 | | | | $ | 67,440,522 | | | |
(a) Contrasting consolidated obligation bonds by contractual maturity dates with potential put dates illustrates the impact of hedging on the effective duration of the bond. With a callable bond, we have purchased the option to terminate debt at agreed upon dates from investors. Call options are exercisable either as a one-time option or as quarterly. Our current practice is to exercise our option to call a bond when the swap counterparty exercises its option to call the cancellable swap hedging the callable bond. Thus, issuance of a callable bond with an associated callable swap significantly alters the contractual maturity characteristics of the original bond and introduces the possibility of an exercise call date that is significantly shorter than the contractual maturity.
The following table summarizes callable bonds outstanding (in thousands):
Table 6.7: Outstanding Callable Bonds
| | December 31, | |
| | 2012 (a) | | 2011 (a) | |
Callable | | $ | 3,906,000 | | $ | 2,885,610 | |
Non-Callable | | $ | 59,919,085 | | $ | 63,443,685 | |
(a) Par Value.
Discount Notes
Consolidated obligation discount notes provide us 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. Additionally, through a 16-member selling group, the Office of Finance, acting on behalf of the 12 Federal Home Loan Banks, issues discount notes in four standard maturities in two auctions each week.
The following table summarizes discount notes issued and outstanding (dollars in thousands):
Table 6.8: Discount Notes Outstanding
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Par value | | $ | 29,785,543 | | $ | 22,127,530 | |
| | | | | |
Amortized cost | | 29,776,704 | | 22,121,109 | |
Hedge basis adjustments | | — | | (1,467 | ) |
Fair value option valuation adjustments | | 3,243 | | 3,683 | |
| | | | | |
Total discount notes | | $ | 29,779,947 | | $ | 22,123,325 | |
| | | | | |
Weighted average interest rate | | 0.13 | % | 0.07 | % |
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The following table summarizes par amounts of bonds under the FVO (in thousands):
Table 6.9: Discount Notes under the Fair Value Option (FVO)
Par Amount | | December 31, 2012 | | December 31, 2011 | |
Discount Notes designated under FVO (a) | | $ | 1,945,744 | | $ | 4,917,172 | |
| | | | | | | |
(a) We hedged discount notes that were elected under the FVO as economic hedges to convert the fixed-rate exposure of the discount notes to a variable-rate exposure, generally indexed to LIBOR. We accomplished the strategy by the execution of interest rate swaps to mitigate fair value risk. In 2012, we opted to reduce the FVO election on new issuances of discount notes.
The following table summarizes hedges of discount notes (in thousands):
Table 6.10: Hedges of Discount Notes
| | Consolidated Obligation Discount Notes | |
Principal Amount | | December 31, 2012 | | December 31, 2011 | |
Discount notes hedged under qualifying hedge (a) | | $ | 1,106,000 | | $ | 3,308,455 | |
Discount notes economically hedged | | $ | — | | $ | 201,520 | |
(a) Discount note issuances have largely been concentrated at the short-end of their maturities, with a significant percentage issued to mature within 3 months; we have determined that it was not necessary to designate discount notes with short-term maturities in a qualifying fair value hedge. Discount notes that were economically hedged in 2011 were primarily those that may have fallen out of effectiveness.
Rating Actions With Respect to the FHLBNY
In July 15, 2011, Standard & Poor’s (“S&P”) placed the AAA rating on the FHLBank System’s senior unsecured debt and the AAA long-term ratings on select FHLBanks on CreditWatch with negative implications. The A-1+ short-term ratings on those entities are not affected. S&P’s CreditWatch action follows placement of the sovereign credit rating on the U.S. on CreditWatch with negative implications. The CreditWatch listing on the FHLBank System’s debt reflects the application of S&P’s Government-related enterprises (“GRE”) criteria, under which S&P equalizes the rating on that debt with the sovereign rating because of the almost certain likelihood of government support. S&P’s CreditWatch listing on the FHLBanks reflects the potential reduction in the implicit support that S&P has historically factored into the issuer credit ratings because of the important role the FHLBanks play as primary liquidity providers to U.S. mortgage and housing-market participants. Under S&P’s GRE criteria, the issuer credit rating for the FHLBank system banks can be one to three notches above the stand-alone credit profile on any of the member banks. Thus, a lower U.S. sovereign rating would directly affect the issuer credit ratings on the individual FHLBanks.
On August 2, 2011, Moody’s Investors Service confirmed the Aaa bond rating of the U.S. government following the raising of the U.S. statutory debt limit. Moody’s also confirmed the long-term Aaa rating on the senior unsecured debt issues of the Federal Home Loan Bank System, the 12 Federal Home Loan Banks, and other ratings Moody’s considers directly linked to the U.S. government. Additionally, Moody’s revised the rating outlook to negative for U.S. government debt and all issuers Moody’s considers directly linked to the U.S. government. On August 5, 2011, S&P lowered its long-term sovereign credit rating on the U.S. to AA+ from AAA. S&P’s outlook on the long-term rating is negative. At the same time, S&P affirmed the A-1+ short-term rating on the U.S.
The senior unsecured debt issues of the Federal Home Loan Bank System and the 12 Federal Home Loan Banks are rated by S&P as AA+ (Long-term rating) with negative outlook. A rating being placed on negative outlook indicates a substantial likelihood of a risk of further downgrades within two years.
FHLBNY Ratings
Table 6.11: FHLBNY Ratings
| | | | S&P | | | | Moody’s |
| | | | Long-Term/ Short-Term | | | | Long-Term/ Short-Term |
Year | | | | Rating | | Outlook | | | | Rating | | Outlook |
| | | | | | | | | | | | |
2012 | | August 15, 2012 | | AA+/A-1+ | | Negative/Affirmed | | August 15, 2012 | | Aaa/P-1 | | Negative/Affirmed |
| | | | | | | | | | | | |
2011 | | August 8, 2011 | | AA+/A-1+ | | Negative/Affirmed | | August 2, 2011 | | Aaa/P-1 | | Negative/Affirmed |
| | July 19, 2011 | | AAA/A-1+ | | | | July 13, 2011 | | Aaa/P-1 | | Negative Watch/Affirmed |
| | April 20, 2011 | | AAA/A-1+ | | Negative Watch/Affirmed | | | | | | |
| | | | | | Negative/Affirmed | | | | | | |
| | | | | | | | | | | | |
2010 | | July 21, 2010 | | AAA/A-1+ | | Affirmed/Affirmed | | June 17, 2010 | | Aaa/P-1 | | Affirmed/Affirmed |
Accrued interest payable
Other liabilities
Accrued interest payable — Accrued interest payable was comprised primarily of interest due and unpaid on consolidated obligation bonds, which are generally payable on a semi-annual basis. Amounts outstanding at December 31, 2012 were $127.7 million, compared to $146.2 million at December 31, 2011. Fluctuations in unpaid interest balance on bonds are due to the timing of accruals outstanding at the balance sheet dates, relative to the semi-annual coupon period.
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Other liabilities — Other liabilities comprised of unfunded pension liabilities, pass through reserves held at the FRB on behalf of our members, commitments and miscellaneous payables. Amount outstanding was $165.7 million and $136.3 million at December 31, 2012 and December 31, 2011.
Stockholders’ Capital, Retained Earnings, and Dividend
The following table summarizes the components of Stockholders’ capital (in thousands):
Table 7.1: Stockholders’ Capital
| | December 31, 2012 | | December 31, 2011 | |
Capital Stock (a) | | $ | 4,797,457 | | $ | 4,490,601 | |
Unrestricted retained earnings (b) | | 797,567 | | 722,198 | |
Restricted retained earnings (c) | | 96,185 | | 24,039 | |
Accumulated Other Comprehensive Income (Loss) | | (199,380 | ) | (190,427 | ) |
| | | | | |
Total Capital | | $ | 5,491,829 | | $ | 5,046,411 | |
(a) Stockholders’ Capital — Capital stock has increased consistent with the increase in advances borrowed by members. Since members are generally required to purchase stock as a percentage of advances borrowed from us, an increase in advances will typically result in an increase in capital stock. In addition, under our present practice, we generally redeem any stock in excess of the amount necessary to support advance activity on a daily basis. Therefore, the amount of capital stock outstanding varies directly with members’ outstanding borrowings under existing practice.
(b) Unrestricted retained earnings — Net Income in 2012 was $360.7 million. Four dividends paid totaled $213.2 million, and $72.1 million was set aside towards Restricted retained earnings, thus preserving $75.4 million towards Unrestricted retained earnings, which has grown to $797.6 million at December 31, 2012, up from $722.2 million at December 31, 2011.
(c) Restricted retained earnings — Restricted retained earnings was established in the third quarter of 2011, and has grown to $96.2 million at December 31, 2012. On February 28, 2011, the Federal Home Loan Bank of New York entered into a Joint Capital Enhancement Agreement (the “Agreement”) with the other 11 Federal Home Loan Banks (“FHLBanks”). The Agreement provides that, upon satisfaction of the FHLBanks’ obligations to make payments related to the Resolution Funding Corporation (“REFCORP”), each FHLBank will, on a quarterly basis, allocate at least 20% of its net income to a separate restricted retained earnings account to be established at each FHLBank until the balance of the account equals at least 1% of its average balance of outstanding Consolidated Obligations for the previous quarter. If the ultimate Restricted retained earnings target was to be calculated at December 31, 2012, it would have amounted to $968.4 million based on the FHLBNY’s average consolidated obligations outstanding during the previous quarter as per provisions under the Capital Agreement.
On August 5, 2011, amendments to the Capital Plans of the FHLBanks intended to reflect the text of the amended Agreement were approved by the Federal Housing Finance Agency (“FHFA”), with such Capital Plan amendments to become effective on September 5, 2011. Also, on August 5, 2011, the FHFA also certified that the FHLBanks had fully satisfied their REFCORP obligations. These restricted retained earnings will not be available to pay dividends, but will remain on the FHLBank’s balance sheet to help serve as an additional capital buffer against losses. The restricted retained earnings account established under the Agreement will be separate from any other restricted retained earnings account that may be maintained by an FHLBank. The Agreement contains mechanisms for voluntary and for automatic termination under certain conditions. For more information, see Form 8-K filed by the Bank on March 1, 2011, and on August 5, 2011.
The following table summarizes the components of AOCI (in thousands):
Table 7.2: Accumulated Other Comprehensive Income (Loss) (“AOCI” or “AOCL”)
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Accumulated other comprehensive income (loss) | | | | | |
Non-credit portion of OTTI on held-to-maturity securities, net of accretion (a) | | $ | (63,471 | ) | $ | (75,849 | ) |
Net unrealized gains (losses) on available-for-sale securities (b) | | 22,506 | | 16,419 | |
Net unrealized (losses) gains on hedging activities (c) | | (137,114 | ) | (111,985 | ) |
Employee supplemental retirement plans (d) | | (21,301 | ) | (19,012 | ) |
Total Accumulated other comprehensive income (loss) | | $ | (199,380 | ) | $ | (190,427 | ) |
(a) OTTI — Non-credit OTTI losses recorded in AOCI declined, primarily due to accretion recorded as a reduction in AOCI and a corresponding increase in the balance sheet carrying values of the OTTI securities. Additional OTTI losses recorded in 2012 were on previously impaired securities. OTTI did not result in significant non-credit OTTI because the market pricing of the credit impaired PLMBS were generally greater than the carrying values of the OTTI securities and further non-credit write downs were not necessary.
(b) Fair values of available-for-sale securities — Balance represents net unrealized fair value gains of MBS securities and a grantor trust fund. The overall pricing of the portfolio has improved at December 31, 2012 compared to December 31, 2011.
(c) Cash flow hedge losses — Net loss represents unrealized valuation losses on interest rate swaps in cash flow “rollover” hedge strategies that hedged the variability of 91-day discount notes issued in sequence for periods up to 15 years. Fair values of the swaps were in unrealized loss positions primarily due to the adverse change in fair values of $1.1 billion of long-term swaps designated as a hedge of discount notes at December 31, 2012. Fair value changes will be recorded through AOCI over the life of the hedges for the effective portion of the cash flow hedge strategy. Ineffectiveness, if any, was recorded through earnings. Discount note expense, which re-sets every 91 days, is synthetically changed to fixed cash flows over the hedge periods, thereby achieving hedge objectives.
The AOCI also included $12.3 million due to realized losses from terminated swaps in cash flow hedge strategy associated with hedges of anticipated issuance of debt. Amounts recorded in AOCL are being reclassified as an interest expense over the terms of the issued debt. The expense is considered as a yield adjustment to the fixed coupons of the debt.
(d) Employee supplemental plans — Represent minimum additional actuarially determined pension and post-retirement health benefit liabilities that were not recognized through earnings. Amounts will be amortized as an expense through earnings over an actuarially determined period. For more information, see Note 15. Employee Retirement Plans in the audited financial statements in this Form 10-K.
Dividend - As a cooperative, we seek to maintain a balance between our public policy mission of providing low-cost funds to members and providing our members with adequate returns on their capital invested in our stock. We also balance our mission with a goal to strengthen our financial position through an increase in the level of retained
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earnings. Our dividend policy takes both factors into consideration - the need to enhance retained earnings and the need to provide low-cost advances, while reasonably compensating members for the use of their capital. By Finance Agency regulation, dividends may be paid out of current earnings or previously retained earnings. We may be restricted from paying dividends if we do not comply with any of its minimum capital requirements or if payment would cause us to fail to meet any of its minimum capital requirements, including our Retained earnings target as established by the Board of Directors of the FHLBNY. In addition, we may not pay dividends if any principal or interest due on any consolidated obligations has not been paid in full, or if we fail to satisfy certain liquidity requirements under applicable Finance Agency regulations. None of these restrictions applied for any period presented in this Form 10-K.
The following table summarizes dividends paid and payout ratios (on all Class B stocks held by members; excludes captal stock held by non-members):
Table 7.3: Dividends Paid and Payout Ratios
| | December 31, 2012 | | December 31, 2011 | |
Cash dividends paid per share | | $ | 4.63 | | $ | 4.70 | |
Dividends paid (a), (c) | | $ | 213,219 | | $ | 210,340 | |
Pay-out ratio (b) | | 59.11 | % | 86.03 | % |
(a) In thousands.
(b) Dividend paid during the year divided by net income for the year.
(c) Excludes dividend paid to non-member; for accounting purposes, such dividends are recorded as interest expense.
Dividends are computed based on the weighted average stock outstanding during a quarter, and are declared and paid in the following quarter.
Derivative Instruments and Hedging Activities
Interest rate swaps, swaptions, cap and floor agreements (collectively, derivatives) enable us to manage our exposure to changes in interest rates by adjusting the effective maturity, repricing frequency, or option characteristics of financial instruments. To a limited extent, we also use interest rate swaps to hedge changes in interest rates prior to debt issuance and essentially lock in funding costs.
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 we have 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, we retain or execute derivative contracts, which are economically effective in reducing risk. Such derivatives are designated as economic hedges either because a qualifying hedge is not available, or it is not possible to demonstrate that the hedge would be effective on an ongoing basis as a qualifying hedge, or the cost of a qualifying hedge is operationally not economical. Changes in the fair value of a derivative are recorded in current period earnings for a fair value hedge, or in AOCL 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. We do not take speculative positions with derivatives or any other financial instruments, or trade derivatives for short-term profits. For additional information, see Note 16. Derivatives and Hedging Activities. Finance Agency regulations prohibit the speculative use of derivatives.
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The following table summarizes the principal derivatives hedging strategies outstanding as of December 31, 2012 and December 31, 2011:
Table 8.1: Derivative Hedging Strategies - Advances
Derivatives/Terms | | Hedging Strategy | | Accounting Designation | | December 31, 2012
Notional Amount
(in millions) | | December 31, 2011
Notional Amount
(in millions) | |
Pay fixed, receive floating interest rate swap no longer cancellable by counterparty | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate non-putable advance | | Economic Hedge of Fair Value Risk | | $ | 25 | | $ | 30 | |
Pay fixed, receive floating interest rate swap non-cancellable | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate non-putable advance | | Economic Hedge of Fair Value Risk | | $ | 146 | | $ | 81 | |
Pay fixed, receive floating interest rate swap cancellable by FHLBNY | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate callable advance | | Fair Value Hedge | | $ | — | | $ | 325 | |
Pay fixed, receive floating interest rate swap cancellable by counterparty | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate putable advance | | Fair Value Hedge | | $ | 15,605 | | $ | 17,439 | |
Pay fixed, receive floating interest rate swap no longer cancellable by counterparty | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate no-longer putable advance | | Fair Value Hedge | | $ | 2,098 | | $ | 2,507 | |
Pay fixed, receive floating interest rate swap non-cancellable | | To convert fixed rate on a fixed rate advance to a LIBOR floating rate non-putable advance | | Fair Value Hedge | | $ | 27,308 | | $ | 30,227 | |
Purchased interest rate cap | | To offset the cap embedded in the variable rate advance | | Economic Hedge of Fair Value Risk | | $ | 8 | | $ | 8 | |
Table 8.2: Derivative Hedging Strategies — Consolidated Obligation Liabilities
Derivatives/Terms | | Hedging Strategy | | Accounting Designation | | December 31, 2012
Notional Amount
(in millions) | | December 31, 2011
Notional Amount
(in millions) | |
Receive fixed, pay floating interest rate swap cancellable by counterparty | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate callable bond | | Economic Hedge of Fair Value Risk | | $ | 285 | | $ | 50 | |
Receive fixed, pay floating interest rate swap non-cancellable | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate non-callable | | Economic Hedge of Fair Value Risk | | $ | 625 | | $ | — | |
Receive fixed, pay floating interest rate swap cancellable by counterparty | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate callable bond | | Fair Value Hedge | | $ | 3,246 | | $ | 1,381 | |
Receive fixed, pay floating interest rate swap non-cancellable | | To convert fixed rate consolidated obligation bond debt to a LIBOR floating rate non-callable | | Fair Value Hedge | | $ | 28,587 | | $ | 30,218 | |
Receive fixed, pay floating interest rate swap | | To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate | | Economic Hedge of Fair Value Risk | | $ | — | | $ | 202 | |
Receive fixed, pay floating interest rate swap | | To convert the fixed rate consolidated obligation discount note debt to a LIBOR floating rate. | | Fair Value Hedge | | $ | — | | $ | 2,405 | |
Pay fixed, receive LIBOR interest rate swap | | To offset the variability of cash flows associated with interest payments on forecasted issuance of fixed rate consolidated obligation discount note debt. | | Cash flow hedge | | $ | 1,106 | | $ | 903 | |
Basis swap | | To convert non-LIBOR index to LIBOR to reduce interest rate sensitivity and repricing gaps | | Economic Hedge of Cash Flows | | $ | 7,345 | | $ | 11,720 | |
Basis swap | | To convert 1M LIBOR index to 3M LIBOR to reduce interest rate sensitivity and repricing gaps | | Economic Hedge of Cash Flows | | $ | — | | $ | 1,850 | |
Receive fixed, pay floating interest rate swap cancellable 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 | | $ | — | | $ | 1,430 | |
Receive fixed, pay floating interest rate swap non-cancellable | | Fixed rate non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under fair value option | | Fair Value Option | | $ | 12,728 | | $ | 11,100 | |
Receive fixed, pay floating interest rate swap non-cancellable | | Fixed rate consolidated obligation discount note converted to a LIBOR floating rate; matched to discount note accounted for under fair value option | | Fair Value Option | | $ | 1,946 | | $ | 4,917 | |
Table 8.3: Derivative Hedging Strategies — Balance Sheet and Intermediation
Derivatives/Terms | | Hedging Strategy | | Accounting Designation | | December 31, 2012
Notional Amount
(in millions) | | December 31, 2011
Notional Amount
(in millions) | |
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 | | $ | 530 | | $ | 550 | |
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Derivatives Financial Instruments by Product
The following table summarizes the notional amounts and estimated fair values of derivative financial instruments (excluding accrued interest) by product and type of accounting treatment. The table also provides a reconciliation of fair value basis gains and (losses) of derivatives to the Statements of Condition (in thousands):
Table 8.4: Derivatives Financial Instruments by Product
| | December 31, 2012 | | December 31, 2011 | |
| | | | 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 (a) | | | | | | | | | |
Advances-fair value hedges | | $ | 45,011,484 | | $ | (3,610,238 | ) | $ | 50,498,321 | | $ | (3,880,147 | ) |
Consolidated obligations-fair value hedges | | 31,833,050 | | 803,389 | | 34,003,896 | | 965,380 | |
Cash Flow-anticipated transactions | | 1,106,000 | | (124,779 | ) | 903,000 | | (97,588 | ) |
Derivatives not designated as hedging instruments (b) | | | | | | | | | |
Advances hedges | | 179,013 | | (788 | ) | 119,329 | | (4,160 | ) |
Consolidated obligations hedges | | 8,255,000 | | 3,526 | | 13,821,520 | | (20,264 | ) |
Mortgage delivery commitments | | 25,217 | | (32 | ) | 31,242 | | 270 | |
Balance sheet | | 1,892,000 | | 4,221 | | 1,892,000 | | 14,927 | |
Intermediary positions hedges | | 530,000 | | 325 | | 550,000 | | 483 | |
Derivatives matching COs designated under FVO (c) | | | | | | | | | |
Interest rate swaps-consolidated obligations-bonds | | 12,728,000 | | 10,130 | | 12,530,000 | | (7,078 | ) |
Interest rate swaps-consolidated obligations-discount notes | | 1,945,744 | | 1,674 | | 4,917,172 | | (568 | ) |
| | | | | | | | | |
Total notional and fair value | | $ | 103,505,508 | | $ | (2,912,572 | ) | $ | 119,266,480 | | $ | (3,028,745 | ) |
| | | | | | | | | |
Total derivatives, excluding accrued interest | | | | $ | (2,912,572 | ) | | | $ | (3,028,745 | ) |
Cash collateral pledged to counterparties | | | | 2,546,568 | | | | 2,638,843 | |
Cash collateral received from counterparties | | | | (7,700 | ) | | | (40,900 | ) |
Accrued interest | | | | (11,190 | ) | | | (30,233 | ) |
| | | | | | | | | |
Net derivative balance | | | | $ | (384,894 | ) | | | $ | (461,035 | ) |
| | | | | | | | | |
Net derivative asset balance (d) | | | | $ | 41,894 | | | | $ | 25,131 | |
Net derivative liability balance | | | | (426,788 | ) | | | (486,166 | ) |
| | | | | | | | | |
Net derivative balance | | | | $ | (384,894 | ) | | | $ | (461,035 | ) |
(a) Qualifying under hedge accounting rules.
(b) Not qualifying under hedge accounting rules but used as an economic hedge (“standalone”).
(c) Economic hedge of debt designated under the FVO.
(d) At December 31, 2012, Net derivative asset balance included $24.1 million of excess cash collateral posted by the FHLBNY.
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.
Derivative Credit Risk Exposure and Concentration
In addition to market risk, we are subject to credit risk in derivative transactions because of the potential for non-performance by the counterparties, which could result in the FHLBNY having to acquire a replacement derivative from a different counterparty at a cost. We are also subject to operational risks in the execution and servicing of derivative transactions. The degree of counterparty credit risk may depend on, among other factors, the extent to which netting procedures and/or the provision of collateral are used to mitigate the risk. See Table 8.5 for summarized information. Summarized below are our risk evaluation and measurement processes:
Risk measurement - We estimate 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. All derivative contracts with non-members are also subject to master netting agreements or other right of offset arrangements.
Exposure - In determining credit risk, we consider accrued interest receivable and payable, and the legal right to offset assets and liabilities by counterparty. We attempt to mitigate exposure by requiring derivative counterparties to pledge cash collateral if the amount of exposure is above the collateral threshold agreements.
Derivative counterparty ratings - Our credit exposures (derivatives in a net gain position) were to counterparties rated Single A or better, and to member institutions on whose behalf we acted as an intermediary. The exposures were collateralized under standard advance collateral agreements with our members. Acting as an intermediary, we had also purchased equivalent notional amounts of derivatives from unrelated derivative counterparties.
Risk mitigation - We attempt to mitigate derivative counterparty credit risk by contracting only with experienced counterparties with investment-grade credit ratings. Annually, our management and Board of Directors review and approve all non-member derivative counterparties. We monitor 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 our bank and, in addition, execute the Credit Support Annex to the ISDA agreement that provides for collateral support at predetermined thresholds.
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Derivatives Counterparty Credit Ratings
The following table summarizes our derivative counterparty credit rating and their notional and fair value exposure (in thousands, except number of counterparties):
Table 8.5: Derivatives Counterparty Notional Balance by Credit Ratings
| | December 31, 2012 | |
| | | | | | Total Net | | Credit Exposure | | Other | | Net | |
| | Number of | | Notional | | Exposure at | | Net of | | Collateral | | Credit | |
Credit Rating | | Counterparties | | Balance | | Fair Value | | Cash Collateral (a) & (c) | | Held (b) | | Exposure | |
| | | | | | | | | | | | | |
AA | | 4 | | $ | 10,218,677 | | $ | — | | $ | — | | $ | — | | $ | — | |
A | | 12 | | 79,689,143 | | 42,226 | | 34,526 | | — | | 34,526 | |
BBB | | 2 | | 13,307,471 | | — | | — | | — | | — | |
Members (a) & (b) | | 2 | | 265,000 | | 7,368 | | 7,368 | | 7,368 | | — | |
Delivery Commitments | | — | | 25,217 | | — | | — | | — | | — | |
| | | | | | | | | | | | | |
| | 20 | | $ | 103,505,508 | | $ | 49,594 | | $ | 41,894 | | $ | 7,368 | | $ | 34,526 | |
| | December 31, 2011 | |
| | | | | | Total Net | | Credit Exposure | | Other | | Net | |
| | Number of | | Notional | | Exposure at | | Net of | | Collateral | | Credit | |
Credit Rating | | Counterparties | | Balance | | Fair Value | | Cash Collateral (a) & (c) | | Held (b) | | Exposure | |
| | | | | | | | | | | | | |
AA | | 6 | | $ | 20,125,098 | | $ | 13,407 | | $ | 13,407 | | $ | — | | $ | 13,407 | |
A | | 11 | | 97,184,740 | | 43,292 | | 2,392 | | — | | 2,392 | |
BBB | | 1 | | 1,650,400 | | — | | — | | — | | — | |
Members (a) & (b) | | 2 | | 275,000 | | 9,062 | | 9,062 | | 9,062 | | — | |
Delivery Commitments | | — | | 31,242 | | 270 | | 270 | | 270 | | — | |
| | | | | | | | | | | | | |
| | 20 | | $ | 119,266,480 | | $ | 66,031 | | $ | 25,131 | | $ | 9,332 | | $ | 15,799 | |
(a) Net credit exposure of $41.9 million at December 31, 2012 comprised of: (1) Derivatives in unrealized fair value gains of $10.4 million, representing the estimated cost of replacing derivatives if counterparties defaulted. (2) $7.4 million in potential exposures if members defaulted at December 31, 2012, before considering collateralization provisions that apply to all members. See Note b below. The FHLBNY acts as an intermediary when we are requested by a member to execute derivative contracts on its behalf. (3) $24.1 million in cash, which was posted to a counterparty in excess of the amount that was required, and that was also considered as a potential exposure. Cash collateral posted by the Bank is typically netted against the counterparty exposure, unless it is in excess of the counterparty’s exposure.
(b) Members are required to pledge collateral to secure our exposure to the derivatives sold to members. As a result of the collateral agreements with our members, we believe that our maximum credit exposure due to the intermediated transactions was $0 at December 31, 2012 and December 31, 2011.
(c) As reported in the Statements of Condition. The table above does not report fair values of counterparties in a net liability position, as only derivatives in a fair value gain position represent the FHLBNY’s credit exposures.
Many of the Credit Support Amount (“CSA”) agreements with swap dealers stipulate that so long as we retain our GSE status, ratings downgrades would not result in the posting of additional collateral. Other CSA agreements would require us to post additional collateral based solely on an adverse change in our credit rating by S&P and Moody’s. In the event of a split rating, the lower rating will apply. On August 8, 2011, S&P downgraded the credit rating of the FHLBank long-term debt from AAA to AA+/Negative and lowered one notch the credit ratings of those FHLBanks rated AAA (including the Federal Home Loan Bank of New York) to AA+/Negative. On August 2, 2011, Moody’s affirmed the AAA status of the FHLBank’s long-term debt and the AAA credit rating of the FHLBNY.
On the assumption we will retain our status as a GSE, we estimate that a one notch downgrade of our credit rating by S&P would have permitted swap dealers and counterparties to make additional collateral calls of up to $73.2 million at December 31, 2012. Additional collateral postings upon an assumed downgrade were estimated based on the factors in the individual collateral posting provisions of the CSA with each counterparty and the exposures as of December 31, 2012. The aggregate fair value of our derivative instruments that were in a net liability position at December 31, 2012 was approximately $426.8 million.
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Derivative Counterparty Country Concentration Risk
The following table summarizes derivative notional exposures by significant counterparty by country of incorporation. The table also summarizes the FHLBNY’s exposure (i.e. when derivative contracts are in a gain position) (dollars in thousands):
Table 8.6: FHLBNY Exposure Concentration (a)
| | | | December 31, 2012 | |
| | Ultimate Country | | Notional | | Percentage | | Fair Value | | Percentage | |
Counterparties (Asset position) | | of Incorporation (b) | | Amount (c) | | of Total | | Exposure | | of Total | |
| | | | | | | | | | | |
Counterparty | | Switzerland | | $ | 8,870,698 | | 8.57 | % | $ | 24,127 | | 57.59 | % |
Counterparty | | France | | 8,814,631 | | 8.52 | | 4,201 | | 10.03 | |
Counterparty | | U.S.A. | | 6,791,620 | | 6.56 | | 6,198 | | 14.79 | |
Members and Delivery Commitments | | | | 290,217 | | 0.28 | | 7,368 | | 17.59 | |
| | | | | | | | | | | |
Total Credit Exposure | | | | 24,767,166 | | 23.93 | | $ | 41,894 | | 100.00 | % |
| | | | | | | | | | | |
Counterparties (Liability position) | | | | | | | | | | | |
Counterparty | | Germany | | 14,143,314 | | 13.66 | | | | | |
Counterparty | | U.S.A. | | 12,529,188 | | 12.10 | | | | | |
Counterparty | | U.S.A. | | 12,007,071 | | 11.60 | | | | | |
| | | | | | | | | | | |
Counterparties below 10% aggregate by country | | | | | | | | | | | |
| | U.S.A. | | 23,873,304 | | 23.07 | | | | | |
| | United Kingdom | | 11,711,684 | | 11.32 | | | | | |
| | Switzerland | | 4,097,781 | | 3.96 | | | | | |
| | Canada | | 361,000 | | 0.35 | | | | | |
| | France | | 15,000 | | 0.01 | | | | | |
| | | | 78,738,342 | | 76.07 | | | | | |
| | | | | | | | | | | |
| | | | $ | 103,505,508 | | 100.00 | % | | | | |
| | | | December 31, 2011 | |
| | Ultimate Country | | Notional | | Percentage | | Fair Value | | Percentage | |
Counterparties (Asset position) | | of Incorporation (b) | | Amount (c) | | of Total | | Exposure | | of Total | |
| | | | | | | | | | | |
Counterparty | | U.S.A. | | $ | 7,780,245 | | 6.52 | % | $ | 2,392 | | 9.52 | % |
Counterparty | | U.S.A. | | 3,041,156 | | 2.55 | | 13,407 | | 53.35 | |
Members and Delivery Commitments | | | | 306,242 | | 0.26 | | 9,332 | | 37.13 | |
| | | | | | | | | | | |
Total Credit Exposure | | | | 11,127,643 | | 9.33 | | $ | 25,131 | | 100.00 | % |
| | | | | | | | | | | |
Counterparties (Liability position) | | | | | | | | | | | |
Counterparty | | Germany | | 20,474,146 | | 17.17 | | | | | |
Counterparty | | Switzerland | | 14,148,654 | | 11.86 | | | | | |
Counterparty | | U.S.A. | | 13,345,921 | | 11.19 | | | | | |
| | | | | | | | | | | |
Counterparties below 10% aggregate by country | | | | | | | | | | | |
| | U.S.A. | | 31,115,082 | | 26.09 | | | | | |
| | United Kingdom | | 13,201,334 | | 11.07 | | | | | |
| | Switzerland | | 5,668,694 | | 4.75 | | | | | |
| | France | | 9,477,756 | | 7.95 | | | | | |
| | Canada | | 707,250 | | 0.59 | | | | | |
| | | | 108,138,837 | | 90.67 | | | | | |
| | | | | | | | | | | |
| | | | $ | 119,266,480 | | 100.00 | % | | | | |
(a) Notional concentration —We measure concentration by fair value exposure and not by notional. At December 31, 2012, concentration as measured by fair values in a gain position was with three counterparties. Derivative contracts with remaining counterparties were in a liability position, and the FHLBNY’s exposure with such contracts would be measured by the FHLBNY’s inability to replace the contracts at a value that was equal to or greater than the cash posted to the defaulting counterparty.
(b) Country of incorporation is based on domicile of the ultimate parent company.
(c) Total notional for all counterparties. Fair values are reported only when the FHLBNY has an exposure. Fair values in a liability position represent our exposure to counterparties, and this information is not reported in the above tables.
Table 8.7: Notional and Fair Value by Contractual Maturity (in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | Notional | | Fair Value | | Notional | | Fair Value | |
| | | | | | | | | |
Maturity in one year or less | | $ | 46,503,770 | | $ | 66,329 | | $ | 46,998,539 | | $ | (52,122 | ) |
Maturity after one year to three years or less | | 22,957,351 | | (247,655 | ) | 34,482,949 | | (86,236 | ) |
Maturity after three years to five years or less | | 19,184,088 | | (2,104,432 | ) | 19,740,911 | | (1,453,810 | ) |
Maturity after five years and thereafter | | 14,835,082 | | (626,782 | ) | 18,012,839 | | (1,436,847 | ) |
Delivery Commitments | | 25,217 | | (32 | ) | 31,242 | | 270 | |
| | $ | 103,505,508 | | $ | (2,912,572 | ) | $ | 119,266,480 | | $ | (3,028,745 | ) |
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Accounting for Derivatives - Hedge Effectiveness
Adoption of OIS — Beginning with the valuation at December 31, 2012, we have adopted the OIS discounting methodology for valuing our derivatives. Previously, cash flows from derivatives were discounted by the LIBOR yield curve. Under the OIS method, the cash flows from derivatives are discounted by the overnight federal funds curve. The adoption was consistent with our determination that the majority of the FHLBNY’s swap dealers had adopted the OIS methodology to price derivatives at December 31, 2012. By pricing derivatives on our balance sheet at the OIS values, the fair values of our derivatives would more closely reflect exit valuations. Adoption resulted in an insignificant impact on our financial statements and results of operations. For more information, see Note 17. Fair Values of Financial Instruments in the audited financial statements in this Form 10-K.
Hedge accounting and assessment of effectiveness — An entity that elects to apply hedge accounting is required, at the inception of the hedge, to establish 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. We assess hedge effectiveness in the following manner:
· Inception prospective assessment. Upon designation of the hedging relationship and on an ongoing basis, we are required to demonstrate that we expect 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 run under instantaneous parallel rate shocks, and 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 note below summarizing statistical regression methodology (a).
· Retrospective assessment. At least quarterly, we 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. The retrospective test utilizes multiple regression and statistical validation (a) parameters to determine that the hedging relation was highly effective.
· Ongoing prospective assessment. For purposes of assessing effectiveness on an ongoing basis, we utilize the regression results from our retrospective assessment as a means of demonstrating that we expect all “long-haul” hedge relationships to be highly effective in future periods (i.e. we will use the regression for both ongoing prospective and retrospective assessment).
(a) We use 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 variable(s). 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. We test 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.
Measurement of hedge ineffectiveness — We calculate the fair values of our 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, we measure 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 we assumed that the hedges presented no ineffectiveness and the short-cut method was applied) and we report changes through current earnings. For hedged items eligible for the short-cut method, we treat 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.
Discontinuation of hedge accounting — If a derivative no longer qualifies as a fair value or a cash flow hedge, we discontinue hedge accounting prospectively, report the derivative in the Statement of Condition at its fair value and record fair value gains and losses in earnings until the derivative matures. If we were 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, we no longer adjust the carrying value (basis) of the hedged item, typically an advance or a bond, for changes in their fair values. We then amortize 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).
Embedded derivatives — Before a trade is executed, our procedures require the identification and evaluation of any embedded derivatives 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, 2012, 2011 and 2010, we had no
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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 — We have insignificant amounts of similar advances that were hedged in aggregate as a portfolio. For such hedges, we perform a similar asset test for homogeneity 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, our other hedged items and derivatives are hedged as separately identifiable instruments.
Liquidity, Cash Flows, Short-Term Borrowings and Short-Term Debt
Our primary source of liquidity is the issuance of consolidated obligation bonds and discount notes. To refinance maturing consolidated obligations, we rely on the willingness of our investors to purchase new issuances. We have access to the discount note market, and the efficiency of issuing discount notes is an important 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. In addition, the Secretary of the Treasury is authorized to purchase up to $4.0 billion of consolidated obligations from the FHLBanks. Our liquidity position remains in compliance with all regulatory requirements and management does not foresee any changes to that position.
Finance Agency Regulations - Liquidity
Regulatory requirements are specified in Parts 917, 932 and 1270 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: (1) Obligations of the United States; (2) Deposits in banks or trust companies; or (3) 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. We met our contingency liquidity requirements. Liquidity in excess of requirements is summarized in the table titled Contingency Liquidity. Violations of the liquidity requirements would result in non-compliance penalties under discretionary powers given to the Finance Agency under applicable regulations, which include other corrective actions.
Liquidity Management
We actively manage our liquidity position to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand and the maturity profile of our assets and liabilities. We recognize that managing liquidity is critical to achieving our statutory mission of providing low-cost funding to our members. In managing liquidity risk, we are required to maintain certain liquidity measures in accordance with the FHLBank Act and policies developed by management and approved by our Board of Directors. The applicable liquidity requirements are described in the next four sections.
Deposit Liquidity. We are required to invest an aggregate amount at least equal to the amount of current deposits received from members in: (1) Obligations of the 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 our members, we may accept deposits from other FHLBanks or from any other governmental instrumentality. Deposit liquidity is calculated daily. Quarterly average reserve requirements and actual reserves are summarized below (in millions). We met these requirements at all times.
Table 9.1: Deposit Liquidity
| | Average Deposit | | Average Actual | | | |
For the Quarters Ended | | Reserve Required | | Deposit Liquidity | | Excess | |
December 31, 2012 | | $ | 1,979 | | $ | 61,032 | | $ | 59,053 | |
September 30, 2012 | | 1,762 | | 62,822 | | 61,060 | |
June 30, 2012 | | 2,216 | | 51,562 | | 49,346 | |
March 31, 2012 | | 3,107 | | 50,840 | | 47,733 | |
December 31, 2011 | | 2,223 | | 49,402 | | 47,179 | |
September 30, 2011 | | 2,334 | | 48,689 | | 46,355 | |
June 30, 2011 | | 2,276 | | 46,994 | | 44,718 | |
March 31, 2011 | | 2,404 | | 44,982 | | 42,578 | |
| | | | | | | | | | |
Operational Liquidity. We must be able to fund our activities as our balance sheet changes from day to day. We maintain the capacity to fund balance sheet growth through regular money market and capital market funding activities. We monitor our operational liquidity needs by regularly comparing our demonstrated funding capacity with potential balance sheet growth. We take such actions as may be necessary to maintain adequate sources of funding for such growth. Operational liquidity is measured daily. We met these requirements at all times.
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The following table summarizes excess operational liquidity (in millions):
Table 9.2: Operational Liquidity
| | Average Balance Sheet | | Average Actual | | | |
For the Quarters Ended | | Liquidity Requirement | | Operational Liquidity | | Excess | |
December 31, 2012 | | $ | 6,077 | | $ | 23,434 | | $ | 17,357 | |
September 30, 2012 | | 3,480 | | 25,165 | | 21,685 | |
June 30, 2012 | | 5,006 | | 24,988 | | 19,982 | |
March 31, 2012 | | 9,152 | | 22,440 | | 13,288 | |
December 31, 2011 | | 5,888 | | 21,205 | | 15,317 | |
September 30, 2011 | | 4,513 | | 20,050 | | 15,537 | |
June 30, 2011 | | 2,867 | | 18,516 | | 15,649 | |
March 31, 2011 | | 2,352 | | 17,796 | | 15,444 | |
| | | | | | | | | | |
Contingency Liquidity. We are required by Finance Agency regulations to hold “contingency liquidity” in an amount sufficient to meet our liquidity needs if we are unable to access the consolidated obligation debt markets for at least five business days. Contingency liquidity includes (1) marketable assets with a maturity of one year or less; (2) self-liquidating assets with a maturity of one year or less; (3) assets that are generally acceptable as collateral in the repurchase market; and (4) irrevocable lines of credit from financial institutions receiving not less than the second-highest credit rating from a Nationally Recognized Statistical Rating Organization. We consistently exceeded the regulatory minimum requirements for contingency liquidity. Contingency liquidity is reported daily. We met these requirements at all times.
The following table summarizes excess contingency liquidity (in millions):
Table 9.3: Contingency Liquidity
| | Average Five Day | | Average Actual | | | |
For the Quarters Ended | | Requirement | | Contingency Liquidity | | Excess | |
December 31, 2012 | | $ | 1,753 | | $ | 23,412 | | $ | 21,659 | |
September 30, 2012 | | 2,450 | | 24,957 | | 22,507 | |
June 30, 2012 | | 2,540 | | 24,806 | | 22,266 | |
March 31, 2012 | | 2,642 | | 22,316 | | 19,674 | |
December 31, 2011 | | 1,397 | | 21,086 | | 19,689 | |
September 30, 2011 | | 2,481 | | 19,781 | | 17,300 | |
June 30, 2011 | | 2,880 | | 18,245 | | 15,365 | |
March 31, 2011 | | 3,024 | | 17,586 | | 14,562 | |
| | | | | | | | | | |
The standards in our risk management policy address our day-to-day operational and contingency liquidity needs. These standards enumerate the specific types of investments to be held to satisfy such liquidity needs and are outlined above. These standards also establish the methodology to be used in determining our operational and contingency needs. We continually monitor and project our cash needs, daily debt issuance capacity, and the amount and value of investments available for use in the market for repurchase agreements. We use this information to determine our liquidity needs and to develop appropriate liquidity plans.
Advance “Roll-Off” and “Roll-Over” Liquidity Guidelines. The Finance Agency’s Minimum Liquidity Requirement Guidelines expanded the existing liquidity requirements to include additional cash flow requirements under two scenarios: Advance “Roll-Over” and “Roll-Off” scenarios. Each FHLBank, including the FHLBNY, must have positive cash balances to be able to maintain positive cash flows for 15 days under the Roll-Off scenario, and for five days under the Roll-Over scenario. The Roll-Off scenario assumes that advances maturing under their contractual terms would mature, and in that scenario we would maintain positive cash flows for a minimum of 15 days on a daily basis. The Roll-Over scenario assumes that our maturing advances would be rolled over, and in that scenario we would maintain positive cash flows for a minimum of 5 days on a daily basis. We calculate the amount of cash flows under each scenario on a daily basis and have been in compliance with these guidelines.
Other Liquidity Contingencies. As discussed more fully under the section Debt Financing Activity and Consolidated Obligations, we are primarily liable for consolidated obligations issued on our behalf. We are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on our behalf is not paid in full when due, we may not pay dividends, redeem or repurchase shares of stock of any member or non-member stockholder until the Finance Agency approves our consolidated obligation payment plan or other remedy and until we pay all the interest or principal currently due on all our consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations.
Finance Agency regulations also state that the FHLBanks must maintain, free from any lien or pledge, the following types of assets in an amount at least equal to the amount of consolidated obligations outstanding: Cash; Obligations of, or fully guaranteed by, the United States; Secured advances; Mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States; 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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Cash flows
Cash and due from banks was $7.6 billion at December 31, 2012, compared to $10.9 billion at December 31, 2011. Large cash balances were at the Federal Reserve Bank (“FRB”) at year-end, and throughout the year, to avoid potential credit issues that may arise if invested in unsecured overnight deposits at other financial institutions. Generally, we maintain funds at the FRB for liquidity purposes for our members.
The following discussion highlights the major activities and transactions that affected our cash flows. See Table 4.15 for a fuller understanding of cash held at the FRB. Also see Statements of Cash Flows in the audited financial statements in this Form 10-K.
Cash flows from operating activities - Our operating assets and liabilities support our lending activities to members. Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by member-driven borrowing, investment strategies and market conditions. Management believes cash flows from operations, available cash balances and our ability to generate cash through the issuance of consolidated obligation bonds and discount notes are sufficient to fund our operating liquidity needs.
Net cash provided by operating activities was $679.0 million in 2012, compared to $701.9 million in 2011, and $760.3 million in 2010. Net cash generated from operating activities was higher than Net income largely as a result of adjustments for noncash items such as the amounts set aside from Net income for the Affordable Housing Program, provisions for mortgage credit losses, depreciation and amortization, net changes in accrued interest receivable, and by derivative financing elements, which are associated with cash flows with off-market terms.
For cash flow reporting, cash outflows (expenses) associated with swaps with off-market terms are considered to be principal repayments of certain off-market swap transactions, although they are reported as an expense to Net income in the Statements of Income. Certain interest rate swaps had been executed, which at inception of the contracts included off-market terms, and required up-front cash exchanges, and were largely outstanding in the periods in this report. We view these swaps to contain “financing elements”, as defined under hedge accounting rules. The amounts re-classified within the Statements of Cash Flows from Operating expenses to Financing activities were $285.6 million in 2012, $374.6 million in 2011 and $440.0 million in 2010, and represented interest payments to certain swap counterparties for the off-market swaps.
Cash flows from investing activities - Our investing activities predominantly were the advances originated to be held for portfolio, the MBS investment portfolios and other short-term interest-earning assets. In 2012, investing activities were a net user of cash of $8.9 billion. This resulted primarily from net increases in advances borrowed by members, increase in investment securities purchased and overnight investments in Federal funds. In 2011 and 2010, investing activities were lower, primarily due to decline in advances made to members, and, as a result investing activities was a net provider of $12.4 billion and $12.9 billion in 2011 and 2010.
Short-term Borrowings and Short-term Debt. Our primary source of funds is the issuance of FHLBank debt. Consolidated obligation discount notes are issued with maturities up to one year and provide us with short-term funds. Discount notes are principally used in funding short-term advances, some long-term advances, as well as money market instruments. We also issue short-term consolidated obligation bonds as part of our asset-liability management strategy. We may also borrow from another FHLBank, generally for a period of one day. Such borrowings have been insignificant historically.
The following table summarizes short-term debt and their key characteristics (dollars in thousands):
Table 9.4: Short-term Debt
| | Consolidated Obligations-Discount Notes | | Consolidated Obligations-Bonds With Original
Maturities of One Year or Less | |
| | December 31, 2012 | | December 31, 2011 | | December 31, 2012 | | December 31, 2011 | |
| | | | | | | | | |
Outstanding at end of the period (a) | | $ | 29,779,948 | | $ | 22,123,325 | | $ | 15,600,000 | | $ | 15,125,000 | |
Weighted-average rate at end of the period | | 0.13 | % | 0.07 | % | 0.19 | % | 0.16 | % |
Average outstanding for the period (a) | | $ | 26,112,900 | | $ | 21,442,303 | | $ | 15,337,500 | (b) | $ | 14,456,667 | (b) |
Weighted-average rate for the period | | 0.11 | % | 0.08 | % | 0.20 | % | 0.23 | % |
Highest outstanding at any month-end (a) | | $ | 33,717,806 | | $ | 27,015,724 | | $ | 17,675,000 | | $ | 17,725,000 | |
(a) Outstanding balances represent the carrying value of discount notes and par value of bonds (one year or less) issued and outstanding at the reported dates.
(b) The amount represents the monthly average par value outstanding balance for the year ended December 31, 2012 and 2011.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements, Guarantees, and Other Commitments — In accordance with regulations governing the operations of the FHLBanks, each FHLBank, including the FHLBNY, is jointly and severally liable for the FHLBank System’s consolidated obligations issued under Section 11(a) of the FHLBank Act, and in accordance with the FHLBank Act, each FHLBank, including the FHLBNY, is jointly and severally liable for consolidated obligations issued under Section 11(c) of the FHLBank Act. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor.
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The FHLBNY’s joint and several contingent liability is a guarantee, but is excluded from initial recognition and measurement provisions because the joint and several obligations are mandated by the FHLBank Act or Finance Agency regulation and are not the result of arms-length transactions among the FHLBanks. The FHLBNY has no control over the amount of the guarantee or the determination of how each FHLBank would perform under the joint and several obligations. The valuation of this contingent liability is therefore not recorded on the balance sheet of the FHLBNY. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $0.7 trillion at December 31, 2012, and 2011. The par value of the FHLBNY’s participation in consolidated obligations was $93.6 billion at December 31, 2012, and $88.5 billion at December 31, 2011. At December 31, 2012, the FHLBNY had committed to the issuance of $1.1 billion in consolidated obligations. For additional information on the FHLBNY’s joint and several liability, see Note 18. Commitments and Contingencies in the audited financial statements in this Form 10-K. In addition, in the ordinary course of business, the FHLBNY engages in financial transactions that, in accordance with U.S. GAAP, are not recorded on the FHLBNY’s balance sheet or may be recorded on the FHLBNY’s balance sheet in amounts that are different from the full contract or notional amount of the transactions. For example, the Bank routinely enters into commitments to purchase MPF loans from PFIs, and to issues standby letters of credit. These commitments may represent future cash requirements of the Bank, although the standby letters of credit usually expire without being drawn upon. For additional information on the FHLBNY’s off-balance sheet arrangements, see Note 18. Commitments and Contingencies in the audited financial statements in this Form 10-K.
Contractual Obligations — In the ordinary course of operations, the Bank enters into certain contractual obligations. Such obligations primarily consist of consolidated obligations for which the Bank is the primary obligor.
The following table summarizes the Bank’s significant contractual obligations as of December 31, 2012, except for obligations associated with short-term discount notes. Additional information with respect to the Bank’s consolidated obligations, see Note 10. Consolidated Obligations in the audited financial statements in this Form 10-K. Also, see Note 15. Employee Retirement Plans for more information of the FHLBNY’s pension and retirement expenses and commitments. The FHLBNY enters into derivative financial instruments, which create contractual obligations, as part of the Bank’s interest rate risk management. See Note 16. Derivatives and Hedging Activities for additional information regarding derivative financial instruments.
Table 9.5: Contractual Obligations
| | December 31, 2012 | |
| | Contractual Obligations by Year | |
| | | | Greater Than | | Greater Than | | | | | |
| | Less Than | | One Year | | Three Years | | Greater Than | | | |
In thousands | | One Year | | to Three Years | | to Five Years | | Five Years | | Total | |
| | | | | | | | | | | |
Long-term debt obligations - principal | | $ | 42,284,800 | | $ | 13,749,910 | | $ | 2,630,580 | | $ | 5,159,795 | | $ | 63,825,085 | |
Long-term debt obligations - interest payments (a) | | 302,155 | | 211,068 | | 64,250 | | 131,255 | | 708,728 | |
Operating lease obligations | | 3,224 | | 6,448 | | 5,669 | | 739 | | 16,080 | |
Other liabilities (b) | | 107,835 | | 4,235 | | 4,727 | | 48,858 | | 165,655 | |
| | | | | | | | | | | |
Total | | $ | 42,698,014 | | $ | 13,971,661 | | $ | 2,705,226 | | $ | 5,340,647 | | $ | 64,715,548 | |
(a). Contractual obligations related to interest payments on long-term debt are calculated by applying the weighted average interest rate on the FHLBNY’s outstanding long-term debt as of December 31, 2012 to the contractual payment obligations on long-term debt for each of the periods disclosed in the table. At December 31, 2012, the FHLBNY’s overall weighted average contractual interest rate for long-term debt was 1.11%.
(b). Includes accounts payable and accrued expenses, Pass-through reserves at the FRB on behalf of certain members of the FHLBNY recorded in Other liabilities on the Statement of Condition. Also includes projected payment obligations for the Postretirement Health Benefit Plan and Benefit Equalization Plan. For more information about these employee retirement plans, see Note 15. Employee Retirement Plans in the audited financial statements in this Form 10-K.
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Leverage Limits, Unpledged Asset Requirements, and MBS Limits
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. We met the Finance Agency’s requirement that unpledged assets, as defined under regulations, exceed the total of consolidated obligations at all periods in this report as follows (in thousands):
Table 9.6: Unpledged Assets
| | December 31, | |
| | 2012 | | 2011 | |
Consolidated Obligations: | | | | | |
Bonds | | $ | 64,784,321 | | $ | 67,440,522 | |
Discount Notes | | 29,779,947 | | 22,123,325 | |
| | | | | |
Total consolidated obligations | | 94,564,268 | | 89,563,847 | |
| | | | | |
Unpledged assets | | | | | |
Cash | | 7,553,188 | | 10,877,790 | |
Less: Member pass-through reserves at the FRB | | (85,079 | ) | (69,555 | ) |
Secured Advances | | 75,888,001 | | 70,863,777 | |
Investments (a) | | 17,458,688 | | 14,236,633 | |
Mortgage loans held-for-portfolio, net of allowance for credit losses | | 1,842,816 | | 1,408,460 | |
Accrued interest receivable on advances and investments | | 179,044 | | 223,848 | |
Less: Pledged Assets | | (2,812 | ) | (2,003 | ) |
| | | | | |
Total unpledged assets | | 102,833,846 | | 97,538,950 | |
Excess unpledged assets | | $ | 8,269,578 | | $ | 7,975,103 | |
(a) The Bank pledged $2.8 million and $2.0 million at December 31, 2012 and 2011 to the FDIC. See Note 5. Held-to-Maturity Securities.
Purchases of MBS. Finance Agency investment regulations limit the purchase of mortgage-backed securities to 300% of capital. We were in compliance with the regulation at all times.
Table 9.7: FHFA MBS Limits
| | December 31, | |
| | 2012 | | 2011 | |
| | Actual | | Limits | | Actual | | Limits | |
| | | | | | | | | |
Mortgage securities investment authority | | 222 | % | 300 | % | 240 | % | 300 | % |
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems or human factors, or from external events. Operational risk is inherent in our business activities and, as with other risk types, is managed through an overall framework designed to balance strong management oversight with well-defined independent risk management. This framework includes: policies and procedures for managing operational risks; recognized ownership of the risk by the business; a compliance group that evaluates compliance with board and regulatory policies, including the evaluation and reporting of operational risk incidents, and an internal audit function, which regularly reports directly to the Audit Committee of the Bank’s Board of Directors regarding compliance with policies and procedures, including those related to managing operational risks.
Information Security and Business Continuity. The Bank has an Information Security Department that is responsible for the policy, procedures, reviews, education and management of the information security program. The Bank also has a Records and Continuity Department that is responsible for the overall Business Continuity Program which includes training, testing, coordination and continual updates. Information security and the protection of confidential customer data, and business continuity are priorities for the FHLBNY, and we have implemented processes that will help secure confidential data and continuity of operations. The information security program is reviewed and enhanced periodically to address emerging threats to data integrity and cyber attacks. The business continuity program includes annual testing of our capabilities. Results of business continuity testing and information security are routinely presented to senior management of the FHLBNY and its Board of Directors.
The FHLBNY’s Information Technology group maintains and regularly reviews controls to ensure that technology assets are well managed and secure from unauthorized access and in accordance with approved policies and procedures.
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Results of Operations
The following section provides a comparative discussion of the FHLBNY’s results of operations for the three years ended December 31, 2012, 2011 and 2010. For a discussion of the significant accounting estimates used by the FHLBNY that affect the results of operations, see Significant Accounting Policies and Estimates in Note 1 in the audited financial statements in this Form 10-K.
Net Income
Interest income from advances is the principal source of revenue. The primary expense is interest paid on consolidated obligations debt. Other expenses are Compensation and benefits and Operating expense, and Assessments on Net income. Other significant factors affecting our Net income include the volume and timing of investments in mortgage-backed securities, prepayments of advances, charges from debt repurchases, gains and losses from derivatives and hedging activities, and earnings from investing our shareholders’ capital.
Summarized below are the principal components of Net income (in thousands):
Table 10.1: Principal Components of Net Income
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Total interest income | | $ | 903,544 | | $ | 953,342 | | $ | 1,080,382 | |
Total interest expense | | 436,676 | | 444,579 | | 622,824 | |
Net interest income before provision for credit losses | | 466,868 | | 508,763 | | 457,558 | |
Provision for credit losses on mortgage loans | | 1,011 | | 3,153 | | 1,409 | |
Net interest income after provision for credit losses | | 465,857 | | 505,610 | | 456,149 | |
Total other income (loss) | | 31,335 | | (80,680 | ) | 14,767 | |
Total other expenses | | 96,172 | | 122,307 | | 95,415 | |
Income before assessments | | 401,020 | | 302,623 | | 375,501 | |
Total assessments | | 40,286 | | 58,137 | | 99,976 | |
Net income | | $ | 360,734 | | $ | 244,486 | | $ | 275,525 | |
Net Income — 2012 Net income benefited from continued low cost of funding, lower Compensation and benefit expenses, lower debt retirement costs, and incurred no REFCORP expense, an 18% assessment charged to the prior year’s Net Income for the first six months, and to the full year 2010 Net Income. REFCORP assessment obligation was satisfied in June 2011, and funds previously paid to REFCORP are being set aside as Restricted Retained earnings, which will further strengthen our balance sheet and the FHLBank system. 2012 Net interest income was lower, compared to 2011, due to lower asset yields, tighter funding spreads, and lower prepayment fees. Fair value gains from derivatives and hedging activities were higher in 2012 than in the previous two years, and as these gains are primarily unrealized, we expect the gains to reverse over the term to maturities of the hedges. Debt buy-back activity was modest in 2012, and expense charged to earnings was $24.1 million in 2012, compared to $86.5 million in 2011, and $2.1 million in 2010. Typically, debt buy-back is executed to adjust balance sheet funding patterns following prepayments of advances. In 2012, advance prepayment activity was modest. OTTI charges were $2.1 million in 2012, compared to $5.6 million in 2011, and $8.3 million in 2010, and we believe credit trends are continuing to improve for our investments in private-label MBS (“PLMBS”). 2012 Operating expenses were well below 2011 Operating expenses, and at the same level as in 2010. In 2012, we benefited from a pension relief measure under a bill enacted by Congress. The relief also referred to as MAP 21, reduced our defined benefit pension cost to $1.7 million in 2012. In contrast, we expensed $30.3 million in 2011 and $10.7 million in 2010.
Net interest income — 2012 Net interest income declined, relative to 2011, in part due to tighter funding spreads, and in part due to declining yields from our investments in MBS. Net interest income includes prepayment fees resulting from member initiated prepayments of advances, which were lower in 2012, and fee income generated was $16.6 million, compared to $109.2 million in 2011, and $13.1 million in 2010.
Funding spreads were tighter due to further decline in the 3-month LIBOR. A significant amount of our fixed-rate debt is swapped to floating-rate sub-LIBOR spreads, and as LIBOR declines, as it did in 2012 that spread narrowed on a swapped out basis, causing increase in funding cost. Also, with the easing of the European credit crises in 2012, our debt may have returned to pre-crises pricing. The impact of “flight to quality” had effectively driven down our cost of debt in 2011 and 2010, during the peak of the credit crises.
Higher-yielding MBS have been paying down, and floating-rate MBS yielded lower coupons in parallel with the declining interest rate environment.
The average balance sheet increased to $102.2 billion in 2012, up from $99.7 billion in 2011 (but down from $107.6 billion in 2010). Average balance sheet is representative of transaction volume, and higher transaction volume in 2012 yielded greater earnings, relative to 2011. Our capital, retained earnings and non-interest-costing liabilities provided funds that were potentially invested in short-term money-market funds, which yielded better returns in 2012, compared to 2011. In 2011, the average shareholders’ equity was a little lower than in 2010, and earned lower returns due to lower prevailing money market rates in 2011 relative to 2010. See Table 10.10 Rate and Volume Analysis for an understanding of the impact of volume and rate changes on Net interest earned.
Debt buy-back charges — In 2012, debt buy-back activity was modest, compared to 2011. Expense charged to earnings was $24.1 million in 2012, compared to $86.5 million in 2011, and $2.1 million in 2010. Charges
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represented cash payments in excess of carrying value of debt. Typically, debt buy-back is executed to re-align balance sheet liabilities following member initiated advance prepayments. When high-costing debt is bought back, a premium is generally paid because market yields are lower than the debt that is extinguished, resulting in a charge to income. Also, see Table 6.2 Transferred and Retired Debt.
Derivative and hedging gains — In 2012, derivative and hedging gains were $47.3 million, compared to $16.7 million and $25.0 million in 2011 and 2010. Gains represented the income effects of hedging activities in (1) a qualifying hedge (fair value effects of derivatives, net of the fair value effects of hedged items), and (2) fair value gains and losses on derivatives in an economic hedge that were not designated under hedge accounting rules (fair value changes of derivatives without the offsetting fair value changes of the hedged items). For more information, see Components of Hedging Gains and Losses in Note 16. Derivatives and Hedging Activities in the audited financial statements in this Form 10-K. Also, see Table 10.12 Earnings Impact of Derivatives and Hedging Activities.
Instruments held at fair value — Consolidated obligation debt elected under the FVO reported fair value losses of $0.1 million in 2012, compared to losses of $10.5 million and $3.3 million in 2011 and 2010. Fair values have declined as the debt instruments were nearing their maturities. Election to account for new debt under the FVO has been selective in 2012. Fair value gains and losses are typically unrealized and will reverse over time if the instruments are held to their maturity. In the fourth quarter of 2012, we also elected the FVO for a floating-rate advance and a gain of $0.4 million was recognized. Instruments elected under the FVO are marked to their fair values at each reporting date, and the Income statement impact is inverse to observed changes in market yields of similar instruments. For more information, see Fair Value Option Disclosures in Note 17. Fair Values of Financial Instruments in the audited financial statements in this Form 10-K.
Analysis of Allowance for Credit Losses
· Mortgage loans held-for-portfolio — We evaluate impaired conventional mortgage loans at least quarterly on an individual loan-by-loan basis and compare the fair values of collateral (net of liquidation costs) to recorded investment values in order to measure credit losses on impaired loans. FHA/VA (Insured mortgage loans) guaranteed loans are evaluated collectively for impairment, and no allowance was deemed necessary. Based on the analysis performed on impaired conventional loans, a provision of $1.0 million was recorded in 2012, compared to $3.2 million and $1.4 million in 2011 and 2010. Increase in the provision in 2011 was due to increase in haircut values of collateral for evaluating impaired loans. Collateral values have since stabilized in 2012. Charge-offs were $1.7 million, $2.6 million, and $0.2 million in 2012, 2011, and 2010, and we do not consider the charge-offs to be significant from a credit quality perspective. Cumulatively, the allowance for credit losses recorded in the Statements of Condition was $7.0 million at December 31, 2012, compared to $6.8 million at December 31, 2011.
Beginning with the fourth quarter of 2012, we consider any loan that has been discharged from bankruptcy as a TDR. Accounting standards view that the borrower has received a concession from a lender allowing the borrower to emerge from bankruptcy. TDR loans discharged from bankruptcy are considered for impairment if past due 90 days or more, which amounted to $0.6 million at December 31, 2012. The allowance for credit loss was $0.2 million.
Loans currently in bankruptcy were deemed impaired at December 31, 2012, regardless of delinquency status. Previously, loans in bankruptcy would be considered impaired if the loan was delinquent for 90 days or more. The incremental allowance associated with the inclusion of all loans in bankruptcy resulted in $0.5 million in additional allowance for credit losses, which we concluded was not significant to the results of operations or financial position at December 31, 2012.
For more information, see Note 8. Mortgage Loans Held-for-Portfolio in the audited financial statement in this Form 10-K.
· Advances — Our credit risk from advances in all periods in this report was concentrated in commercial banks, savings institutions and insurance companies. All advances are fully collateralized during their entire term. In addition, borrowing members pledge their stock in the FHLBNY as additional collateral for advances. We have not experienced any losses on credit extended to any member since the FHLBNY’s inception. Based on the collateral held as security and prior repayment history, no allowance for losses is currently deemed necessary.
Operating expenses, Compensation and benefits, and allocated expenses paid to the Office of Finance and the Finance Agency — Operating expenses include occupancy costs, computer service agreements, professional and legal fees, and depreciation and amortization. Compensation and benefits expenses in 2012 were the lowest in the last three years. The government relief provisions for pension expenses, in the form of MAP-21 lowered the pension expense for our Defined Benefit Plan in 2012. In 2011, the expense included a contribution of $24.0 million for the Defined Benefit Plan to eliminate a funding shortfall. For more information about the MAP 21 relief, see Note 15. Employee Retirement Plans in the audited financial statements in this Form 10-K.
REFCORP assessments — The REFCORP assessment obligation was satisfied in June 2011, and no further payments were necessary. Assessments paid in the first six months of 2011 were $30.7 million. In 2010, payments of $68.9 million were made. For more information about the satisfaction of REFCORP and the provisions to set aside funds towards Restricted Retained earnings after the satisfaction of the REFCORP assessments, see Table 7.1 Stockholders’ Capital and notes thereto in this Form 10-K.
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Affordable Housing Program (“AHP”) assessments — AHP set aside from income totaled $40.3 million in 2012, compared to $27.4 million and $31.1 million in 2011 and 2010. Assessments are calculated as a percentage of Net income, and the increase was due to an increase in Net income. For more information about AHP assessments, see Affordable Housing Program and Other Mission Related Programs in Item 1. Business, in this Form 10-K.
2011 Net Income compared to 2010
2011 Net income was lower than 2010. In 2011, we took two significant charges — $86.5 million due to early retirement of high-costing debt, and $24.0 million cash contribution made to our Defined benefit pension plan to improve the plan’s funded status. Net interest income was $508.8 million in 2011, compared to $457.6 million in 2010, benefitting from $109.2 million in prepayment fees on advances due to significant member driven prepayments in 2011. The comparable prepayment fee earned in 2010 was $13.1 million. Absent the favorable impact of prepayment fees, 2011 Interest income was lower than in 2010. Lower average advance balances, due to lower transaction volume, was one factor. Investments in floating-rate mortgage-backed securities earned lower yields. As high-yielding fixed-rate MBS and intermediate-term advances continue to pay down or mature, they have been replaced by lower yielding assets due to the low interest rate environment, and this tended to lower the overall yield on total assets.
Derivative hedging gains contributed $16.7 million in 2011 compared to $25.0 million in 2010. Consolidated obligation debt accounted for under the Fair Value Option reported fair value losses of $10.5 million in 2011 compared with losses of $3.3 million in 2010, and losses were primarily attributable to the strong credit quality of FHLBank debt that drove market yields lower and fair values of balance sheet debt higher.
OTTI charges were $5.6 million in 2011, compared to $8.3 million in 2010.
The satisfaction of the REFCORP assessment in June 2011 benefited 2011 Net income for the last six months of 2011.
Interest income
Interest income from advances and investments in mortgage-backed securities are our principal sources of income. Changes in both rate and intermediation volume (average interest-yielding assets) explain the change in the current year periods from the prior year periods. The principal categories of Interest Income are summarized below (dollars in thousands):
Table 10.2: Interest Income — Principal Sources
| | | | | | | | Percentage | | Percentage | |
| | Years ended December 31, | | Variance | | Variance | |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | |
Interest Income | | | | | | | | | | | |
Advances (a) | | $ | 524,233 | | $ | 570,966 | | $ | 616,575 | | (8.18 | )% | (7.40 | )% |
Interest-bearing deposits (b) | | 3,649 | | 2,834 | | 5,461 | | 28.76 | | (48.10 | ) |
Securities purchased under agreements to resell | | 86 | | — | | — | | NM | | — | |
Federal funds sold (c) | | 15,218 | | 6,746 | | 9,061 | | NM | | (25.55 | ) |
Available-for-sale securities | | 23,626 | | 30,248 | | 31,465 | | (21.89 | ) | (3.87 | ) |
Held-to-maturity securities | | 270,835 | | 279,602 | | 352,398 | | (3.14 | ) | (20.66 | ) |
Mortgage loans held-for-portfolio | | 65,892 | | 62,942 | | 65,422 | | 4.69 | | (3.79 | ) |
Loans to other FHLBanks | | 5 | | 4 | | — | | 25.00 | | NM | |
| | | | | | | | | | | |
Total interest income | | $ | 903,544 | | $ | 953,342 | | $ | 1,080,382 | | (5.22 | )% | (11.76 | )% |
(a) Reported Interest income from advances was adjusted for the cash flows associated with interest rate swaps in qualifying hedging relationships. We recorded $1.2 billion of cash outflows as an expense in 2012, down from $1.6 million and $2.0 billion in 2011 and 2010. We recorded prepayment fees of $16.6 million in 2012, compared to$109.2 million and $13.1 million in 2011 and 2010.
(b) Primarily from cash collateral deposited with swap counterparties. Cash collateral typically earns the overnight Federal funds rate.
(c) Increase compared to 2011 due to increase in volume of overnight Federal funds sold transaction in 2012, and increase in overnight federal fund rates. See Table 10.9 Spread and Yield Analysis.
NM — not meaningful.
Accounting Changes (See Change in Accounting Principle in Note 1 in the audited financial statements in this Form 10-K) Beginning with the fourth quarter of 2012, the FHLBNY has changed the method of presenting amortization of fair value hedge basis adjustments of modified advances. Reported Interest Income from advances in 2011 and 2010 were reclassified to conform to the classification adopted in 2012. The reclassification increased Interest Income in 2011 by $66.8 million and by $1.8 million in 2010, with a corresponding decrease in Net realized and unrealized gains (losses) from derivatives and hedging activities in Other income for the same years.
The composition of the advance portfolio in 2012 has a greater percentage of floating-rate and short-term advances that reset their yields frequently, and are sensitive to changes in the prevailing interest rate environment. Declining yields were driven by lower interest rates as floaters and new advances reset at lower coupons. Over the years, as vintage high-coupon advances have matured, prepaid or have been modified, the fixed-rate coupons of the replacement advances have declined in line with the lower interest rate environment. Prepayment fees, which are recorded in interest income from advances, were lower in 2012, also contributed to the decline. Such fees were $16.6 million in 2012, compared to $109.2 million in 2011, and $13.1 million in 2010. Reported interest income is net of the impact of cash flows associated with interest rate swaps hedging advances. Hedging expense to synthetically convert certain fixed-rate advances to 3-month LIBOR has been declining over the years. The declining swap expense has resulted in a favorable impact on Interest income. We have paid lower amounts of payments to swap counterparties in each successive year. See Table 10.3 and notes thereto for more information about the impact of interest rate exchanges between the swap counterparty and the FHLBNY.
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Yields earned from our investments in MBS have been declining even as our investment portfolios of fixed- and floating rate GSE issued MBS have grown. As vintage fixed-rate MBS, with higher coupons, have paid down, they have been replaced by lower yielding fixed-rate bonds. Spreads to LIBOR for the floating-rate MBS have also been tighter, relative to 2011 and 2010, in line with declining LIBOR. Overall yield from long-term investments, primarily MBS, was 213 basis points in 2012, compared to 259 basis points in 2011 and 320 basis points in 2010. The Federal Reserve’s quantitative easing programs have pushed yields down and prices up, as the FRB is committed to purchasing large quantities of agency MBS at a time when supply is stable to lower.
Impact of hedging advances — Reported interest income is net of the impact of cash flows associated with interest rate swaps hedging advances. Fixed rate payments to swap counterparties have declined in part due to extensive member initiated modifications of hedged advances in a lower interest rate environment, and in part due to new advances with lower fixed-rate coupons that have been hedged. As a result, fixed-rate cash flow payments to swap counterparties have declined, and have had a favorable impact on interest income from advances. In 2012, we expensed $1.2 billion to synthetically convert fixed-rate advances to LIBOR floaters. In 2011 and 2010, the comparable expense was $1.6 billion and $2.0 billion.
We execute interest rate swaps to modify the effective interest rate terms of many of our fixed-rate advance products and typically all of our putable advances, effectively converting a fixed-rate stream of cash flows from fixed-rate advances to a floating-rate stream of cash flows, typically indexed to LIBOR. The cash flow patterns from derivatives in the periods reported were in line with our interest rate risk management practices and achieved our goal of converting fixed-rate cash flows of hedged advances to LIBOR-indexed cash flows. Derivative strategies 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 10.3: Impact of Interest Rate Swaps on Interest Income Earned from Advances
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Advance Interest Income | | | | | | | |
Advance interest income before adjustment for interest rate swaps | | $ | 1,733,922 | | $ | 2,187,949 | | $ | 2,616,286 | |
Net interest adjustment from interest rate swaps (a) | | (1,209,689 | ) | (1,616,983 | ) | (1,999,711 | ) |
Total Advance interest income reported | | $ | 524,233 | | $ | 570,966 | | $ | 616,575 | |
(a) The unfavorable cash flow patterns of the interest rate swaps were indicative of the lower LIBOR rates (obligation of the swap counterparty) compared to our obligation to pay out fixed-rate cash flows, which have been higher than LIBOR cash in-flows. We are generally indifferent to changes in the cash flow patterns as we also hedge our fixed-rate consolidated obligation debt, which is our primary funding base, and two hedge strategies together achieve management’s overall net interest spread objective.
Interest expense
Our primary source of funding is through the issuance of consolidated obligation bonds and discount notes in the global debt markets. Consolidated obligation bonds are medium- and long-term bonds, while discount notes are short-term instruments. To fund our assets, our management considers our interest rate risk and liquidity requirements in conjunction with consolidated obligation buyers’ preferences and capital market conditions when determining the characteristics of debt to be issued. Typically, we have used fixed-rate callable and non-callable 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 below (dollars in thousands). Changes in 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.
Table 10.4: Interest Expenses - Principal Categories
| | | | | | | | Percentage | | Percentage | |
| | Years ended December 31, | | Variance | | Variance | |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | |
Interest Expense | | | | | | | | | | | |
Consolidated obligations-bonds (a) | | $ | 376,554 | | $ | 406,166 | | $ | 572,730 | | (7.29 | )% | (29.08 | )% |
Consolidated obligations-discount notes (a) | | 57,494 | | 34,704 | | 42,237 | | 65.67 | | (17.84 | ) |
Deposits (b) | | 757 | | 1,243 | | 3,502 | | (39.10 | ) | (64.51 | ) |
Mandatorily redeemable capital stock (b) | | 1,839 | | 2,384 | | 4,329 | | (22.86 | ) | (44.93 | ) |
Cash collateral held and other borrowings | | 32 | | 82 | | 26 | | (60.98 | ) | 215.38 | |
| | | | | | | | | | | |
Total interest expense (c) | | $ | 436,676 | | $ | 444,579 | | $ | 622,824 | | (1.78 | )% | (28.62 | )% |
(a) | Reported Interest expense from consolidated obligation bonds and discount notes were adjusted for the cash flows associated with interest rate swaps in qualifying hedging relationships. We generally pay variable-rate LIBOR-indexed cash flows to swap counterparties and, in exchange, receive fixed-rate cash flows, which typically mirror the fixed-rate coupon payments to investors holding the FHLBank bonds. Certain discount notes were hedged in a cash flow hedging strategy that converted forecasted long-term variable-rate funding to fixed-rate funding by the use of long-term swaps. For such discount notes, the recorded expense is equivalent to long-term fixed rate coupons. |
(b) | Average deposit from members in 2012 was about the same as in 2011, and lower than in 2010. Overnight rate paid was lower in 2012, relative to prior years. Holders of mandatorily redeemable capital stock are paid dividend at the same rate as all stockholders. The dividend payments are classified as interest payments in conformity with accounting rules. Payments have declined due to decline in outstanding balances of such capital stock, and the dividend rate has also declined. |
(c) | Reported Interest expense in 2012 was a little lower than in 2011. Although the general interest rate environment was lower in 2012, the debt cost of bonds issued was only 3 basis points lower in 2012 compared to 2011. This was due to the narrowing of spreads between LIBOR and cost of consolidated obligation debt. Debt volume was higher in 2012 in line with increased balance sheet assets. The funding mix between consolidated obligation bonds and discount notes changed in 2012 relative to 2011. In 2012, 28% of the total average interest-costing liabilities were comprised of discount notes at an average cost of 22 basis points. The funding mix between discount notes and interest costing liabilities was 23% in 2011at an average cost of 16 basis points, and 22% in 2010 at an average cost of 19 basis points. For more information, see Table 10.9 Spread and Yield Analysis, and Table 10.10 Rate and Volume Analysis. |
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Impact of hedging debt — We issue both fixed-rate callable and non-callable debt. Typically, the callable debt is issued with the simultaneous execution of cancellable interest rate swaps to modify the effective interest rate terms and the effective durations of our fixed-rate callable debt. A substantial percentage of non-callable fixed-rate debt is also swapped to “plain vanilla” LIBOR-indexed cash flows. These hedging strategies benefit us in two principal ways. First, fixed-rate callable bond, in conjunction with interest rate swap containing a call feature that mirrors the option embedded in the callable bond, enables us to meet our funding needs at yields not otherwise directly attainable through the issuance of callable debt. Second, the issuances of fixed-rate debt and the simultaneous execution of interest rate swaps convert the debt to an adjustable-rate instrument tied to an index, typically 3-month LIBOR, which is our preferred funding rate. Derivative strategies are used to manage the interest rate risk inherent in fixed-rate debt, and certain floating-rate debt that is 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 rate, 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 10.5: Impact of Interest Rate Swaps on Consolidated Obligation Interest Expense
| | Years ended December 31, 2012 | |
| | 2012 | | 2011 | | 2010 | |
Consolidated bonds and discount notes-Interest expense | | | | | | | |
Bonds-Interest expense before adjustment for swaps | | $ | 707,416 | | $ | 884,812 | | $ | 1,199,734 | |
Discount notes-Interest expense before adjustment for swaps | | 32,032 | | 23,350 | | 42,237 | |
Net interest adjustment for interest rate swaps (a) | | (305,400 | ) | (467,292 | ) | (627,004 | ) |
Total Consolidated bonds and discount notes-interest expense reported | | $ | 434,048 | | $ | 440,870 | | $ | 614,967 | |
(a) Net interest adjustments have resulted in favorable cash inflows in each of the years, although the amounts have declined in each successive year. The favorable cash flow patterns were indicative of lower LIBOR indexed payments we make to swap counterparties in exchange for the higher fixed cash flows that we receive from counterparties. We are generally indifferent to changes in the cash flow patterns as we typically hedge our fixed-rate advances borrowed by member to meet our overall net interest spread objective. The declining favorable cash flows in the interest rate exchange agreements are indicative of the narrowing of spreads between the fixed rate cash flows that we receive versus the LIBOR indexed cash flows that we pay to swap counterparties.
Net Interest Income
The following table summarizes Net interest income (dollars in thousands):
Table 10.6: Net Interest Income
| | | | | | | | Percentage | | Percentage | |
| | Years ended December 31, | | Variance | | Variance | |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | |
Total interest income | | $ | 903,544 | | $ | 953,342 | | $ | 1,080,382 | | (5.22 | )% | (11.76 | )% |
Total interest expense | | 436,676 | | 444,579 | | 622,824 | | (1.78 | ) | (28.62 | ) |
Net interest income before provision (reversal) for credit losses | | $ | 466,868 | | $ | 508,763 | | $ | 457,558 | | (8.23 | )% | 11.19 | % |
Net interest income is our principal source of revenue, and represents the difference between interest income from interest-earning assets, and interest expense accrued on interest-costing liabilities. Net interest income is impacted by a variety of factors: (1) transaction volumes, as measured by average balances of interest earning assets, and by (2) the prevailing balance sheet yields, as measured by coupons on earning assets minus yields paid on interest-costing liabilities, after including the impact of the cash flows paid or received on interest rate derivatives that qualified under hedge accounting rules. These factors may fluctuate based on changes in interest rates, demand by members for advances, investor demand for debt issued by us, the change in the spread between the yields on advances and investments and the cost of financing these assets by issuance of debt to investors.
Impact of lower interest income from investing member capital — We earn interest income from investing our members’ capital to fund interest-earning assets. Such earnings are sensitive to the changes in short-term interest rates (Rate effects), and changes in the average outstanding capital and non-interest bearing liabilities (Volume effects). Typically, we invest capital and net non-interest costing liabilities (“deployed capital”) to fund short-term investment assets that yield money market rates. The most significant element of deployed capital is Capital stock, which increases or decreases in parallel with the volume of advances borrowed by members. Capital stock has averaged around $5.0 billion over the last three years. If capital was invested in assets tied to the federal funds rate, Net interest income would have benefited in 2012 due a yield pick-up, relative to 2011. Investment yields from assets earning overnight federal funds rate in 2012 was 13 basis points, up from 8 basis points in 2011, and down from 16 basis points in 2010. On the other hand, the 3-month LIBOR was lower across the same periods, and if capital was invested in assets that were tied to LIBOR, the assets would have yielded lower income.
For more information about factors that impact Interest income and Interest expense, see Tables 10.2 through 10.5 and discussions thereto. Also, see Table 10.9 Spread and Yield Analysis, and Table 10.10, Rate and Volume Analysis.
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Impact of qualifying hedges on Net interest income — We deploy 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 that qualify under hedge accounting rules are recorded as adjustments to the interest income or interest expense associated with hedged assets or liabilities. The following table summarizes the impact of net interest adjustments from hedge qualifying interest-rate swaps (in thousands):
Table 10.7: Net Interest Adjustments from Hedge Qualifying Interest-Rate Swaps
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Interest Income | | $ | 2,113,233 | | $ | 2,570,325 | | $ | 3,080,093 | |
Net interest adjustment from interest rate swaps (a) | | (1,209,689 | ) | (1,616,983 | ) | (1,999,711 | ) |
Reported interest income | | 903,544 | | 953,342 | | 1,080,382 | |
| | | | | | | |
Interest Expense | | 742,076 | | 911,871 | | 1,249,828 | |
Net interest adjustment from interest rate swaps (b) | | (305,400 | ) | (467,292 | ) | (627,004 | ) |
Reported interest expense | | 436,676 | | 444,579 | | 622,824 | |
| | | | | | | |
Net interest income (Margin) (c) | | $ | 466,868 | | $ | 508,763 | | $ | 457,558 | |
| | | | | | | |
Net interest adjustment - interest rate swaps | | $ | (904,289 | ) | $ | (1,149,691 | ) | $ | (1,372,707 | ) |
(a) The Net interest payments to swap counterparties in the hedges of advances have declined over the years. In a hedge of a fixed-rate advance, we pay the swap dealer fixed-rate interest payment (which typically mirrors the coupon of the hedged advance), and in return the swap counterparties pay a pre-determined spread plus the prevailing LIBOR, which typically resets every three months. The decrease in the unfavorable Net interest adjustment in 2012 was due to the narrowing of the spread between the fixed-rate we pay to the swap dealer, and the LIBOR indexed cash flows received in exchange. New advances were issued and hedged at a lower coupon in the declining interest rate environment or as vintage advances were modified and hedged at a lower coupon, and these activities effectively drove down the cash flow payments to swap counterparties.
(b) The favorable Net interest adjustments in the hedges of debt have declined over the years. In a hedge of a fixed-rate consolidated obligation debt, we pay the swap dealer LIBOR-indexed interest payments, and in return the swap dealer pays fixed-rate interest payments (which typically mirrors the coupon paid to investors holding the FHLBank debt). The decrease in favorable Net interest adjustment in 2012 was due to the narrowing of the spread between the fixed-rate we receive from the swap dealer, and the LIBOR indexed cash flows we pay in exchange. New bonds were issued and hedged at a lower coupon in the declining interest rate environment, effectively driving down the cash flow received from swap counterparties.
(c) Our Interest income is sensitive to changes in the relationship between our fixed-rate cash instruments and the LIBOR, but our margin as a percentage is stable, and we are generally indifferent to changes in the cash flow patterns, as the interest rate swap agreements achieve our overall net interest spread objective, and we remain indifferent for the most part to the volatility of interest rates.
The following table contrasts Net interest income, Net income (a) spread and Return on earning assets between GAAP and economic basis (dollar amounts in thousands):
Table 10.8: GAAP Versus Economic Basis (b) — Contrasting Net Interest Income, Net Income Spread and Return on Earning Assets
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | Amount | | ROA | | Net Spread | | Amount | | ROA | | Net Spread | | Amount | | ROA | | Net Spread | |
| | | | | | | | | | | | | | | | | | | |
GAAP net interest income | | $ | 466,868 | | 0.46 | % | 0.42 | % | $ | 508,763 | | 0.51 | % | 0.47 | % | $ | 457,558 | | 0.43 | % | 0.37 | % |
Interest income (expense) | | | | | | | | | | | | | | | | | | | |
Swaps not designated in a hedging relationship | | 6,563 | | 0.01 | | 0.01 | | 31,428 | | 0.03 | | 0.03 | | 81,454 | | 0.08 | | 0.08 | |
| | | | | | | | | | | | | | | | | | | |
Economic net interest income | | $ | 473,431 | | 0.47 | % | 0.43 | % | $ | 540,191 | | 0.54 | % | 0.50 | % | $ | 539,012 | | 0.51 | % | 0.45 | % |
(a) The decline in the amount of interest associated with economic hedges in 2012, compared to prior years was due to decline in the volume of swaps designated as economic hedges and the decline in interest rates. Interest expenses for both periods were associated with swaps that hedged consolidated obligation debt in a hedging strategy that converted floating-rate debt indexed to 1-month LIBOR, the Prime rate, and the Federal funds rate to 3-month LIBOR cash flows.
(b) Explanation of the use of non-GAAP measures of Net Spread, return on assets (“ROA”) used in the table above. These are non-GAAP financial measures used by management that we believe are useful to investors and stockholders in understanding our operational performance as well as business and performance trends. Although we believe these non-GAAP financial measures enhance investor and members’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
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Spread and Yield Analysis
Table 10.9: Spread and Yield Analysis
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | Interest | | | | | | Interest | | | | | | Interest | | | |
| | Average | | Income/ | | | | Average | | Income/ | | | | Average | | Income/ | | | |
(Dollars in thousands) | | Balance | | Expense | | Rate (a) | | Balance | | Expense | | Rate (a) | | Balance | | Expense | | Rate (a) | |
Earning Assets: | | | | | | | | | | | | | | | | | | | |
Advances | | $ | 72,720,037 | | $ | 524,233 | | 0.72 | % | $ | 75,202,253 | | $ | 570,966 | | 0.76 | % | $ | 85,908,274 | | $ | 616,575 | | 0.72 | % |
Interest bearing deposits and others | | 2,599,654 | | 3,649 | | 0.14 | | 2,701,786 | | 2,834 | | 0.10 | | 2,780,919 | | 5,461 | | 0.20 | |
Federal funds sold and other overnight funds | | 11,406,495 | | 15,304 | | 0.13 | | 8,499,097 | | 6,746 | | 0.08 | | 5,673,805 | | 9,061 | | 0.16 | |
Investments | | 13,833,918 | | 294,461 | | 2.13 | | 11,980,570 | | 309,850 | | 2.59 | | 12,003,578 | | 383,863 | | 3.20 | |
Mortgage and other loans | | 1,627,752 | | 65,897 | | 4.05 | | 1,321,726 | | 62,946 | | 4.76 | | 1,281,549 | | 65,422 | | 5.10 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | $ | 102,187,856 | | $ | 903,544 | | 0.88 | % | $ | 99,705,432 | | $ | 953,342 | | 0.95 | % | $ | 107,648,125 | | $ | 1,080,382 | | 1.00 | % |
| | | | | | | | | | | | | | | | | | | |
Funded By: | | | | | | | | | | | | | | | | | | | |
Consolidated obligations-bonds | | $ | 65,597,967 | | $ | 376,554 | | 0.57 | % | $ | 68,027,867 | | $ | 406,166 | | 0.60 | % | $ | 72,135,934 | | $ | 572,730 | | 0.79 | |
Consolidated obligations-discount notes | | 26,112,900 | | 57,494 | | 0.22 | | 21,442,303 | | 34,704 | | 0.16 | | 21,727,968 | | 42,237 | | 0.19 | |
Interest-bearing deposits and other borrowings | | 2,253,490 | | 789 | | 0.04 | | 2,389,368 | | 1,325 | | 0.06 | | 4,663,653 | | 3,528 | | 0.08 | |
Mandatorily redeemable capital stock | | 37,618 | | 1,839 | | 4.89 | | 58,492 | | 2,384 | | 4.08 | | 82,650 | | 4,329 | | 5.24 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | 94,001,975 | | 436,676 | | 0.46 | % | 91,918,030 | | 444,579 | | 0.48 | % | 98,610,205 | | 622,824 | | 0.63 | % |
| | | | | | | | | | | | | | | | | | | |
Other non-interest-bearing funds | | 2,874,742 | | | | | | 2,647,528 | | — | | | | 3,679,708 | | — | | | |
Capital | | 5,311,139 | | — | | | | 5,139,874 | | — | | | | 5,358,212 | | — | | | |
| | | | | | | | | | | | | | | | | | | |
Total Funding | | $ | 102,187,856 | | $ | 436,676 | | | | $ | 99,705,432 | | $ | 444,579 | | | | $ | 107,648,125 | | $ | 622,824 | | | |
| | | | | | | | | | | | | | | | | | | |
Net Interest Income/Spread | | | | $ | 466,868 | | 0.42 | % | | | $ | 508,763 | | 0.47 | % | | | $ | 457,558 | | 0.37 | % |
| | | | | | | | | | | | | | | | | | | |
Net Interest Margin
(Net interest income/Earning Assets) | | | | | | 0.46 | % | | | | | 0.51 | % | | | | | 0.43 | % |
(a) Reported yields with respect to advances and consolidated obligations may not necessarily equal the coupons on the instruments as derivatives are extensively used to change the yield and optionality characteristics of the underlying hedged items. When we issue fixed-rate debt and is hedged with an interest rate swap, the hedge effectively converts the debt into a simple floating-rate bond. Similarly, we make fixed-rate advances to members and hedge the advances with a pay-fixed and receive-variable interest rate swap that effectively converts the fixed-rate asset to one that floats with prevailing LIBOR rates. Average balance sheet information is presented, as it is more representative of activity throughout the periods presented. For most components of the average balances, a daily weighted average balance is calculated for the period. When daily weighted average balance information is not available, a simple monthly average balance is calculated. Average yields are derived by dividing income by the average balances of the related assets, and average costs are derived by dividing expenses by the average balances of the related liabilities. Yields and rates are annualized.
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 our interest income and interest expense (in thousands):
Table 10.10: Rate and Volume Analysis
| | For the years ended | |
| | December 31, 2012 vs. December 31, 2011 | |
| | Increase (Decrease) | |
| | Volume | | Rate | | Total | |
Interest Income | | | | | | | |
Advances | | $ | (18,470 | ) | $ | (28,263 | ) | $ | (46,733 | ) |
Interest bearing deposits and others | | (111 | ) | 926 | | 815 | |
Federal funds sold and other overnight funds | | 2,836 | | 5,722 | | 8,558 | |
Investments | | 43,976 | | (59,365 | ) | (15,389 | ) |
Mortgage loans and other loans | | 13,247 | | (10,296 | ) | 2,951 | |
| | | | | | | |
Total interest income | | 41,478 | | (91,276 | ) | (49,798 | ) |
| | | | | | | |
Interest Expense | | | | | | | |
Consolidated obligations-bonds | | (14,239 | ) | (15,373 | ) | (29,612 | ) |
Consolidated obligations-discount notes | | 8,586 | | 14,204 | | 22,790 | |
Deposits and borrowings | | (71 | ) | (465 | ) | (536 | ) |
Mandatorily redeemable capital stock | | (959 | ) | 414 | | (545 | ) |
| | | | | | | |
Total interest expense | | (6,683 | ) | (1,220 | ) | (7,903 | ) |
| | | | | | | |
Changes in Net Interest Income | | $ | 48,161 | | $ | (90,056 | ) | $ | (41,895 | ) |
| | For the years ended | |
| | December 31, 2011 vs. December 31, 2010 | |
| | Increase (Decrease) | |
| | Volume | | Rate | | Total | |
Interest Income | | | | | | | |
Advances | | $ | (79,875 | ) | $ | 34,266 | | $ | (45,609 | ) |
Interest bearing deposits and others | | (151 | ) | (2,476 | ) | (2,627 | ) |
Federal funds sold and other overnight funds | | 3,382 | | (5,697 | ) | (2,315 | ) |
Investments | | (735 | ) | (73,278 | ) | (74,013 | ) |
Mortgage loans and other loans | | 2,008 | | (4,484 | ) | (2,476 | ) |
| | | | | | | |
Total interest income | | (75,371 | ) | (51,669 | ) | (127,040 | ) |
| | | | | | | |
Interest Expense | | | | | | | |
Consolidated obligations-bonds | | (31,106 | ) | (135,458 | ) | (166,564 | ) |
Consolidated obligations-discount notes | | (549 | ) | (6,984 | ) | (7,533 | ) |
Deposits and borrowings | | (1,424 | ) | (779 | ) | (2,203 | ) |
Mandatorily redeemable capital stock | | (1,106 | ) | (839 | ) | (1,945 | ) |
| | | | | | | |
Total interest expense | | (34,185 | ) | (144,060 | ) | (178,245 | ) |
| | | | | | | |
Changes in Net Interest Income | | $ | (41,186 | ) | $ | 92,391 | | $ | 51,205 | |
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Analysis of Non-Interest Income (Loss) - The principal components of non-interest income (loss) are summarized below (in thousands):
Table 10.11: Other Income (loss)
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Other income (loss): | | | | | | | |
Service fees and other (a) | | $ | 9,761 | | $ | 5,909 | | $ | 4,918 | |
Instruments held at fair value - Unrealized gains (losses) (b) | | 255 | | (10,494 | ) | (3,343 | ) |
| | | | | | | |
Total OTTI losses | | (651 | ) | (791 | ) | (5,052 | ) |
Net amount of impairment losses reclassified (from) to Accumulated other comprehensive income (loss) | | (1,400 | ) | (4,802 | ) | (3,270 | ) |
Net impairment losses recognized in earnings (c) | | (2,051 | ) | (5,593 | ) | (8,322 | ) |
| | | | | | | |
Net realized and unrealized gains (losses) on derivatives and hedging activities (d) | | 47,280 | | 16,691 | | 24,982 | |
Net realized gains (losses) from sale of available-for-sale securities and redemption of held-to-maturity securities | | 256 | | 17 | | 931 | |
Losses from extinguishment of debt | | (24,106 | ) | (86,501 | ) | (2,115 | ) |
Other | | (60 | ) | (709 | ) | (2,284 | ) |
Total other income (loss) | | $ | 31,335 | | $ | (80,680 | ) | $ | 14,767 | |
(a) Service fees and other — Service fees are derived primarily from providing correspondent banking services to members. The category Other includes fees earned on standby financial letters of credit. The increase in the current year was primarily due to increase in volume of issuance of financial letters of credits.
(b) Instruments held at fair value under the Fair Value Option — Fair value changes in 2012 were not significant as the debt instruments were nearing their maturities. Changes in fair value in 2011 and 2010 resulted in unrealized losses, as in those period end dates, market observable yields of similar debt instruments were lower than the debt carried by the FHLBNY. The debt instruments are generally medium and shorter-term instruments. In the fourth quarter of 2012, we also elected the FVO for a floating-rate advance, and a gain of $0.4 million was recognized. Recorded fair value gains and losses are primarily attributable to changes in market observable pricing (and inversely, yields); they are also impacted by the weighted average remaining maturity and duration of such instruments outstanding at the balance sheet dates. At issuance of the instruments, or as the instruments approach maturity, their fair values will generally be close to par. If the instruments are held to maturity, their fair values will decline to zero. For more information about FHLBank debt and advances elected under the FVO, see Note 17. Fair Values of Financial Instruments in the audited financial statements in this Form 10-K. .
(c) Net impairment losses recognized in earnings on held-to-maturity securities - Credit-related OTTI has continued to be insignificant in 2012 and has been declining over the years. Our cash flow analyses at each quarter identified very modest deterioration in the performance parameters of certain previously impaired private-label MBS. When cash flow analysis identifies credit losses that exceed fair value, our policy is to cap the loss to a floor equal to its amortized cost. The amounts capped in all periods in this report were insignificant.
(d) Earnings impact of derivatives and hedging activities — We may designate a derivative as either a hedge of (1) the fair value changes of a recognized fixed-rate asset (advance) or liability (Consolidated obligation debt), or an unrecognized firm commitment; (2) a forecasted transaction; or (3) the variability of future cash flows of a floating-rate asset or liability (cash flow hedge). We may also designate a derivative as an economic hedge, which does not qualify for hedge accounting under the accounting standards.
Reclassifications - Gains recorded due to the amortization of valuation basis adjustments of modified interest rate swaps to offset the amortization expense (fair value basis of modified hedged advances) are recorded in Derivatives and hedging gains and losses in Other income. Until the fourth quarter of 2012, amortization of the valuation basis adjustments of the modified hedged advance was recorded in a separate line, specifically Interest income from advances. In the fourth quarter of 2012, we changed our accounting policy for reporting amortization of the valuation basis of hedged advances that were modified, and have recorded the amortization in the same line item as the fair value changes of derivatives associated with the hedge, specifically in Other income, as part of Derivatives and hedging activities. This change in accounting policy has been described in Note 1. Significant Accounting Policies and Estimates, as a change in the reporting classification only. The change had no impact on Net income. The 2011 and 2010 comparable amortization expenses reported in the Statements of income have been reclassified to conform to the classification adopted in 2012. Amortization expenses re-presented as a result of the change in policy and recorded in Other income (loss) as a component of Derivatives and hedging activities were $88.3 million, $66.8 million and $1.8 million in 2012, 2011 and 2010.
Absent the amortization gains, the net impact of derivatives and hedging activities resulted in gains of $47.3 million, $16.7 million, and $25.0 million in 2012, 2011, and 2010. Principal components are discussed below:
1. | Impact of Qualifying hedges — Ineffectiveness recorded were on fair value hedges of consolidated obligation bonds, discount notes, advances, and insignificant amounts of ineffectiveness from closed cash flow hedges. Reported fair value gains of $4.2 million, compared to $39.0 million and $10.6 million in 2011 and 2010, represented ineffectiveness between changes in the fair values of derivatives and the hedged advances and debt. |
| |
2. | Impact of interest rate swaps designated in economic hedges - In 2012, fair value changes resulted in gain of $47.0 million, compared to losses of $27.0 million and $34.9 million in 2011 and 2010. They represent fair value changes of the derivatives without the offsetting benefit from changes in the hedged item, since the hedged items are not fair valued in an economic hedge. Such gains and losses, which are principally unrealized, will reverse if the swaps are held to their maturities, so that cumulatively, their fair values will sum to zero. Such swaps were primarily (a) hedging debt that are structured to pay 3-month LIBOR cash flows to swap dealers, and to receive federal funds indexed cash flows, or 1-month LIBOR cash flows, and (b) hedging short- and intermediate-term fixed-rate debt elected under the FVO. The hedging instrument is an interest rate swap that paid floating rate (primarily 3-month LIBOR), and received fixed-rate interest rate cash flows. The rise and fall of the 3-month LIBOR, relative to the Federal funds rate or the 1-month LIBOR, or relative to a fixed-rate, are factors that determine fair value gains and losses, as is the volume of derivatives designated as standalone, and their proximity to their maturity dates. At December 31, 2012, the 1-year basis spread between the 3-month LIBOR and the Federal funds index narrowed, and projected obligations to pay swap dealers on the Federal fund basis swaps declined. Fair values of the swaps benefited, and gains were recorded. The basis between 3-month LIBOR and 1-month LIBOR also narrowed. A decline in basis benefits the fair values of the swaps, resulting in unrealized fair value gains. In prior years, the spread basis between the 3-month LIBOR and the Federal funds rate, or between the 3 month LIBOR and 1-month LIBOR had expanded at the balance sheet dates, period over period, resulting in fair value losses. |
| |
3. | Interest accrued, either as an expense or income on the standalone swap is also recorded as a derivative gain or loss in Other income (loss). Interest accrued on a derivative in a qualifying hedge is recorded as an adjustment to the interest income or expense of the hedged debt or advance. In 2012, interest accrued contributed gains of $6.7 million. In 2011 and 2010, interest accrued contributed gains of $31.6 million and $79.0 million. Higher accruals in prior years were due in part to higher volume of economic hedges, and in part due to higher interest rates. These cash flows reduce cost of debt, thereby achieving economic hedge objectives. |
| |
4. | Impact of interest rate caps designated in economic hedges - $1.9 billion of notional amounts of interest rate caps were purchased in 2008 to hedge capped LIBOR indexed floating-rate MBS. The fair values of the caps were $4.2 million at December 31, 2012, down from $14.9 million at December 31, 2011, and a loss of $10.7 million was recorded in 2012. Cap values have been declining in line with declining rate environment and lower volatilities. Cap market values lost $26.9 million in 2011 and $29.7 million in 2010. |
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Earnings Impact of Derivatives and Hedging Activities
The following tables summarize the impact of hedging activities on earnings (in thousands):
Table 10.12: Earnings Impact of Derivatives and Hedging Activities — By Financial Instrument Type
| | Year ended December 31, 2012 | |
| | | | | | Consolidated | | Consolidated | | | | | | | |
| | | | MPF | | Obligation | | Obligation | | Balance | | Intermediary | | | |
Earnings Impact | | Advances | | Loans | | Bonds | | Discount Notes | | Sheet | | Positions | | Total | |
| | | | | | | | | | | | | | | |
Amortization/accretion/interest accruals of hedging activities reported in net interest income | | $ | (1,209,689 | ) | $ | (441 | ) | $ | 330,862 | | $ | (25,462 | ) | $ | — | | $ | — | | $ | (904,730 | ) |
Net realized and unrealized gains (losses) on derivatives and hedging activities | | | | | | | | | | | | | | | |
Gains (losses) on fair value hedges | | (8,731 | ) | — | | 14,557 | | (1,400 | ) | — | | — | | 4,426 | |
Gains (losses) on cash flow hedges | | — | | — | | (214 | ) | — | | — | | — | | (214 | ) |
Net gains (losses) derivatives-FVO | | — | | — | | 24,574 | | 2,941 | | — | | — | | 27,515 | |
Gains (losses)-economic hedges | | 1,414 | | 2,065 | | 22,674 | | 80 | | (10,706 | ) | 26 | | 15,553 | |
| | | | | | | | | | | | | | | |
Net realized and unrealized gains (losses) on derivatives and hedging activities | | (7,317 | ) | 2,065 | | 61,591 | | 1,621 | | (10,706 | ) | 26 | | 47,280 | |
| | | | | | | | | | | | | | | |
Total earnings impact | | $ | (1,217,006 | ) | $ | 1,624 | | $ | 392,453 | | $ | (23,841 | ) | $ | (10,706 | ) | $ | 26 | | $ | (857,450 | ) |
| | Year ended December 31, 2011 | |
| | | | | | Consolidated | | Consolidated | | | | | | | |
| | | | MPF | | Obligation | | Obligation | | Balance | | Intermediary | | | |
Earnings Impact | | Advances | | Loans | | Bonds | | Discount Notes | | Sheet | | Positions | | Total | |
| | | | | | | | | | | | | | | |
Amortization/accretion/interest accruals of hedging activities reported in net interest income | | $ | (1,616,983 | ) | $ | (74 | ) | $ | 478,647 | | $ | (11,355 | ) | $ | — | | $ | — | | $ | (1,149,765 | ) |
Net realized and unrealized gains (losses) on derivatives and hedging activities | | | | | | | | | | | | | | | |
Gains (losses) on fair value hedges | | 39,864 | | — | | (2,255 | ) | 1,400 | | — | | — | | 39,009 | |
Gains (losses) on cash flow hedges | | — | | — | | (119 | ) | — | | — | | — | | (119 | ) |
Net gains (losses) derivatives-FVO | | — | | — | | 15,142 | | 655 | | — | | — | | 15,797 | |
Gains (losses)-economic hedges | | (2,462 | ) | 3,060 | | (11,849 | ) | 102 | | (26,858 | ) | 11 | | (37,996 | ) |
| | | | | | | | | | | | | | | |
Net realized and unrealized gains (losses) on derivatives and hedging activities | | 37,402 | | 3,060 | | 919 | | 2,157 | | (26,858 | ) | 11 | | 16,691 | |
| | | | | | | | | | | | | | | |
Total earnings impact | | $ | (1,579,581 | ) | $ | 2,986 | | $ | 479,566 | | $ | (9,198 | ) | $ | (26,858 | ) | $ | 11 | | $ | (1,133,074 | ) |
| | Year ended December 31, 2010 | |
| | | | | | Consolidated | | Consolidated | | | | | | | |
| | | | MPF | | Obligation | | Obligation | | Balance | | Intermediary | | | |
Earnings Impact | | Advances | | Loans | | Bonds | | Discount Notes | | Sheet | | Positions | | Total | |
| | | | | | | | | | | | | | | |
Amortization/accretion/interest accruals of hedging activities reported in net interest income | | $ | (1,999,711 | ) | $ | (22 | ) | $ | 627,004 | | $ | — | | $ | — | | $ | — | | $ | (1,372,729 | ) |
Net realized and unrealized gains (losses) on derivatives and hedging activities | | | | | | | | | | | | | | | |
Gains (losses) on fair value hedges | | 1,466 | | — | | 9,144 | | — | | — | | — | | 10,610 | |
Net gains (losses) derivatives-FVO | | — | | — | | 29,431 | | 3,964 | | — | | — | | 33,395 | |
Gains (losses)-economic hedges | | (6,887 | ) | (24 | ) | 16,502 | | 716 | | (29,775 | ) | 445 | | (19,023 | ) |
| | | | | | | | | | | | | | | |
Net realized and unrealized gains (losses) on derivatives and hedging activities | | (5,421 | ) | (24 | ) | 55,077 | | 4,680 | | (29,775 | ) | 445 | | 24,982 | |
| | | | | | | | | | | | | | | |
Total earnings impact | | $ | (2,005,132 | ) | $ | (46 | ) | $ | 682,081 | | $ | 4,680 | | $ | (29,775 | ) | $ | 445 | | $ | (1,347,747 | ) |
Impact of Cash flow hedging on earnings and AOCI.
No amounts 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 in any periods in this report. Ineffectiveness from hedges designated as cash flow hedges was not significant in any periods reported in this Form 10-K. The two primary cash flow hedging strategies were:
Hedges of anticipated issuances of consolidated obligation bonds — From time to time, we execute interest rate swaps on the anticipated issuance of debt to lock in a spread between the earning asset and the cost of funding. The effective portion of changes in the fair values of the swaps is recorded in AOCI. The ineffective portion is recorded through net income. The swap is terminated upon issuance of the debt instrument, and amounts reported in AOCI are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued. The maximum period of time that we typically hedge our exposure to the variability in future cash flows for forecasted transactions to issue consolidated obligation bonds is between three and six months. At December 31, 2012, we had no open contracts to hedge the anticipated issuances of debt. Over the next 12 months, it is expected that $3.2 million of net losses recorded in AOCI will be recognized as an interest expense.
Hedges of discount note issuances — We have executed long-term pay-fixed, receive 3-month LIBOR-indexed interest rate swaps that are designated as cash flow hedges of a rollover financing program involving the sequential issuances of fixed-rate 3-month term discount notes over the same period as the term of the swap. The objective of the hedge is to offset the variability of cash flows attributable to changes in benchmark interest rate (3-month LIBOR), due to the rollover of the fixed-rate 91-day discount notes issued in parallel with the cash flow payments of
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the swap every 91 days through the maturity of the swap. The maximum period of time that we hedged exposure to the variability in future cash flows in this program is up to 15 years.
Derivative gains and losses reclassified from AOCI (a) 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 10.13: Accumulated Other Comprehensive Income (Loss) to Current Period Income from Cash Flow Hedges
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Accumulated other comprehensive income/(loss) from cash flow hedges | | | | | | | |
Beginning of period | | $ | (111,985 | ) | $ | (15,196 | ) | $ | (22,683 | ) |
Net hedging transactions | | (29,285 | ) | (99,880 | ) | (249 | ) |
Reclassified into earnings | | 4,156 | | 3,091 | | 7,736 | |
| | | | | | | |
End of period | | $ | (137,114 | ) | $ | (111,985 | ) | $ | (15,196 | ) |
(a) Includes unrecognized losses from rollover cash flow hedge strategy, and previously recorded basis from settled derivatives that hedged anticipatory issuances of debt. Amounts reclassified relate to reclassification of basis to interest expense in parallel with the yields being recognized on issued debt. Changes in the cash flows of the interest rate swap are expected to be highly effective at offsetting the changes in the interest element of the cash flows related to the forecasted issuance of the consolidated obligation bonds or the 91-day discount notes in the rollover-program. At December 31, 2012, the fair values of interest rate swaps designated in the cash flow strategy to hedge long-term issuance of consolidated obligation discount notes in the rollover-program were in an unrealized loss position of $124.8 million, which was recorded in the balance sheet as a derivative liability, and an offset recorded in AOCI as an unrealized loss. The comparable loss in AOCI at December 31, 2011 was $97.6 million. In addition, closed cash flow hedges of anticipatory issuance of consolidated obligation bonds, less amounts amortized, were also recorded to AOCI as unrecognized fair value losses, and were $12.3 million at December 31, 2012 and $14.4 million at December 31, 2011. See Table 10.13 for changes in cash flow hedges in AOCI.
Earnings Impact of Debt extinguishment and sales of investment securities
We retire debt principally to reduce future debt costs or when the associated asset is either prepaid or terminated early, and less frequently from prepayments of mortgage-backed securities. From time to time, we may sell investment securities classified as available-for-sale, or on an isolated basis, may be asked by the issuer of a security, which we have classified as held-to-maturity (“HTM”) to redeem the investment security.
The following table summarizes such activities (in thousands):
Table 10.14: Debt Extinguishment and Sale of Investment Securities
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | Carrying Value | | Gains/(Losses) | | Carrying Value | | Gains/(Losses) | | Carrying Value | | Gains/(Losses) | |
Sales of AFS Securities-MBS (a) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 32,156 | | $ | 708 | |
Redemption of Housing Finance Agency (a) | | $ | 4,742 | | $ | 256 | | $ | 3,918 | | $ | 17 | | $ | 22,300 | | $ | 223 | |
Extinguishment of CO Bonds (b) | | $ | 268,631 | | $ | (24,106 | ) | $ | 623,921 | | $ | (69,169 | ) | $ | 300,648 | | $ | (2,115 | ) |
Transfer of CO Bonds to Other FHLBanks (b) | | $ | — | | $ | — | | $ | 150,049 | | $ | (17,332 | ) | $ | — | | $ | — | |
(a) From time to time, we may sell investment securities classified as available-for-sale, or on an isolated basis may be asked by the issuer of a security, which we have classified as held-to-maturity, to redeem the investment security. There were insignificant gains from such redemptions in 2012.
(b) Bond buy-back activity was lower in 2012, compared to prior years in this report.
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Operating Expenses, Compensation and Benefits, and Other Expenses
The following table sets forth the major categories of operating expenses (dollars in thousands):
Table 10.15: Operating Expenses, and Compensation and Benefits
| | Years ended December 31, | |
| | 2012 | | Percentage of
Total | | 2011 | | Percentage of
Total | | 2010 | | Percentage of
total | |
| | | | | | | | | | | | | |
Temporary workers | | $ | 36 | | 0.13 | % | $ | 93 | | 0.32 | % | $ | 116 | | 0.42 | % |
Occupancy | | 4,156 | | 15.26 | | 4,395 | | 15.05 | | 4,316 | | 15.77 | |
Depreciation and leasehold amortization | | 4,294 | | 15.77 | | 5,334 | | 18.26 | | 5,646 | | 20.63 | |
Computer service agreements and contractual services | | 10,254 | | 37.67 | | 10,467 | | 35.84 | | 8,862 | | 32.37 | |
Professional and legal fees | | 1,080 | | 3.97 | | 2,404 | | 8.23 | | 2,981 | | 10.89 | |
Other (a) | | 7,407 | | 27.20 | | 6,514 | | 22.30 | | 5,452 | | 19.92 | |
Total operating expenses (b) | | $ | 27,227 | | 100.00 | % | $ | 29,207 | | 100.00 | % | $ | 27,373 | | 100.00 | % |
| | | | | | | | | | | | | |
Salaries | | $ | 31,811 | | 57.55 | % | $ | 30,235 | | 37.89 | % | $ | 29,120 | | 50.02 | % |
Employee benefits | | 23,462 | | 42.45 | | 49,560 | | 62.11 | | 29,100 | | 49.98 | |
Total Compensation and Benefits (c) | | $ | 55,273 | | 100.00 | % | $ | 79,795 | | 100.00 | % | $ | 58,220 | | 100.00 | % |
| | | | | | | | | | | | | |
Finance Agency and Office of Finance (d) | | $ | 13,672 | | | | $ | 13,305 | | | | $ | 9,822 | | | |
(a) Other Expense — includes audit fees, director fees and expenses, insurance and telecommunications. The Bank reserved $0.8 million for asset impairment in 2012 and was the primary reason for the increase over 2011. This category increased in 2011 over 2010 mainly due to increase in fees paid to the Board of Directors, and increase in telecommunication expenses.
(b) Operating expenses included the administrative and overhead costs of operating our Bank, as well as the operating costs of providing advances and managing collateral associated with the advances, managing the investment portfolios, and providing correspondent banking services to members. Computer service expense category was higher in 2011 compared to 2010 due to additional software fees to improve processes. Professional and legal fees in 2012 were lower due to reversal of legal fees that had been accrued at 2011 as fees were not incurred.
(c) Employee benefit costs were lower in 2012 compared to 2011 because of a one-time payment of $24.0 million in 2011 to the Defined benefit pension plan to restore the plan to a fully funding status.
(d) We are also assessed for our share of the operating expenses for the Finance Agency and the Office of Finance. The 12 FHLBanks and two other GSEs share the entire cost of the Finance Agency.
Assessments
Each FHLBank is required to set aside a portion of earnings to fund its Affordable Housing Program (“AHP”), and until June 30, 2011 to pay assessments to satisfy its REFCORP obligations. For more information, see “Affordable Housing Program and Other Mission Related Programs” and “Assessments” under ITEM 1 BUSINESS in this Form 10-K. We fulfill our 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. Ten percent of our annual pre-assessment regulatory net income is set aside for the AHP. The amounts set aside are considered our liability towards our AHP 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 AHP liabilities (in thousands):
Table 11.1: Affordable Housing Program Liabilities
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Beginning balance | | $ | 127,454 | | $ | 138,365 | | $ | 144,489 | |
Additions from current period’s assessments | | 40,286 | | 27,430 | | 31,095 | |
Net disbursements for grants and programs | | (32,798 | ) | (38,341 | ) | (37,219 | ) |
Ending balance | | $ | 134,942 | | $ | 127,454 | | $ | 138,365 | |
Subsequent to June 30, 2011, AHP is 10% of net income after adding back interest expense on mandatorily redeemable stock. Prior to June 30, 2011, AHP was 10% of net income after deducting REFCORP assessments, and adding back interest expense on mandatorily redeemable capital stock.
The following table provides roll-forward information with respect to changes in REFCORP liabilities (in thousands):
Table 11.2: REFCORP
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Beginning balance | | $ | — | | $ | 21,617 | | $ | 24,234 | |
Additions from current period assessments | | — | | 30,707 | | 68,881 | |
Net disbursements to REFCORP | | — | | (52,324 | ) | (71,498 | ) |
Ending balance | | $ | — | | $ | — | | $ | 21,617 | |
The REFCORP obligation was satisfied in June 2011, and no further payments are necessary.
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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. We could earn higher income by having higher IRR through greater mismatches between our assets and liabilities at the cost of potentially significant declines in market value and future income if the interest rate environment turned against our expectations. We have opted to retain a modest level of IRR which allows us to preserve our capital value while generating steady and predictable income. In keeping with that philosophy, our balance sheet consists of predominantly short-term and LIBOR-based assets and liabilities. More than 85 percent of our financial assets are either short-term or LIBOR-based, and a similar percentage of our liabilities are also either short-term or LIBOR-based. These positions protect our capital from large changes in value arising from interest rate or volatility changes.
Our primary tool 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 the conservative philosophy, IRR does arise from a number of aspects in our portfolio. These include the embedded prepayment rights, refunding needs, rate resets between short-term assets and liabilities, and basis risks arising from differences between the yield curves associated with assets and liabilities. To address these risks, we use 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. Our Risk Management Policy sets up a series of risk limits that we calculate on a regular basis. The risk limits are as follows:
· The option-adjusted DOE is limited to a range of +2.0 years to -3.5 years in the rates unchanged case, and to a range of +/-6.0 years in the +/-200bps shock cases. Due to the low interest rate environment beginning in early 2008, the December 2011, March 2012, June 2012, September 2012, and December 2012 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 through the 3-year term point and a cumulative limit of +/-30 months from the 5-year through 30-year term points.
Our portfolio, including derivatives, is tracked and the overall mismatch between assets and liabilities is summarized by using a DOE measure. Our last five quarterly DOE results are shown in years in the table below (due to the on-going low interest rate environment, there was no down-shock measurement performed between the fourth quarter of 2011 and the fourth quarter of 2012):
| | Base Case DOE | | -200bps DOE | | +200bps DOE | |
December 31, 2012 | | -1.46 | | N/A | | 2.02 | |
September 30, 2012 | | -0.96 | | N/A | | 2.43 | |
June 30, 2012 | | -0.36 | | N/A | | 3.06 | |
March 31, 2012 | | 0.72 | | N/A | | 3.74 | |
December 31, 2011 | | 0.02 | | N/A | | 2.67 | |
The DOE has remained within policy limits. Duration indicates any cumulative re-pricing/maturity imbalance in the portfolio’s financial assets and liabilities. A positive DOE indicates that, on average, the liabilities will re-price or mature sooner than the assets, while a negative DOE indicates that, on average, the assets will re-price or mature earlier than the liabilities. We measure DOE using software that incorporates any optionality within our portfolio using well-known and tested financial pricing theoretical models.
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We do not solely rely on the DOE measure as a mismatch measure between assets and liabilities. We also perform the more traditional gap measure that subtracts re-pricing/maturing liabilities from re-pricing/maturing assets over time. We observe the differences over various horizons, but have set a 10 percent of assets limit on cumulative re-pricings at the one-year point. This quarterly observation of the one-year cumulative re-pricing gap is provided in the table below and all values are below 10 percent of assets, well within the limit:
| | One Year
Re-pricing Gap | |
December 31, 2012 | | $6.259 Billion | |
September 30, 2012 | | $6.155 Billion | |
June 30, 2012 | | $5.762 Billion | |
March 31, 2012 | | $5.354 Billion | |
December 31, 2011 | | $5.641 Billion | |
Our review of potential interest rate risk issues also includes the effect of changes in interest rates on expected net income. We project asset and liability volumes and spreads over a one-year horizon and then simulate expected income and expenses from those volumes and other inputs. The effects of changes in interest rates are measured to test whether the portfolio has too much exposure in its net interest income over the coming 12-month period. To measure the effect, the change to the spread in the shocks is calculated and compared against the base case and subjected to a -15 percent limit. The quarterly sensitivity of our expected net interest income under both +/-200bps shocks over the next 12 months is provided in the table below (due to the ongoing low interest rate environment, the down-shock measurement was not performed between the fourth quarter of 2011 and the fourth quarter of 2012):
| | Sensitivity in
the -200bps
Shock | | Sensitivity in
the +200bps
Shock | |
December 31, 2012 | | N/A | | 14.21 | % |
September 30, 2012 | | N/A | | 17.94 | % |
June 30, 2012 | | N/A | | 8.16 | % |
March 31, 2012 | | N/A | | 8.87 | % |
December 31, 2011 | | N/A | | 13.93 | % |
Aside from net interest income, the other significant impact on changes in the interest rate environment is the potential impact on the value of the portfolio. These calculated and quoted market values are estimated based upon their financial attributes (including optionality) and then re-estimated under the assumption that interest rates suddenly rise or fall by 200bps. The worst effect, whether it is the up or the down shock, is compared to the internal limit of 10 percent. The quarterly potential maximum decline in the market value of equity under these 200bps shocks is provided below (due to the ongoing low interest rate environment, the down-shock measurement was not performed between the fourth quarter of 2011 and the fourth quarter of 2012):
| | Down-
shock Change
in MVE | | +200bps Change
in
MVE | |
December 31, 2012 | | N/A | | -1.18 | % |
September 30, 2012 | | N/A | | -1.58 | % |
June 30, 2012 | | N/A | | -3.01 | % |
March 31, 2012 | | N/A | | -4.72 | % |
December 31, 2011 | | N/A | | -2.26 | % |
As noted, the potential declines under these shocks are within our limits of a maximum 10 percent.
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The following table displays the portfolio’s maturity/re-pricing gaps as of December 31, 2012 and December 31, 2011 (in millions):
| | Interest Rate Sensitivity | |
| | December 31, 2012 | |
| | | | 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 | | $ | 15,280 | | $ | 259 | | $ | 529 | | $ | 256 | | $ | 449 | |
MBS Investments | | 8,173 | | 220 | | 367 | | 346 | | 3,592 | |
Adjustable-rate loans and advances | | 14,961 | | — | | — | | — | | — | |
Net unswapped | | 38,414 | | 479 | | 896 | | 602 | | 4,041 | |
| | | | | | | | | | | |
Fixed-rate loans and advances | | 14,845 | | 2,232 | | 12,489 | | 18,645 | | 9,120 | |
Swaps hedging advances | | 40,889 | | (1,746 | ) | (11,802 | ) | (18,421 | ) | (8,919 | ) |
Net fixed-rate loans and advances | | 55,734 | | 486 | | 687 | | 224 | | 201 | |
| | | | | | | | | | | |
Total interest-earning assets | | $ | 94,148 | | $ | 965 | | $ | 1,583 | | $ | 826 | | $ | 4,242 | |
| | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Deposits | | $ | 2,043 | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | |
Discount notes | | 29,315 | | 464 | | — | | — | | — | |
Swapped discount notes | | (1,106 | ) | — | | — | | — | | 1,106 | |
Net discount notes | | 28,209 | | 464 | | — | | — | | 1,106 | |
| | | | | | | | | | | |
Consolidated Obligation Bonds | | | | | | | | | | | |
FHLB bonds | | 29,201 | | 14,454 | | 12,881 | | 2,635 | | 4,794 | |
Swaps hedging bonds | | 28,481 | | (13,998 | ) | (10,897 | ) | (915 | ) | (2,671 | ) |
Net FHLB bonds | | 57,682 | | 456 | | 1,984 | | 1,720 | | 2,123 | |
| | | | | | | | | | | |
Total interest-bearing liabilities | | $ | 87,934 | | $ | 920 | | $ | 1,984 | | $ | 1,720 | | $ | 3,229 | |
Post hedge gaps (a): | | | | | | | | | | | |
Periodic gap | | $ | 6,214 | | $ | 45 | | $ | (401 | ) | $ | (894 | ) | $ | 1,013 | |
Cumulative gaps | | $ | 6,214 | | $ | 6,259 | | $ | 5,858 | | $ | 4,964 | | $ | 5,977 | |
| | Interest Rate Sensitivity | |
| | December 31, 2011 | |
| | | | 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 | | $ | 15,436 | | $ | 229 | | $ | 455 | | $ | 216 | | $ | 337 | |
MBS Investments | | 8,954 | | 527 | | 571 | | 214 | | 2,306 | |
Adjustable-rate loans and advances | | 6,271 | | — | | — | | — | | — | |
Net unswapped | | 30,661 | | 756 | | 1,026 | | 430 | | 2,643 | |
| | | | | | | | | | | |
Fixed-rate loans and advances | | 14,242 | | 3,746 | | 12,147 | | 17,034 | | 13,551 | |
Swaps hedging advances | | 44,910 | | (3,379 | ) | (11,415 | ) | (16,618 | ) | (13,498 | ) |
Net fixed-rate loans and advances | | 59,152 | | 367 | | 732 | | 416 | | 53 | |
| | | | | | | | | | | |
Total interest-earning assets | | $ | 89,813 | | $ | 1,123 | | $ | 1,758 | | $ | 846 | | $ | 2,696 | |
| | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Deposits | | $ | 2,130 | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | |
Discount notes | | 21,239 | | 885 | | — | | — | | — | |
Swapped discount notes | | (248 | ) | (610 | ) | — | | — | | 858 | |
Net discount notes | | 20,991 | | 275 | | — | | — | | 858 | |
| | | | | | | | | | | |
Consolidated Obligation Bonds | | | | | | | | | | | |
FHLB bonds | | 20,922 | | 13,594 | | 24,443 | | 4,272 | | 3,217 | |
Swaps hedging bonds | | 40,478 | | (13,095 | ) | (22,740 | ) | (2,923 | ) | (1,720 | ) |
Net FHLB bonds | | 61,400 | | 499 | | 1,703 | | 1,349 | | 1,497 | |
| | | | | | | | | | | |
Total interest-bearing liabilities | | $ | 84,521 | | $ | 774 | | $ | 1,703 | | $ | 1,349 | | $ | 2,355 | |
Post hedge gaps (a): | | | | | | | | | | | |
Periodic gap | | $ | 5,292 | | $ | 349 | | $ | 55 | | $ | (503 | ) | $ | 341 | |
Cumulative gaps | | $ | 5,292 | | $ | 5,641 | | $ | 5,696 | | $ | 5,193 | | $ | 5,534 | |
(a) Re-pricing gaps are estimated at the scheduled rate reset dates for floating rate instruments, and at maturity for fixed rate instruments. For callable instruments, the re-pricing period is estimated by the earlier of the estimated call date under the current interest rate environment or the instrument’s contractual maturity.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
| | PAGE |
| | |
Financial Statements | | |
| | |
Management’s Report on Internal Control over Financial Reporting | | 97 |
| | |
Report of Independent Registered Public Accounting Firm | | 98 |
Statements of Condition as of December 31, 2012 and 2011 | | 99 |
Statements of Income for the years ended December 31, 2012, 2011 and 2010 | | 100 |
Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 | | 101 |
Statements of Capital for the years ended December 31, 2012, 2011 and 2010 | | 102 |
Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 | | 103 |
Notes to Financial Statements | | 105 |
| | |
Supplementary Data | | |
| | |
Supplementary financial data for each full quarter within the two years ended December 31, 2012, are included in ITEM 6. SELECTED FINANCIAL DATA. | | |
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Federal Home Loan Bank of New York
Management’s Report on 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, 2012. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on its assessment, management of the Bank determined that as of December 31, 2012, 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 appears on the following page.
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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, comprehensive income, capital, and cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of New York (the “FHLBank”) at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The FHLBank’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 FHLBank’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, the Company changed the manner in which it presents the amortization of fair value hedge basis adjustments of modified advances.
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.
March 25, 2013
PricewaterhouseCoopers LLP, PricewaterhouseCoopers Center, 300 Madison Avenue, New York, NY 10017
T: (646) 471 3000, F: (813) 286 6000, www.pwc.com/us
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Federal Home Loan Bank of New York
Statements of Condition (in thousands, except par value of capital stock)
As of December 31, 2012 and 2011
| | December 31, 2012 | | December 31, 2011 | |
Assets | | | | | |
Cash and due from banks (Note 3) | | $ | 7,553,188 | | $ | 10,877,790 | |
Federal funds sold (Note 4) | | 4,091,000 | | 970,000 | |
Available-for-sale securities, net of unrealized gains of $22,506 at December 31, 2012 and $16,419 at December 31, 2011 (Note 6) | | 2,308,774 | | 3,142,636 | |
Held-to-maturity securities (Note 5) | | 11,058,764 | | 10,123,805 | |
Advances (Note 7) (Includes $500,502 at December 31, 2012 and $0 at December 31, 2011 at fair value under the fair value option) | | 75,888,001 | | 70,863,777 | |
Mortgage loans held-for-portfolio, net of allowance for credit losses of $6,982 at December 31, 2012 and $6,786 at December 31, 2011 (Note 8) | | 1,842,816 | | 1,408,460 | |
Accrued interest receivable | | 179,044 | | 223,848 | |
Premises, software, and equipment | | 11,576 | | 13,487 | |
Derivative assets (Note 16) | | 41,894 | | 25,131 | |
Other assets | | 13,743 | | 13,406 | |
| | | | | |
Total assets | | $ | 102,988,800 | | $ | 97,662,340 | |
| | | | | |
Liabilities and capital | | | | | |
| | | | | |
Liabilities | | | | | |
Deposits (Note 9) | | | | | |
Interest-bearing demand | | $ | 1,994,974 | | $ | 2,066,598 | |
Non-interest-bearing demand | | 19,537 | | 12,450 | |
Term | | 40,000 | | 22,000 | |
| | | | | |
Total deposits | | 2,054,511 | | 2,101,048 | |
| | | | | |
Consolidated obligations, net (Note 10) | | | | | |
Bonds (Includes $12,740,883 at December 31, 2012 and $12,542,603 at December 31, 2011 at fair value under the fair value option) | | 64,784,321 | | 67,440,522 | |
Discount notes (Includes $1,948,987 at December 31, 2012 and $4,920,855 at December 31, 2011 at fair value under the fair value option) | | 29,779,947 | | 22,123,325 | |
| | | | | |
Total consolidated obligations | | 94,564,268 | | 89,563,847 | |
| | | | | |
Mandatorily redeemable capital stock (Note 12) | | 23,143 | | 54,827 | |
| | | | | |
Accrued interest payable | | 127,664 | | 146,247 | |
Affordable Housing Program (Note 11) | | 134,942 | | 127,454 | |
Derivative liabilities (Note 16) | | 426,788 | | 486,166 | |
Other liabilities | | 165,655 | | 136,340 | |
| | | | | |
Total liabilities | | 97,496,971 | | 92,615,929 | |
| | | | | |
Commitments and Contingencies (Notes 12, 16 and 18) | | | | | |
| | | | | |
Capital (Note 12) | | | | | |
Capital stock ($100 par value), putable, issued and outstanding shares: | | | | | |
47,975 at December 31, 2012 and 44,906 at December 31, 2011 | | 4,797,457 | | 4,490,601 | |
Retained earnings | | | | | |
Unrestricted | | 797,567 | | 722,198 | |
Restricted (Note 12) | | 96,185 | | 24,039 | |
Total retained earnings | | 893,752 | | 746,237 | |
Total accumulated other comprehensive income (loss) (Note 13) | | (199,380 | ) | (190,427 | ) |
| | | | | |
Total capital | | 5,491,829 | | 5,046,411 | |
| | | | | |
Total liabilities and capital | | $ | 102,988,800 | | $ | 97,662,340 | |
The accompanying notes are an integral part of these financial statements.
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Federal Home Loan Bank of New York
Statements of Income (in thousands, except per share data)
Years Ended December 31, 2012, 2011 and 2010
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Interest income | | | | | | | |
Advances (Note 7) | | $ | 524,233 | | $ | 570,966 | | $ | 616,575 | |
Interest-bearing deposits (Note 3) | | 3,649 | | 2,834 | | 5,461 | |
Securities purchased under agreements to resell (Note 4) | | 86 | | — | | — | |
Federal funds sold (Note 4) | | 15,218 | | 6,746 | | 9,061 | |
Available-for-sale securities (Note 6) | | 23,626 | | 30,248 | | 31,465 | |
Held-to-maturity securities (Note 5) | | 270,835 | | 279,602 | | 352,398 | |
Mortgage loans held-for-portfolio (Note 8) | | 65,892 | | 62,942 | | 65,422 | |
Loans to other FHLBanks (Note 19) | | 5 | | 4 | | — | |
| | | | | | | |
Total interest income | | 903,544 | | 953,342 | | 1,080,382 | |
| | | | | | | |
Interest expense | | | | | | | |
Consolidated obligations-bonds (Note 10) | | 376,554 | | 406,166 | | 572,730 | |
Consolidated obligations-discount notes (Note 10) | | 57,494 | | 34,704 | | 42,237 | |
Deposits (Note 9) | | 757 | | 1,243 | | 3,502 | |
Mandatorily redeemable capital stock (Note 12) | | 1,839 | | 2,384 | | 4,329 | |
Cash collateral held and other borrowings (Note 19) | | 32 | | 82 | | 26 | |
| | | | | | | |
Total interest expense | | 436,676 | | 444,579 | | 622,824 | |
| | | | | | | |
Net interest income before provision for credit losses | | 466,868 | | 508,763 | | 457,558 | |
| | | | | | | |
Provision for credit losses on mortgage loans | | 1,011 | | 3,153 | | 1,409 | |
| | | | | | | |
Net interest income after provision for credit losses | | 465,857 | | 505,610 | | 456,149 | |
| | | | | | | |
Other income (loss) | | | | | | | |
Service fees and other | | 9,761 | | 5,909 | | 4,918 | |
Instruments held at fair value - Unrealized gains (losses) (Note 17) | | 255 | | (10,494 | ) | (3,343 | ) |
| | | | | | | |
Total OTTI losses | | (651 | ) | (791 | ) | (5,052 | ) |
Net amount of impairment losses reclassified (from) to | | | | | | | |
Accumulated other comprehensive income (loss) | | (1,400 | ) | (4,802 | ) | (3,270 | ) |
Net impairment losses recognized in earnings | | (2,051 | ) | (5,593 | ) | (8,322 | ) |
| | | | | | | |
Net realized and unrealized gains (losses) on derivatives and hedging activities (Note 16) | | 47,280 | | 16,691 | | 24,982 | |
Net realized gains (losses) from sale of available-for-sale securities and redemption of held-to-maturity securities (Notes 5 and 6) | | 256 | | 17 | | 931 | |
Losses from extinguishment of debt | | (24,106 | ) | (86,501 | ) | (2,115 | ) |
Other | | (60 | ) | (709 | ) | (2,284 | ) |
| | | | | | | |
Total other income (loss) | | 31,335 | | (80,680 | ) | 14,767 | |
| | | | | | | |
Other expenses | | | | | | | |
Operating | | 27,227 | | 29,207 | | 27,373 | |
Compensation and benefits | | 55,273 | | 79,795 | | 58,220 | |
Finance Agency and Office of Finance | | 13,672 | | 13,305 | | 9,822 | |
| | | | | | | |
Total other expenses | | 96,172 | | 122,307 | | 95,415 | |
| | | | | | | |
Income before assessments | | 401,020 | | 302,623 | | 375,501 | |
| | | | | | | |
Affordable Housing Program (Note 11) | | 40,286 | | 27,430 | | 31,095 | |
REFCORP (Note 11) | | — | | 30,707 | | 68,881 | |
| | | | | | | |
Total assessments | | 40,286 | | 58,137 | | 99,976 | |
| | | | | | | |
Net income | | $ | 360,734 | | $ | 244,486 | | $ | 275,525 | |
| | | | | | | |
Basic earnings per share (Note 14) | | $ | 7.78 | | $ | 5.46 | | $ | 5.86 | |
| | | | | | | |
Cash dividends paid per share | | $ | 4.63 | | $ | 4.70 | | $ | 5.24 | |
The accompanying notes are an integral part of these financial statements.
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Federal Home Loan Bank of New York
Statements of Comprehensive Income – (in thousands)
Years Ended December 31, 2012, 2011 and 2010
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Net Income | | $ | 360,734 | | $ | 244,486 | | $ | 275,525 | |
Other Comprehensive income (loss) | | | | | | | |
Net unrealized gains/losses on available-for-sale securities | | | | | | | |
Unrealized gains (losses) | | 6,087 | | (6,546 | ) | 26,374 | |
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities | | | | | | | |
Non-credit portion of other-than-temporary impairment losses | | (222 | ) | (315 | ) | (2,372 | ) |
Reclassification of non-credit portion included in net income | | 1,622 | | 5,117 | | 5,642 | |
Accretion of non-credit portion | | 10,978 | | 12,275 | | 14,374 | |
Total net non-credit portion of other-than-temporary impairment (losses)/gains on held-to-maturity securities | | 12,378 | | 17,077 | | 17,644 | |
Net unrealized gains/losses relating to hedging activities | | | | | | | |
Unrealized (losses) gains | | (29,285 | ) | (99,880 | ) | (249 | ) |
Reclassification of losses (gains) included in net income | | 4,156 | | 3,091 | | 7,736 | |
Total net unrealized (losses)/gains relating to hedging activities | | (25,129 | ) | (96,789 | ) | 7,487 | |
Pension and postretirement benefits | | (2,289 | ) | (7,485 | ) | (3,650 | ) |
Total other comprehensive (loss) income | | (8,953 | ) | (93,743 | ) | 47,855 | |
Total comprehensive income | | $ | 351,781 | | $ | 150,743 | | $ | 323,380 | |
The accompanying notes are an integral part of these financial statements.
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Federal Home Loan Bank of New York
Statements of Capital (in thousands, except per share data)
Years Ended December 31, 2012, 2011 and 2010
| | | | | | | | | | | | Accumulated | | | |
| | Capital Stock (a) | | | | Other | | | |
| | Class B | | Retained Earnings | | Comprehensive | | Total | |
| | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | Income (Loss) | | Capital | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | 50,590 | | $ | 5,058,956 | | $ | 688,874 | | $ | — | | $ | 688,874 | | $ | (144,539 | ) | $ | 5,603,291 | |
| | | | | | | | | | | | | | | |
Proceeds from issuance of capital stock | | 18,749 | | 1,874,910 | | — | | — | | — | | — | | 1,874,910 | |
Repurchase/redemption of capital stock | | (23,566 | ) | (2,356,594 | ) | — | | — | | — | | — | | (2,356,594 | ) |
Shares reclassified to mandatorily redeemable capital stock | | (483 | ) | (48,310 | ) | — | | — | | — | | — | | (48,310 | ) |
Cash dividends ($5.24 per share) on capital stock | | — | | — | | (252,308 | ) | — | | (252,308 | ) | — | | (252,308 | ) |
Comprehensive income (loss) | | — | | — | | 275,525 | | — | | 275,525 | | 47,855 | | 323,380 | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2010 | | 45,290 | | $ | 4,528,962 | | $ | 712,091 | | $ | — | | $ | 712,091 | | $ | (96,684 | ) | $ | 5,144,369 | |
| | | | | | | | | | | | | | | |
Proceeds from issuance of capital stock | | 23,956 | | 2,395,681 | | — | | — | | — | | — | | 2,395,681 | |
Repurchase/redemption of capital stock | | (24,304 | ) | (2,430,428 | ) | — | | — | | — | | — | | (2,430,428 | ) |
Shares reclassified to mandatorily redeemable capital stock | | (36 | ) | (3,614 | ) | — | | — | | — | | — | | (3,614 | ) |
Cash dividends ($4.70 per share) on capital stock | | — | | — | | (210,340 | ) | — | | (210,340 | ) | — | | (210,340 | ) |
Comprehensive income (loss) | | — | | — | | 220,447 | | 24,039 | | 244,486 | | (93,743 | ) | 150,743 | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2011 | | 44,906 | | $ | 4,490,601 | | $ | 722,198 | | $ | 24,039 | | $ | 746,237 | | $ | (190,427 | ) | $ | 5,046,411 | |
| | | | | | | | | | | | | | | |
Proceeds from issuance of capital stock | | 35,500 | | 3,549,980 | | — | | — | | — | | — | | 3,549,980 | |
Repurchase/redemption of capital stock | | (32,355 | ) | (3,235,548 | ) | — | | — | | — | | — | | (3,235,548 | ) |
Shares reclassified to mandatorily redeemable capital stock | | (76 | ) | (7,576 | ) | — | | — | | — | | — | | (7,576 | ) |
Cash dividends ($4.63 per share) on capital stock | | — | | — | | (213,219 | ) | — | | (213,219 | ) | — | | (213,219 | ) |
Comprehensive income (loss) | | — | | — | | 288,588 | | 72,146 | | 360,734 | | (8,953 | ) | 351,781 | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2012 | | 47,975 | | $ | 4,797,457 | | $ | 797,567 | | $ | 96,185 | | $ | 893,752 | | $ | (199,380 | ) | $ | 5,491,829 | |
(a) Putable stock
The accompanying notes are an integral part of these financial statements.
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Federal Home Loan Bank of New York
Statements of Cash Flows – (in thousands)
Years Ended December 31, 2012, 2011 and 2010
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Operating activities | | | | | | | |
| | | | | | | |
Net Income | | $ | 360,734 | | $ | 244,486 | | $ | 275,525 | |
| | | | | | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | |
Depreciation and amortization: | | | | | | | |
Net premiums and discounts on consolidated obligations, investments, mortgage loans and other adjustments | | (20,254 | ) | (167,727 | ) | (61,255 | ) |
Concessions on consolidated obligations | | 4,316 | | 8,051 | | 12,978 | |
Premises, software, and equipment | | 4,294 | | 5,334 | | 5,646 | |
Provision for credit losses on mortgage loans | | 1,011 | | 3,153 | | 1,409 | |
Net realized gains from redemption of held-to-maturity securities | | (256 | ) | (17 | ) | (223 | ) |
Net realized gains from sale of available-for-sale securities | | — | | — | | (708 | ) |
Credit impairment losses on held-to-maturity securities | | 2,051 | | 5,593 | | 8,322 | |
Change in net fair value adjustments on derivatives and hedging activities | | 272,834 | | 533,791 | | 504,841 | |
Change in fair value adjustments on financial instruments held at fair value | | (255 | ) | 10,494 | | 3,343 | |
Losses from extinguishment of debt | | 24,106 | | 86,501 | | — | |
Net change in: | | | | | | | |
Accrued interest receivable | | 47,979 | | 63,487 | | 53,175 | |
Derivative assets due to accrued interest | | 31,596 | | 26,012 | | 67,998 | |
Derivative liabilities due to accrued interest | | (50,639 | ) | (45,739 | ) | (37,141 | ) |
Other assets | | 1,919 | | 2,725 | | (2,584 | ) |
Affordable Housing Program liability | | 7,488 | | (10,911 | ) | (6,124 | ) |
Accrued interest payable | | (18,436 | ) | (54,254 | ) | (73,358 | ) |
REFCORP liability | | — | | (21,617 | ) | (2,617 | ) |
Other liabilities | | 10,502 | | 12,492 | | 11,117 | |
Total adjustments | | 318,256 | | 457,368 | | 484,819 | |
Net cash provided by (used in) operating activities | | 678,990 | | 701,854 | | 760,344 | |
Investing activities | | | | | | | |
Net change in: | | | | | | | |
Interest-bearing deposits | | 92,275 | | 100,560 | | (502,374 | ) |
Federal funds sold | | (3,121,000 | ) | 4,018,000 | | (1,538,000 | ) |
Deposits with other FHLBanks | | 43 | | (80 | ) | 66 | |
Premises, software, and equipment | | (2,383 | ) | (3,889 | ) | (5,786 | ) |
Held-to-maturity securities: | | | | | | | |
Purchased | | (3,409,692 | ) | (4,691,522 | ) | (551,113 | ) |
Repayments | | 2,482,153 | | 2,342,986 | | 3,302,202 | |
In-substance maturities | | 4,998 | | 3,935 | | 22,523 | |
Available-for-sale securities: | | | | | | | |
Purchased | | — | | (1,094,954 | ) | (2,860,592 | ) |
Repayments | | 842,038 | | 1,938,319 | | 1,121,667 | |
Proceeds from sales | | 735 | | 656 | | 36,877 | |
Advances: | | | | | | | |
Principal collected | | 429,633,248 | | 270,176,636 | | 224,670,438 | |
Made | | (434,936,449 | ) | (260,225,999 | ) | (210,872,277 | ) |
Mortgage loans held-for-portfolio: | | | | | | | |
Principal collected | | 334,288 | | 248,205 | | 245,580 | |
Purchased | | (772,900 | ) | (394,653 | ) | (195,777 | ) |
Proceeds from sales of REO | | 1,924 | | 1,692 | | — | |
Net cash (used in) provided by investing activities | | (8,850,722 | ) | 12,419,892 | | 12,873,434 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
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Federal Home Loan Bank of New York
Statements of Cash Flows – (in thousands)
Years Ended December 31, 2012, 2011 and 2010
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Financing activities | | | | | | | |
Net change in: | | | | | | | |
Deposits and other borrowings | | $ | (64,214 | ) | $ | (301,761 | ) | $ | (146,577 | ) |
Derivative contracts with financing element | | (285,614 | ) | (374,625 | ) | (439,963 | ) |
Consolidated obligation bonds: | | | | | | | |
Proceeds from issuance | | 45,603,515 | | 54,659,796 | | 68,041,134 | |
Payments for maturing and early retirement | | (48,121,389 | ) | (59,197,084 | ) | (70,571,842 | ) |
Net payments on bonds transferred (to)/from other FHLBanks (a) | | — | | (167,381 | ) | 224,664 | |
Consolidated obligation discount notes: | | | | | | | |
Proceeds from issuance | | 148,596,815 | | 148,526,627 | | 121,978,200 | |
Payments for maturing | | (140,943,936 | ) | (145,793,308 | ) | (133,402,396 | ) |
Capital stock: | | | | | | | |
Proceeds from issuance of capital stock | | 3,549,980 | | 2,395,681 | | 1,874,910 | |
Payments for repurchase/redemption of capital stock | | (3,235,548 | ) | (2,430,428 | ) | (2,356,594 | ) |
Redemption of mandatorily redeemable capital stock | | (39,260 | ) | (12,006 | ) | (111,385 | ) |
Cash dividends paid (b) | | (213,219 | ) | (210,340 | ) | (252,308 | ) |
Net cash provided by (used in) financing activities | | 4,847,130 | | (2,904,829 | ) | (15,162,157 | ) |
Net (decrease) increase in cash and due from banks | | (3,324,602 | ) | 10,216,917 | | (1,528,379 | ) |
Cash and due from banks at beginning of the period | | 10,877,790 | | 660,873 | | 2,189,252 | |
Cash and due from banks at end of the period | | $ | 7,553,188 | | $ | 10,877,790 | | $ | 660,873 | |
| | | | | | | |
Supplemental disclosures: | | | | | | | |
Interest paid | | $ | 530,256 | | $ | 566,651 | | $ | 722,595 | |
Affordable Housing Program payments (c) | | $ | 32,798 | | $ | 38,341 | | $ | 37,219 | |
REFCORP payments | | $ | — | | $ | 52,324 | | $ | 71,498 | |
Transfers of mortgage loans to real estate owned | | $ | 1,378 | | $ | 1,450 | | $ | 1,305 | |
Portion of non-credit OTTI gains on held-to-maturity securities | | $ | (1,400 | ) | $ | (4,802 | ) | $ | (3,270 | ) |
(a) For information about bonds transferred (to)/from FHLBanks and other related party transactions, see Note 19. Related Party Transactions.
(b) Does not include payments to holders of mandatorily redeemable capital stock. Such payments are reported as interest expense.
(c) AHP payments = (beginning accrual - ending accrual) + AHP assessment for the period; payments represent funds released to the Affordable Housing Program.
The accompanying notes are an integral part of these financial statements.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Background
The Federal Home Loan Bank of New York (“FHLBNY” or “the Bank”) is a federally chartered corporation, and 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 FHLBNY’s defined geographic district is New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands.
Tax Status
The FHLBanks, including the FHLBNY, are exempt from ordinary federal, state, and local taxation except for real property taxes.
Assessments
Resolution Funding Corporation (“REFCORP”) Assessments. — Up until June 30, 2011, the FHLBanks, including the FHLBNY, were required to make payments to REFCORP based on a percentage of Net Income. Each FHLBank was required to make payments to REFCORP until the total amount of payment actually made by all 12 FHLBanks was equivalent to a $300 million annual annuity, whose final maturity date was April 15, 2030. The Federal Housing Finance Agency has determined that the 12 FHLBanks have satisfied their obligation to REFCORP at June 30, 2011, and no further payments will be necessary.
Affordable Housing Program (“AHP”) Assessments. — Each FHLBank, including the FHLBNY, provides subsidies in the form of direct grants and below-market interest rate advances to members, who use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. Annually, the 12 FHLBanks must set aside the greater of $100 million or 10 percent of their regulatory defined net income for the Affordable Housing Program.
Note 1. Significant Accounting Policies and Estimates.
Change in Accounting Principle
Beginning with the fourth quarter of 2012, the FHLBNY has changed its presentation of the amortization of fair value hedge basis adjustments of modified advances. From time to time, the FHLBNY will enter into an agreement with a member to modify the terms of an existing advance. If the FHLBNY determines the modification is minor, the subsequent advance is considered a modification of the original advance. If the modified advance is also hedged under a qualifying fair value hedge, the fair value basis adjustment at the modification date will be amortized over the life of the modified advance on a level-yield basis even if the modified advance was designated after modification in a fair value hedge relationship. Prior to the fourth quarter of 2012, the FHLBNY had previously made an accounting policy election to present the amortization of the hedge basis adjustment as a component of Interest income from advances. Beginning in the fourth quarter of 2012, the FHLBNY presented the amortization of fair value basis of the modified hedged advance in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. The change in presentation is preferable as the Interest income from advances would not be impacted by the amortization if the advance is continuously hedged, and the total Interest income and Net interest income would more closely reflect the economics of the FHLBNY’s interest margin. The preferability of one acceptable method of accounting over another for hedge adjustments to an hedged item, which continues to be hedged when simultaneously dedesignated from one hedge relationship and redesignated into another hedge relationship, has not been addressed in any authoritative accounting literature. The change in presentation had no impact on Net income for any periods in this report since the change impacts only the presentation of the amortization of the hedge basis adjustment. The presentation reflects increases in reported Interest income from Advances within Net interest income by $88.3 million in 2012, $66.8 million in 2011, and $1.8 million in 2010 and corresponding decreases in Net realized and unrealized gains (losses) from derivatives and hedging actives in Other income. The FHLBNY has reclassified the appropriate line items in the Statements of Income for 2011 and 2010 to conform to the presentation adopted in 2012.
The following table summarizes the reclassifications (in thousands):
| | December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | After
Adjustment | | Before
Adjustment | | Adjusted | | As Previously
Reported | | Adjusted | | As Previously
Reported | |
Interest income | | | | | | | | | | | | | |
Advances | | $ | 524,233 | | $ | 435,938 | | $ | 570,966 | | $ | 504,118 | | $ | 616,575 | | $ | 614,801 | |
Total interest income | | $ | 903,544 | | $ | 815,249 | | $ | 953,342 | | $ | 886,494 | | $ | 1,080,382 | | $ | 1,078,608 | |
Net interest income before provision for credit losses | | $ | 466,868 | | $ | 378,573 | | $ | 508,763 | | $ | 441,915 | | $ | 457,558 | | $ | 455,784 | |
Net interest income after provision for credit losses | | $ | 465,857 | | $ | 377,562 | | $ | 505,610 | | $ | 438,762 | | $ | 456,149 | | $ | 454,375 | |
| | | | | | | | | | | | | |
Other income (loss) | | | | | | | | | | | | | |
Net realized and unrealized gains (losses) on derivatives and hedging activities | | $ | 47,280 | | $ | 135,575 | | $ | 16,691 | | $ | 83,539 | | $ | 24,982 | | $ | 26,756 | |
| | | | | | | | | | | | | |
Total other income (loss) | | $ | 31,335 | | $ | 119,630 | | $ | (80,680 | ) | $ | (13,832 | ) | $ | 14,767 | | $ | 16,541 | |
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Federal Home Loan Bank of New York
Notes to Financial Statements
Basis of Presentation
The accompanying financial statements of the Federal Home Loan Bank of New York have been prepared in accordance with GAAP and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the SEC.
Significant Accounting Policies and Estimates
The FHLBNY has identified certain accounting policies that it believes are significant because they require management to make subjective judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or by using different assumptions. These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios, evaluating the impairment of the Bank’s securities portfolios, and estimating fair values of certain assets and liabilities.
Financial Instruments with Legal Right of Offset
The FHLBNY has derivative instruments and securities purchased under agreements to resell, that are subject to enforceable master netting arrangements. The FHLBNY has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when it has the legal right of offset under these master agreements. The FHLBNY did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.
The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset based on the terms of the individual master agreement between the FHLBNY and its derivative counterparty. Additional information regarding these agreements is provided in Note 16. Derivatives and Hedging Activities. For securities purchased under agreements to resell, the FHLBNY did not have any unsecured amounts based on the fair value of the related collateral held for the periods presented. Additional information about the FHLBNY’s investments in securities purchased under agreements to resell is disclosed in Note 4. Federal Funds Sold and Securities Purchased Under Agreements to Resell.
Fair Value Measurements and Disclosures
The accounting standard on fair value measurements and disclosures discusses how entities should measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. In January 2010, the Financial Accounting Standards Board (“FASB”) provided further guidelines effective January 1, 2010 that required enhanced disclosures about fair value measurements, which the FHLBNY adopted in the 2010 first quarter. For more information, see Note 17. Fair Values of Financial Instruments.
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).
The FHLBNY has complied with 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.
At December 31, 2012 and 2011, fair values were measured and recorded on a recurring basis for derivatives, available-for-sale securities (“AFS securities”), and certain financial instruments elected under the Fair Value
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Option (“FVO”). On a non-recurring basis, certain held-to-maturity securities that were deemed to be credit impaired or other-than-temporarily impaired, were measured and recorded at their fair values. For more information about the fair value hierarchy, and the hierarchy levels of the FHLBNY’s financial instruments, see Note 17. Fair Values of Financial Instruments.
Fair values of Derivative Positions — The FHLBNY is an end-user of over-the-counter (“OTC”) derivatives to hedge assets, liabilities, and certain firm commitments to mitigate fair value risks. 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. At December 31, 2012, the FHLBNY adopted the overnight indexed swap curve (“OIS”) methodology for valuing its derivatives by incorporating OIS as an additional input to its valuation model. Adoption did not result in a material effect on the FHLBNY’s financial condition, results of operations or cash flows. For more information about the OIS methodology and adoption, see Note 17. Fair Values of Financial Statements.
Fair values of Investments Classified as AFS securities — The Bank’s investments classified as AFS are primarily comprised of mortgage-backed securities that are GSE issued variable-rate collateralized mortgage obligations and are recorded at their estimatable fair values. The fair values of investment in MBS are estimated by management using specialized pricing services that employ pricing models or quoted prices of securities with similar characteristics. The Bank has established that the pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing.
Fair values of other assets and liabilities — For more information about methodologies used by the Bank to validate vendor pricing, and Levels associated with assets and liabilities recorded on the FHLBNY’s Statements of Condition at December 31, 2012 and 2011, see Note 17. Fair Values of Financial Instruments.
Investment Securities
The FHLBNY classifies investment securities as held-to-maturity and available-for-sale at the date of the acquisition of securities. Investments were primarily agency issued mortgage-backed securities, and state and local housing finance agency obligations. Purchases and sales of securities are recorded on a trade date basis. We estimate 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, we periodically recalculate the effective yield to reflect actual prepayments to date. Adjustments of the effective yields for mortgage-backed securities are recorded on a retrospective basis, as if the new estimated life of the security had been known at its original acquisition date.
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 credit impaired or other-than-temporarily impaired (“OTTI”), the amortized cost basis of the security is adjusted for credit losses. Amortized cost basis of a held-to-maturity OTTI security is further adjusted for impairment related to all other factors (also referred to as the non-credit component of OTTI) and recognized in AOCI; the adjusted amortized cost basis is the carrying value of the OTTI security as reported in the Statements of Condition. Carrying value for a held-to-maturity security that is not OTTI is its amortized cost basis. Interest income on such securities is included in Interest income.
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.
AFS Securities — The FHLBNY classifies investments that it may sell before maturity as AFS and carries them at fair value. Until AFS securities are sold, changes in fair values are recorded in AOCI as Net unrealized gain or (loss) on AFS securities. 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. Interest from such securities is included in Interest income.
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Notes to Financial Statements
Other-Than-Temporary Impairment (“OTTI”) — Accounting and governance policies, and impairment analysis.
The FASB’s guidance issued in 2009 on the recognition and presentation of OTTI is primarily intended to provide greater clarity to investors about the credit and non-credit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. The guidance was incorporated in the Bank’s investment policies, and is summarized below.
The FHLBNY evaluates its investments for impairment quarterly, 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.
To assess whether the amortized cost basis of the FHLBNY’s private-label MBS will be recovered in future periods, the Bank performs OTTI analysis by cash flow testing 100 percent of its private-label MBS. The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac, a government agency, or a state and local housing agency by considering the creditworthiness and performance of the debt securities and the strength of the guarantees underlying the securities.
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, management determines whether an OTTI has occurred by comparing the present value of the cash flows expected to be collected to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the security’s amortized cost, an OTTI exists, irrespective of whether management will be required to sell such a security. The Bank’s methodology to calculate the present value of expected cash flows is to discount the expected cash flows (principal and interest) of a fixed-rate security that is being evaluated for OTTI, by using the effective interest rate of the security as of the date it was acquired. For a variable-rate security that is evaluated for OTTI, the expected cash flows are computed using a forward-rate curve and discounted using the forward rates.
If the FHLBNY determines that OTTI has occurred, it accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment. The investment security is written down to fair value, which becomes its new amortized cost basis. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.
For securities designated as AFS, 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 — In 2009, the Finance Agency, the FHLBanks’ regulator, provided the FHLBanks with guidance on the process for determining OTTI with respect to the FHLBanks’ holdings of private-label MBS and for adoption of the guidance for recognition and presentation of OTTI. The goal of the guidance is to promote consistency among all FHLBanks in the process for determining and presenting OTTI for private-label MBS. 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 in 2009, and provides a formal process by which the FHLBanks can provide input on and approve the assumptions. 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 OTTI, including the determination of fair value and the credit loss component of the unrealized loss, is consistent among those FHLBanks.
Consistent with guidelines provided by the OTTI Committee, the FHLBNY has contracted with the FHLBanks of San Francisco and Chicago to perform cash-flow analyses for 50 percent of the FHLBNY’s private-label MBS that the two FHLBanks could analyze for OTTI. The FHLBNY has developed key modeling assumptions to forecast cash flows for 100 percent of its private-label MBS in order to identify credit OTTI each quarter. The FHLBNY uses the OTTI results from the FHLBanks of San Francisco and Chicago to benchmark the FHLBNY’s own OTTI conclusions.
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 51 private-label MBS (100 percent) at each quarter-end date in 2011 and 2012. These assumptions and performance measures were benchmarked by comparing to (1) performance parameters from “market consensus”, and for 50 percent of the PLMBS portfolio to (2) the assumptions and parameters provided by the OTTI Committee.
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Notes to Financial Statements
The internal process calculates the historical average of each bond’s prepayments, defaults, and loss severities, and considered other factors such as delinquencies and foreclosures. Management’s assumptions are primarily based on historical performance statistics extracted from reports from trustees, loan servicers and other sources. In arriving at historical performance assumptions, which is the FHLBNY’s expected case assumptions, the FHLBNY also considers various characteristics of each security including, but not limited to, the following: the credit rating and related outlook or status; the creditworthiness of the issuers of the debt securities; the underlying type of collateral; the year of securitization or vintage, the duration and level of the unrealized loss, credit enhancements, if any; and other collateral-related characteristics such as FICO® credit scores, and delinquency rates. The relative importance of this information varies based on the facts and circumstances surrounding each security as well as the economic environment at the time of assessment.
Each bond’s performance parameters, primarily prepayments, defaults and loss severities, and bond insurance financial guarantee predictors, as calculated by the Bank’s internal approach are then input into the specialized bond cash flow model that allocates the projected collateral level losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancements for the senior securities are derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
GSE Issued Securities — The FHLBNY evaluates its individual securities issued by Fannie Mae and Freddie Mac or a government agency by considering the creditworthiness and performance of the debt securities and the strength of the GSE’s guarantees of the securities. Based on the Bank’s analysis, GSE and U.S. agency issued securities are performing in accordance with their contractual agreements. The Housing Act contains provisions allowing the U.S. Treasury to provide support to Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury and the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship in an attempt to stabilize their financial conditions and their ability to support the secondary mortgage market. The FHLBNY believes that it will recover its investments in GSE and agency issued securities given the current levels of collateral and credit enhancements and guarantees that exist to protect the investments.
Federal Funds Sold and Securities Purchased Under Agreements to Resell
Federal funds sold. Federal funds sold are recorded at cost on settlement date and interest is accrued using contractual rates.
Securities purchased under agreements to resell. As part of FHLBNY’s banking activities with counterparties, the FHLBNY has entered into secured financing transactions that mature overnight, and can be extended only at the discretion of the FHLBNY. These transactions involve the lending of cash, against which securities are taken as collateral. The FHLBNY does not have the right to repledge the securities received. Securities purchased under agreements to resell generally do not constitute a sale for accounting purposes of the underlying securities and so are treated as collateralized financing transactions. The FHLBNY did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.
Advances
Accounting for 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). If the advance is hedged, its carrying value will include hedging valuation adjustments. Advances elected under the FVO will include fair value adjustments. The FHLBNY records interest on advances to income as earned, and amortizes the premium and accretes the discounts on advances prospectively to interest income using a level-yield methodology.
Impairment Analysis of Advances. An advance will be considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all amounts due according to the contractual terms of the advance agreement. The FHLBNY has established asset classification and reserve policies. All adversely classified assets of the FHLBNY will have a reserve established for probable losses. 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.
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.
Advance Modifications. 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. 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
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more than minor. If the FHLBNY determines that the modification is more than minor, the transaction is treated as an advance termination with subsequent funding of a new advance, with gains or losses recognized in earnings for the period. If the FHLBNY determines the modification is minor, the subsequent advance is considered a modification of the original advance.
If the modified advance is also hedged under a qualifying fair value hedge, the fair value basis adjustments at the modification date will be amortized over the life of the modified advance on a level-yield basis, and recorded in Other income (loss) as Net realized and unrealized gain (loss) on derivatives and hedging activities. Typically, hedge accounting will continue after modification. The FHLBNY will record subsequent fair value changes attributable to hedged risks of the advance and the fair value changes of the hedging instrument in Other income as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
If the FHLBNY would receive prepayment fees on an advance that is determined to be a modification of the original advance, the fees would be deferred, recorded in the basis of the modified advance, and amortized over the life of the modified advance using the level-yield method. This amortization would be recorded as a component of interest income from advances.
Prepayment Fees on Advances. The FHLBNY charges a member a prepayment fee when the member prepays certain advances before the original maturity.
For advances that are hedged under a qualifying fair value hedge, 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 from advances.
For prepaid advances that are not hedged or that are hedged but do not meet the hedge accounting requirements, the Bank records prepayment fees net of any fair value basis adjustments included in the book basis of the prepaid advance.
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, 2012 and 2011. The FHLBNY manages the liquidity, interest rate and prepayment option risk of the MPF loans, while the PFIs retain servicing activities.
Credit Enhancement Obligations and Loss Layers. 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 $18.4 million and $13.6 million at December 31, 2012 and 2011. 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.
Accounting for Mortgage Loans. The FHLBNY has the intent and ability to hold these mortgage loans for the foreseeable future or until maturity or payoff, and classifies mortgage loans as held-for-portfolio. Loans are reported at their principal amount outstanding, net of premiums and discounts, which is the fair value of the mortgage loan on settlement date. The FHLBNY defers premiums and discounts, and uses the contractual method to amortize premiums and accrete discounts on mortgage loans. 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.
Mortgage loans in foreclosure are written down and measured at their fair values on a non-recurring basis (see Note 17. Fair Values of Financial Instruments). The FHLBNY records credit enhancement fees as a reduction to mortgage loan interest income, and records other non-origination fees, such as delivery commitment extension fees
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and pair-off fees, as derivative income over the life of the commitment. All such fees were insignificant for all periods reported.
Non-Accrual Mortgage Loans. 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. A loan on non-accrual status may be restored to accrual when (1) principal and interest is no longer 90 days or more past due, (2) the FHLBNY expects to collect the remaining interest and principal, and (3) the collection is not under legal proceedings. For mortgage-loans on non-accrual status, if the collection of the remaining principal and interest due is determined to be doubtful, then cash received would be applied first to principal until the remaining principal amount due is expected to be collected, and then as a recovery of any charge-offs. Any remaining cash flows would be recorded as interest income.
Troubled Debt Restructurings (“TDRs”) and MPF modification standards. Troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties and that concession would not have been otherwise considered. In April 2011, FASB issued new guidance that clarified how to determine when a borrower is experiencing financial difficulty, when a concession is granted by a creditor, and when a delay is considered insignificant. Adoption of the new TDR accounting guidance had no material impact on the numbers of loans restructured and modified or the amounts in allowance for credit losses.
Effective August 1, 2009, the MPF program introduced a temporary loan payment modification plan for participating PFIs, which was initially available until December 31, 2011 and has been extended through December 31, 2013. This modification plan was made available to homeowners currently in default or imminent danger of default. As of December 31, 2012, three MPF loans, which were modified under the plan, were performing under the plan terms. One modified loan was in bankruptcy.
The MPF loan troubled debt restructurings primarily involve modifying the borrower’s monthly payment for a period of up to 36 months to no more than a housing expense ratio of 38% of their monthly income. The outstanding principal balance is re-amortized to reflect a principal and interest payment for a term not to exceed 40 years and a housing expense ratio not to exceed 38%. This would result in a balloon payment at the original maturity date of the loan as the maturity date and number of remaining monthly payments is unchanged. If the 38% ratio is still not met, the MPF program reduces for up to 36 months the interest rate in 0.125% increments below the original note rate, to a floor rate of 3.00%, resulting in reduced principal and interest payments, until the target 38% housing expense ratio is met. A MPF loan involved in the troubled debt restructuring program is individually evaluated by the FHLBNY for impairment when determining its related allowance for credit losses. The credit loss on a TDR would be based on the restructured loan’s expected cash flows over the life of the loan, taking into account the effect of any concessions granted to the borrower, and the net cash flows discounted by its original yield. When a TDR is executed, the loan status becomes current, but the loan will continue to be classified as a non-performing TDR loan and will continue to be evaluated individually for credit losses until the MPF loan is performing to its original terms. Forgiveness information for loans modified under this program has been omitted since the MPF allows modifications for no more than a maximum period of 36 months, at which point the loan terms revert to its original terms.
Beginning with the fourth quarter of 2012, the FHLBNY expanded the TDR disclosures to include loans that had been discharged from bankruptcy. As of December 31, 2012, mortgage loans included $8.8 million of MPF that had been previously discharged under bankruptcy. The FHLBNY determined that the discharge of mortgage debt in bankruptcy is a concession as defined under existing accounting literature for TDRs. The FHLBNY does not consider loans discharged from bankruptcy as impaired, unless the loan is past due 90 days or more, and $0.6 million of such loans were considered for impairment because of their past-due delinquency status. The allowance for credit losses associated with those loans was immaterial.
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. An allowance for credit losses is a valuation allowance separately established for each identified loan (individually evaluated) in order to provide for probable losses inherent in loans, that are either classified under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due 90 days or more. Beginning with the third quarter of 2012, the FHLBNY deemed loans that were in bankruptcy status as impaired, regardless of their delinquency status. At December 31, 2012, the expanded impairment classification resulted in an additional $2.7 million of loans as impaired, and the associated credit loss allowance was $0.5 million.
The aggregate allowance for credit losses on mortgage loans was $7.0 million and $6.8 million at December 31, 2012 and 2011.
Impairment Methodology and Portfolio Segmentation and Disaggregation — When a mortgage loan is classified as impaired, it is then analyzed for credit losses. Measurement of credit losses is based on current information and events and when it is probable that the FHLBNY will be unable to collect all amounts due according to the contractual terms of the loan agreement. Each such loan is measured for impairment based on the fair value of the underlying property less estimated selling costs. It is assumed that repayment is expected to be provided solely by the sale of the underlying property, that is, there is no other available and reliable source of repayment. To the extent that the net fair value of the property (collateral) is less than the recorded investment in the loan, a loan loss allowance is recorded. FHA and VA are insured loans, and are excluded from the analysis. FHA and VA insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicers defaulting on their
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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.
Aside from separating conventional mortgage loans from FHA and VA insured loans, the FHLBNY has determined that no further disaggregation and or portfolio segmentation is needed as the credit risk is measured at the individual loan level.
Charge-Off Policy — The FHLBNY records a charge-off on a conventional loan generally at the foreclosure of a loan. A charge-off is typically recognized when the fair value of the underlying collateral, less estimated selling costs, is less than the recorded investment in the loan.
Real Estate Owned (“REO”) — REO includes assets that have been received in satisfaction of mortgage loans through foreclosure. REO is recorded at the lower of cost or fair value less estimated selling costs. The FHLBNY recognizes a charge-off to allowance for credit losses if the fair value is less than the recorded investment in the loan at the date of transfer from mortgage loan to REO. Any subsequent realized gains, realized or unrealized losses and carrying costs are included in Other income (non-interest) in the Statements of Income. REO is recorded in Other assets in the Statements of Condition.
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 paid on 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, 2012 and 2011 represented stocks held by former members who were no longer members by virtue of being acquired by members of another FHLBank.
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, charter termination, 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. 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. 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 FHLBNY’s capital stock can only be acquired and redeemed at par value; and are not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.
Affordable Housing Program
The FHLBank Act requires each FHLBank to establish and fund an AHP (see Note 11. Affordable Housing Program). 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 FHLBNY’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 not material 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 adjustment for dividends associated with mandatorily redeemable capital stock, and until June 30, 2011, before REFCORP assessments (REFCORP assessments ceased effective June 30, 2011). 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
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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 11. Affordable Housing Program.
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 straight line method.
Derivatives
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, and serves as a basis for calculating periodic interest payments or cash flow. 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. All derivatives are recognized on the balance sheet at their estimated fair values, including accrued unpaid interest as either a derivative asset or a derivative liability net of cash collateral received from and pledged to derivative counterparties.
Each derivative is designated as one of the following:
(1) a qualifying (a) hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a “fair value” hedge);
(2) a qualifying (a) hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge);
(3) a non-qualifying (a) hedge of an asset or liability (“economic hedge”) for asset-liability management purposes; or
(4) a non-qualifying (a) 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.
(a) The terms “qualifying” and “non-qualifying” refer to accounting standards for derivatives and hedging.
The FHLBNY had no foreign currency assets, liabilities or hedges in 2012, 2011 or 2010.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current period’s earnings in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are reported in AOCI, a component of equity, until earnings are affected by the variability of the cash flows of the hedged transaction (i.e., until the recognition of interest on a variable rate asset or liability is recorded in earnings).
The FHLBNY records derivatives on trade date, but records the associated hedged consolidated obligations and advances on settlement date. Hedge accounting commences on trade date, at which time subsequent changes to the derivative’s fair value are recorded along with the offsetting changes in the fair value of the hedged item attributable to the risk being hedged. On settlement date, the basis adjustments to the hedged item’s carrying amount are combined with the principal amounts and the basis becomes part of the total carrying amount of the hedged item.
The FHLBNY has defined its market settlement conventions for hedged items to be five business days or less for advances and thirty calendar days or less, using a next business day convention, for consolidated obligations bonds and discount notes. These market settlement conventions are the shortest period possible for each type of advance and consolidated obligation from the time the instruments are committed to the time they settle.
The FHLBNY considers hedges of committed advances and consolidated obligation bonds eligible for the “short cut” provisions, under accounting standards for derivatives and hedging, as long as settlement of the committed asset or liability occurs within the market settlement conventions for that type of instrument. A short-cut hedge is a highly effective hedging relationship that uses an interest rate swap as the hedging instrument to hedge a recognized asset or liability and that meets the criteria under the accounting standards for derivatives and hedging to qualify for an assumption of no ineffectiveness. To meet the short-cut provisions that assume no ineffectiveness, hedge accounting standards also require the fair value of the swap to approximate 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
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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 for hedge accounting are recorded in current period earnings with no fair value adjustment to the asset or liability that are being hedged on an economic basis. For a derivative that does not qualify for hedge accounting, the net interest associated with the derivative is recorded together with changes in its fair value in Other income (loss) as a Net realized and unrealized gain (loss) on derivatives and hedging activities. Net interest and changes in fair values of derivatives designated as economic hedges (also referred to as standalone hedges), or when executed as intermediated derivatives for members, are also recorded in the manner described above.
The FHLBNY routinely issues debt to investors and makes advances to members in which a derivative instrument is “embedded”. Upon execution of these transactions, the FHLBNY assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance or debt (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. If the FHLBNY determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate, standalone instrument with the same terms would qualify as a derivative instrument, the embedded derivative would be separated from the host contract as prescribed for hybrid financial instruments under accounting standards for derivatives and hedge accounting, and carried at fair value. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, the changes in fair value would be reported in current earnings (such as an investment security classified as “trading”; or, if the FHLBNY cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the balance sheet at fair value and no portion of the contract would be designated as a hedging instrument). The FHLBNY had no financial instruments with embedded derivatives that required bifurcation at December 31, 2012 and 2011.
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 the hedged item is a firm commitment, and 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.
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.
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 executed with swap counterparties at December 31, 2012 and 2011.
Premises, Software and Equipment
The Bank computes depreciation using the straight-line method over the estimated useful lives of assets ranging from four to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful lives or the terms of the underlying leases. Amortization periods range up to five 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).
Consolidated Obligations
The FHLBNY reports consolidated obligation bonds and discount notes at amortized cost, net of discounts and premiums. If the consolidated obligation debt is hedged, its carrying value will include hedging valuation adjustments. The carrying value of consolidated obligation debt elected under the FVO will be its fair value. The FHLBNY records interest paid on consolidated obligation bond in interest expense.
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Concessions on Consolidated Obligations — Concessions are paid to dealers in connection with the issuance of certain consolidated obligation bonds. The Office of Finance prorates the amount of the concession to the FHLBNY based upon the percentage of the debt issued that is assumed by the FHLBNY. Concessions paid on consolidated obligation bonds elected under the FVO are expensed as incurred. Concessions paid on consolidated obligation bonds not designated under the FVO, are deferred and amortized, using the contractual level-yield method, over the term to maturity of the consolidated obligation bond. 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 contractual level-yield method, over the term to maturity of the consolidated obligation bonds.
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 and two other GSEs, in amounts sufficient to pay the Finance Agency’s annual operating expenses.
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 — (1) two-thirds based upon each FHLBank’s share of total consolidated obligations outstanding and (2) one-third based upon an equal pro-rata allocation. Prior to January 2, 2011, each FHLBank was assessed for the Office of Finance operating and capital expenditures based on capital stock outstanding, the volume of consolidated obligations issued, and the amount of consolidated obligations outstanding, all as a percentage of the total of the items for all 12 FHLBanks.
Earnings per Capital Share
Basic earnings per share is computed by dividing income available to stockholders by the weighted average number of shares outstanding for the period. 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 shares that may be dilutive.
Cash Flows
In the Statements of Cash Flows, the FHLBNY considers Cash and due from banks to be cash. Federal funds sold, securities purchased under agreements to resell, certificates of deposit, and interest-earning balances at the Federal Reserve Banks are reported in the Statements of Cash Flows as investing activities. Cash collateral posted 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 posted is reported as a net change in investing activities, and cash collateral received is reported as a net change in financing activities.
Derivative instruments — 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 the derivative instrument does not include an other-than-insignificant financing element at inception.
When the FHLBNY executes an off-market derivative, which would typically require an up-front cash exchange, the FHLBNY will analyze the transaction and would deem it to contain a financing element if the cash exchange is more than insignificant.
Losses on debt extinguishment — In the Statements of Cash flows for the years ended December 31, 2012 and 2011, net losses of $24.1 million and $86.5 million from debt retirement were included as part of financing activities.
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Recently Adopted Significant Accounting Policies
Presentation of Comprehensive Income. — In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The Accounting Standards Update (“ASU”) requires an entity to present comprehensive income either in a single statement or in two consecutive statements. This ASU became effective for the FHLBNY for interim and annual periods beginning on January 1, 2012, applied retrospectively for all periods presented. The FHLBNY elected and adopted the two-statement approach. Under this approach, the FHLBNY is required to present components of net income and total net income in the Statement of Income. The Statements of Comprehensive Income follows the Statements of Income and includes the components of OCI and a total for OCI, along with a total for comprehensive income. The ASU removed the option of reporting other comprehensive income in the Statement of changes in stockholders’ equity.
Reconsideration of Effective Control for Repurchase Agreements. — In April 2011, the FASB issued ASU No. 2011-03, Transfer and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU was issued to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes from the assessment of effective control: (i) the criterion requiring the transferor to have the ability to repurchase or redeem financial assets before their maturity on the substantially agreed-upon terms, even in the event of the transferee’s default, and (ii) the collateral maintenance implementation guidance related to that criterion. The new guidance became effective for interim or annual periods beginning on or after December 15, 2011 (January 1, 2012, for the Bank) and was applied prospectively to transactions or modifications of existing transactions that occurred on or after January 1, 2012. The adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, or cash flows.
Fair Value Measurement and Disclosure — Beginning January 1, 2012, the FHLBNY adopted the guidance under the FASB’s ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The guidance is intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs, and its adoption did not change the FHLBNY’s methodologies for estimating fair value. The FHLBNY’s disclosures with respect to the classification of its financial instruments and measurement of their significance are summarized in Note 17. Fair Values of Financial Instruments.
Note 2. Recently Issued Accounting Standards and Interpretations.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. The ASU requires new footnote disclosures of items reclassified from accumulated OCI to net income. The requirements will be effective for the first quarter of 2013. For the FHLBNY, the expanded disclosures would include reclassifications from AOCI for previously recorded non-credit losses due to OTTI, realized gains and loss due to cash flow hedges, gains and losses due to changes in assumptions of supplemental pension and postretirement benefit plans, and reclassifications of gains and losses on available-for-sale securities. The application of this guidance will impact disclosures and will have no impact on the FHLBNY’s financial condition, results of operations or cash flows.
Joint and Several Liability Arrangements. In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This guidance requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, this guidance requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. We are evaluating the potential impact, if any, of this ASU on our financial statements. This guidance is effective for interim and annual periods beginning on or after December 15, 2013 and should be applied retrospectively for obligations with joint and several liabilities existing at the beginning of an entity’s fiscal year of adoption.
Disclosures about Offsetting Assets and Liabilities. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The standard requires enhanced disclosures about certain financial instruments and derivative instruments that are either offset in the balance sheet (presented on a net basis) or subject to an enforceable master netting arrangement or similar arrangement. In January 2013, the FASB clarified that the scope of this guidance is limited to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions.
The new disclosures requirements should enhance comparability between those companies that prepare their financial statements on the basis of U.S. GAAP and those financial statements in accordance with IFRS. On adoption, this guidance will require the FHLBNY to disclose both gross and net information about certain financial instruments and derivative instruments, which are either offset on the statement of condition or subject to an enforceable master netting arrangement or similar agreement. This guidance will become effective for interim and annual periods beginning January 1, 2013 and is required retrospectively for all comparative periods presented. The application of this guidance will impact disclosures and will have no impact on the FHLBNY’s financial condition, results of operations or cash flows.
Framework For Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the Federal Housing Finance Agency (“FHFA”), the FHLBank’s regulator,
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issued Advisory Bulletin 2012-02 (“Advisory Bulletin”) that establishes adverse classification, identification of Special Mention assets and off-balance sheet credit exposures. The guidance is expected to be applied prospectively, and was effective at issuance. However, the FHFA issued additional guidance that extends the effective date of this Advisory Bulletin to January 1, 2014.
The guidance also prescribes the timing of asset charge-offs if an asset is at 180 days or more past due, subject to certain conditions.
The FHLBNY is continuing to review the guidance, and its preliminary conclusion is that adoption of the Advisory Bulletin would change the FHLBNY’s existing charge-off policy, but would not impact the Bank’s credit classification practices or the credit loss measurement methodologies in any significant manner. Under existing policies, the FHLBNY records a charge-off on MPF loans based upon the occurrence of a confirming event, which is typically the occurrence of an in-substance foreclosure (which occurs when the PFI takes physical possession of real estate without having to go through formal foreclosure procedures) or actual foreclosure. Adoption of the Advisory Bulletin may accelerate the timing of charge-offs, and the FHLBNY is reviewing the operational aspects of implementing the guidance. The FHLBNY’s current practice is to record credit loss allowance on a loan level basis on all MPF loans delinquent 90 days or greater (for loans in bankruptcy status, an allowance is recorded regardless of delinquency status), and to measure the allowance based on the shortfall of the value of collateral (less estimated selling costs) to the recorded investment in the impaired loan. Therefore, the FHLBNY does not expect an acceleration of the charge-offs to have a material impact on the results of financial condition, results of operations and cash flows.
Note 3. Cash and Due from Banks.
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Banks are included in Cash and due from banks.
Compensating Balances
The Federal Reserve Board of Governors modified the reserve requirements at the Federal Reserve Bank effective July 12, 2012. These new requirements state that the FHLBNY is exempted from maintaining any required clearing balance. Prior to the change, the FHLBNY maintained $1.0 million and utilized the balance 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 $85.1 million and $69.6 million as of December 31, 2012 and December 31, 2011. The Bank includes member reserve balances in Other liabilities in the Statements of Condition.
Cash Collateral Pledged to Derivative Counterparties
The FHLBNY executes derivatives with major swap dealers and financial institutions, collectively swap counterparties, and enters into bilateral collateral agreements. When counterparties are exposed, the FHLBNY would typically post cash as pledged collateral to mitigate the counterparty’s credit exposure. At December 31, 2012 and 2011, the FHLBNY had deposited $2.5 billion and $2.6 billion with swap counterparties and these amounts earned interest generally at the overnight Federal funds rate. The cash posted was recorded as a deduction to Derivative liabilities.
Note 4. Federal Funds Sold and Securities Purchased Under Agreements to Resell.
Federal funds sold — Federal funds sold are unsecured advances to third parties.
Securities purchased under agreements to resell — As part of FHLBNY’s banking activities, the FHLBNY has entered into secured financing transactions that mature overnight, and can be extended only at the discretion of the FHLBNY. These transactions involve the lending of cash, against which securities are taken as collateral. The amount of cash loaned against the securities collateral is a function of the liquidity and quality of the collateral. The collateral is typically in the form of highly-rated marketable securities, and the FHLBNY has the ability to call for additional collateral if the value of the securities falls below a pre-defined haircut. The FHLBNY can terminate the transaction and liquidate the collateral if the counterparty fails to post the additional margin. Under these agreements, the FHLBNY would not have the right to repledge the securities received. Securities purchased under agreements to resell (reverse repos) generally do not constitute a sale for accounting purposes of the underlying securities and so are treated as collateralized financing transactions.
There were no balances outstanding at December 31, 2012 or 2011. Transaction balances averaged $42.1 million in 2012 and $0 in 2011.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Note 5. Held-to-Maturity Securities.
Major Security Types (in thousands)
| | December 31, 2012 | |
| | | | OTTI | | | | Gross | | Gross | | | |
| | Amortized | | Recognized | | Carrying | | Unrecognized | | Unrecognized | | Fair | |
Issued, guaranteed or insured: | | Cost | | in AOCI | | Value | | Holding Gains (a) | | Holding Losses (a) | | Value | |
Pools of Mortgages | | | | | | | | | | | | | |
Fannie Mae | | $ | 459,114 | | $ | — | | $ | 459,114 | | $ | 37,312 | | $ | — | | $ | 496,426 | |
Freddie Mac | | 133,347 | | — | | 133,347 | | 9,462 | | — | | 142,809 | |
Total pools of mortgages | | 592,461 | | — | | 592,461 | | 46,774 | | — | | 639,235 | |
| | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | |
Fannie Mae | | 2,602,017 | | — | | 2,602,017 | | 24,940 | | — | | 2,626,957 | |
Freddie Mac | | 2,484,560 | | — | | 2,484,560 | | 27,058 | | (1 | ) | 2,511,617 | |
Ginnie Mae | | 64,681 | | — | | 64,681 | | 854 | | — | | 65,535 | |
Total CMOs/REMICs | | 5,151,258 | | — | | 5,151,258 | | 52,852 | | (1 | ) | 5,204,109 | |
| | | | | | | | | | | | | |
Commercial Mortgage-Backed Securities | | | | | | | | | | | | | |
Fannie Mae | | 930,982 | | — | | 930,982 | | 30,272 | | (593 | ) | 960,661 | |
Freddie Mac | | 3,128,561 | | — | | 3,128,561 | | 266,562 | | — | | 3,395,123 | |
Ginnie Mae | | 2,969 | | — | | 2,969 | | 27 | | — | | 2,996 | |
Total commercial mortgage-backed securities | | 4,062,512 | | — | | 4,062,512 | | 296,861 | | (593 | ) | 4,358,780 | |
| | | | | | | | | | | | | |
Non-GSE MBS (b) | | | | | | | | | | | | | |
CMOs/REMICs | | 106,063 | | (1,006 | ) | 105,057 | | 3,336 | | (537 | ) | 107,856 | |
| | | | | | | | | | | | | |
Asset-Backed Securities (b) | | | | | | | | | | | | | |
Manufactured housing (insured) (c) | | 132,551 | | — | | 132,551 | | 1,531 | | (1,810 | ) | 132,272 | |
Home equity loans (insured) (c) | | 204,500 | | (45,676 | ) | 158,824 | | 49,531 | | (944 | ) | 207,411 | |
Home equity loans (uninsured) | | 135,290 | | (16,789 | ) | 118,501 | | 15,354 | | (10,634 | ) | 123,221 | |
Total asset-backed securities | | 472,341 | | (62,465 | ) | 409,876 | | 66,416 | | (13,388 | ) | 462,904 | |
| | | | | | | | | | | | | |
Total MBS | | 10,384,635 | | (63,471 | ) | 10,321,164 | | 466,239 | | (14,519 | ) | 10,772,884 | |
| | | | | | | | | | | | | |
Other | | | | | | | | | | | | | |
State and local housing finance agency obligations | | 737,600 | | — | | 737,600 | | 2,097 | | (56,025 | ) | 683,672 | |
| | | | | | | | | | | | | |
Total Held-to-maturity securities | | $ | 11,122,235 | | $ | (63,471 | ) | $ | 11,058,764 | | $ | 468,336 | | $ | (70,544 | ) | $ | 11,456,556 | |
| | December 31, 2011 | |
| | | | OTTI | | | | Gross | | Gross | | | |
| | Amortized | | Recognized | | Carrying | | Unrecognized | | Unrecognized | | Fair | |
Issued, guaranteed or insured: | | Cost | | in AOCI | | Value | | Holding Gains (a) | | Holding Losses (a) | | Value | |
Pools of Mortgages | | | | | | | | | | | | | |
Fannie Mae | | $ | 652,061 | | $ | — | | $ | 652,061 | | $ | 49,797 | | $ | — | | $ | 701,858 | |
Freddie Mac | | 187,515 | | — | | 187,515 | | 12,709 | | — | | 200,224 | |
Total pools of mortgages | | 839,576 | | — | | 839,576 | | 62,506 | | — | | 902,082 | |
| | | | | | | | | | | | | |
Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits | | | | | | | | | | | | | |
Fannie Mae (d) | | 2,643,004 | | — | | 2,643,004 | | 30,093 | | (1,865 | ) | 2,671,232 | |
Freddie Mac | | 2,822,438 | | — | | 2,822,438 | | 47,207 | | (1,604 | ) | 2,868,041 | |
Ginnie Mae | | 89,586 | | — | | 89,586 | | 741 | | — | | 90,327 | |
Total CMOs/REMICs | | 5,555,028 | | — | | 5,555,028 | | 78,041 | | (3,469 | ) | 5,629,600 | |
| | | | | | | | | | | | | |
Commercial Mortgage-Backed Securities | | | | | | | | | | | | | |
Fannie Mae (d) | | 269,014 | | — | | 269,014 | | 8,364 | | (1 | ) | 277,377 | |
Freddie Mac | | 1,993,002 | | — | | 1,993,002 | | 138,025 | | — | | 2,131,027 | |
Ginnie Mae | | 34,447 | | — | | 34,447 | | 978 | | — | | 35,425 | |
Total commercial mortgage-backed securities | | 2,296,463 | | — | | 2,296,463 | | 147,367 | | (1 | ) | 2,443,829 | |
| | | | | | | | | | | | | |
Non-GSE MBS (b) | | | | | | | | | | | | | |
CMOs/REMICs | | 186,805 | | (1,708 | ) | 185,097 | | 2,925 | | (1,343 | ) | 186,679 | |
| | | | | | | | | | | | | |
Asset-Backed Securities (b) | | | | | | | | | | | | | |
Manufactured housing (insured) (c) | | 153,881 | | — | | 153,881 | | — | | (8,387 | ) | 145,494 | |
Home equity loans (insured) (c) | | 230,901 | | (53,596 | ) | 177,305 | | 34,483 | | (5,853 | ) | 205,935 | |
Home equity loans (uninsured) | | 157,089 | | (20,545 | ) | 136,544 | | 14,294 | | (18,395 | ) | 132,443 | |
Total asset-backed securities | | 541,871 | | (74,141 | ) | 467,730 | | 48,777 | | (32,635 | ) | 483,872 | |
| | | | | | | | | | | | | |
Total MBS | | 9,419,743 | | (75,849 | ) | 9,343,894 | | 339,616 | | (37,448 | ) | 9,646,062 | |
| | | | | | | | | | | | | |
Other | | | | | | | | | | | | | |
State and local housing finance agency obligations | | 779,911 | | — | | 779,911 | | 2,433 | | (80,032 | ) | 702,312 | |
| | | | | | | | | | | | | |
Total Held-to-maturity securities | | $ | 10,199,654 | | $ | (75,849 | ) | $ | 10,123,805 | | $ | 342,049 | | $ | (117,480 | ) | $ | 10,348,374 | |
(a) Unrecognized gross holding gains and losses represent the difference between fair value and carrying value of a held-to-maturity security. At December 31, 2012 and December 31, 2011, the FHLBNY had pledged MBS with an amortized cost basis of $2.8 million and $2.0 million to the FDIC in connection with deposits maintained by the FDIC at the FHLBNY.
(b) These are private-label mortgage- and asset-backed securities.
(c) Amortized cost - Manufactured housing bonds insured by AGM (formerly FSA) were $132.6 million and $153.9 million at December 31, 2012 and December 31, 2011. Asset-backed securities (supported by home equity loans) insured by AGM were $69.8 million and $73.7 million at December 31, 2012 and December 31, 2011. Asset-backed securities (supported by home equity loans) insured by Ambac and MBIA, together, were $134.7 million and $157.2 million at December 31, 2012 and December 31, 2011. For the purpose of calculating OTTI, the FHLBNY has determined that it will rely on Ambac and MBIA for projected cash flow shortfalls through March 31, 2013.
(d) The reported CMBS balance at December 31, 2011 was adjusted to appropriately classify the security type at December 31, 2011.
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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. Unrealized losses represent the difference between fair value and amortized cost. The baseline measure of unrealized loss is amortized cost, which is not adjusted for non-credit OTTI. Total unrealized losses in this table will not equal unrecognized losses by Major security type disclosed in the previous table. Unrealized losses are calculated after adjusting for credit OTTI. In the previous table, unrecognized losses are adjusted for credit and non-credit OTTI. (in thousands):
| | December 31, 2012 | |
| | 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 | | $ | — | | $ | — | | $ | 309,295 | | $ | (56,025 | ) | $ | 309,295 | | $ | (56,025 | ) |
| | | | | | | | | | | | | |
MBS Investment Securities | | | | | | | | | | | | | |
MBS-GSE | | | | | | | | | | | | | |
Fannie Mae | | 192,268 | | (593 | ) | — | | — | | 192,268 | | (593 | ) |
Freddie Mac | | 453 | | (1 | ) | — | | — | | 453 | | (1 | ) |
Total MBS-GSE | | 192,721 | | (594 | ) | — | | — | | 192,721 | | (594 | ) |
MBS-Private-Label | | 61,742 | | (595 | ) | 297,585 | | (19,207 | ) | 359,327 | | (19,802 | ) |
Total MBS | | 254,463 | | (1,189 | ) | 297,585 | | (19,207 | ) | 552,048 | | (20,396 | ) |
Total | | $ | 254,463 | | $ | (1,189 | ) | $ | 606,880 | | $ | (75,232 | ) | $ | 861,343 | | $ | (76,421 | ) |
| | December 31, 2011 | |
| | 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 | | $ | — | | $ | — | | $ | 292,348 | | $ | (80,032 | ) | $ | 292,348 | | $ | (80,032 | ) |
| | | | | | | | | | | | | |
MBS Investment Securities | | | | | | | | | | | | | |
MBS-GSE | | | | | | | | | | | | | |
Fannie Mae | | 993,420 | | (1,866 | ) | — | | — | | 993,420 | | (1,866 | ) |
Freddie Mac | | 729,246 | | (1,604 | ) | — | | — | | 729,246 | | (1,604 | ) |
Total MBS-GSE | | 1,722,666 | | (3,470 | ) | — | | — | | 1,722,666 | | (3,470 | ) |
MBS-Private-Label | | 19,418 | | (430 | ) | 525,436 | | (61,469 | ) | 544,854 | | (61,899 | ) |
Total MBS | | 1,742,084 | | (3,900 | ) | 525,436 | | (61,469 | ) | 2,267,520 | | (65,369 | ) |
Total | | $ | 1,742,084 | | $ | (3,900 | ) | $ | 817,784 | | $ | (141,501 | ) | $ | 2,559,868 | | $ | (145,401 | ) |
At December 31, 2012, the Bank’s investments in housing finance agency bonds had gross unrealized losses totaling $56.0 million. These gross unrealized losses were due to an illiquid market for such securities, causing these investments to be valued at a discount to their acquisition cost. Management has reviewed the portfolio and has observed that the bonds are performing to their contractual terms, and has concluded that, as of December 31, 2012, all of the gross unrealized losses on its housing finance agency bonds are temporary because the underlying collateral and credit enhancements were sufficient to protect the Bank from losses based on current expectations. As a result, the Bank expects to recover the entire amortized cost basis of these securities. If conditions in the housing and mortgage markets and general business and economic conditions remain stressed or deteriorate further, the fair value of the bonds may decline further and the Bank may experience OTTI in future periods.
Redemption Terms
The amortized cost and estimated fair value of held-to-maturity securities, arranged 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 features.
| | December 31, 2012 | | December 31, 2011 | |
| | Amortized | | Estimated | | Amortized | | Estimated | |
| | Cost (a) | | Fair Value | | Cost (a) | | Fair Value | |
State and local housing finance agency obligations | | | | | | | | | |
Due in one year or less | | $ | — | | $ | — | | $ | 3,315 | | $ | 3,347 | |
Due after one year through five years | | 15,040 | | 15,853 | | — | | — | |
Due after five years through ten years | | 60,885 | | 59,531 | | 59,175 | | 58,750 | |
Due after ten years | | 661,675 | | 608,288 | | 717,421 | | 640,215 | |
State and local housing finance agency obligations | | 737,600 | | 683,672 | | 779,911 | | 702,312 | |
| | | | | | | | | |
Mortgage-backed securities | | | | | | | | | |
Due after one year through five years | | 156,317 | | 166,810 | | 972 | | 981 | |
Due after five years through ten years | | 4,219,907 | | 4,521,574 | | 2,836,464 | | 3,005,000 | |
Due after ten years | | 6,008,411 | | 6,084,500 | | 6,582,307 | | 6,640,081 | |
Mortgage-backed securities | | 10,384,635 | | 10,772,884 | | 9,419,743 | | 9,646,062 | |
| | | | | | | | | |
Total Held-to-maturity securities | | $ | 11,122,235 | | $ | 11,456,556 | | $ | 10,199,654 | | $ | 10,348,374 | |
(a) Amortized cost is net of unamortized discounts and premiums of $28.0 million and $8.3 million at December 31, 2012 and December 31, 2011.
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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 held-to-maturity (in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | Amortized | | Carrying | | Amortized | | Carrying | |
| | Cost | | Value | | Cost | | Value | |
Mortgage-backed securities | | | | | | | | | |
CMO | | | | | | | | | |
Fixed | | $ | 4,079,413 | | $ | 4,077,539 | | $ | 3,528,227 | | $ | 3,525,334 | |
Floating | | 5,177,391 | | 5,177,392 | | 4,391,908 | | 4,391,907 | |
Total CMO | | 9,256,804 | | 9,254,931 | | 7,920,135 | | 7,917,241 | |
Pass Thru (a) | | | | | | | | | |
Fixed | | 1,018,578 | | 958,014 | | 1,373,804 | | 1,301,956 | |
Floating | | 109,253 | | 108,219 | | 125,804 | | 124,697 | |
Total Pass Thru | | 1,127,831 | | 1,066,233 | | 1,499,608 | | 1,426,653 | |
Total MBS | | 10,384,635 | | 10,321,164 | | 9,419,743 | | 9,343,894 | |
State and local housing finance agency obligations | | | | | | | | | |
Fixed | | 76,375 | | 76,375 | | 106,901 | | 106,901 | |
Floating | | 661,225 | | 661,225 | | 673,010 | | 673,010 | |
Total HFA | | 737,600 | | 737,600 | | 779,911 | | 779,911 | |
Total Held-to-maturity securities | | $ | 11,122,235 | | $ | 11,058,764 | | $ | 10,199,654 | | $ | 10,123,805 | |
(a) Includes MBS supported by pools of mortgages.
Impairment Analysis (OTTI) of GSE-issued and Private Label Mortgage-backed Securities
The FHLBNY evaluates its individual securities issued by Fannie Mae, Freddie Mac and a U.S. 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 analysis, GSE- and agency-issued securities are performing in accordance with their contractual agreements. 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.
Management evaluates its investments in private-label MBS (“PLMBS”) for OTTI on a quarterly basis by performing cash flow tests on 100 percent of securities. For more information about cash flow impairment assessment methodology, see Note 1. Significant Accounting Policies and Estimates.
Monoline insurance — 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 analyze and assess the ability of the monoline insurers to meet future insurance obligations. Based on analysis performed, the Bank has determined that for bond insurer Assured Guaranty Municipal Corp. insurance guarantees can be relied upon to cover projected shortfalls. For bond insurers MBIA and Ambac, the reliance period is probable until March 31, 2013.
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Federal Home Loan Bank of New York
Notes to Financial Statements
The following tables present the UPB, Fair values, and the Bond insurer at December 31, 2012 and 2011 for securities that were determined to be OTTI in 2012 and 2011 (in thousands):
| | At December 31, 2012 (a) | | Twelve months ended
December 31, 2012 | |
| | Insurer MBIA | | Insurer Ambac | | Uninsured | | OTTI (b), (d) | |
Security
Classification | | UPB | | Fair
Value | | UPB | | Fair
Value | | UPB | | Fair
Value | | Credit
Loss | | Non-credit
Loss | |
RMBS-Prime | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 7,788 | | $ | 7,045 | | $ | (305 | ) | $ | 24 | |
HEL Subprime (c) | | — | | — | | 42,027 | | 30,703 | | 2,807 | | 2,805 | | (1,746 | ) | 1,376 | |
Total Securities | | $ | — | | $ | — | | $ | 42,027 | | $ | 30,703 | | $ | 10,595 | | $ | 9,850 | | $ | (2,051 | ) | $ | 1,400 | |
| | At December 31, 2011 (a) | | Twelve months ended
December 31, 2011 | |
| | Insurer MBIA | | Insurer Ambac | | Uninsured | | OTTI (b), (d) | |
Security
Classification | | UPB | | Fair
Value | | UPB | | Fair
Value | | UPB | | Fair
Value | | Credit
Loss | | Non-credit
Loss | |
RMBS-Prime | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 24,960 | | $ | 24,141 | | $ | (141 | ) | $ | (175 | ) |
HEL Subprime (c) | | 28,543 | | 16,779 | | 40,734 | | 25,470 | | 3,478 | | 3,328 | | (5,452 | ) | 4,977 | |
Total Securities | | $ | 28,543 | | $ | 16,779 | | $ | 40,734 | | $ | 25,470 | | $ | 28,438 | | $ | 27,469 | | $ | (5,593 | ) | $ | 4,802 | |
(a) Unpaid principal balances and fair values at December 31, 2012 and 2011 were for securities impaired in the four quarters in 2012 and 2011.
(b) Represent OTTI recorded in the twelve months ended December 31, 2012 and 2011. If the present value of cash flows expected to be collected (discounted at the security’s initial effective yield) is less than the amortized cost basis of the security, an OTTI is considered to have occurred because the entire amortized cost basis of the security will not be recovered. The credit-related OTTI is recognized in earnings. The non-credit portion of OTTI, which represents fair value losses of OTTI securities (excluding the amount of credit loss), is recognized in AOCI. Positive non-credit loss represents the net amount of non-credit loss reclassified from AOCI to increase the carrying value of securities previously deemed OTTI.
(c) HEL Subprime securities are supported by home equity loans.
(d) Securities deemed to be OTTI in the twelve months ended December 31, 2012 and 2011 had been previously determined to be OTTI, and the additional impairment, or re-impairment, was due to further deterioration in the credit performance metrics of the securities.
Based on cash flow testing, the Bank believes no additional OTTI exists for the remaining investments at December 31, 2012. The Bank’s conclusion is also based upon multiple factors, but not limited to the expected performance of the underlying collateral, and the evaluation of the fundamentals of the issuers’ financial condition. Management has not made a decision to sell such securities at December 31, 2012, and has concluded that it will not be required to sell such securities before recovery of the amortized cost basis of the securities.
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Federal Home Loan Bank of New York
Notes to Financial Statements
The following table provides roll-forward information about the cumulative credit component of OTTI recognized as a charge to earnings related to held-to-maturity securities (in thousands):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Beginning balance | | $ | 34,731 | | $ | 29,138 | | $ | 20,816 | |
Additions for OTTI on securities not previously impaired | | — | | 85 | | 176 | |
Additional credit losses for which an OTTI charge was previously recognized | | 2,051 | | 5,508 | | 8,146 | |
Ending balance | | $ | 36,782 | | $ | 34,731 | | $ | 29,138 | |
Key Base Assumptions
The tables below summarize the weighted average and range of Key Base Assumptions for all 51 private-label MBS at December 31, 2012 and December 31, 2011, including those deemed OTTI:
| | Key Base Assumptions - All PLMBS at December 31, 2012 | |
| | CDR % (a) | | CPR % (b) | | Loss Severity % (c) | |
Security Classification | | Range | | Average | | Range | | Average | | Range | | Average | |
| | | | | | | | | | | | | |
RMBS Prime (d) | | 1.0-6.1 | | 2.1 | | 4.4-33.4 | | 23.3 | | 30.0-63.2 | | 35.9 | |
RMBS Alt-A | | 1.0-1.1 | | 1.0 | | 2.0-14.0 | | 3.7 | | 30.0-30.0 | | 30.0 | |
HEL Subprime (e) | | 1.5-8.6 | | 4.6 | | 2.0-10.1 | | 3.7 | | 30.0-100.0 | | 71.0 | |
Manufactured Housing Loans | | 3.6-5.9 | | 4.9 | | 2.0-3.8 | | 2.5 | | 75.1-81.0 | | 78.5 | |
| | Key Base Assumptions - All PLMBS at December 31, 2011 | |
| | CDR % (a) | | CPR % (b) | | Loss Severity % (c) | |
Security Classification | | Range | | Average | | Range | | Average | | Range | | Average | |
| | | | | | | | | | | | | |
RMBS Prime (d) | | 1.0-4.3 | | 1.6 | | 5.2-42.0 | | 21.4 | | 30.0-85.4 | | 37.4 | |
RMBS Alt-A | | 1.0-1.0 | | 1.0 | | 2.0-11.5 | | 4.2 | | 30.0-30.0 | | 30.0 | |
HEL Subprime (e) | | 1.0-11.5 | | 4.4 | | 2.0-13.0 | | 3.6 | | 30.0-100.0 | | 74.6 | |
Manufactured Housing Loans | | 3.5-6.7 | | 5.3 | | 2.1-2.3 | | 2.2 | | 76.6-76.8 | | 76.7 | |
(a) 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).
(b) 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.
(c) Loss Severity (Principal and Interest in the current period) = Sum (Total Realized Loss Amount)/Sum (Beginning Principal and Interest Balance of Liquidated Loans).
(d) CMOs/REMICS private-label MBS.
(e) Residential asset-backed MBS.
Significant Inputs
Seven PLMBS were determined to be OTTI in 2012. One PLMBS was re-impaired in the fourth quarter of 2012, and the carrying value of the one OTTI security was written down to its fair value of $7.0 million on a non-recurring basis and categorized within Level 3 of the fair value hierarchy. The carrying values of the remaining OTTI securities were less than their fair values at December 31, 2012, and it was not necessary for further write-downs. The FHLBNY has used third party pricing as the fair values of all MBS, including the bonds deemed OTTI. Third party prices were obtained from four pricing services; the prices were clustered, averaged, and then assessed qualitatively before adopting the final price. For more information, see Note 17. Fair Values of Financial Instruments.
The table below provides the distribution of the prices, and the final price adopted for determining OTTI at December 31, 2012 (dollars in thousands except for price):
| | Significant Inputs | |
| | Securities deemed OTTI at December 31, 2012 | |
| | Carrying | | Fair | | Fair Value Recorded on | | | | Price | | Final | | | |
| | Value | | Value | | a Non-recurring basis | | Level | | Range | | Price | | Rating | |
| | | | | | | | | | | | | | | |
RMBS | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | |
Bond 1 | | $ | 7,045 | | $ | 7,045 | | $ | 7,045 | | 3 | | $ 90.47 - 96.85 | | $ | 90.47 | | C | |
Total OTTI PLMBS | | $ | 7,045 | | $ | 7,045 | | $ | 7,045 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Beginning with the first quarter of 2012, the FHLBNY began reporting vendor pricing data for securities determined to be OTTI. Period end information at December 31, 2012 has been presented and one bond was OTTI in the fourth quarter of 2012.
Disaggregation of the Level 3 bonds is by collateral type supporting the credit structure of the PLMBS, and the FHLBNY deems that no further disaggregation is necessary for a qualitative understanding of the sensitivity of fair values.
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Notes to Financial Statements
Note 6. Available-for-Sale Securities.
The carrying value of an AFS security equals its fair value, and at December 31, 2012 and 2011, no AFS security was Other-then-temporarily impaired. The following table provides major security types (in thousands):
| | December 31, 2012 | |
| | | | OTTI | | Gross | | Gross | | | |
| | Amortized | | Recognized | | Unrealized | | Unrealized | | Fair | |
| | Cost | | in AOCI | | Gains | | Losses | | Value | |
| | | | | | | | | | | |
Cash equivalents (a) | | $ | 215 | | $ | — | | $ | — | | $ | — | | $ | 215 | |
Equity funds (a) | | 5,172 | | — | | 540 | | — | | 5,712 | |
Fixed income funds (a) | | 3,382 | | — | | 324 | | — | | 3,706 | |
GSE and U.S. Obligations | | | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | | | |
CMO-Floating | | 2,230,813 | | — | | 21,448 | | — | | 2,252,261 | |
CMBS-Floating | | 46,686 | | — | | 194 | | — | | 46,880 | |
Total Available-for-sale securities | | $ | 2,286,268 | | $ | — | | $ | 22,506 | | $ | — | | $ | 2,308,774 | |
| | December 31, 2011 | |
| | | | OTTI | | Gross | | Gross | | | |
| | Amortized | | Recognized | | Unrealized | | Unrealized | | Fair | |
| | Cost | | in AOCI | | Gains | | Losses | | Value | |
| | | | | | | | | | | |
Cash equivalents (a) | | $ | 125 | | $ | — | | $ | — | | $ | — | | $ | 125 | |
Equity funds (a) | | 5,955 | | — | | 124 | | (560 | ) | 5,519 | |
Fixed income funds (a) | | 3,241 | | — | | 282 | | — | | 3,523 | |
GSE and U.S. Obligations | | | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | | | |
CMO-Floating | | 3,067,213 | | — | | 18,263 | | (1,516 | ) | 3,083,960 | |
CMBS-Floating | | 49,683 | | — | | — | | (174 | ) | 49,509 | |
Total Available-for-sale securities | | $ | 3,126,217 | | $ | — | | $ | 18,669 | | $ | (2,250 | ) | $ | 3,142,636 | |
(a) The Bank has a grantor trust to fund current and future payments for its employee supplemental pension plan. Investments in the trust are classified as AFS. The grantor trust invests in money market, equity and fixed income and bond funds. Daily net asset values are readily available and investments are redeemable at short notice. Realized gains and losses from investments in the funds were not significant.
Unrealized Losses — MBS Classified as AFS Securities (in thousands):
There were no unrealized losses at December 31, 2012 and therefore none were reported.
| | December 31, 2011 | |
| | Less than 12 months | | 12 months or more | | Total | |
| | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | |
MBS Investment Securities | | | | | | | | | | | | | |
MBS-GSE | | | | | | | | | | | | | |
Fannie Mae-CMOs | | $ | 162,451 | | $ | (127 | ) | $ | 247,794 | | $ | (474 | ) | $ | 410,245 | | $ | (601 | ) |
Fannie Mae-CMBS | | 49,509 | | (174 | ) | — | | — | | 49,509 | | (174 | ) |
Freddie Mac-CMOs | | 77,834 | | (29 | ) | 304,846 | | (886 | ) | 382,680 | | (915 | ) |
Total | | $ | 289,794 | | $ | (330 | ) | $ | 552,640 | | $ | (1,360 | ) | $ | 842,434 | | $ | (1,690 | ) |
Impairment Analysis on AFS Securities — The Bank’s portfolio of MBS classified as AFS is comprised primarily of GSE-issued collateralized mortgage obligations, which are “pass through” securities. The FHLBNY evaluates its individual securities issued by Fannie Mae, Freddie Mac and a U.S. agency 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 analysis, GSE-issued securities are performing in accordance with their contractual agreements. The FHLBNY believes that it will recover its investments in GSE-issued securities given the current levels of collateral, credit enhancements and guarantees that exist to protect the investments.
Redemption Terms
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees. The amortized cost and estimated fair value (a) of investments classified as AFS, by contractual maturity, were as follows (in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | Amortized Cost (c) | | Fair Value | | Amortized Cost (c) | | Fair Value | |
Mortgage-backed securities | | | | | | | | | |
Due after five years through ten years | | $ | 46,686 | | $ | 46,880 | | $ | 49,683 | | $ | 49,509 | |
Due after ten years | | 2,230,813 | | 2,252,261 | | 3,067,213 | | 3,083,960 | |
Fixed income funds, equity funds and cash equivalents (b) | | 8,769 | | 9,633 | | 9,321 | | 9,167 | |
| | | | | | | | | |
Total Available-for-sale securities | | $ | 2,286,268 | | $ | 2,308,774 | | $ | 3,126,217 | | $ | 3,142,636 | |
(a) The carrying value of AFS securities equals fair value.
(b) Determined to be redeemable at short notice.
(c) Amortized cost is net of unamortized discounts and premiums of $8.0 million and $10.6 million at December 31, 2012 and December 31, 2011.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Interest Rate Payment Terms
The following table summarizes interest rate payment terms of investments in mortgage-backed securities classified as AFS securities (in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | |
Mortgage-backed securities | | | | | | | | | |
Mortgage pass-throughs-GSE/U.S. agency issued | | | | | | | | | |
Floating - LIBOR indexed | | $ | 2,230,813 | | $ | 2,252,261 | | $ | 3,067,213 | | $ | 3,083,960 | |
Floating CMBS - LIBOR indexed | | 46,686 | | 46,880 | | 49,683 | | 49,509 | |
| | | | | | | | | |
Total Mortgage-backed securities (a) | | $ | 2,277,499 | | $ | 2,299,141 | | $ | 3,116,896 | | $ | 3,133,469 | |
(a) Total will not agree to total AFS portfolio because bond and equity funds in a grantor trust have been excluded.
Note 7. Advances.
The Bank offers to its members a wide range of fixed- and adjustable-rate advance loan products with different maturities, interest rates, payment characteristics, and optionality.
Redemption Terms
Contractual redemption terms and yields of advances were as follows (dollars in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | | | Weighted (b) | | | | | | Weighted (b) | | | |
| | | | Average | | Percentage | | | | Average | | Percentage | |
| | Amount | | Yield | | of Total | | Amount | | Yield | | of Total | |
| | | | | | | | | | | | | |
Due in one year or less | | $ | 26,956,874 | | 0.90 | % | 37.29 | % | $ | 20,417,821 | | 1.44 | % | 30.48 | % |
Due after one year through two years | | 7,798,776 | | 1.96 | | 10.79 | | 6,746,684 | | 2.70 | | 10.07 | |
Due after two years through three years | | 7,234,380 | | 2.38 | | 10.00 | | 6,642,878 | | 2.38 | | 9.92 | |
Due after three years through four years | | 9,658,689 | | 3.64 | | 13.36 | | 6,629,810 | | 2.57 | | 9.90 | |
Due after four years through five years | | 10,255,616 | | 3.35 | | 14.19 | | 10,999,042 | | 3.99 | | 16.42 | |
Due after five years through six years | | 3,627,477 | | 2.91 | | 5.02 | | 10,840,355 | | 3.89 | | 16.18 | |
Thereafter | | 6,760,291 | | 2.70 | | 9.35 | | 4,712,312 | | 2.71 | | 7.03 | |
| | | | | | | | | | | | | |
Total par value | | 72,292,103 | | 2.15 | % | 100.00 | % | 66,988,902 | | 2.68 | % | 100.00 | % |
| | | | | | | | | | | | | |
Discount on AHP advances (a) | | — | | | | | | (15 | ) | | | | |
Hedge value basis adjustments | | 3,595,396 | | | | | | 3,874,890 | | | | | |
Fair value option valuation adjustments and accrued interest | | 502 | | | | | | — | | | | | |
| | | | | | | | | | | | | |
Total | | $ | 75,888,001 | | | | | | $ | 70,863,777 | | | | | |
(a) Discounts on AHP advances were amortized to interest income using the level-yield method and were not significant for all periods reported. Interest rate on AHP advances was 3.50% at December 31, 2012, and ranged from 1.25% to 3.50% at December 31, 2011.
(b) The weighted average yield is the weighted average coupon rates for advances, unadjusted for swaps. For floating-rate advances, the weighted average rate is the rate outstanding at the reporting dates.
Advance Prepayment — 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. Member initiated prepayments totaled $1.6 billion, $12.3 billion and $3.4 billion for the years ended December 31, 2012, 2011 and 2010. Prepayment fees of $16.6 million, $109.2 million, and $13.1 million were recorded in Interest income from advances for the years ended December 31, 2012, 2011, and 2010. For hedged advances that are prepaid, prepayment fees are recorded net of fair value basis adjustments of the prepaid advances.
Monitoring and Evaluating Credit Losses on Advances — Summarized below are the FHLBNY’s assessment methodologies for evaluating credit losses on 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’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. This provision would benefit the FHLBNY in a scenario when a member defaults). The FHLBNY also has a statutory lien under the FHLBank Act on members’ capital stock, which serves as further collateral for members’ indebtedness to the FHLBNY.
Credit Risk. The Bank has policies and procedures in place to manage credit risk. There were no past due advances and all advances were current for all periods in this report. 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.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Concentration of Advances Outstanding. Advances to the FHLBNY’s top ten borrowing member institutions are reported in Note 20. Segment Information and Concentration. The FHLBNY held sufficient collateral to cover the advances to all institutions and it does not expect to incur any credit losses.
Security Terms. The FHLBNY lends to financial institutions involved in housing finance within its district. Borrowing members pledge their capital stock of the FHLBNY as additional collateral for advances. As of December 31, 2012 and 2011, 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 mortgage collateral pledged to the FHLBNY if the member executes a written security agreement, provides periodic listings and agrees to hold such collateral for the benefit of the FHLBNY; however, securities and cash collateral are always in physical possession; or
(2) Requires the member specifically to assign or place physical possession of such mortgage collateral with the FHLBNY or its custodial agent.
Beyond these provisions, Section 10(e) of the FHLBank Act affords any security interest granted by a member to the FHLBNY priority over the claims or rights of any other party. The two exceptions are claims that would be entitled to priority under otherwise applicable law or perfected security interests. All member obligations with the Bank were fully collateralized throughout their entire term. The total of collateral pledged to the Bank includes excess collateral pledged above the Bank’s minimum collateral requirements. However, a “Maximum Lendable Value” is established to ensure that the Bank has sufficient eligible collateral securing credit extensions.
Note 8. 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 its participating financial institutions (“PFIs”). The members retain servicing rights and may credit-enhance the portion of the loans participated to the FHLBNY. No intermediary trust is involved.
The following table presents information on mortgage loans held-for-portfolio (dollars in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | Amount | | Percentage of
Total | | Amount | | Percentage of
Total | |
Real Estate(a): | | | | | | | | | |
Fixed medium-term single-family mortgages | | $ | 400,309 | | 22.09 | % | $ | 329,659 | | 23.55 | % |
Fixed long-term single-family mortgages | | 1,412,061 | | 77.90 | | 1,069,956 | | 76.43 | |
Multi-family mortgages | | 156 | | 0.01 | | 246 | | 0.02 | |
| | | | | | | | | |
Total par value | | 1,812,526 | | 100.00 | % | 1,399,861 | | 100.00 | % |
| | | | | | | | | |
Unamortized premiums | | 35,760 | | | | 16,811 | | | |
Unamortized discounts | | (2,580 | ) | | | (3,592 | ) | | |
Basis adjustment (b) | | 4,092 | | | | 2,166 | | | |
| | | | | | | | | |
Total mortgage loans held-for-portfolio | | 1,849,798 | | | | 1,415,246 | | | |
Allowance for credit losses | | (6,982 | ) | | | (6,786 | ) | | |
Total mortgage loans held-for-portfolio after allowance for credit losses | | $ | 1,842,816 | | | | $ | 1,408,460 | | | |
(a) Conventional mortgages represent the majority of mortgage loans held-for-portfolio, with the remainder invested in FHA and VA insured loans.
(b) Represents fair value basis of closed delivery commitments.
No loans were transferred to a “loan-for-sale” category. From time to time, the Bank may request a PFI to repurchase loans if the loan failed to comply with the MPF loan standards. In 2012 and 2011, PFIs repurchased $3.5 million and $7.3 million of loans.
The FHLBNY and its members share the credit risk of MPF loans by structuring potential credit losses into layers. The first layer is typically 100 basis points, but this varies with the particular MPF product. The amount of the first layer, or First Loss Account (“FLA”), was estimated at $18.4 million and $13.6 million at December 31, 2012 and December 31, 2011. The FLA is not recorded or reported as a reserve for loan losses, as it serves as a memorandum or information account. The FHLBNY is responsible for absorbing the first layer. The second layer is that amount of credit obligations that the PFI has 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 the year ended December 31, 2012 and $1.4 million for the years ended December 31, 2011 and 2010. These fees were reported as a reduction to mortgage loan interest income.
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Federal Home Loan Bank of New York
Notes to Financial Statements
In terms of the credit enhancement waterfall, the MPF program structures potential credit losses on conventional MPF loans into layers on each loan pool as follows:
· The first layer of protection against loss is the liquidation value of the real property securing the loan.
· The next layer of protection comes from the primary mortgage insurance (“PMI”) that is required for loans with a loan-to-value ratio greater than 80% at origination.
· Losses that exceed the liquidation value of the real property and any PMI, up to an agreed upon amount, the FLA for each Master Commitment, will be absorbed by the FHLBNY.
· Losses in excess of the FLA, up to an agreed-upon amount, the credit enhancement amount, will be covered by the PFI’s credit enhancement obligation.
· Losses in excess of the FLA and the PFI’s remaining credit enhancement for the Master Commitment, if any, will be absorbed by the FHLBNY.
Allowance Methodology for Loan Losses
Mortgage loans are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements. The Bank performs periodic reviews of individual impaired mortgage loans within the MPF loan portfolio to identify the potential for losses inherent in the portfolio and to determine the likelihood of collection of the principal and interest. Conventional mortgage loans that are past due 90 days or more, or classified under regulatory criteria (Sub-standard, Doubtful or Loss), and beginning in the third quarter of 2012, loans that are in bankruptcy regardless of their delinquency status, are evaluated separately on a loan level basis for impairment. The FHLBNY bases its provision for credit losses on its estimate of probable credit losses inherent in the impaired MPF loan. The FHLBNY computes the provision for credit losses without considering the private mortgage insurance and other accompanying credit enhancement features (except the “First Loss Account”) to provide credit assurance to the FHLBNY. 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. Management determines the liquidation value of the real-property collateral supporting the impaired loan after deducting costs to liquidate. That value is compared to the carrying value of the impaired mortgage loan, and a shortfall is recorded as an allowance for credit losses. This methodology is applied on a loan level basis. Only FHA- and VA-insured MPF loans are evaluated collectively.
When a loan is foreclosed and the Bank takes possession of real estate, the Bank will charge any excess carrying value over the net realizable value of the foreclosed loan to the allowance for credit losses.
FHA- and VA-insured mortgage loans have minimal inherent credit risk, and are therefore not considered for impairment. Risk of such loans generally arises from servicers defaulting on their obligations. If adversely classified, the FHLBNY will have reserves established only in the event of a default of a PFI, and reserves would be based on the estimated costs to recover any uninsured portion of the MPF loan. Classes of the MPF loan portfolio would be subject to disaggregation to the extent that it is needed to understand the exposure to credit risk arising from these loans. The FHLBNY has determined that no further disaggregation of portfolio segments is needed, other than the methodology discussed above.
Credit Enhancement Fees
As discussed previously, the FHLBNY pays a credit enhancement fee (“CE fees”) to the PFI for taking on a credit enhancement obligation. For certain MPF products, the CE fees are accrued on the master commitments outstanding and paid each month. Under the MPF agreements with PFIs, the FHLBNY may recover credit losses from future CE fees. For certain MPF products, the CE fees are held back for 12 months and then paid monthly to the PFIs. The FHLBNY does not consider CE fees when computing the allowance for credit losses. It is assumed that repayment is expected to be provided solely by the sale of the underlying property, and that there is no other available and reliable source of repayment. Any incurred losses that would be recovered from the credit enhancements are also not reserved as part of allowance for credit loan losses. In such cases, the FHLBNY would withhold CE fee payments to PFIs.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Allowance for Credit Losses
Allowances for credit losses have been recorded against the uninsured MPF loans. All other types of mortgage loans were insignificant and no allowances were necessary. The following provides a roll-forward analysis of the allowance for credit losses (a) (in thousands):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Allowance for credit losses: | | | | | | | |
Beginning balance | | $ | 6,786 | | $ | 5,760 | | $ | 4,498 | |
Charge-offs | | (1,662 | ) | (2,595 | ) | (223 | ) |
Recoveries | | 847 | | 468 | | 76 | |
Provision (reversal) for credit losses on mortgage loans | | 1,011 | | 3,153 | | 1,409 | |
Ending balance | | $ | 6,982 | | $ | 6,786 | | $ | 5,760 | |
| | | | | | | |
Ending balance, individually evaluated for impairment | | $ | 6,982 | | $ | 6,786 | | $ | 5,760 | |
| | | | | | | |
Recorded investment, end of period: | | | | | | | |
Individually evaluated for impairment | | | | | | | |
Impaired, with or without a related allowance (c) | | $ | 31,596 | | $ | 27,054 | | $ | 26,785 | |
Not impaired, no related allowance | | 1,754,852 | | 1,368,062 | | 1,244,611 | |
Total uninsured mortgage loans | | $ | 1,786,448 | | $ | 1,395,116 | | $ | 1,271,396 | |
| | | | | | | |
Collectively evaluated for impairment (b) | | | | | | | |
Impaired, with or without a related allowance | | $ | 413 | | $ | 280 | | $ | 577 | |
Not impaired, no related allowance | | 71,741 | | 25,194 | | 5,094 | |
Total insured mortgage loans | | $ | 72,154 | | $ | 25,474 | | $ | 5,671 | |
(a) The Bank assesses impairment on a loan level basis for conventional loans. Increase in allowance for credit losses is primarily due to decline in liquidation values of real property securing impaired loans.
(b) FHA- and VA loans are collectively evaluated for impairment. Loans past due 90 days or more were considered for impairment but credit analysis indicated funds would be collected and no allowance was necessary.
(c) When a conventional loan is identified as impaired, and if the impaired loan is well collateralized, no allowance may be necessary. All loans that are discharged from bankruptcy are considered for impairment if past due 90 days or more, and an allowance for credit loss is computed on an individual loan level. Beginning in the third quarter of 2012, loans in bankruptcy status, regardless of their delinquency status, are considered for impairment. The total amount of loans that had not been previously considered for impairment was $2.7 million at December 31, 2012, and an additional $0.5 million in credit losses were recorded. Prior to the third quarter of 2012, loans in bankruptcy were deemed impaired if delinquent 90 days or more.
Non-performing Loans
The FHLBNY’s impaired mortgage loans are reported in the table below (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Total Mortgage loans, net of provisions for credit losses (a) | | $ | 1,842,816 | | $ | 1,408,460 | |
Non-performing mortgage loans - Conventional (b) | | $ | 28,458 | | $ | 26,696 | |
Insured MPF loans past due 90 days or more and still accruing interest (b) | | $ | 410 | | $ | 278 | |
(a) Includes loans classified as sub-standard, doubtful or loss under regulatory criteria, reported at carrying value.
(b) Data in this table represents unpaid principal balance, and would not agree to data reported in table below at “recorded investment,” which includes interest receivable. Loans in bankruptcy status and past due 90 days or more (nonaccrual status) are included.
The following table summarizes the recorded investment in impaired loans, the unpaid principal balance, related allowance (individually assessed for impairment), and the average recorded investment of impaired loans (in thousands):
| | December 31, 2012 | |
| | | | Unpaid | | | | Average | | Interest | |
| | Recorded | | Principal | | Related | | Recorded | | Income | |
Impaired Loans | | Investment | | Balance | | Allowance | | Investment | | Recognized (c) | |
With no related allowance: | | | | | | | | | | | |
Conventional MPF Loans (a) , (b) | | $ | 8,118 | | $ | 8,134 | | $ | — | | $ | 6,768 | | $ | — | |
With an allowance: | | | | | | | | | | | |
Conventional MPF Loans (a) | | 23,478 | | 23,507 | | 6,982 | | 22,798 | | — | |
Total Conventional MPF Loans (a) | | $ | 31,596 | | $ | 31,641 | | $ | 6,982 | | $ | 29,566 | | $ | — | |
| | December 31, 2011 | |
| | | | Unpaid | | | | Average | | Interest | |
| | Recorded | | Principal | | Related | | Recorded | | Income | |
Impaired Loans | | Investment | | Balance | | Allowance | | Investment | | Recognized (c) | |
With no related allowance: | | | | | | | | | | | |
Conventional MPF Loans (a) , (b) | | $ | 5,801 | | $ | 5,790 | | $ | — | | $ | 4,605 | | $ | — | |
With an allowance: | | | | | | | | | | | |
Conventional MPF Loans (a) | | 21,253 | | 21,287 | | 6,786 | | 21,572 | | — | |
Total Conventional MPF Loans (a) | | $ | 27,054 | | $ | 27,077 | | $ | 6,786 | | $ | 26,177 | | $ | — | |
(a) Based on analysis of the nature of risks of the Bank’s investments in MPF loans, including its methodologies for identifying and measuring impairment, the management of the FHLBNY has determined that presenting such loans as a single class is appropriate.
(b) Collateral values, net of estimated costs to sell, exceeded the recorded investments in impaired loans and no allowances were deemed necessary.
(c) The Bank does not record interest received as Interest income if an uninsured loan is past due 90 days or more. Cash received is recorded as a liability on the assumption that cash was remitted by the servicer to the FHLBNY that could potentially be recouped by the borrower in a foreclosure. On insured loans, the Bank will record interest received as Interest income even if past due 90 days or more.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Loans discharged from bankruptcy are considered TDR, and considered for impairment if the loan is past due 90 days or more. All loans currently in bankruptcy status, regardless of their delinquency status, are considered for impairment. The allowance for credit losses in the previous page includes allowances recorded for all impaired loans. Prior to the third quarter of 2012, loans in bankruptcy were considered impaired if past due 90 days or more.
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):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Interest contractually due (a) | | $ | 1,471 | | $ | 1,387 | | $ | 1,254 | |
Interest actually received | | 1,393 | | 1,293 | | 1,171 | |
| | | | | | | |
Shortfall | | $ | 78 | | $ | 94 | | $ | 83 | |
(a) The Bank does not recognize interest received as income from conventional loans past due 90 days or greater. Cash received is considered as an advance from the PFI or the servicer and recorded as a liability until the loan is performing again. This table reports Interest income that was not recognized in earnings. It also reports the actual cash that was received against interest due, but not recognized. Cash received is recorded as a liability, as the Bank considers cash received on impaired loans as subject to reversal if the loan goes into foreclosure. See footnote (c) in table above that reports zero Interest income from impaired MPF loans. Amounts that were not recognized over the reporting periods have remained materially unchanged due to relative stability in delinquencies.
Recorded investments in MPF loans that were past due, and real estate owned are summarized below. Recorded investments, which includes accrued interest receivable, would not equal carrying values reported elsewhere (dollars in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | Conventional | | Insured | | Other | | Conventional | | Insured | | Other | |
Mortgage loans: | | MPF Loans | | Loans | | Loans | | MPF Loans | | Loans | | Loans | |
Past due 30 - 59 days | | $ | 22,899 | | $ | 884 | | $ | — | | $ | 21,757 | | $ | 1,009 | | $ | — | |
Past due 60 - 89 days | | 6,027 | | 407 | | — | | 5,920 | | 172 | | — | |
Past due 90 - 179 days | | 4,202 | | 184 | | — | | 5,479 | | 33 | | — | |
Past due 180 days or more | | 24,221 | | 229 | | — | | 21,196 | | 247 | | — | |
Total past due | | 57,349 | | 1,704 | | — | | 54,352 | | 1,461 | | — | |
Total current loans | | 1,728,942 | | 70,450 | | 157 | | 1,340,516 | | 24,013 | | 248 | |
Total mortgage loans | | $ | 1,786,291 | | $ | 72,154 | | $ | 157 | | $ | 1,394,868 | | $ | 25,474 | | $ | 248 | |
Other delinquency statistics: | | | | | | | | | | | | | |
Loans in process of foreclosure, included above | | $ | 21,464 | | $ | 187 | | $ | — | | $ | 18,499 | | $ | 163 | | $ | — | |
Number of foreclosures outstanding at period end | | 140 | | 6 | | — | | 124 | | 7 | | — | |
Serious delinquency rate (a) | | 1.62 | % | 0.57 | % | — | % | 1.94 | % | 1.10 | % | — | % |
Serious delinquent loans total used in calculation of serious delinquency rate | | $ | 28,947 | | $ | 413 | | $ | — | | $ | 27,028 | | $ | 280 | | $ | — | |
Past due 90 days or more and still accruing interest | | $ | — | | $ | 413 | | $ | — | | $ | — | | $ | 280 | | $ | — | |
Loans on non-accrual status | | $ | 28,423 | | $ | — | | $ | — | | $ | 26,675 | | $ | — | | $ | — | |
Troubled debt restructurings: | | | | | | | | | | | | | |
Loans discharged from bankruptcy | | $ | 8,818 | | $ | 638 | | $ | — | | $ | 8,046 | | $ | 640 | | $ | — | |
Modified loans under MPF® program | | $ | 681 | | $ | — | | $ | — | | $ | 816 | | $ | — | | $ | — | |
Real estate owned | | $ | 169 | | | | | | $ | 589 | | | | | |
(a) Serious delinquency rate is recorded investments in loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of total loan class.
Troubled Debt Restructurings (“TDRs”) and MPF modification — As described more fully in Note 1. Significant Accounting Policies and Estimates, the MPF Program introduced a temporary modification plan that is available to PFIs.
Under this program, no loans were modified in 2012, and four loans were modified in 2011. For the four loans that were modified, recorded investments prior to the modifications were materially the same as the recorded investments after modification. In addition, beginning with the fourth quarter of 2012, the FHLBNY considers loans discharged from bankruptcy as TDR.
Forgiveness information that would be required under the disclosure standards for loans deemed TDR has been omitted as the MPF modification program limits loan terms that can be modified for up to 36 months, after which period the borrower is required to adhere to the original terms of the loan.
When a loan is modified under the MPF modification program, the loan would be assessed individually for credit impairment. A loan discharged from bankruptcy is assessed individually for credit impairment if past due 90 days or more.
MPF Program temporary modification plan — MPF restructurings primarily involve modifying the borrower’s monthly payment for a period of up to 36 months, with a cap based on a ratio of the borrower’s housing expense to monthly income. The outstanding principal balance is re-amortized to reflect a principal and interest payment for a term not to exceed 40 years. This would result in a balloon payment at the original maturity date of the loan as the maturity date and number of remaining monthly payments is unchanged. If the housing expense ratio is still not
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Notes to Financial Statements
met, the interest rate is reduced for up to 36 months in 0.125% increments below the original note rate, to a floor rate of 3.00%, resulting in reduced principal and interest payments until the target housing expense ratio is met.
Due to the temporary nature of the allowed modifications (up to 36 months), modified loans that are past due 90 days or more are considered for impairment. One of the four modified loans was in bankruptcy status at December 31, 2012, and deemed impaired. The allowance for credit loss on the four loans were evaluated individually and an immaterial amount of credit loss recorded at December 31, 2012.
Loans discharged from bankruptcy — Beginning with the fourth quarter of 2012, the FHLBNY includes MPF loans discharged from bankruptcy as TDRs, and $8.8 million of such loans were outstanding at December 31, 2012. The FHLBNY has determined that the discharge of mortgage debt in bankruptcy is a concession as defined under existing accounting literature for TDRs. Of the $8.8 million of loans that were discharged from bankruptcy, $0.6 million were impaired because of their past-due delinquency status, and the allowance for credit losses associated with those loans were immaterial at December 31, 2012. Prior to the fourth quarter of 2012, the FHLBNY’s policy did not consider loans discharged from bankruptcy as TDR. Forgiveness information has been omitted because other than being released from bankruptcy, the borrowers were not allowed any other concessions.
The following table summarizes performing and non-performing troubled debt restructurings balances (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
Recorded Investment Outstanding | | Performing | | Non-performing | | Total TDR | | Performing | | Non-performing | | Total TDR | |
Troubled debt restructurings (TDR) (a): | | | | | | | | | | | | | |
Loans discharged from bankruptcy | | $ | 8,189 | | $ | 629 | | $ | 8,818 | | $ | 7,415 | | $ | 631 | | $ | 8,046 | |
Modified loans under MPF® program | | 459 | | 222 | | 681 | | 379 | | 437 | | 816 | |
Total troubled debt restructurings | | $ | 8,648 | | $ | 851 | | $ | 9,499 | | $ | 7,794 | | $ | 1,068 | | $ | 8,862 | |
Related Allowance | | | | | | $ | 317 | | | | | | $ | 736 | |
(a) Insured loans were not included in the calculation for troubled debt restructuring.
Prepayment Risks - 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. 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. 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.
Note 9. Deposits.
The FHLBNY accepts demand, overnight and term deposits from its members. Also, a member that services mortgage loans may deposit funds collected in connection with the mortgage loans as a pending disbursement to the owners of the mortgage loans. The following table summarizes deposits (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
Interest-bearing deposits | | | | | |
Interest-bearing demand | | $ | 1,994,974 | | $ | 2,066,598 | |
Term | | 40,000 | | 22,000 | |
Total interest-bearing deposits | | 2,034,974 | | 2,088,598 | |
Non-interest-bearing demand | | 19,537 | | 12,450 | |
Total deposits | | $ | 2,054,511 | | $ | 2,101,048 | |
Interest rate payment terms for deposits are summarized below (dollars in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | Amount
Outstanding | | Weighted
Average
Interest Rate | | Amount
Outstanding | | Weighted
Average
Interest Rate | |
Due in one year or less | | | | | | | | | |
Interest-bearing deposits - adjustable rate | | $ | 2,034,974 | | 0.03 | % | $ | 2,088,598 | | 0.05 | % |
Non-interest-bearing deposits | | 19,537 | | | | 12,450 | | | |
Total deposits | | $ | 2,054,511 | | | | $ | 2,101,048 | | | |
The aggregate amount of term deposits due in one year or less was $40.0 million and $22.0 million at December 31, 2012 and 2011.
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Notes to Financial Statements
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. In connection with each debt issuance, a FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. Each FHLBank separately tracks and records as a liability for its specific portion of consolidated obligations for which it is the primary obligor. Consolidated 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 a 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 other FHLBanks, were approximately $0.7 trillion as of December 31, 2012 and 2011.
Finance Agency regulations require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and securities in which fiduciary and trust funds may invest under the laws of the state in which the FHLBank is located.
The FHLBNY met the qualifying unpledged asset requirements as follows:
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Percentage of unpledged qualifying assets to consolidated obligations | | 109 | % | 109 | % |
The following table summarizes consolidated obligations issued by the FHLBNY and outstanding at December 31, 2012 and 2011 (in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Consolidated obligation bonds-amortized cost | | $ | 63,903,744 | | $ | 66,448,705 | |
Hedge basis adjustments | | 804,174 | | 979,013 | |
Hedge basis adjustments on terminated hedges | | 63,520 | | 201 | |
FVO (a)-valuation adjustments and accrued interest | | 12,883 | | 12,603 | |
| | | | | |
Total Consolidated obligation-bonds | | $ | 64,784,321 | | $ | 67,440,522 | |
| | | | | |
Discount notes-amortized cost | | $ | 29,776,704 | | $ | 22,121,109 | |
Hedge basis adjustments | | — | | (1,467 | ) |
FVO (a)-valuation adjustments and remaining accretion | | 3,243 | | 3,683 | |
| | | | | |
Total Consolidated obligation-discount notes | | $ | 29,779,947 | | $ | 22,123,325 | |
(a) Accounted for under the Fair Value Option rules.
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Redemption Terms of Consolidated Obligation Bonds
The following is a summary of consolidated obligation bonds outstanding by year of maturity (dollars in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | | | Weighted | | | | | | Weighted | | | |
| | | | Average | | Percentage | | | | Average | | Percentage | |
Maturity | | Amount | | Rate (a) | | of Total | | Amount | | Rate (a) | | of Total | |
| | | | | | | | | | | | | |
One year or less | | $ | 42,284,800 | | 0.71 | % | 66.25 | % | $ | 34,498,875 | | 0.63 | % | 52.00 | % |
Over one year through two years | | 8,003,630 | | 1.47 | | 12.54 | | 20,552,410 | | 1.23 | | 30.99 | |
Over two years through three years | | 5,746,280 | | 1.62 | | 9.00 | | 3,801,280 | | 2.62 | | 5.73 | |
Over three years through four years | | 1,115,010 | | 2.29 | | 1.75 | | 3,282,190 | | 2.60 | | 4.95 | |
Over four years through five years | | 1,515,570 | | 2.56 | | 2.38 | | 971,735 | | 2.52 | | 1.47 | |
Over five years through six years | | 722,420 | | 1.96 | | 1.13 | | 873,470 | | 3.78 | | 1.32 | |
Thereafter | | 4,437,375 | | 2.64 | | 6.95 | | 2,349,335 | | 3.83 | | 3.54 | |
| | | | | | | | | | | | | |
Total par value | | 63,825,085 | | 1.11 | % | 100.00 | % | 66,329,295 | | 1.21 | % | 100.00 | % |
| | | | | | | | | | | | | |
Bond premiums (b) | | 102,225 | | | | | | 145,869 | | | | | |
Bond discounts (b) | | (23,566 | ) | | | | | (26,459 | ) | | | | |
Hedge basis adjustments | | 804,174 | | | | | | 979,013 | | | | | |
Hedge basis adjustments on terminated hedges | | 63,520 | | | | | | 201 | | | | | |
FVO (c) - valuation adjustments and accrued interest | | 12,883 | | | | | | 12,603 | | | | | |
| | | | | | | | | | | | | |
Total Consolidated obligation-bonds | | $ | 64,784,321 | | | | | | $ | 67,440,522 | | | | | |
(a) | Weighted average rate represents the weighted average contractual coupons of bonds, unadjusted for swaps. |
(b) | Amortization of bond premiums and discounts resulted in net reduction of interest expense of $59.1 million, $54.5 million and $32.8 million for the years ended December 31, 2012, 2011 and 2010. Amortization of basis adjustments from terminated hedges was $4.1 million, $3.1 million and $7.2 million for the years ended December 31, 2012, 2011 and 2010. |
(c) | Accounted for under the Fair Value Option rules. |
Interest rate Payment Terms
The following summarizes types of bonds issued and outstanding (dollars in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | Amount | | Percentage of
Total | | Amount | | Percentage of
Total | |
| | | | | | | | | |
Fixed-rate, non-callable | | $ | 48,184,085 | | 75.49 | % | $ | 47,108,685 | | 71.02 | % |
Fixed-rate, callable | | 2,685,000 | | 4.21 | | 1,935,610 | | 2.92 | |
Step Up, callable | | 1,221,000 | | 1.91 | | 950,000 | | 1.43 | |
Single-index floating rate | | 11,735,000 | | 18.39 | | 16,335,000 | | 24.63 | |
| | | | | | | | | |
Total par value | | 63,825,085 | | 100.00 | % | 66,329,295 | | 100.00 | % |
| | | | | | | | | |
Bond premiums | | 102,225 | | �� | | 145,869 | | | |
Bond discounts | | (23,566 | ) | | | (26,459 | ) | | |
Hedge basis adjustments | | 804,174 | | | | 979,013 | | | |
Hedge basis adjustments on terminated hedges | | 63,520 | | | | 201 | | | |
Fair value option valuation adjustments and accrued interest | | 12,883 | | | | 12,603 | | | |
| | | | | | | | | |
Total Consolidated obligation-bonds | | $ | 64,784,321 | | | | $ | 67,440,522 | | | |
Discount Notes
Consolidated obligation-discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities of up to one year. These notes are issued at less than their face amount and redeemed at par when they mature.
The FHLBNY’s outstanding consolidated obligation-discount notes were as follows (dollars in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Par value | | $ | 29,785,543 | | $ | 22,127,530 | |
| | | | | |
Amortized cost | | 29,776,704 | | 22,121,109 | |
Hedge basis adjustments | | — | | (1,467 | ) |
Fair value option valuation adjustments | | 3,243 | | 3,683 | |
| | | | | |
Total discount notes | | $ | 29,779,947 | | $ | 22,123,325 | |
| | | | | |
Weighted average interest rate | | 0.13 | % | 0.07 | % |
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Notes to Financial Statements
Note 11. Affordable Housing Program.
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 its 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, in aggregate, the greater of $100 million or 10 percent of regulatory income for the AHP. 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 pre-assessment income to the sum of total pre-assessment income for all 12 FHLBanks. There was no shortfall in 2012, 2011 and 2010.
Each FHLBank accrues this expense monthly based on its income before assessments. Pre-assessment income is net income before the AHP assessment and, until June 30, 2011, before REFCORP assessments. With the satisfaction of the REFCORP obligation on June 30, 2011, the REFCORP assessments have ceased starting July 1, 2011. 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 proration would be made on the basis of a 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, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Beginning balance | | $ | 127,454 | | $ | 138,365 | | $ | 144,489 | |
Additions from current period’s assessments | | 40,286 | | 27,430 | | 31,095 | |
Net disbursements for grants and programs | | (32,798 | ) | (38,341 | ) | (37,219 | ) |
Ending balance | | $ | 134,942 | | $ | 127,454 | | $ | 138,365 | |
Note 12. Capital Stock, Mandatorily Redeemable Capital Stock and Restricted Retained Earnings.
The FHLBanks, including the FHLBNY, have a cooperative structure. To access the FHLBNY’s products and services, a financial institution must be approved for membership and purchase capital stock in the FHLBNY. A member’s stock requirement is generally based on its use of FHLBNY products, subject to a minimum membership requirement as prescribed by the FHLBank Act and the FHLBNY’s Capital Plan. FHLBNY stock can be issued, exchanged, redeemed and repurchased only at its stated par value of $100 per share. It is not publicly traded. An option to redeem capital stock that is greater than a member’s minimum requirement is held by both the member and the FHLBNY.
The FHLBNY’s Capital Plan offers two sub-classes of Class B capital stock, 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 stock 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, mainly MPF loans, 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 B stock by giving five years notice. The Bank’s capital plan does not provide for the issuance of Class A capital stock.
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.
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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.
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, market risk, and operations risk capital requirements as calculated in accordance with the FHLBNY policy, and 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 an amount of permanent capital greater than what is required 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 times divided by total assets.
The FHLBNY was in compliance with the aforementioned capital rules and requirements for all periods presented. The FHLBNY met the “adequately capitalized” classification, which is the highest rating, under the capital rule. However, the Finance Agency has discretion to reclassify a FHLBank and to modify or add to the corrective action requirements for a particular capital classification.
The Capital Rules Are Summarized Below:
The Capital Rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the Finance Agency to determine on no less than a quarterly basis the capital classification of each FHLBank. Each FHLBank is required to notify the Director of the Finance Agency within 10 calendar days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level necessary to maintain its assigned capital classification. The following describes each capital classification and its related corrective action requirements, if any.
· Adequately capitalized. A FHLBank is adequately capitalized if it has sufficient permanent and total capital to meet or exceed its risk-based and minimum capital requirements. FHLBanks that are adequately capitalized have no corrective action requirements.
· Undercapitalized. A FHLBank is undercapitalized if it does not have sufficient permanent or total capital to meet one or more of its risk-based and minimum capital requirements, but such deficiency is not large enough to classify the FHLBank as significantly undercapitalized or critically undercapitalized. A FHLBank classified as undercapitalized must submit a capital restoration plan that conforms with regulatory requirements to the Director of the Finance Agency for approval, execute the approved plan, suspend dividend payments and excess stock redemptions or repurchases, and not permit growth of its average total assets in any calendar quarter beyond the average total assets of the preceding quarter unless otherwise approved by the Director of the Finance Agency.
· Significantly undercapitalized. A FHLBank is significantly undercapitalized if either (1) the amount of permanent or total capital held by the FHLBank is less than 75 percent of any one of its risk-based or minimum capital requirements, but such deficiency is not large enough to classify the FHLBank as critically undercapitalized or (2) an undercapitalized FHLBank fails to submit or adhere to a Finance Agency Director-approved capital restoration plan in conformance with regulatory requirements. A FHLBank classified as significantly undercapitalized must submit a capital restoration plan that conforms with regulatory requirements to the Director of the Finance Agency for approval, execute the approved plan, suspend dividend payments and excess stock redemptions or repurchases, and is prohibited from paying a bonus to or increasing the compensation of its executive officers without prior approval of the Director of the Finance Agency.
· Critically undercapitalized. A FHLBank is critically undercapitalized if either (1) the amount of total capital held by the FHLBank is less than two percent of the FHLBank’s total assets or (2) a significantly undercapitalized FHLBank fails to submit or adhere to a Finance Agency Director-approved capital restoration plan in conformance with regulatory requirements. The Director of the Finance Agency may place a FHLBank in conservatorship or receivership. A FHLBank will be placed in mandatory receivership if (1) the assets of a FHLBank are less than its obligations during a 60-day period or (2) the FHLBank is not, and during a 60-day period has not, been paying its debts on a regular basis. Until such time the Finance Agency is appointed as conservator or receiver for a critically undercapitalized FHLBank, the FHLBank is subject to all mandatory restrictions and obligations applicable to a significantly undercapitalized FHLBank.
Each required capital restoration plan must be submitted within 15 business days following notice from the Director of the Finance Agency unless an extension is granted and is subject to the Director of the Finance Agency review
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and must set forth a plan to restore permanent and total capital levels to levels sufficient to fulfill its risk-based and minimum capital requirements.
The Director of the Finance Agency has discretion to add to or modify the corrective action requirements for each capital classification other than adequately capitalized if the Director of the Finance Agency determines that such action is necessary to ensure the safe and sound operation of the FHLBank and the FHLBank’s compliance with its risk-based and minimum capital requirements. Further, the Capital Rule provides the Director of the Finance Agency discretion to reclassify a FHLBank’s capital classification if the Director of the Finance Agency determines that:
· The FHLBank is engaging in conduct that could result in the rapid depletion of permanent or total capital;
· The value of collateral pledged to the FHLBank has decreased significantly;
· The value of property subject to mortgages owned by the FHLBank has decreased significantly;
· The FHLBank is in an unsafe and unsound condition following notice to the FHLBank and an informal hearing before the Director of the Finance Agency; or
· The FHLBank is engaging in an unsafe and unsound practice because the FHLBank’s asset quality, management, earnings, or liquidity were found to be less than satisfactory during the most recent examination, and such deficiency has not been corrected.
If the FHLBNY became classified into a capital classification other than adequately capitalized, the Bank could be adversely impacted by the corrective action requirements for that capital classification.
Risk-based Capital — The following table summarizes the Bank’s risk-based capital ratios (dollars in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | Required (d) | | Actual | | Required (d) | | Actual | |
Regulatory capital requirements: | | | | | | | | | |
Risk-based capital (a), (e) | | $ | 489,133 | | $ | 5,714,352 | | $ | 495,427 | | $ | 5,291,666 | |
Total capital-to-asset ratio | | 4.00 | % | 5.55 | % | 4.00 | % | 5.42 | % |
Total capital (b) | | $ | 4,119,552 | | $ | 5,714,352 | | $ | 3,906,494 | | $ | 5,291,666 | |
Leverage ratio | | 5.00 | % | 8.32 | % | 5.00 | % | 8.13 | % |
Leverage capital (c) | | $ | 5,149,440 | | $ | 8,571,529 | | $ | 4,883,117 | | $ | 7,937,449 | |
(a) | Actual “Risk-based capital” is capital stock and retained earnings plus mandatorily redeemable capital stock. Section 932.2 of the Finance Agency’s regulations also refers to this amount as “Permanent Capital.” |
(b) | Required “Total capital” is 4.0% of total assets. |
(c) | Actual “Leverage capital” is actual “Risk-based capital” times 1.5. |
(d) | Required minimum. |
(e) | Under regulatory guidelines issued by the Federal Housing Finance Agency (“FHFA”), the Bank’s regulator, concurrently with the rating action on August 8, 2011 by S&P lowered the rating of long-term securities issued by the U.S. government, federal agencies, and other entities, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, from AAA to AA+. With regard to this action, consistent with guidance provided by the banking regulators with respect to capital rules, the FHFA provides the following guidance for the Federal Home Loan Banks: the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. Government, government agencies, and government-sponsored entities do not change for purposes of calculating risk-based capital. |
Mandatorily Redeemable Capital Stock
Generally, the FHLBNY’s capital stock is redeemable at the option of either the member or the FHLBNY subject to certain conditions, including the provisions under the accounting guidance for certain financial instruments with characteristics of both liabilities and equity. In accordance with the accounting guidance, the FHLBNY generally reclassifies the stock subject to redemption from equity to a liability once a member irrevocably exercises a written redemption right, gives notice of intent to withdraw from membership, or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership. Under such circumstances, the member shares will then meet the definition of a mandatorily redeemable financial instrument and are reclassified to a liability at fair value.
Anticipated redemptions of mandatorily redeemable capital stock in the following table assume the FHLBNY will follow its current practice of daily redemption of capital in excess of the amount required to support advances and MPF loans (in thousands):
| | December 31, 2012 | | December 31, 2011 | |
| | | | | |
Redemption less than one year | | $ | 2,582 | | $ | 34,264 | |
Redemption from one year to less than three years | | 698 | | 2,990 | |
Redemption from three years to less than five years | | 5,210 | | 4,567 | |
Redemption from five years or greater | | 14,653 | | 13,006 | |
| | | | | |
Total | | $ | 23,143 | | $ | 54,827 | |
Voluntary and Involuntary Withdrawal and Changes in Membership — Changes in membership due to mergers were not significant in any periods in this report. When a member is acquired by a non-member, the FHLBNY reclassifies stock of the member to a liability on the day the member’s charter is dissolved. Under existing practice, the FHLBNY repurchases Class B2 capital stock held by former members if such stock is considered “excess” and
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is no longer required to support outstanding advances. Class B1 membership stock held by former members is re-calculated and repurchased annually.
The following table provides withdrawals and terminations in membership:
| | Years Ended December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Voluntary Termination/Notices Received and Pending | | 1 | | 1 | |
| | | | | |
Involuntary Termination (a) | | 2 | | 3 | |
| | | | | |
Non-member due to merger | | 1 | | 1 | |
(a) | The Board of Directors of FHLBank may terminate the membership of any institution that: (1) fails to comply with any requirement of the FHLBank Act, any regulation adopted by the Finance Agency, or any requirement of the Bank’s capital plan; (2) becomes insolvent or otherwise subject to the appointment of a conservator, receiver, or other legal custodian under federal or state law; or (3) would jeopardize the safety or soundness of the FHLBank if it was to remain a member. |
The following table provides roll-forward information with respect to changes in mandatorily redeemable capital stock liabilities (in thousands):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Beginning balance | | $ | 54,827 | | $ | 63,219 | | $ | 126,294 | |
Capital stock subject to mandatory redemption reclassified from equity | | 7,576 | | 3,614 | | 48,310 | |
Redemption of mandatorily redeemable capital stock (a) | | (39,260 | ) | (12,006 | ) | (111,385 | ) |
| | | | | | | |
Ending balance | | $ | 23,143 | | $ | 54,827 | | $ | 63,219 | |
| | | | | | | |
Accrued interest payable (b) | | $ | 266 | | $ | 584 | | $ | 950 | |
(a) | Redemption includes repayment of excess stock. |
(b) | The annualized accrual rates were 4.50%, 4.00% and 6.50% for 2012, 2011 and 2010 on mandatorily redeemable capital stock. |
Restricted Retained Earnings
In 2011, the 12 FHLBanks entered into a Joint Capital Enhancement Agreement (“Capital Agreement”), as amended. The Capital Agreement is intended to enhance the capital position of each FHLBank, by allocating that portion of each FHLBank’s earnings historically paid to satisfy its REFCORP obligation to a separate retained earnings account at that FHLBank. Because each FHLBank had been required to contribute 20% of its earnings toward payment of the interest on REFCORP bonds until the REFCORP obligation was satisfied, the Capital Agreement provides that, with full satisfaction of the REFCORP obligation, each FHLBank will contribute 20% of its Net income each quarter to a restricted retained earnings account until the balance of that account equals at least one percent of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. These restricted retained earnings will not be available to pay dividends. Each FHLBank subsequently amended its capital plan or capital plan submission, as applicable, to implement the provisions of the Capital Agreement, and the Finance Agency approved the capital plan amendments on August 5, 2011. On August 5, 2011, the Finance Agency certified that the FHLBanks had fully satisfied their REFCORP obligation. In accordance with the Capital Agreement, starting in the third quarter of 2011, the FHLBNY allocates 20% of its net income to a separate restricted retained earnings account. At December 31, 2012, restricted retained earnings were $96.2 million.
Note 13. Total Comprehensive Income (in thousands).
| | | | Non-credit | | Reclassification | | | | | | Accumulated | | | | | |
| | Available- | | OTTI on HTM | | of Non-credit | | Cash | | Supplemental | | Other | | | | Total | |
| | for-sale | | Securities, | | OTTI to | | Flow | | Retirement | | Comprehensive | | Net | | Comprehensive | |
| | Securities | | Net of accretion | | Net Income | | Hedges | | Plans | | Income (Loss) | | Income | | Income | |
| | | | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | $ | (3,409 | ) | $ | (113,562 | ) | $ | 2,992 | | $ | (22,683 | ) | $ | (7,877 | ) | $ | (144,539 | ) | | | | |
| | | | | | | | | | | | | | | | | |
Net change | | 26,374 | | 12,002 | | 5,642 | | 7,487 | | (3,650 | ) | 47,855 | | $ | 275,525 | | $ | 323,380 | |
| | | | | | | | | | | | | | | | | |
Balance, December 31, 2010 | | $ | 22,965 | | $ | (101,560 | ) | $ | 8,634 | | $ | (15,196 | ) | $ | (11,527 | ) | $ | (96,684 | ) | | | | |
| | | | | | | | | | | | | | | | | |
Net change | | (6,546 | ) | 11,960 | | 5,117 | | (96,789 | ) | (7,485 | ) | (93,743 | ) | $ | 244,486 | | $ | 150,743 | |
| | | | | | | | | | | | | | | | | |
Balance, December 31, 2011 | | $ | 16,419 | | $ | (89,600 | ) | $ | 13,751 | | $ | (111,985 | ) | $ | (19,012 | ) | $ | (190,427 | ) | | | | |
| | | | | | | | | | | | | | | | | |
Net change | | 6,087 | | 10,756 | | 1,622 | | (25,129 | ) | (2,289 | ) | (8,953 | ) | $ | 360,734 | | $ | 351,781 | |
| | | | | | | | | | | | | | | | | |
Balance, December 31, 2012 | | $ | 22,506 | | $ | (78,844 | ) | $ | 15,373 | | $ | (137,114 | ) | $ | (21,301 | ) | $ | (199,380 | ) | | | | |
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Note 14. Earnings Per Share of Capital.
The following table sets forth the computation of earnings per share. Basic and diluted earnings per share of capital are the same. The FHLBNY has no dilutive potential common shares or other common stock equivalents (dollars in thousands except per share amounts):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Net income | | $ | 360,734 | | $ | 244,486 | | $ | 275,525 | |
| | | | | | | |
Net income available to stockholders | | $ | 360,734 | | $ | 244,486 | | $ | 275,525 | |
| | | | | | | |
Weighted average shares of capital | | 46,718 | | 45,340 | | 47,820 | |
Less: Mandatorily redeemable capital stock | | (376 | ) | (585 | ) | (826 | ) |
Average number of shares of capital used to calculate earnings per share | | 46,342 | | 44,755 | | 46,994 | |
| | | | | | | |
Basic earnings per share | | $ | 7.78 | | $ | 5.46 | | $ | 5.86 | |
Note 15. Employee Retirement Plans.
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan), a tax-qualified, defined-benefit multiemployer pension plan that covers all officers and employees of the Bank. The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. In addition, the Bank maintains a Benefit Equalization Plan (“BEP”) that restores defined benefits for those employees who have had their qualified defined benefits limited by IRS regulations. The BEP is an unfunded plan. 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.
Retirement Plan Expenses — Summary
The following table presents employee retirement plan expenses for the years ended (in thousands):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Defined Benefit Plan (a) | | $ | 1,688 | | $ | 30,303 | | $ | 10,680 | |
Benefit Equalization Plan (defined benefit) | | 3,633 | | 2,780 | | 2,281 | |
Defined Contribution Plan | | 1,523 | | 1,414 | | 1,531 | |
Postretirement Health Benefit Plan | | 1,398 | | 990 | | 1,138 | |
| | | | | | | |
Total retirement plan expenses | | $ | 8,242 | | $ | 35,487 | | $ | 15,630 | |
(a) | In March 2011, the FHLBNY contributed $24.0 million to its Defined Benefit Plan to eliminate a funding shortfall. Prior to the contribution, the DB Plan’s adjusted funding target attainment percentage (“AFTAP”) was 79.9% based on the actuarial valuation for the DB Plan. The AFTAP equals DB Plan assets divided by plan liabilities. Under the Pension Protection Act of 2006 (“PPA”), if the AFTAP in any future year is less than 80%, then the DB Plan will be restricted in its ability to provide increased benefits and /or lump sum distributions. If the AFTAP in any future year is less than 60%, then benefit accruals would be frozen. The contribution to the DB Plan was charged to Compensation and Benefits. |
| |
| In July 2012, a transportation bill was enacted under the Surface Transportation Extension Act of 2012 — Moving Ahead for Progress in the 21st Century Act (“MAP-21”), which includes pension plan provisions intended to ease the negative effect of historically low interest rates. Previously, a plan sponsor could elect to calculate future pension obligations based on either the “yield curve” of corporate investment-grade bonds for the preceding month, or three “segment rates” that are drawn from the average yield curves over the most recent 24-month period. The primary change under the relief bill is to smooth segment rate changes by calculating each rate based on the average of that segment rate over 25 years — a much longer period than the two-year period previously used to determine segment rates. The FHLBNY’s Defined Benefit Plan participates in the Pentegra Defined Benefit Plan pension, which has adopted the relief provisions, and adoption resulted in a significant reduction in plan expenses. The FHLBNY paid in $0.7 million for the plan period July 1, 2012 to June 30, 2013, which was the minimum amount payable under the relief provided under MAP-21. Payments to the plan under the pre-existing methodology (prior to the relief) were $2.6 million for the plan year ended June 30, 2012, and $10.1 million for the plan year ended June 30, 2011. Pentegra operates the Defined Benefit Plan with a June 30, fiscal year-end date. |
Pentegra DB Plan Net Pension Cost and Funded Status
The Pentegra DB Plan operates as a multiemployer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multiemployer plan disclosures, including the certified zone status, are not applicable to the Pentegra DB Plan. Typically, multiemployer plans contain provisions for collective bargaining arrangements. There are no collective bargaining agreements in place at any of the FHLBanks (including the FHLBNY) that participate in the plan. Under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. In addition, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers
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could increase proportionately. If an employee transfers employment to the FHLBNY, and the employee was a participant in the Pentegra Benefit Plan with another employer, the FHLBNY is responsible for the entire benefit. At the time of transfer, the former employer will transfer assets to the FHLBNY’s plan, in the amount of the liability for the accrued benefit.
The Pentegra DB Plan operates on a fiscal year from July 1 through June 30, and files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333.
The Pentegra DB Plan’s annual valuation process includes calculating the plan’s funded status, and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100% of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra DB Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a result, the market value of assets at the valuation date (July 1) may increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.
The following table presented multiemployer plan disclosure for the three years ended December 31, (dollars in thousands):
| | 2012 | | 2011 | | 2010 (d) | |
| | | | | | | |
Net pension cost charged to compensation and benefit expense for the year ended December 31 | | $ | 1,688 | | $ | 30,303 | | $ | 10,680 | |
Contributions allocated to plan year ended June 30 | | $ | 2,620 | | $ | 14,196 | | $ | 28,100 | (a) |
Pentegra DB Plan funded status as of July 1 (b) | | 108.22 | % | 90.29 | % | 87.98 | % |
FHLBNY’s funded status as of July 1 (c) | | 115.88 | % | 101.30 | % | 100.00 | % |
(a) Represented more than 5% of contributions made by all employers in the 2010 Plan.
(b) Based on actuarial valuation of the Pentegra DB Plan and include all participants’ allocated to plan years and known at the time of the preparation of the actuarial valuation. The funded status may increase because the plan’s participants are permitted to make contributions through March 15 of the following year. Funded status remains preliminary until the Form 5500 is filed no later than April 15 of 2013 and 2014 for the plan years ended June 30, 2011 and 2012.
(c) Based on cash contributions made through December 31, 2012 and allocated to the DB Plan year(s). The funded status may increase because the FHLBNY is permitted to make contribution through March 15 of the following year.
(d) The most recent Form 5500 available for the Pentegra DB Plan is for the plan year ended June 30, 2010.
Benefit Equalization Plan (BEP)
The method for determining the accrual expense and liabilities of the plan is the Projected Unit Credit Accrual Method. Under this method, the liability of the plan is composed mainly of two components, Projected Benefit Obligation (PBO) and Service Cost accruals. The total liability is determined by projecting each person’s expected plan benefits. These projected benefits are then discounted to the measurement date. Finally, the liability is allocated to service already worked (PBO) and service to be worked (Service Cost). There were no plan assets (this is an unfunded plan) 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, | |
| | 2012 | | 2011 | |
| | | | | |
Accumulated benefit obligation | | $ | 29,230 | | $ | 25,092 | |
Effect of future salary increases | | 7,011 | | 6,252 | |
Projected benefit obligation | | 36,241 | | 31,344 | |
Unrecognized prior service cost | | 207 | | 260 | |
Unrecognized net (loss) | | (16,376 | ) | (14,406 | ) |
| | | | | |
Accrued pension cost | | $ | 20,072 | | $ | 17,198 | |
Components of the projected benefit obligation for the Bank’s BEP plan were as follows (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Projected benefit obligation at the beginning of the year | | $ | 31,344 | | $ | 24,695 | |
Service | | 764 | | 660 | |
Interest | | 1,300 | | 1,294 | |
Benefits paid | | (759 | ) | (656 | ) |
Actuarial loss | | 3,592 | | 5,351 | |
| | | | | |
Projected benefit obligation at the end of the year | | $ | 36,241 | | $ | 31,344 | |
The measurement date used to determine projected benefit obligation for the BEP plan was December 31 in each of the two years.
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Amounts recognized in AOCI for the Bank’s BEP plan were as follows (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Unrecognized (gain)/loss | | $ | 16,376 | | $ | 14,406 | |
Prior service cost | | (207 | ) | (260 | ) |
| | | | | |
Accumulated other comprehensive loss | | $ | 16,169 | | $ | 14,146 | |
Changes in the BEP plan assets were as follows (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Fair value of the plan assets at the beginning of the year | | $ | — | | $ | — | |
Employer contributions | | 759 | | 656 | |
Benefits paid | | (759 | ) | (656 | ) |
Fair value of the plan assets at the end of the year | | $ | — | | $ | — | |
Components of the net periodic pension cost for the defined benefit component of the BEP were as follows (in thousands):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Service cost | | $ | 764 | | $ | 660 | | $ | 653 | |
Interest cost | | 1,300 | | 1,294 | | 1,117 | |
Amortization of unrecognized prior service cost | | (53 | ) | (53 | ) | (67 | ) |
Amortization of unrecognized net loss | | 1,622 | | 879 | | 578 | |
| | | | | | | |
Net periodic benefit cost | | $ | 3,633 | | $ | 2,780 | | $ | 2,281 | |
Other changes in benefit obligations recognized in AOCI were as follows (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Net loss (gain) | | $ | 3,592 | | $ | 5,351 | |
Prior service cost (benefit) | | — | | — | |
Amortization of net loss (gain) | | (1,622 | ) | (879 | ) |
Amortization of prior service cost (benefit) | | 53 | | 53 | |
Amortization of net obligation | | — | | — | |
| | | | | |
Total recognized in other comprehensive income | | $ | 2,023 | | $ | 4,525 | |
| | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive income | | $ | 5,656 | | $ | 7,305 | |
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, 2013 | |
| | | |
Expected amortization of net (gain)/loss | | $ | 1,794 | |
Expected amortization of prior service cost/(credit) | | $ | (53 | ) |
Expected amortization of transition obligation/(asset) | | $ | — | |
Key assumptions and other information for the actuarial calculations to determine benefit obligations for the BEP plan were as follows (dollars in thousands):
| | December 31, 2012 | | December 31, 2011 | | December 31, 2010 | |
| | | | | | | |
Discount rate (a) | | 3.80 | % | 4.23 | % | 5.35 | % |
Salary increases | | 5.50 | % | 5.50 | % | 5.50 | % |
Amortization period (years) | | 7 | | 7 | | 8 | |
Benefits paid during the period | | $ | (759 | ) | $ | (656 | ) | $ | (515 | ) |
| | | | | | | | | | |
(a) | The discount rates were based on the Citigroup Pension Liability Index at December 31, adjusted for duration in each of the three years. |
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Future BEP plan benefits to be paid were estimated to be as follows (in thousands):
Years | | Payments | |
| | | |
2013 | | $ | 1,321 | |
2014 | | 1,382 | |
2015 | | 1,427 | |
2016 | | 1,493 | |
2017 | | 1,562 | |
2018-2022 | | 9,661 | |
| | | |
Total | | $ | 16,846 | |
The net periodic benefit cost for 2013 is expected to be $4.0 million (2012 was $3.6 million).
Postretirement Health Benefit Plan
The FHLBNY has a postretirement health benefit plan for retirees called the Retiree Medical Benefit Plan. The plan is unfunded. Assumptions used in determining the accumulated postretirement benefit obligation (“APBO”) included a discount rate assumption of 3.80%. At December 31, 2012, the effect of a percentage point increase in the assumed healthcare trend rates would be an increase in postretirement benefit expense of $376.9 thousand and an increase in APBO of $3.7 million. At December 31, 2011, the effect of a percentage point increase in the assumed healthcare trend rates would be an increase in postretirement benefit expense of $270.7 thousand and an increase in APBO of $3.3 million. At December 31, 2012, the effect of a percentage point decrease in the assumed healthcare trend rates would be a decrease in postretirement benefit expense of $299.5 thousand and a decrease in APBO of $3.0 million. At December 31, 2011, the effect of a percentage point decrease in the assumed healthcare trend rates would be a decrease in postretirement benefit expense of $220.8 thousand and a decrease in APBO of $2.7 million. Employees over the age of 55 are eligible provided they have completed ten years of service after age 45.
Components of the accumulated postretirement benefit obligation for the postretirement health benefits plan for the years ended December 31, 2012 and 2011 (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Accumulated postretirement benefit obligation at the beginning of the year | | $ | 20,346 | | $ | 16,728 | |
Service cost | | 999 | | 681 | |
Interest cost | | 793 | | 841 | |
Actuarial loss | | (1,419 | ) | (431 | ) |
Benefits paid, net of participants’ contributions | | (431 | ) | (332 | ) |
Change in discount rate assumptions | | 1,291 | | 2,859 | |
Accumulated postretirement benefit obligation at the end of the year | | 21,579 | | 20,346 | |
Unrecognized net gain | | — | | — | |
Accrued postretirement benefit cost | | $ | 21,579 | | $ | 20,346 | |
Changes in postretirement health benefit plan assets (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Fair value of plan assets at the beginning of the year | | $ | — | | $ | — | |
Employer contributions | | 431 | | 332 | |
Benefits paid, net of participants’ contributions and subsidy received | | (431 | ) | (332 | ) |
Fair value of plan assets at the end of the year | | $ | — | | $ | — | |
Amounts recognized in AOCI for the Bank’s postretirement benefit obligation (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Prior service cost/(credit) | | $ | (643 | ) | $ | (1,374 | ) |
Net loss/(gain) | | 5,775 | | 6,240 | |
Accrued pension cost | | $ | 5,132 | | $ | 4,866 | |
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, 2013 | |
| | | |
Expected amortization of net (gain)/loss | | $ | 404 | |
Expected amortization of prior service cost/(credit) | | $ | (643 | ) |
Expected amortization of transition obligation/(asset) | | $ | — | |
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Components of the net periodic benefit cost for the postretirement health benefit plan were as follows (in thousands):
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Service cost (benefits attributed to service during the period) | | $ | 999 | | $ | 681 | | $ | 621 | |
Interest cost on accumulated postretirement health benefit obligation | | 793 | | 841 | | 909 | |
Amortization of loss | | 337 | | 199 | | 339 | |
Amortization of prior service cost/(credit) | | (731 | ) | (731 | ) | (731 | ) |
| | | | | | | |
Net periodic postretirement health benefit cost | | $ | 1,398 | | $ | 990 | | $ | 1,138 | |
Other changes in benefit obligations recognized in AOCI were as follows (in thousands):
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Net loss (gain) | | $ | (128 | ) | $ | 2,428 | |
Prior service cost (benefit) | | — | | — | |
Amortization of net loss (gain) | | (337 | ) | (199 | ) |
Amortization of prior service cost (benefit) | | 731 | | 731 | |
Amortization of net obligation | | — | | — | |
| | | | | |
Total recognized in other comprehensive income | | $ | 266 | | $ | 2,960 | |
| | | | | |
Total recognized in net periodic benefit cost and other comprehensive income | | $ | 1,664 | | $ | 3,950 | |
The measurement date used to determine benefit obligations was December 31 in each of the two years.
Key assumptions (a) and other information to determine current year’s obligation for the FHLBNY’s postretirement health benefit plan were as follows:
| | Years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Weighted average discount rate | | 3.80% | | 4.23% | | 5.35% | |
| | | | | | | |
Health care cost trend rates: | | | | | | | |
Assumed for next year | | | | | | | |
Pre 65 | | 7.50% | | 8.00% | | 9.00% | |
Post 65 | | 7.50% | | 8.50% | | 9.50% | |
Pre 65 Ultimate rate | | 5.00% | | 5.00% | | 5.00% | |
Pre 65 Year that ultimate rate is reached | | 2018 | | 2017 | | 2016 | |
Post 65 Ultimate rate | | 5.50% | | 5.50% | | 6.00% | |
Post 65 Year that ultimate rate is reached | | 2018 | | 2017 | | 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 | |
(a) | The discount rates were based on the Citigroup Pension Liability Index adjusted for duration at December 31, in each of three years. |
Future postretirement benefit plan expenses to be paid were estimated to be as follows (in thousands):
Years | | Payments | |
| | | |
2013 | | $ | 623 | |
2014 | | 678 | |
2015 | | 748 | |
2016 | | 804 | |
2017 | | 868 | |
2018-2022 | | 5,545 | |
| | | |
Total | | $ | 9,266 | |
The Bank’s postretirement health benefit plan accrual for 2013 is expected to be $1.5 million (2012 was $1.4 million).
Note 16. Derivatives and Hedging Activities.
General — The FHLBNY may enter into interest-rate swaps, swaptions, and interest-rate cap and floor agreements to manage its exposure to changes in interest rates. The FHLBNY may also use callable swaps to potentially adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The FHLBNY, consistent with the Finance Agency’s regulations, enters into derivatives to manage the market risk exposures inherent in otherwise unhedged assets and funding positions. The FHLBNY is not a derivatives dealer and does not trade derivatives for short-term profit. 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
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derivative as an asset-liability management hedge (i.e., an “economic hedge”). The FHLBNY may execute an interest rate swap to match the terms of an asset or liability that is elected under the FVO 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. 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.
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. 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. As a result, an economic hedge introduces the potential for earnings variability. Economic hedges are an acceptable hedging strategy under the FHLBNY’s risk management program, and the strategies comply with the Finance Agency’s regulatory requirements prohibiting speculative use of derivatives.
Types of Hedging Activities and Hedged Items
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. 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. When such transactions qualify for hedge accounting, they are treated as fair value hedges under the accounting standards for derivatives and hedging. The FHLBNY has also elected the FVO for certain consolidated obligation bonds and discount notes. To mitigate the volatility resulting from changes in fair values of bonds and notes designated under the FVO, the Bank may execute interest rate swaps as economic hedges.
The FHLBNY has issued variable-rate consolidated obligations bonds indexed to 1-month LIBOR, the U.S. Prime rate, or Federal funds rate and simultaneously executed interest-rate swaps (“basis swaps”) to hedge the basis risk of the variable rate debt to 3-month LIBOR, the FHLBNY’s preferred funding base. The interest rate basis swaps were accounted as economic hedges of the floating-rate bonds because the FHLBNY deemed that the operational cost of designating the hedges under accounting standards for derivatives and hedge accounting would outweigh the accounting benefits.
Advances — The Bank offers a wide array of advances structures to meet members’ funding needs. These advances may have maturities up to 30 years with fixed or adjustable rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and/or options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance or a variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. This type of hedge is treated as a fair value hedge. With a putable advance borrowed by a member, the FHLBNY may purchase from the member a put option. 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 FHLBNY also offers callable advances to members, which is a fixed-rate advance borrowed by a member. With the advance, the FHLBNY sells to the member a call option that enables the member to terminate the advance at pre-determined exercise dates. The FHLBNY hedges such advances by executing interest rate swaps with cancellable option features that would allow the FHLBNY to terminate the swaps also at pre-determined option exercise dates.
Mortgage Loans — The Bank’s investment portfolio includes fixed rate mortgage loans. The FHLBNY manages the interest rate and prepayment risk associated with mortgages through debt issuance. Firm commitments to purchase, or “delivery commitments” are considered derivatives. Also see “Firm Commitment Strategies”.
Firm Commitment Strategies — Mortgage delivery commitments are considered derivatives under the accounting standards for derivatives and hedging. 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 Other income as a Net realized and unrealized gains (losses) on derivatives and hedging activities. Fair values were not significant for all periods in this report.
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The FHLBNY may also hedge a firm commitment for a forward starting advance with 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 fair value adjustments associated with the firm commitment will be added to the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
If a hedged firm commitment no longer qualified as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings. There were no material amounts of gains and losses recognized due to disqualification of firm commitment hedges in 2012, 2011 and 2010.
Forward Settlements — There were no forward settled securities at December 31, 2012 and 2011 that would settle outside the shortest period of time for the settlement of such securities. When the FHLBNY purchases a security that forward settles within the shortest period of time for the settlement of such a security, the Bank records the purchase on trade date. When a security forward settles outside the shortest period of time, a derivative is recorded in addition to the purchased security.
Cash Flow Hedges of Anticipated Consolidated Bond Issuance — The FHLBNY enters into interest-rate swaps on the anticipated issuance of debt to “lock in” the interest to be paid for the cost of funding. The swap is terminated upon issuance of the debt instrument, and amounts reported in AOCI are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued.
Cash Flow Hedges of Rolling Issuance of Discount Notes — The Bank hedges the rolling issuance of discount notes as a cash flow hedge. In these hedges, the Bank enters into interest rate swap agreements with unrelated swap dealers and designates the swaps as hedges of the variable quarterly interest payments on the discount note borrowing program. In this program, the Bank issues a series of discount notes with 91-day terms over periods, generally up to 15 years. The FHLBNY will continue issuing new 91-day discount notes over the terms of the swaps as each outstanding discount note matures. The interest rate swaps require a settlement every 91 days, and the variable rate, which is based on the 3-month LIBOR, is reset immediately following each payment. The swaps are expected to eliminate the risk of variability of cash flows for each forecasted discount note issuance every 91 days. The FHLBNY documents at hedge origination, and on an ongoing basis, that the forecasted issuances of discount notes are probable. The FHLBNY performs a prospective hedge effectiveness analysis at inception of the hedges, and also performs an on-going retrospective hedge effectiveness analysis at least every quarter to provide assurance that the hedges will remain highly effective. The fair values of the interest rate swaps are recorded in AOCI and ineffectiveness, if any, is measured using the “hypothetical derivative method” and recorded in earnings. The effective portion remains in AOCI. The Bank monitors the credit standing of the derivative counterparty each quarter.
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 outstanding at December 31, 2012 and 2011, in which the FHLBNY was an intermediary, was $265.0 million and $275.0 million, with offsetting purchased positions from unrelated swap dealers. 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, 2012 and 2011. Collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBNY as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBNY.
Economic Hedges
In 2012 and 2011, 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. 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 to hedge balance sheet risk, specifically interest rate risk from certain capped floating rate investment securities. (3) 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. (4) interest rate swaps executed to offset the fair value changes of bonds and discount notes designated under the FVO. These swaps in economic hedges were considered freestanding and changes in the fair values of the swaps were recorded through income.
Credit Risk
The contractual or notional amount of derivatives reflects the involvement of the FHLBNY in the various classes of financial instruments, and serves as a basis for calculating periodic interest payments or cash flow. Notional amount of a derivative does not measure the credit risk exposure, and the maximum credit exposure is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing 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.
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Notes to Financial Statements
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, 2012 and 2011, the Bank’s credit exposure, representing derivatives in a fair value net gain position, was approximately $41.9 million and $25.1 million after the recognition of any cash collateral held by the FHLBNY. The credit exposures at December 31, 2012 included $9.8 million of net interest receivable and $24.0 million in cash pledged in excess of fair value exposure. The FHLBNY’s policy is to consider excess cash pledged as a component of derivative credit exposure. The credit exposure at December 31, 2011 included $6.8 million in net interest receivable.
Derivative counterparties are also exposed to credit losses resulting from potential nonperformance risk of the FHLBNY with respect to derivative contracts. Derivative counterparties’ exposure to the FHLBNY 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, 2012 and 2011, derivatives in a net unrealized loss position, which represented the counterparties’ exposure to the potential non-performance risk of the FHLBNY, were $426.8 million and $486.2 million after deducting $2.5 billion and $2.6 billion of cash collateral posted by the FHLBNY at those dates to the exposed counterparties. The FHLBNY is also 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 as a deposit is exposed to credit risk of the defaulting counterparty. Derivative counterparties holding the FHLBNY’s cash as pledged collateral were primarily rated Triple B or better at December 31, 2012, and based on credit analyses and collateral requirements, the management of the FHLBNY does not anticipate any credit losses on its derivative agreements.
Offsetting of Derivative Assets and Derivative Liabilities
The following tables represented outstanding notional balances and estimated fair values of the derivatives outstanding at December 31, 2012 and 2011 (in thousands):
| | December 31, 2012 | |
| | Notional Amount of
Derivatives | | Derivative Assets | | Derivative Liabilities | |
| | | | | | | |
Fair value of derivative instruments (a) | | | | | | | |
Derivatives designated in hedging relationships | | | | | | | |
Interest rate swaps-fair value hedges | | $ | 76,844,534 | | $ | 925,635 | | $ | 3,753,684 | |
Interest rate swaps-cash flow hedges | | 1,106,000 | | 1,647 | | 126,426 | |
Total derivatives in hedging instruments | | 77,950,534 | | 927,282 | | 3,880,110 | |
| | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | |
Interest rate swaps | | 23,099,757 | | 27,486 | | 2,939 | |
Interest rate caps or floors | | 1,900,000 | | 4,221 | | 12 | |
Mortgage delivery commitments | | 25,217 | | 9 | | 41 | |
Other (b) | | 530,000 | | 7,534 | | 7,192 | |
Total derivatives not designated as hedging instruments | | 25,554,974 | | 39,250 | | 10,184 | |
| | | | | | | |
Total derivatives before netting and collateral adjustments | | $ | 103,505,508 | | 966,532 | | 3,890,294 | |
Netting adjustments | | | | (916,938 | ) | (916,938 | ) |
Cash collateral and related accrued interest | | | | (7,700 | ) | (2,546,568 | ) |
Total collateral and netting adjustments | | | | (924,638 | ) | (3,463,506 | ) |
| | | | | | | |
Total reported on the Statements of Condition | | | | $ | 41,894 | | $ | 426,788 | |
| | December 31, 2011 | |
| | Notional Amount of
Derivatives | | Derivative Assets | | Derivative Liabilities | |
| | | | | | | |
Fair value of derivative instruments (a) | | | | | | | |
Derivatives designated in hedging relationships | | | | | | | |
Interest rate swaps-fair value hedges | | $ | 84,502,217 | | $ | 1,124,954 | | $ | 4,074,397 | |
Interest rate swaps-cash flow hedges | | 903,000 | | — | | 97,588 | |
Total derivatives in hedging instruments | | 85,405,217 | | 1,124,954 | | 4,171,985 | |
| | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | |
Interest rate swaps | | 31,380,021 | | 13,460 | | 41,093 | |
Interest rate caps or floors | | 1,900,000 | | 14,935 | | 20 | |
Mortgage delivery commitments | | 31,242 | | 270 | | — | |
Other (b) | | 550,000 | | 9,285 | | 8,784 | |
Total derivatives not designated as hedging instruments | | 33,861,263 | | 37,950 | | 49,897 | |
| | | | | | | |
Total derivatives before netting and collateral adjustments | | $ | 119,266,480 | | 1,162,904 | | 4,221,882 | |
Netting adjustments | | | | (1,096,873 | ) | (1,096,873 | ) |
Cash collateral and related accrued interest | | | | (40,900 | ) | (2,638,843 | ) |
Total collateral and netting adjustments | | | | (1,137,773 | ) | (3,735,716 | ) |
Total reported on the Statements of Condition | | | | $ | 25,131 | | $ | 486,166 | |
(a) | All derivative assets and liabilities with swap dealers and counterparties are collateralized by cash; derivative instruments are subject to legal right of offset under master netting agreements. |
(b) | Other: Comprised of swaps intermediated for members. Notional amounts represent purchases from dealers and sales to members. |
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Notes to Financial Statements
Earnings Impact of Derivatives and Hedging Activities
The FHLBNY carries all derivative instruments on the Statements of Condition at fair value as Derivative Assets and Derivative Liabilities. If derivatives meet the hedging criteria under hedge accounting rules, including effectiveness measures, changes in fair value of the associated hedged financial instrument attributable to the risk being hedged (benchmark interest-rate risk, which is LIBOR for the FHLBNY) may also be recorded so that some or all of the unrealized fair value gains or losses recognized on the derivatives are offset by corresponding unrealized gains or losses on the associated hedged financial assets and liabilities. The net differential between fair value changes of the derivatives and the hedged items represents hedge ineffectiveness. Hedge ineffectiveness represents the amounts by which the changes in the fair value of the derivatives differ from the changes in the fair values of the hedged items or the variability in the cash flows of forecasted transactions. The net ineffectiveness from hedges that qualify under hedge accounting rules are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income. If derivatives do not qualify for the hedging criteria under hedge accounting rules, but are executed as economic hedges of financial assets or liabilities under a FHLBNY-approved hedge strategy, only the fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss) in the Statements of Income.
When the FHLBNY elects to measure certain debt under the accounting designation for FVO, the Bank will typically execute a derivative as an economic hedge of the debt. Fair value changes of the derivatives are recorded as a Net realized and unrealized gain (loss) on derivatives and hedging activities in Other income (loss). Fair value changes of the debt designated under the FVO are also recorded in Other income (loss) as an unrealized (loss) or gain from Instruments held at fair value.
Components of net gains/(losses) on derivatives and hedging activities as presented in the Statements of Income are summarized below (in thousands):
| | December 31, 2012 | |
| | Gains (Losses) on
Derivative | | Gains (Losses) on
Hedged Item | | Earnings Impact | | Effect of Derivatives on
Net Interest Income (a) | |
Derivatives designated as hedging instruments | | | | | | | | | |
Interest rate swaps | | | | | | | | | |
Advances (a) | | $ | 177,116 | | $ | (185,847 | ) | $ | (8,731 | ) | $ | (1,209,689 | ) |
Consolidated obligations-bonds | | (95,467 | ) | 110,024 | | 14,557 | | 330,862 | |
Consolidated obligations-discount notes | | 67 | | (1,467 | ) | (1,400 | ) | 1,237 | |
| | | | | | | | | |
Net gains (losses) related to fair value hedges | | 81,716 | | $ | (77,290 | ) | 4,426 | | $ | (877,590 | ) |
Cash flow hedges | | (214 | ) | | | (214 | ) | $ | (26,699 | ) |
| | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | |
Interest rate swaps | | | | | | | | | |
Advances | | 2,878 | | | | 2,878 | | | |
Consolidated obligations-bonds | | 22,874 | | | | 22,874 | | | |
Consolidated obligations-discount notes | | (6 | ) | | | (6 | ) | | |
Member intermediation | | (158 | ) | | | (158 | ) | | |
Accrued interest-swaps (b) | | (1,503 | ) | | | (1,503 | ) | | |
Accrued interest-intermediation (b) | | 184 | | | | 184 | | | |
Caps or floors | | | | | | | | | |
Advances | | (75 | ) | | | (75 | ) | | |
Balance sheet hedges | | (10,706 | ) | | | (10,706 | ) | | |
Mortgage delivery commitments | | 2,065 | | | | 2,065 | | | |
Swaps economically hedging instruments designated under FVO | | | | | | | | | |
Consolidated obligations-bonds | | 17,208 | | | | 17,208 | | | |
Consolidated obligations-discount notes | | 2,241 | | | | 2,241 | | | |
Accrued interest-swaps (b) | | 8,066 | | | | 8,066 | | | |
| | | | | | | | | |
Net gains (losses) related to derivatives not designated as hedging instruments | | 43,068 | | | | 43,068 | | | |
| | | | | | | | | |
| | $ | 124,570 | | | | $ | 47,280 | | | |
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| | December 31, 2011 | |
| | Gains (Losses) on
Derivative | | Gains (Losses) on
Hedged Item | | Earnings Impact | | Effect of Derivatives on
Net Interest Income (a) | |
| | | | | | | | | |
Derivatives designated as hedging instruments | | | | | | | | | |
Interest rate swaps | | | | | | | | | |
Advances (a) | | $ | (839,798 | ) | $ | 879,662 | | $ | 39,864 | | $ | (1,616,983 | ) |
Consolidated obligations-bonds | | 354,431 | | (356,686 | ) | (2,255 | ) | 478,647 | |
Consolidated obligations-discount notes | | (67 | ) | 1,467 | | 1,400 | | 1,088 | |
| | | | | | | | | |
Net gains (losses) related to fair value hedges | | (485,434 | ) | $ | 524,443 | | 39,009 | | $ | (1,137,248 | ) |
Cash flow hedges | | (119 | ) | | | (119 | ) | $ | (12,443 | ) |
| | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | |
Interest rate swaps | | | | | | | | | |
Advances | | 358 | | | | 358 | | | |
Consolidated obligations-bonds | | (21,706 | ) | | | (21,706 | ) | | |
Consolidated obligations-discount notes | | 6 | | | | 6 | | | |
Member intermediation | | (176 | ) | | | (176 | ) | | |
Accrued interest-swaps (b) | | 7,208 | | | | 7,208 | | | |
Accrued interest-intermediation (b) | | 187 | | | | 187 | | | |
Caps or floors | | | | | | | | | |
Advances | | (75 | ) | | | (75 | ) | | |
Balance sheet hedges | | (26,858 | ) | | | (26,858 | ) | | |
Mortgage delivery commitments | | 3,060 | | | | 3,060 | | | |
Swaps economically hedging instruments designated under FVO | | | | | | | | | |
Consolidated obligations-bonds | | (6,573 | ) | | | (6,573 | ) | | |
Consolidated obligations-discount notes | | (1,850 | ) | | | (1,850 | ) | | |
Accrued interest-swaps (b) | | 24,220 | | | | 24,220 | | | |
| | | | | | | | | |
Net gains (losses) related to derivatives not designated as hedging instruments | | (22,199 | ) | | | (22,199 | ) | | |
| | | | | | | | | |
| | $ | (507,752 | ) | | | $ | 16,691 | | | |
| | December 31, 2010 | |
| | Gains (Losses) on
Derivative | | Gains (Losses) on
Hedged Item | | Earnings Impact | | Effect of Derivatives on
Net Interest Income (a) | |
| | | | | | | | | |
Derivatives designated as hedging instruments | | | | | | | | | |
Interest rate swaps | | | | | | | | | |
Advances (a) | | $ | (701,008 | ) | $ | 702,474 | | $ | 1,466 | | $ | (1,999,711 | ) |
Consolidated obligations-bonds | | 61,202 | | (52,058 | ) | 9,144 | | 627,004 | |
| | | | | | | | | |
Net gains (losses) related to fair value hedges | | (639,806 | ) | $ | 650,416 | | 10,610 | | $ | (1,372,707 | ) |
| | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | |
Interest rate swaps | | | | | | | | | |
Advances | | (1,693 | ) | | | (1,693 | ) | | |
Consolidated obligations-bonds | | (32,316 | ) | | | (32,316 | ) | | |
Consolidated obligations-discount notes | | (4,332 | ) | | | (4,332 | ) | | |
Member intermediation | | 307 | | | | 307 | | | |
Balance sheet hedges | | 173 | | | | 173 | | | |
Accrued interest-swaps (b) | | 51,468 | | | | 51,468 | | | |
Accrued interest-intermediation (b) | | 138 | | | | 138 | | | |
Caps or floors | | | | | | | | | |
Advances | | (437 | ) | | | (437 | ) | | |
Balance sheet hedges | | (29,709 | ) | | | (29,709 | ) | | |
Accrued interest-options (b) | | (2,598 | ) | | | (2,598 | ) | | |
Mortgage delivery commitments | | (24 | ) | | | (24 | ) | | |
Swaps economically hedging instruments designated under FVO | | | | | | | | | |
Consolidated obligations-bonds | | 2,127 | | | | 2,127 | | | |
Consolidated obligations-discount notes | | 1,282 | | | | 1,282 | | | |
Accrued interest-swaps (b) | | 29,986 | | | | 29,986 | | | |
| | | | | | | | | |
Net gains (losses) related to derivatives not designated as hedging instruments | | 14,372 | | | | 14,372 | | | |
| | | | | | | | | |
| | $ | (625,434 | ) | | | $ | 24,982 | | | |
(a) | See Change in Accounting Principles in Note 1. Significant Accounting Policies and Estimates. Reported amortization expenses of fair value basis of hedged advance that were modified have been reclassified in 2011 and 2010 to conform to the classification adopted in 2012. Previously, the amortization expenses were a charge to Interest income from advances. The preferred reporting policy adopted in 2012 is to record the expense as a Net realized and unrealized gains (losses) on derivatives and hedging activities. |
(b) | Represents interest expense and income generated from hedge qualifying interest-rate swaps that were recorded with interest income on the hedged advances, and interest expense on hedged Consolidated obligation bonds and discount notes. Also includes amortization as described in footnote (a) above. |
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Cash Flow Hedges
The effect of interest rate swaps in cash flow hedging relationships was as follows (in thousands):
| | December 31, 2012 | |
| | AOCI | |
| | Gains/(Losses) | |
| | Recognized in
AOCI (c), (d) | | Location:
Reclassified to
Earnings (c) | | Amount
Reclassified to
Earnings (c) | | Ineffectiveness
Recognized in
Earnings | |
| | | | | | | | | |
Consolidated obligations-bonds (a) | | $ | (2,095 | ) | Interest Expense | | $ | 4,156 | | $ | (214 | ) |
Consolidated obligations-discount notes (b) | | (27,190 | ) | Interest Expense | | — | | — | |
| | $ | (29,285 | ) | | | $ | 4,156 | | $ | (214 | ) |
| | December 31, 2011 | |
| | AOCI | |
| | Gains/(Losses) | |
| | Recognized in
AOCI (c), (d) | | Location:
Reclassified to
Earnings (c) | | Amount
Reclassified to
Earnings (c) | | Ineffectiveness
Recognized in
Earnings | |
| | | | | | | | | |
Consolidated obligations-bonds (a) | | $ | (2,292 | ) | Interest Expense | | $ | 3,091 | | $ | (119 | ) |
Consolidated obligations-discount notes (b) | | (97,588 | ) | Interest Expense | | — | | — | |
| | $ | (99,880 | ) | | | $ | 3,091 | | $ | (119 | ) |
| | December 31, 2010 | |
| | AOCI | |
| | Gains/(Losses) | |
| | Recognized in
AOCI (c), (d) | | Location:
Reclassified to
Earnings (c) | | Amount
Reclassified to
Earnings (c) | | Ineffectiveness
Recognized in
Earnings | |
| | | | | | | | | |
Consolidated obligations-bonds (a) | | $ | (249 | ) | Interest Expense | | $ | 7,736 | | $ | — | |
| | $ | (249 | ) | | | $ | 7,736 | | $ | — | |
(a) | Hedges of anticipated issuance of debt - The maximum period of time that the Bank typically hedges its exposure to the variability in future cash flows for forecasted transactions in this program is between three and nine months. There were no open contracts at December 31, 2012 and 2011. The amounts in AOCI from “closed” cash flow hedges representing net unrecognized losses were $12.3 million and $14.4 million at December 31, 2012 and December 31, 2011. At December 31, 2012, it is expected that over the next 12 months about $3.2 million of net losses recorded in AOCI will be recognized as a yield adjustment (expense) to consolidated bond interest expense. |
(b) | Hedges of discount notes in rolling issuances — At December 31, 2012 and 2011, $1.1 billion and $903.0 million of notional amounts of the interest rate swaps were outstanding under this program, and $124.8 million and $97.6 million in unrealized fair values losses were recorded in AOCI at December 31, 2012 and 2011. The cash flow hedges mitigated exposure to the variability in future cash flows for a maximum period of 15 years. |
(c) | Effective portion was recorded in AOCI. Ineffectiveness was immaterial and was recorded within Net income. |
(d) | Represents unrecognized loss from cash flow hedges recorded in AOCI. |
There were no material amounts 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.
Note 17. Fair Values of Financial Instruments.
The fair value amounts recorded on the Statement of Condition or presented in the note disclosures have been determined by the FHLBNY using available market information and best judgment of appropriate valuation methods. These values 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 and liabilities.
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Estimated Fair Values — Summary Tables
The carrying values, estimated fair values and the levels within the fair value hierarchy were as follows (in thousands):
| | December 31, 2012 | |
| | | | Estimated Fair Value | |
Financial Instruments | | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 (a) | | Netting
Adjustment and
Cash Collateral | |
Assets | | | | | | | | | | | | | |
Cash and due from banks | | $ | 7,553,188 | | $ | 7,553,188 | | $ | 7,553,188 | | $ | — | | $ | — | | $ | — | |
Federal funds sold | | 4,091,000 | | 4,091,010 | | — | | 4,091,010 | | — | | — | |
Available-for-sale-securities | | 2,308,774 | | 2,308,774 | | 9,633 | | 2,299,141 | | — | | — | |
Held-to-maturity securities | | 11,058,764 | | 11,456,556 | | — | | 10,202,124 | | 1,254,432 | | — | |
Advances | | 75,888,001 | | 75,880,070 | | — | | 75,880,070 | | — | | — | |
Mortgage loans held-for-portfolio, net | | 1,842,816 | | 1,931,437 | | — | | 1,931,437 | | — | | — | |
Accrued interest receivable | | 179,044 | | 179,044 | | — | | 179,044 | | — | | — | |
Derivative assets | | 41,894 | | 41,894 | | — | | 966,532 | | — | | (924,638 | ) |
Other financial assets | | 533 | | 533 | | — | | 364 | | 169 | | — | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Deposits | | 2,054,511 | | 2,054,523 | | — | | 2,054,523 | | — | | — | |
Consolidated obligations | | | | | | | | | | | | | |
Bonds | | 64,784,321 | | 64,942,869 | | — | | 64,942,869 | | — | | — | |
Discount notes | | 29,779,947 | | 29,781,720 | | — | | 29,781,720 | | — | | — | |
Mandatorily redeemable capital stock | | 23,143 | | 23,143 | | 23,143 | | — | | — | | — | |
Accrued interest payable | | 127,664 | | 127,664 | | — | | 127,664 | | — | | — | |
Derivative liabilities | | 426,788 | | 426,788 | | — | | 3,890,295 | | — | | (3,463,507 | ) |
Other financial liabilities | | 85,079 | | 85,079 | | 85,079 | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2011 | |
| | Carrying | | Estimated | |
Financial Instruments | | Value | | Fair Value | |
Assets | | | | | |
Cash and due from banks | | $ | 10,877,790 | | $ | 10,877,790 | |
Federal funds sold | | 970,000 | | 971,233 | |
Available-for-sale securities | | 3,142,636 | | 3,142,636 | |
Held-to-maturity securities | | 10,123,805 | | 10,348,374 | |
Advances | | 70,863,777 | | 71,025,990 | |
Mortgage loans held-for-portfolio, net | | 1,408,460 | | 1,490,639 | |
Accrued interest receivable | | 223,848 | | 223,848 | |
Derivative assets | | 25,131 | | 25,131 | |
Other financial assets | | 1,544 | | 1,544 | |
| | | | | |
Liabilities | | | | | |
Deposits | | 2,101,048 | | 2,101,056 | |
Consolidated obligations | | | | | |
Bonds | | 67,440,522 | | 67,697,074 | |
Discount notes | | 22,123,325 | | 22,126,093 | |
Mandatorily redeemable capital stock | | 54,827 | | 54,827 | |
Accrued interest payable | | 146,247 | | 146,247 | |
Derivative liabilities | | 486,166 | | 486,166 | |
Other financial liabilities | | 79,749 | | 79,749 | |
| | | | | | | |
(a) Level 3 Instruments — The fair values of private-label MBS and housing finance agency bonds were estimated by management based on pricing services. Valuations may have required pricing services to use significant inputs that were subjective because of the current lack of significant market activity so that the inputs may not be market based and observable.
Fair Value Hierarchy
The FHLBNY records available-for-sale securities, derivative assets, derivative liabilities, certain consolidated obligations and advances elected under the FVO, and certain other liabilities at fair value on a recurring basis. On a non-recurring basis, certain held-to-maturity securities determined to be OTTI are also measured and recorded at their fair values. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability. An entity must disclose the level within the fair value hierarchy in which the measurements are classified for all assets and liabilities measured on a recurring or non-recurring basis.
The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
· Level 1 Inputs — Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.
· Level 2 Inputs — Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2
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input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and volatilities).
· Level 3 Inputs — Unobservable inputs for the asset or liability.
The FHLBNY reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no such transfers in 2012 and 2011.
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.
Summary of Valuation Techniques and Primary Inputs
The fair value of a financial instrument that is an asset is defined as the price the FHLBNY would receive to sell the asset in an orderly transaction with market participants. A financial liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair values are based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices are not available, valuation models and inputs are utilized. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or markets and the instruments’ complexity.
Because an active secondary market does not exist for a portion of the FHLBNY’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. The fair values of financial assets and liabilities reported in the tables above are discussed below.
Cash and Due from Banks — The estimated fair value approximates the recorded book balance.
Interest-bearing Deposits, Federal Funds Sold, and Securities purchased under agreements to resell — The FHLBNY determines estimated fair values of certain short-term investments by calculating the present value of expected future cash flows from the investments, a methodology also referred to as the Income approach under the Fair value measurement standards. The discount rates used in these calculations are the current coupons of investments with similar terms. Inputs into the cash flow models employed by the Bank are the yields on the instruments and are market based and observable and are considered to be within Level 2 of the fair value hierarchy.
Investment Securities — The fair value of investment securities is estimated by the FHLBNY using information primarily from pricing services. This methodology is also referred to as the Market approach under the Fair value measurement standards. 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.
Mortgage-backed securities — The FHLBNY’s valuation technique incorporates prices from up to four designated third-party pricing services, when available. The FHLBNY’s base investment pricing methodology establishes a median price for each security using a formula that is based on the number of prices received. If four prices are received from the four pricing vendors, the average of the two middle prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used subject to further validation. Vendor prices that are outside of a defined tolerance threshold of the median price are identified as outliers and subject to additional review, including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates, or use of internal model prices, which are deemed to be reflective of all relevant facts and circumstances that a market participant would consider. Such analysis is also applied in those limited instances where no third-party vendor price or only one third-party vendor price is available in order to arrive at an estimated fair value. If the analysis confirms that an outlier is not representative of fair value and that the average of the vendor prices within the tolerance threshold of the median price is the best estimate, then the average of the vendor prices within the tolerance threshold of the median price is used as the final price. If, on the other hand, an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price. In all cases, the final price is used to determine the fair value of the security.
Effective December 31, 2011, the FHLBNY refined its method for estimating the fair values for its investment securities, and provides an additional level of analysis through pre-defined cluster tolerances, and examination of outliers in a manner that has further strengthened the FHLBNY’s investment valuation process. The methodology introduced the concept of clustering pricing, and to predefine cluster tolerances. An outlier, under the methodology,
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is any vendor price that is outside of a defined cluster tolerance. The outlier is evaluated for reasonableness. Once the median prices are computed from the four pricing vendors, the second step is to determine which of the sourced prices fall within the required tolerance level interval to the median price, which forms the “cluster” of prices to be averaged. This average will determine a “default” price for the security. To be included among the cluster, each price must fall within 10 points of the median price for residential PLMBS and within 3 points of the median price for GSE issued MBS. The cluster tolerance guidelines shall be reviewed annually and may be revised as necessary. The final step is to determine the final price of the security based on the cluster average and an evaluation of any outlier prices. If all prices fall within the cluster, the final price is simply the average of the cluster. However, if a price falls outside the cluster, additional analysis is required. If the price that falls outside the cluster tolerance is found to be a better estimate of the fair value, then the selected outlier price will be the final price instead of the average of prices that fit within the appropriate tolerance range.
The FHLBNY has also established that the pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. To validate vendor prices of PLMBS, the FHLBNY has also adopted a formal process to examine yields as an additional validation method. The FHLBNY calculates an implied yield for each of its PLMBS using estimated fair values derived from cash flows on a bond-by-bond basis. This yield is then compared to the implied yield for comparable securities according to price information from third-party MBS “market surveillance reports”. Significant variances or inconsistencies are evaluated in conjunction with all of the other available pricing information. The objective is to determine whether an adjustment to the fair value estimate is appropriate. The FHLBNY’s pre-existing methodology also examined price changes that exceeded a pre-established tolerance and price changes relative to changes in the option-adjusted spread (“OAS”).
An independent team also reviews pricing by putting like securities into cohorts and tracking outliers and the review is performed for all mortgage-backed securities and state and local housing finance agency bonds.
The methodologies adopted at December 31, 2011, have enhanced the FHLBNY’s pre-existing price validation processes and provide a greater degree of reliance on the recorded fair values of the FHLBNY’s investments.
The FHLBNY believes such methodologies — valuation comparison, review of changes in valuation parameters, and credit analysis have been designed to identify the effects of the credit crisis, which has tended to reduce the availability of certain observable market pricing or has caused the widening of the bid/offer spread of certain securities. As of December 31, 2012, four vendor prices were received for a very significant percentage of the FHLBNY’s MBS holdings. The remaining MBS were priced utilizing three vendor prices or less. Substantially all vendor prices fell within specified thresholds, and the relative proximity of the prices received supported the FHLBNY’s conclusion that the final computed prices were reasonable estimates of fair values. Based on the FHLBNY’s review processes, management has concluded that inputs into the pricing models employed by pricing services for the Bank’s investments in GSE securities are market based and observable and are considered to be within Level 2 of the fair value hierarchy.
The valuation of the FHLBNY’s private-label securities, all designated as held-to-maturity, may require pricing services to use significant inputs that are subjective and are considered to be within Level 3 of the fair value hierarchy. This determination was made based on management’s view that the private-label instruments may not have an active market because of the specific vintage of the securities as well as inherent conditions surrounding the trading of private-label MBS, so that the inputs may not be market based and observable. At December 31, 2012 and 2011, certain held-to-maturity private-label MBS were deemed OTTI and were written down to their fair values, so that their carrying values recorded in the balance sheet equaled their fair values, which were classified on a nonrecurring basis as Level 3 financial instruments under the valuation hierarchy.
Housing finance agency bonds - The fair value of housing finance agency bonds is estimated by management using information primarily from pricing services. Because of the current lack of significant market activity, their fair values were categorized within Level 3 of the fair value hierarchy as inputs into vendor pricing models may not be market based and observable.
Consolidated Obligations — The FHLBNY estimates the fair values of consolidated obligations based on the present values of expected future cash flows due on the debt obligations. Calculations are performed by using the FHLBNY’s industry standard option adjusted valuation models. Inputs are based on the cost of raising comparable term debt.
The FHLBNY’s internal valuation models use standard valuation techniques and estimate fair values based on the following inputs:
· CO Curve and LIBOR Swap Curve. The Office of Finance constructs an internal curve, referred to as the CO Curve, using the U.S. Treasury Curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades and secondary market activity. The FHLBNY considers the inputs as Level 2 inputs as they are market observable.
· Volatility assumption. To estimate the fair values of consolidated obligations with optionality, the FHLBNY uses market-based expectations of future interest rate volatility implied from current market prices for similar options. These inputs are also considered Level 2 as they are market based and observable.
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The FHLBNY has elected the FVO designation for certain consolidated obligation debt and recorded their fair values in the Statements of Conditions. The CO Curve and volatility assumptions (for debt with call options) were primary inputs, which are market based and observable. Fair values were classified within Level 2 of the valuation hierarchy.
The fair values of consolidated obligation debt, as disclosed in the Estimated Fair Values- Summary Tables in this Note were computed using the CO curve and volatility assumptions (for debt with call options) and were classified within Level 2 of the valuation hierarchy.
Advances — The fair values of advances are computed using standard option valuation models. The most significant inputs to the valuation model are (1) consolidated obligation debt curve (the “CO Curve”), published by the Office of Finance and available to the public, and (2) LIBOR swap curves and volatilities. The Bank considers both these inputs to be market based and observable as they can be directly corroborated by market participants.
The FHLBNY determines the fair values of its advances by calculating the present value of expected future cash flows from the advances, a methodology also referred to as the Income approach under the Fair value measurement standards. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. In accordance with the Finance Agency’s advances regulations, an advance with a maturity or repricing period greater than six months requires a prepayment fee sufficient to make a FHLBank financially indifferent to the borrower’s decision to prepay the advance. Therefore, the fair value of an advance does not assume prepayment risk.
The inputs used to determine fair value of advances are as follows:
· CO Curve. The FHLBNY uses the CO Curve, which represents its cost of funds, as an input to estimate the fair value of advances, and to determine current advance rates. This input is considered market observable and therefore a Level 2 input.
· Volatility assumption. To estimate the fair value of advances with optionality, the FHLBNY uses market-based expectations of future interest rate volatility implied from current market prices for similar options. This input is considered a Level 2 input as it is market based and market observable.
· Spread adjustment. Adjustments represent the FHLBNY’s mark-up based on its pricing strategy. The input is considered as unobservable, and is classified as a Level 3 input. The spread adjustment is not a significant input to the overall fair value of an advance.
The FHLBNY creates an internal curve, which is interpolated from its advance rates. Advance rates are calculated by applying a spread to an underlying “base curve” derived from the FHLBNY’s cost of funds, which is based on the CO Curve. The CO Curve inputs have been determined to be market observable and classified as Level 2. The spreads applied to the base curve, which typically represent the FHLBNY’s mark-ups over the FHLBNY’s cost of funds, are not market observable inputs, but rather are based on the FHLBNY’s advance pricing strategy, and such inputs have been classified as a Level 3. For the FHLBNY, Level 3 inputs were considered not significant.
To determine the appropriate classification of the overall measurement in the fair value hierarchy of an advance, an analysis of the inputs to the entire fair value measurement was performed at December 31, 2012. If the unobservable spread to the FHLBNY’s cost of funds was not significant to the overall fair value, then the measurement was classified as Level 2. Conversely, if the unobservable spread was significant to the overall fair value, then the measurement would be classified as Level 3. The impact of the unobservable input was calculated as the difference in the value determined by discounting an advance’s cash flows using the FHLBNY’s advance curve and the value determined by discounting an advance’s cash flows using the FHLBNY’s cost of funds curve. Given the relatively small mark-ups over the FHLBNY’s cost of funds, the results of the FHLBNY’s quantitative analysis confirmed the FHLBNY’s expectations that the measurement of the FHLBNY’s advances was Level 2. The unobservable mark-up spreads were not significant to the overall fair value of the instrument. A quantitative threshold for significance factor was established at 10 percent, with additional qualitative factors to be considered if the ratio exceeded the threshold.
The FHLBNY has elected the FVO designation for certain advances and recorded their fair values in the Statements of Conditions. The CO Curve was the primary input, which is market based and observable. Inputs to apply spreads, which are FHLBNY specific, were not material. Fair values were classified within Level 2 of the valuation hierarchy.
The fair values of advances, as disclosed in the Estimated Fair Values- Summary Tables in this Note were also computed using the CO curve, volatility assumptions (for advances with call or put options) and were classified within Level 2 of the valuation hierarchy.
Mortgage Loans (MPF Loans)
A. Principal and/or Most Advantageous Market and Market Participants
The FHLBNY may sell mortgage loans to another FHLBank or in the secondary mortgage market. Because transactions between FHLBanks occur infrequently, the FHLBNY has identified the secondary mortgage market as the principal market for mortgage loans under the MPF programs. Also, based on the nature of the supporting collateral to the MPF loans held by FHLBNY, the presentation of a single class for all products within the MPF product types is considered appropriate. As described below, the FHLBNY believe that the market participants
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within the secondary mortgage market for the MPF portfolio would differ primarily whether qualifying or non-qualifying loans are being sold.
Qualifying Loans — The FHLBNY believes that a market participant is an entity that would buy qualifying mortgage loans for the purpose of securitization and subsequent resale as a security. Other government-sponsored enterprises (GSEs), specifically Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), conduct the majority of such activity in the United States, but there are other commercial banks and financial institutions that periodically conduct business in this market. Therefore, the FHLBNY has identified market participants for qualifying loans to include (1) all GSEs, and (2) other commercial banks and financial institutions that are independent of the FHLBank System.
Non-qualifying Loans — For the FHLBNY, non-qualifying loans are primarily impaired loans. The FHLBNY believes that it is unlikely the GSE market participants would willingly buy loans that did not meet their normal criteria or underwriting standards. However, a market exists with commercial banks and financial institutions other than GSEs where such market participants buy non-qualifying loans in order to securitize them as they become current, resell them in the secondary market, or hold them in their portfolios. Therefore, the FHLBNY has identified the market participants for non-qualifying loans to include other commercial banks and financial institutions that are independent of the FHLBank System.
B. Fair Value at Initial Recognition — MPF Loans
The FHLBNY believes that the transaction price (entry price) may differ from the fair value (exit price) at initial recognition because it is determined using a different method than subsequent fair value measurements. However, because mortgage loans are not measured at fair value in the balance sheet, day one gains and losses would not be applicable. Additionally, all mortgage loans are performing at the time of origination.
The FHLBNY receives an entry price from the FHLBank of Chicago, the MPF Provider, at the time of acquisition. This entry price is based on the TBA rates, as well as exit prices received from market participants, such as Fannie Mae and Freddie Mac. The price is adjusted for specific MPF program characteristics and may be further adjusted by a FHLBank to accommodate changing market conditions. Because of the adjustments, in many cases, the entry price would not equal the exit price at the time of acquisition.
C. Valuation Technique, Inputs and Hierarchy
The FHLBNY calculates the fair value of the entire mortgage loan portfolio 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. The fair values are based on TBA rates (or agency commitment rates), as discussed above, adjusted primarily for seasonality. The fair values of impaired MPF are also based on TBA rates and are adjusted for a haircut value on the underlying collateral value. The FHLBNY validates the impairment adjustment made to TBA rates by “back-testing” against incurred losses.
TBA and agency commitment rates are market observable and therefore classified as Level 2 in the fair value hierarchy. Any inputs derived from observable market data also result in a Level 2 classification. Any inputs based on unobservable assumptions would be classified as Level 3 inputs. Since most of the FHLBNY mortgage loans are currently performing and no credit losses are expected, any Level 3 inputs are generally insignificant to the total measurement and therefore the measurement of most loans may be classified as Level 2 in the fair value hierarchy. However, many of the credit and default risk related inputs involved with the valuation techniques described above may be considered unobservable due to variety of reasons (e.g., lack of market activity for a particular loan, inherent judgment involved in property estimates). If unobservable inputs are considered significant, the loans would be classified as Level 3 in the fair value hierarchy. Therefore, loans with expected credit losses may result in Level 2 or Level 3 classifications depending upon the significance of unobservable inputs used.
Accrued Interest Receivable and Other Assets — 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 the fair values of interest rate swaps. The valuation technique is considered as an “Income approach”. Interest rate caps and floors are valued under the “Market approach”. Interest rate swaps and interest rate caps and floors, collectively “derivatives”, were valued in industry-standard option adjusted valuation models, which generated fair values. The valuation models employed multiple market inputs including interest rates, prices and indices to create continuous yield or pricing curves and volatility factors. These multiple market inputs were corroborated by management to independent market data, and to relevant benchmark indices. In addition, derivative valuations were compared by management to counterparty valuations received as part of the collateral exchange process.
These derivative positions were classified within Level 2 of the valuation hierarchy at December 31, 2012 and 2011.
The Bank’s valuation model utilizes a modified Black-Karasinski model that assumes that rates are distributed log normally. The log-normal model precludes interest rates turning negative in the model computations. Significant market based and observable inputs into the valuation model include volatilities and interest rates. The Bank’s valuation model employs industry standard market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative were as follows:
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Interest-rate related:
· LIBOR Swap Curve.
· Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.
· Prepayment assumption (if applicable).
· Federal funds curve (OIS curve).
Mortgage delivery commitments (considered a derivative):
· TBA security prices are adjusted for differences in coupon, average loan rate and seasoning.
OIS adoption — On December 31, 2012, the FHLBNY began incorporating overnight indexed swap (“OIS”) curves as fair value measurement inputs for the valuation of its derivatives, as the OIS curves reflect the interest rates paid on cash collateral provided against the fair value of these derivatives. The FHLBNY believes using relevant OIS curves as inputs to determine fair value measurements provides a more representative reflection of the fair values of these collateralized interest-rate related derivatives. The OIS curve (Federal funds curve) was an additional input incorporated into the valuation model. The federal funds curve is observable over its entire term structure and is considered to be a Level 2 input. The FHLBNY’s valuation model utilizes industry standard OIS methodology, and beginning with December 31, 2012, the model generates forecasted cash flows using the OIS calibrated 3-month LIBOR curve. The model then discounts the cash flows by the OIS curve to generate fair values. Previously, the FHLBNY used the 3-month London Interbank Offered Rate (“LIBOR”) curve as the relevant benchmark curve for its derivative and as the discount rate for these collateralized interest-rate related derivatives. The impact of the adoption of OIS on the FHLBNY’s financial position, results of operations and cash flows was not material.
Credit risk — The FHLBNY is subject to credit risk in derivatives transactions due to the potential nonperformance of its derivatives counterparties, which are generally highly rated institutions. To mitigate this risk, the FHLBNY has entered into master netting agreements with its derivative counterparties. To further limit the FHLBNY’s net unsecured credit exposure to those counterparties, the FHLBNY has entered into bilateral security agreements with all of its derivatives counterparties that provide for the delivery of collateral at specified levels. The FHLBNY has evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and its own credit risk and has determined that no adjustments were significant to the overall fair value measurements. Additional information about credit risk associated with derivative transactions is provided in Note 16. Derivatives and Hedging Activities.
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 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, 2012 and 2011.
Control processes — 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.
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.
Mandatorily Redeemable Capital Stock — The fair value of capital stock subject to mandatory redemption is generally equal to its par value as indicated by contemporaneous member purchases and sales at par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently declared dividend. FHLBank stock can only be acquired and redeemed at par value. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the FHLBank System’s cooperative structure.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Accrued Interest Payable and Other Liabilities — The estimated fair values approximate the recorded book value because of the relatively short period of time between their origination and expected realization.
Fair Value Measurement
The tables below present the fair value of those assets and liabilities that are recorded at fair value on a recurring or nonrecurring basis at December 31, 2012 and 2011, by level within the fair value hierarchy. The FHLBNY measures certain held-to-maturity securities and mortgage loans at fair value on a non-recurring basis due to the recognition of a credit loss. Real estate owned is measured at fair value when the asset’s fair value less costs to sell is lower than its carrying amount.
Items Measured at Fair Value on a Recurring Basis (in thousands)
| | December 31, 2012 | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Netting
Adjustment and Cash
Collateral | |
Assets | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | |
GSE/U.S. agency issued MBS | | $ | 2,299,141 | | $ | — | | $ | 2,299,141 | | $ | — | | $ | — | |
Equity and bond funds | | 9,633 | | 9,633 | | — | | — | | — | |
Advances (to the extent FVO is elected) | | 500,502 | | — | | 500,502 | | — | | — | |
Derivative assets(a) | | | | | | | | | | | |
Interest-rate derivatives | | 41,885 | | — | | 966,523 | | — | | (924,638 | ) |
Mortgage delivery commitments | | 9 | | — | | 9 | | — | | — | |
| | | | | | | | | | | |
Total recurring fair value measurement - assets | | $ | 2,851,170 | | $ | 9,633 | | $ | 3,766,175 | | $ | — | | $ | (924,638 | ) |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Consolidated obligations: | | | | | | | | | | | |
Discount notes (to the extent FVO is elected) | | $ | (1,948,987 | ) | $ | — | | $ | (1,948,987 | ) | $ | — | | $ | — | |
Bonds (to the extent FVO is elected) (b) | | (12,740,883 | ) | — | | (12,740,883 | ) | — | | — | |
Derivative liabilities(a) | | | | | | | | | | | |
Interest-rate derivatives | | (426,747 | ) | — | | (3,890,254 | ) | — | | 3,463,507 | |
Mortgage delivery commitments | | (41 | ) | — | | (41 | ) | — | | — | |
| | | | | | | | | | | |
Total recurring fair value measurement - liabilities | | $ | (15,116,658 | ) | $ | — | | $ | (18,580,165 | ) | $ | — | | $ | 3,463,507 | |
| | December 31, 2011 | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Netting
Adjustment and Cash
Collateral | |
Assets | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | |
GSE/U.S. agency issued MBS | | $ | 3,133,469 | | $ | — | | $ | 3,133,469 | | $ | — | | $ | — | |
Equity and bond funds | | 9,167 | | 9,167 | | — | | — | | — | |
Derivative assets(a) | | | | | | | | | | | |
Interest-rate derivatives | | 24,861 | | — | | 1,162,634 | | — | | (1,137,773 | ) |
Mortgage delivery commitments | | 270 | | — | | 270 | | — | | — | |
| | | | | | | | | | | |
Total recurring fair value measurement - assets | | $ | 3,167,767 | | $ | 9,167 | | $ | 4,296,373 | | $ | — | | $ | (1,137,773 | ) |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Consolidated obligations: | | | | | | | | | | | |
Discount notes (to the extent FVO is elected) | | $ | (4,920,855 | ) | $ | — | | $ | (4,920,855 | ) | $ | — | | $ | — | |
Bonds (to the extent FVO is elected) (b) | | (12,542,603 | ) | — | | (12,542,603 | ) | — | | — | |
Derivative liabilities(a) | | | | | | | | | | | |
Interest-rate derivatives | | (486,166 | ) | — | | (4,221,882 | ) | — | | 3,735,716 | |
| | | | | | | | | | | |
Total recurring fair value measurement - liabilities | | $ | (17,949,624 | ) | $ | — | | $ | (21,685,340 | ) | $ | — | | $ | 3,735,716 | |
(a) | Based on analysis of the nature of the risk, the presentation of derivatives as a single class is appropriate. |
(b) | Based on analysis of the nature of risks of consolidated obligation bonds measured at fair value, the FHLBNY has determined that presenting the bonds as a single class is appropriate. |
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Federal Home Loan Bank of New York
Notes to Financial Statements
Items Measured at Fair Value on a Nonrecurring Basis (in thousands)
Fair values of Held-to-Maturity Securities on a Nonrecurring Basis — Certain held-to-maturity investment securities were 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, held-to-maturity mortgage-backed securities that were determined to be credit impaired at December 31, 2012 and 2011, were recorded at their fair values in the Statements of Condition at those dates. For more information, see Note 5. Held-to-Maturity Securities.
| | December 31, 2012 | |
| | Fair Value (a) | | Level 1 | | Level 2 | | Level 3 (b) | |
| | | | | | | | | |
Held-to-maturity securities | | | | | | | | | |
RMBS-Prime | | $ | 7,045 | | $ | — | | $ | — | | $ | 7,045 | |
Total non-recurring assets at fair value | | $ | 7,045 | | $ | — | | $ | — | | $ | 7,045 | |
| | December 31, 2011 | |
| | Fair Value (a) | | Level 1 | | Level 2 | | Level 3 (b) | |
Held-to-maturity securities | | | | | | | | | |
RMBS-Prime | | $ | 14,609 | | $ | — | | $ | — | | $ | 14,609 | |
Home equity loans | | 5,669 | | — | | — | | 5,669 | |
Total non-recurring assets at fair value | | $ | 20,278 | | $ | — | | $ | — | | $ | 20,278 | |
(a) Fair values were developed by pricing vendors and reviewed by the FHLBNY. Our review methodology is summarized in this note under “Summary of Valuation Techniques and Primary Inputs.”
(b) Level 3 Instruments — The fair values of private-label MBS determined OTTI at December 31, 2012 (and all private-label MBS) were based on pricing services. In management’s view, valuations may have required pricing services to use significant inputs that were subjective because of the current lack of significant market activity so that the inputs may not be market based and observable.
Fair Value Option Disclosures
The following table summarizes the activity related to financial instruments for which the Bank elected the fair value option (in thousands):
| | Years ended December 31, | |
| | 2012 | | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 | |
| | Advances (a) | | Bonds | | Discount Notes | |
| | | | | | | | | | | | | | | |
Balance, beginning of the period | | $ | — | | $ | (12,542,603 | ) | $ | (14,281,463 | ) | $ | (6,035,741 | ) | $ | (4,920,855 | ) | $ | (956,338 | ) | $ | — | |
New transactions elected for fair value option | | 500,000 | | (18,793,000 | ) | (26,395,000 | ) | (25,471,000 | ) | (2,145,618 | ) | (4,917,172 | ) | (1,851,991 | ) |
Maturities and terminations | | — | | 18,595,000 | | 28,141,000 | | 17,235,000 | | 5,117,046 | | 953,202 | | 898,788 | |
Net gains (losses) on financial instruments held under fair value option | | 388 | | (133 | ) | (10,376 | ) | (2,556 | ) | — | | (118 | ) | (787 | ) |
Change in accrued interest/unaccreted balance | | 114 | | (147 | ) | 3,236 | | (7,166 | ) | 440 | | (429 | ) | (2,348 | ) |
| | | | | | | | | | | | | | | |
Balance, end of the period | | $ | 500,502 | | $ | (12,740,883 | ) | $ | (12,542,603 | ) | $ | (14,281,463 | ) | $ | (1,948,987 | ) | $ | (4,920,855 | ) | $ | (956,338 | ) |
(a) | A floating-rate advance was designated under the FVO in the fourth quarter of 2012. No Advances were designated under the FVO at December 31, 2011 or 2010. |
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Federal Home Loan Bank of New York
Notes to Financial Statements
The following tables present the change in fair value included in the Statements of Income for financial instruments for which the fair value option has been elected (in thousands):
| | December 31, 2012 | |
| | Interest Income | | Net Gains Due to
Changes in Fair
Value | | Total Change in Fair
Value Included in Current
Period Earnings | |
| | | | | | | |
Advances (a) | | $ | 114 | | $ | 388 | | $ | 502 | |
| | | | | | | | | | |
(a) | A floating-rate advance was designated under the FVO in the fourth quarter of 2012. No Advances were designated under the FVO at December 31, 2011 or 2010. |
| | December 31, 2012 | |
| | Interest Expense | | Net Losses Due to
Changes in Fair
Value | | Total Change in Fair
Value Included in Current
Period Earnings | |
| | | | | | | |
Consolidated obligations-bonds | | $ | (31,883 | ) | $ | (133 | ) | $ | (32,016 | ) |
Consolidated obligations-discount notes | | (3,453 | ) | — | | (3,452 | ) |
| | | | | | | |
| | $ | (35,336 | ) | $ | (133 | ) | $ | (35,468 | ) |
| | December 31, 2011 | |
| | Interest Expense | | Net Losses Due to
Changes in Fair
Value | | Total Change in Fair
Value Included in Current
Period Earnings | |
| | | | | | | |
Consolidated obligations-bonds | | $ | (37,522 | ) | $ | (10,376 | ) | $ | (47,898 | ) |
Consolidated obligations-discount notes | | (4,308 | ) | (118 | ) | (4,426 | ) |
| | | | | | | |
| | $ | (41,830 | ) | $ | (10,494 | ) | $ | (52,324 | ) |
| | December 31, 2010 | |
| | Interest Expense | | Net Losses Due to
Changes in Fair Value | | Total Change in Fair
Value Included in Current
Period Earnings | |
| | | | | | | |
Consolidated obligations-bonds | | $ | (40,983 | ) | $ | (2,556 | ) | $ | (43,539 | ) |
Consolidated obligations-discount notes | | (2,348 | ) | (787 | ) | (3,135 | ) |
| | | | | | | |
| | $ | (43,331 | ) | $ | (3,343 | ) | $ | (46,674 | ) |
The following table compares the aggregate fair value and aggregate remaining contractual principal balance outstanding of financial instruments for which the fair value option has been elected (in thousands):
| | December 31, 2012 | |
| | Aggregate Unpaid
Principal Balance | | Aggregate Fair
Value | | Fair Value
Over/(Under)
Aggregate Unpaid
Principal Balance | |
| | | | | | | |
Advances (a) | | $ | 500,000 | | $ | 500,502 | | $ | 502 | |
| | | | | | | |
Consolidated obligations-bonds (b) | | $ | 12,728,000 | | $ | 12,740,883 | | $ | 12,883 | |
Consolidated obligations-discount notes (c) | | 1,945,744 | | 1,948,987 | | 3,243 | |
| | $ | 14,673,744 | | $ | 14,689,870 | | $ | 16,126 | |
| | December 31, 2011 | |
| | Aggregate Unpaid
Principal Balance | | Aggregate Fair
Value | | Fair Value
Over/(Under)
Aggregate Unpaid
Principal Balance | |
| | | | | | | |
Consolidated obligations-bonds (b) | | $ | 12,530,000 | | $ | 12,542,603 | | $ | 12,603 | |
Consolidated obligations-discount notes (c) | | 4,917,172 | | 4,920,855 | | 3,683 | |
| | $ | 17,447,172 | | $ | 17,463,458 | | $ | 16,286 | |
| | December 31, 2010 | |
| | Aggregate Unpaid
Principal Balance | | Aggregate Fair
Value | | Fair Value
Over/(Under)
Aggregate Unpaid
Principal Balance | |
| | | | | | | |
Consolidated obligations-bonds (b) | | $ | 14,276,000 | | $ | 14,281,463 | | $ | 5,463 | |
Consolidated obligations-discount notes (c) | | 953,203 | | 956,338 | | 3,135 | |
| | $ | 15,229,203 | | $ | 15,237,801 | | $ | 8,598 | |
(a) Advance — In the fourth quarter of 2012, a floating-rate advance was elected under the FVO.
(b) | Fair values of fixed-rate bonds at December 31, 2012 were in unrealized loss positions primarily due to increase in debt elected under the FVO. The Bank has continued to elect the FVO for short-term callable bonds because management is not able to assert with confidence that the hedges will remain highly effective through the maturity of the bonds. |
(c) | The FHLBNY elected fewer discount notes under the FVO designation in 2012 compared to 2011. In 2012, the interest rate environment has been less volatile relative to 2011, and the Bank has successfully hedged discount notes under qualifying fair value hedges, and relying less on electing the FVO to economically hedge discount notes. |
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Federal Home Loan Bank of New York
Notes to Financial Statements
Note 18. 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 standards 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, which in aggregate was $0.7 trillion at December 31, 2012 and 2011.
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 $6.6 billion and $2.8 billion as of December 31, 2012 and 2011, 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 are recorded in Other liabilities, and were not significant as of December 31, 2012 and 2011.
MPF Program — Under the MPF program, the Bank was unconditionally obligated to purchase $25.2 million and $31.2 million of mortgage loans at December 31, 2012 and December 31, 2011. Commitments are generally for periods not to exceed 45 business days. Such commitments 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 $927.6 million and $884.1 million as of December 31, 2012 and 2011.
Future benefit payments — The Bank expects to contribute $1.0 million over the next 12 months towards the Defined Benefit Plan, a non-contributory pension plan.
Derivative contracts — The FHLBNY executes derivatives with major financial institutions 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 $2.5 billion and $2.6 billion in cash with derivative counterparties as pledged collateral at December 31, 2012 and December 31, 2011, and these amounts were reported as a deduction to Derivative liabilities. Further information is provided in Note 16. Derivatives and Hedging Activities.
Lease contracts — The FHLBNY charged to operating expenses net rental costs of approximately $3.2 million for the year ended December 31, 2012 and $3.3 million for each of the years ended December 31, 2011 and 2010. Lease agreements for FHLBNY premises generally provide for inflationary increases in the basic rentals resulting from increases in property taxes and maintenance expenses. In the fourth quarter of 2012, the FHLBNY executed a lease agreement for a shared offsite data backup site for a 36 month period at an annual cost of $0.6 million.
The following table summarizes contractual obligations and contingencies as of December 31, 2012 (in thousands):
| | December 31, 2012 | |
| | Payments Due or Expiration Terms by Period | |
| | | | Greater Than | | Greater Than | | | | | |
| | Less Than | | One Year | | Three Years | | Greater Than | | | |
| | One Year | | to Three Years | | to Five Years | | Five Years | | Total | |
Contractual Obligations | | | | | | | | | | | |
Consolidated obligations-bonds at par (a) | | $ | 42,284,800 | | $ | 13,749,910 | | $ | 2,630,580 | | $ | 5,159,795 | | $ | 63,825,085 | |
Mandatorily redeemable capital stock (a) | | 2,582 | | 698 | | 5,210 | | 14,653 | | 23,143 | |
Premises (lease obligations) (b) | | 3,224 | | 6,448 | | 5,669 | | 739 | | 16,080 | |
| | | | | | | | | | | |
Total contractual obligations | | 42,290,606 | | 13,757,056 | | 2,641,459 | | 5,175,187 | | 63,864,308 | |
| | | | | | | | | �� | | |
Other commitments | | | | | | | | | | | |
Standby letters of credit | | 6,290,327 | | 264,573 | | 34,270 | | 3,861 | | 6,593,031 | |
Consolidated obligations-bonds/discount notes traded not settled | | 1,111,100 | | — | | — | | — | | 1,111,100 | |
Commitments to fund pension (c) | | 1,000 | | — | | — | | — | | 1,000 | |
Open delivery commitments (MPF) | | 25,217 | | — | | — | | — | | 25,217 | |
| | | | | | | | | | | |
Total other commitments | | 7,427,644 | | 264,573 | | 34,270 | | 3,861 | | 7,730,348 | |
| | | | | | | | | | | |
Total obligations and commitments | | $ | 49,718,250 | | $ | 14,021,629 | | $ | 2,675,729 | | $ | 5,179,048 | | $ | 71,594,656 | |
(a) | Callable bonds contain an 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 member obligations 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. |
(b) | Immaterial amount of commitments for equipment leases are not included. |
(c) | This is based on the minimum expected payment under the MAP 21 relief provisions. The Bank’s expected contribution towards the funded Defined Benefit Plan is not available beyond one year. For projected benefits payable for the Bank’s unfunded Benefit Equalization Plan and the Bank’s Postretirement Benefit Plan, see Note 15. |
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Federal Home Loan Bank of New York
Notes to Financial Statements
The FHLBNY does not anticipate any credit losses from its off-balance sheet commitments and accordingly no provision for losses is required.
Impact of the bankruptcy of Lehman Brothers
From time to time, the Bank is involved in disputes or regulatory inquiries that arise in the ordinary course of business. At the present time, except as noted below, there are no pending claims against the Bank that, if established, are reasonably likely to have a material effect on the Bank’s financial condition, results of operations or cash flows.
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 filed for protection under Chapter 11 in the same court on October 3, 2008. A Chapter 11 plan was confirmed in their bankruptcy cases by order of the Bankruptcy Court dated December 6, 2011 (the “Plan”). The Plan became effective on March 6, 2012.
LBSF was a counterparty to FHLBNY on multiple derivative transactions under an International Swap Dealers Association, Inc. master agreement with a total notional amount of $16.5 billion at the time of termination of the Bank’s derivative transactions with LBSF. The net amount that was due to the Bank after giving effect to obligations that were due LBSF was approximately $65 million. The Bank filed timely proofs of claim in the amount of approximately $65 million as creditors of LBSF and LBHI in connection with the bankruptcy proceedings. The Bank fully reserved the LBSF and LBHI receivables as the dispute with LBSF described below make the timing and the amount of any recoveries uncertain.
As previously reported, the Bank received a Derivatives ADR Notice from LBSF dated July 23, 2010 claiming that the Bank was liable to LBSF under the master agreement. Subsequently, in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court dated September 17, 2009 (“Order”), the Bank responded to LBSF on August 23, 2010, denying LBSF’s Demand. LBSF served a reply on September 7, 2010, effectively reiterating its position. A mediation conducted pursuant to the Order commenced on December 8, 2010 and concluded without settlement on March 17, 2011. LBSF claims that the Bank is liable to it in the principal amount of approximately $198 million plus interest on such principal amount from the Early Termination Date to December 1, 2008 at an interest rate equal to the average of the cost of funds of the Bank and LBSF on the Early Termination Date, and after December 1, 2008 at a default interest rate of LIBOR plus 13.5%. LBSF’s asserted claim as of December 6, 2010, including principal and interest, was approximately $268 million. Pursuant to the Order, positions taken by the parties in the ADR process are confidential.
While the Bank believes that LBSF’s position is without merit, and therefore no payment to LBSF or LBHI is probable, the amount the Bank actually recovers or pays will ultimately be decided in the course of the bankruptcy proceedings.
Note 19. Related Party Transactions.
The FHLBNY is a cooperative and the members own almost all of the stock of the Bank. Stock issued and outstanding that is not owned by members is held by former members. The majority of the members of the Board of Directors of the FHLBNY are elected by and from the membership. The FHLBNY conducts its advances business almost exclusively with members. 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. The FHLBNY conducts all transactions with members and non-members in the ordinary course of business. All transactions with all members, including those whose officers may serve as directors of the FHLBNY, are at terms that are no more favorable than comparable transactions with other members. The FHLBNY may from time to time borrow or sell overnight and term Federal funds at market rates to members.
Debt Assumptions and Transfers
Debt assumptions — The Bank did not assume debt from another FHLBank in 2012 and 2011.
Debt transfers — There were no debt transfers to another FHLBank in 2012. In 2011, the Bank transferred $150.0 million to another FHLBank at negotiated market rates that exceeded book cost by $17.3 million, which amount was charged to earnings in that period. When debt is transferred, the transferring bank notifies the Office of Finance on trade date of the 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 any periods in this report.
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Federal Home Loan Bank of New York
Notes to Financial Statements
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, 2012 was $47.5 million from inception of the program through mid-2004. At December 31, 2011, the comparable number was $62.9 million. Since 2004, the FHLBNY has not shared its purchases with the FHLBank of Chicago. Fees paid to the FHLBank of Chicago were $0.8 million, $0.6 million and $0.5 million in each of the years ended December 31, 2012, 2011 and 2010.
Mortgage-backed Securities
No mortgage-backed securities were acquired from other FHLBanks during the periods in this report.
Intermediation
Notional amounts of $265.0 million and $275.0 million of interest rate swaps outstanding at December 31, 2012 and 2011 represented derivative contracts in which the FHLBNY acted as an intermediary to sell derivatives to members with an offsetting purchased contracts with unrelated derivatives dealers. Net fair value exposures of these transactions at December 31, 2012 and 2011 were not significant. The intermediated derivative transactions with members were fully collateralized.
Loans to Other Federal Home Loan Banks
In 2012, the FHLBNY extended seven overnight loans for a total of $1.3 billion. In 2011, the FHLBNY extended five overnight loans for a total of $1.4 billion to another FHLBank. In 2010, The FHLBNY extended one overnight loan for a total of $27.0 million to other FHLBank. Generally, loans made to other FHLBanks are uncollateralized. The impact to Net interest income from such loans was not significant in any period in this report.
Borrowings from Other Federal Home Loan Banks
The FHLBNY borrows from other FHLBanks, generally for a period of one day. In 2012, the FHLBNY borrowed one overnight loan for a total of $50.0 million from a FHLBank, and there was no borrowing from other FHLBanks in 2011 and 2010. In 2012, such borrowings averaged $0.1 million, and interest expense for such borrowings was not significant.
The following tables summarize outstanding balances with related parties at December 31, 2012 and December 31, 2011, and transactions for each of the years ended December 31, 2012, 2011 and 2010 (in thousands):
Related Party: Outstanding Assets, Liabilities and Capital
| | December 31, 2012 | | December 31, 2011 | |
| | Related | | Unrelated | | Related | | Unrelated | |
Assets | | | | | | | | | |
Cash and due from banks | | $ | — | | $ | 7,553,188 | | $ | — | | $ | 10,877,790 | |
Federal funds sold | | — | | 4,091,000 | | — | | 970,000 | |
Available-for-sale securities | | — | | 2,308,774 | | — | | 3,142,636 | |
Held-to-maturity securities | | — | | 11,058,764 | | — | | 10,123,805 | |
Advances | | 75,888,001 | | — | | 70,863,777 | | — | |
Mortgage loans (a) | | — | | 1,842,816 | | — | | 1,408,460 | |
Accrued interest receivable | | 150,907 | | 28,137 | | 195,700 | | 28,148 | |
Premises, software, and equipment | | — | | 11,576 | | — | | 13,487 | |
Derivative assets (b) | | — | | 41,894 | | — | | 25,131 | |
Other assets (c) | | 150 | | 13,593 | | 193 | | 13,213 | |
| | | | | | | | | |
Total assets | | $ | 76,039,058 | | $ | 26,949,742 | | $ | 71,059,670 | | $ | 26,602,670 | |
| | | | | | | | | |
Liabilities and capital | | | | | | | | | |
Deposits | | $ | 2,054,511 | | $ | — | | $ | 2,101,048 | | $ | — | |
Consolidated obligations | | — | | 94,564,268 | | — | | 89,563,847 | |
Mandatorily redeemable capital stock | | 23,143 | | — | | 54,827 | | — | |
Accrued interest payable | | 25 | | 127,639 | | 8 | | 146,239 | |
Affordable Housing Program (d) | | 134,942 | | — | | 127,454 | | — | |
Derivative liabilities (b) | | — | | 426,788 | | — | | 486,166 | |
Other liabilities (e) | | 85,079 | | 80,576 | | 69,555 | | 66,785 | |
| | | | | | | | | |
Total liabilities | | 2,297,700 | | 95,199,271 | | 2,352,892 | | 90,263,037 | |
| | | | | | | | | |
Total capital | | 5,491,829 | | — | | 5,046,411 | | — | |
| | | | | | | | | |
Total liabilities and capital | | $ | 7,789,529 | | $ | 95,199,271 | | $ | 7,399,303 | | $ | 90,263,037 | |
(a) | Includes insignificant amounts of mortgage loans purchased from members of another FHLBank. |
(b) | Derivative transactions with Citibank, N.A., a member that is a derivatives dealer counterparty, were at market terms and in the ordinary course of the FHLBNY’s business — At December 31, 2012, notional amounts outstanding were $3.5 billion; net fair value after posting $124.7 million cash collateral was a net derivative liability of $25.2 million. At December 31, 2011, notional amounts outstanding were $3.9 billion; net fair value after posting $49.5 million cash collateral was a net derivative liability of $38.0 million. Citibank, N.A., became a member in the second quarter of 2011. The swap interest rate exchanges with Citibank, N.A., resulted in interest expense of $21.5 million and $12.6 million in 2012 and 2011. Also, includes insignificant fair values due to intermediation activities on behalf of other members with derivative dealers. |
(c) | Includes insignificant amounts of miscellaneous assets that are considered related party. |
(d) | Represents funds not yet disbursed to eligible programs. |
(e) | Related column includes member pass-through reserves at the Federal Reserve Bank. |
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Federal Home Loan Bank of New York
Notes to Financial Statements
Related Party: Income and Expense transactions
| | Years Ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | Related | | Unrelated | | Related | | Unrelated | | Related | | Unrelated | |
Interest income | | | | | | | | | | | | | |
Advances | | $ | 524,233 | | $ | — | | $ | 570,966 | | $ | — | | $ | 616,575 | | $ | — | |
Interest-bearing deposits (a) | | — | | 3,649 | | — | | 2,834 | | — | | 5,461 | |
Securities purchased under agreements to resell | | — | | 86 | | — | | — | | — | | — | |
Federal funds sold | | — | | 15,218 | | — | | 6,746 | | — | | 9,061 | |
Available-for-sale securities | | — | | 23,626 | | — | | 30,248 | | — | | 31,465 | |
Held-to-maturity securities | | — | | 270,835 | | — | | 279,602 | | — | | 352,398 | |
Mortgage loans held-for-portfolio (b) | | — | | 65,892 | | — | | 62,942 | | — | | 65,422 | |
Loans to other FHLBanks | | 5 | | — | | 4 | | — | | — | | — | |
| | | | | | | | | | | | | |
Total interest income | | $ | 524,238 | | $ | 379,306 | | $ | 570,970 | | $ | 382,372 | | $ | 616,575 | | $ | 463,807 | |
| | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | | |
Consolidated obligations | | $ | — | | $ | 434,048 | | $ | — | | $ | 440,870 | | $ | — | | $ | 614,967 | |
Deposits | | 757 | | — | | 1,243 | | — | | 3,502 | | — | |
Mandatorily redeemable capital stock | | 1,839 | | — | | 2,384 | | — | | 4,329 | | — | |
Cash collateral held and other borrowings | | — | | 32 | | — | | 82 | | — | | 26 | |
| | | | | | | | | | | | | |
Total interest expense | | $ | 2,596 | | $ | 434,080 | | $ | 3,627 | | $ | 440,952 | | $ | 7,831 | | $ | 614,993 | |
| | | | | | | | | | | | | |
Service fees and other | | $ | 8,163 | | $ | 1,598 | | $ | 5,677 | | $ | 232 | | $ | 4,918 | | $ | — | |
(a) Includes insignificant amounts of interest income from MPF service provider.
(b) Includes immaterial amounts of mortgage interest income from loans purchased from members of another FHLBank.
Note 20. 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’s total assets and capital could significantly decrease if one or more large members were to withdraw from membership or decrease business with the Bank. Members might withdraw or reduce their business as a result of consolidating with an institution that was a member of another FHLBank, or for other reasons. The FHLBNY has considered the impact of losing one or more large members. In general, a withdrawing member would be required to repay all indebtedness prior to the redemption of its capital stock. Under current conditions, the FHLBNY does not expect the loss of a large member to impair its operations, since the FHLBank Act of 1999 does not allow the FHLBNY to redeem the capital of an existing member if the redemption would cause the FHLBNY to fall below its capital requirements. Consequently, the loss of a large member should not result in an inadequate capital position for the FHLBNY. However, such an event could reduce the amount of capital that the FHLBNY has available for continued growth. This could have various ramifications for the FHLBNY, including a possible reduction in net income and dividends, and a lower return on capital stock for remaining members.
The top ten advance holders at December 31, 2012, 2011 and 2010 and associated interest income for the years then ended are summarized as follows (dollars in thousands):
| | December 31, 2012 | |
| | | | | | | | Percentage of | | | |
| | | | | | Par | | Total Par Value | | Twelve Months | |
| | City | | State | | Advances | | of Advances | | Interest Income | |
| | | | | | | | | | | |
Metropolitan Life Insurance Company | | New York | | NY | | $ | 13,512,000 | | 18.69 | % | $ | 290,223 | |
Citibank, N.A. | | New York | | NY | | 12,070,000 | | 16.70 | | 31,422 | |
New York Community Bank* | | Westbury | | NY | | 8,293,143 | | 11.47 | | 302,229 | |
Hudson City Savings Bank, FSB* | | Paramus | | NJ | | 6,025,000 | | 8.33 | | 302,559 | |
Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | 2,897,000 | | 4.01 | | 62,676 | |
Investors Bank | | Short Hills | | NJ | | 2,700,500 | | 3.74 | | 57,780 | |
First Niagara Bank, National Association | | Buffalo | | NY | | 2,438,500 | | 3.37 | | 10,851 | |
The Prudential Insurance Co. of America | | Newark | | NJ | | 2,325,000 | | 3.22 | | 50,142 | |
Valley National Bank | | Wayne | | NJ | | 2,075,500 | | 2.87 | | 83,143 | |
New York Life Insurance Company | | New York | | NY | | 1,350,000 | | 1.87 | | 13,764 | |
Total | | | | | | $ | 53,686,643 | | 74.27 | % | $ | 1,204,789 | |
Pending merger — On August 27, 2012, Hudson City Bancorp, Inc. (“Hudson City Bancorp”), entered into an Agreement and Plan of Merger (“Merger Agreement”) with M&T Bank Corporation and Wilmington Trust Corporation (“WTC”), a wholly owned subsidiary of M&T Bank Corporation. The Merger Agreement provides that FHLBNY member Hudson City Savings Bank, a wholly owned subsidiary of Hudson City Bancorp, will merge with and into FHLBNY member Manufacturers and Traders Trust Company (“M&T Bank”), a wholly owned subsidiary of M&T Bank Corporation, with M&T Bank continuing as the surviving bank. The Merger Agreement is subject to, among other items, shareholder and regulatory approvals. The parties currently anticipate that the closing of the merger transactions will take place in the second quarter of 2013. At December 31, 2012, total advances borrowed by Hudson City Savings Bank were $6.0 billion, or 8.3% of total advances of the FHLBNY. Interest income earned from Hudson City Bancorp in 2012 was $302.6 million. The parties have indicated their intention to pay off these advances upon the closing of the merger transactions.
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Federal Home Loan Bank of New York
Notes to Financial Statements
* At December 31, 2012, officer of member bank also served on the Board of Directors of the FHLBNY.
| | December 31, 2011 | |
| | | | | | | | Percentage of | | | |
| | | | | | Par | | Total Par Value | | Twelve Months | |
| | City | | State | | Advances | | of Advances | | Interest Income | |
| | | | | | | | | | | |
Metropolitan Life Insurance Company | | New York | | NY | | $ | 11,655,000 | | 17.40 | % | $ | 266,792 | |
Hudson City Savings Bank, FSB* | | Paramus | | NJ | | 8,925,000 | | 13.32 | | 520,044 | |
New York Community Bank* | | Westbury | | NY | | 8,755,154 | | 13.07 | | 304,289 | |
MetLife Bank, N.A. | | Convent Station | | NJ | | 4,764,500 | | 7.11 | | 95,740 | |
The Prudential Insurance Co. of America | | Newark | | NJ | | 2,424,000 | | 3.62 | | 57,154 | |
Investors Bank | | Short Hills | | NJ | | 2,115,486 | | 3.16 | | 53,984 | |
Valley National Bank | | Wayne | | NJ | | 2,103,500 | | 3.14 | | 90,261 | |
Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | 2,043,000 | | 3.05 | | 71,909 | |
First Niagara Bank, National Association | | Buffalo | | NY | | 1,667,072 | | 2.49 | | 16,626 | |
New York Life Insurance Company | | New York | | NY | | 1,500,000 | | 2.24 | | 14,497 | |
Total | | | | | | $ | 45,952,712 | | 68.60 | % | $ | 1,491,296 | |
* At December 31, 2011, officer of member bank also served on the Board of Directors of the FHLBNY.
| | December 31, 2010 | |
| | | | | | | | Percentage of | | | |
| | | | | | Par | | Total Par Value | | Twelve Months | |
| | City | | State | | Advances | | of Advances | | Interest Income | |
| | | | | | | | | | | |
Hudson City Savings Bank, FSB* | | Paramus | | NJ | | $ | 17,025,000 | | 22.13 | % | $ | 705,743 | |
Metropolitan Life Insurance Company | | New York | | NY | | 12,555,000 | | 16.32 | | 294,526 | |
New York Community Bank* | | Westbury | | NY | | 7,793,165 | | 10.13 | | 307,102 | |
MetLife Bank, N.A. | | Convent Station | | NJ | | 3,789,500 | | 4.93 | | 61,036 | |
Manufacturers and Traders Trust Company | | Buffalo | | NY | | 2,758,000 | | 3.58 | | 42,979 | |
The Prudential Insurance Co. of America | | Newark | | NJ | | 2,500,000 | | 3.25 | | 77,544 | |
Astoria Federal Savings and Loan Assn. | | Lake Success | | NY | | 2,391,000 | | 3.11 | | 107,917 | |
Valley National Bank | | Wayne | | NJ | | 2,310,500 | | 3.00 | | 98,680 | |
New York Life Insurance Company | | New York | | NY | | 1,500,000 | | 1.95 | | 14,678 | |
First Niagara Bank, National Association | | Buffalo | | NY | | 1,473,493 | | 1.92 | | 24,911 | |
Total | | | | | | $ | 54,095,658 | | 70.32 | % | $ | 1,735,116 | |
* At December 31, 2010, officer of member bank also served on the Board of Directors of the FHLBNY.
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, 2013 and December 31, 2012 (shares in thousands):
| | | | Number | | Percent | |
| | February 28, 2013 | | of Shares | | of Total | |
Name of Beneficial Owner | | Principal Executive Office Address | | Owned | | Capital Stock | |
| | | | | | | |
Citibank, N.A. | | 399 Park Avenue, New York, NY 10043 | | 8,716 | | 18.73 | % |
Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | 7,290 | | 15.66 | |
New York Community Bank* | | 615 Merrick Avenue, Westbury, NY 11590 | | 4,033 | | 8.67 | |
Hudson City Savings Bank, FSB* | | West 80 Century Road, Paramus, NJ 07652 | | 3,565 | | 7.66 | |
| | | | | | | |
| | | | 23,604 | | 50.72 | % |
| | | | Number | | Percent | |
| | December 31, 2012 | | of Shares | | of Total | |
Name of Beneficial Owner | | Principal Executive Office Address | | Owned | | Capital Stock | |
| | | | | | | |
Citibank, N.A. | | 399 Park Avenue, New York, NY 10043 | | 9,166 | | 19.02 | % |
Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | 7,347 | | 15.24 | |
New York Community Bank* | | 615 Merrick Avenue, Westbury, NY 11590 | | 4,337 | | 9.00 | |
Hudson City Savings Bank, FSB* | | West 80 Century Road, Paramus, NJ 07652 | | 3,565 | | 7.39 | |
| | | | | | | |
| | | | 24,415 | | 50.65 | % |
* At February 28, 2013 and December 31, 2012, officer of member bank also served on the Board of Directors of the FHLBNY.
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Federal Home Loan Bank of New York
Notes to Financial Statements
Note 21. Subsequent Events.
Subsequent events for the FHLBNY are events or transactions that occur after the balance sheet date but before financial statements are issued. The FHLBNY has evaluated subsequent events through the filing 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, Kevin M. Neylan, at December 31, 2012. Based on this evaluation, they concluded that as of December 31, 2012, the Bank’s disclosure controls and procedures were effective at a reasonable level of assurance in ensuring that the information required to be disclosed by the Bank in the reports it files or submits under the Act is (i) accumulated and communicated to the Bank’s management (including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b) Changes in Internal Control Over Financial Reporting: There were no changes in the Bank’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the Bank’s fourth quarter that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth in Part II, Item 8 of the Annual Report on Form 10-K and incorporated herein by reference.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
2012 and 2013 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 each of 2012 and 2013, the FHFA Director designated seventeen directorships for us, 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 our district and that meets all minimum regulatory capital requirements. There are no other qualification requirements for Member Directors apart from the foregoing.
Member Directors are, generally speaking, elected by our stockholders in, respectively, New York, New Jersey, and Puerto Rico and the U.S. Virgin Islands. Our Board of Directors is ordinarily 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. (The Board may also take action to fill a mid-term vacancy of a Member Directorship.) 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 none of our directors, officers, employees, attorneys or agents, other than in a personal capacity, may support the nomination or election of a particular individual for a Member Directorship.
Because of the process described above pertaining to how Member Directors are nominated and elected, we do not know what particular factors our member institutions may consider in nominating particular candidates for Member Directorships or in voting to elect Member Directors. However, if the Board takes action to fill a vacant Member Directorship, we can know what was considered in electing such Director. In general, such considerations may include satisfaction of the regulatory qualification requirements for the Directorship, the nature of the person’s experience in the financial industry and at a member institution, knowledge of the person by various members of the Board, and previous service on the Board, if any.
In contrast to the requirements pertaining to Member Directorships, per FHFA regulations, an Independent Directorship may be held, generally speaking, only by an individual who is a bona fide resident of our district, who is not a director, officer, or employee of a member institution or of any person that receives advances from us, 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.
Any individual may submit an Independent Director application form and request to be considered by us for inclusion on the Independent Director nominee slate. Our Board of Directors is then required by Finance Agency regulations to consult with our Affordable Housing Advisory Council (“Advisory Council”) in establishing the nominee slate. (The Advisory Council is an advisory body consisting of fifteen persons residing in our district appointed by our 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 we can better carry out our housing finance and community lending mission.) After the nominee slate is approved by the Board, the slate is then presented to our membership for a district-wide vote. The election regulation permits our directors, officers, attorneys, employees, agents, and Advisory Council to support the candidacy of the board of director’s nominees for Independent Directorships. (As is the case with Member Directorships, the Board may also take action to fill a mid-term vacancy of an Independent Directorship.)
The Board does not solicit proxies, nor are member institutions permitted to solicit or use proxies in order to cast their votes in an election.
The following table sets forth information regarding each of the directors who served on our Board during the period from January 1, 2012 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 2012 and who were also elected to serve by our members for a new term on the Board commencing on January 1, 2013. Following the table is biographical information for each director.
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No director has any family relationship with any of our other directors or executive officers of us. 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.
Director Name | | Age as of
3/25/2013 | | Bank
Director
Since | | Start of
Current
Term | | Expiration
of Current
Term | | Represents
Bank
Members in | | Director
Type | |
Michael M. Horn (Chair) | | 73 | | 4/2007 | | 1/1/10 | | 12/31/13 | | Districtwide | | Independent | |
José Ramon González (Vice Chair) | | 58 | | 1/2004 | | 1/1/10 | | 12/31/13 | | PR & USVI | | Member | |
John R. Buran | | 63 | | 12/2010 | | 1/1/12 | | 12/31/15 | | NY | | Member | |
Anne Evans Estabrook | | 68 | | 1/2004 | | 1/1/11 | | 12/31/14 | | Districtwide | | Independent | |
Joseph R. Ficalora | | 66 | | 1/2005 | | 1/1/11 | | 12/31/14 | | NY | | Member | |
Jay M. Ford (a) | | 63 | | 6/2008 | | 1/1/13 | | 12/31/16 | | NJ | | Member | |
James W. Fulmer | | 61 | | 1/2007 | | 1/1/10 | | 12/31/13 | | NY | | Member | |
Ronald E. Hermance, Jr. | | 65 | | 1/2005 | | 1/1/11 | | 12/31/14 | | NJ | | Member | |
Thomas L. Hoy | | 64 | | 1/2012 | | 1/1/12 | | 12/31/15 | | NY | | Member | |
Katherine J. Liseno | | 68 | | 1/2004 | | 1/1/10 | | 12/31/13 | | NJ | | Member | |
Kevin J. Lynch | | 66 | | 1/2005 | | 1/1/11 | | 12/31/14 | | NJ | | Member | |
Joseph J. Melone | | 81 | | 4/2007 | | 1/1/12 | | 12/31/15 | | Districtwide | | Independent | |
Richard S. Mroz | | 51 | | 3/2002 | | 1/1/11 | | 12/31/14 | | Districtwide | | Independent | |
Vincent F. Palagiano (b) | | 72 | | 1/2012 | | 1/1/13 | | 12/31/16 | | NY | | Member | |
C. Cathleen Raffaeli (c) | | 56 | | 4/2007 | | 1/1/13 | | 12/31/16 | | Districtwide | | Independent | |
Edwin C. Reed (c) | | 59 | | 4/2007 | | 1/1/13 | | 12/31/16 | | Districtwide | | Independent | |
DeForest B. Soaries, Jr. | | 61 | | 1/2009 | | 1/1/12 | | 12/31/15 | | Districtwide | | Independent | |
(a) Mr. Ford served on the Board as a Member Director representing the interests of New Jersey members throughout 2012, and his term expired on December 31, 2012. On December 6, 2012, Mr. Ford was elected by our New Jersey membership to serve as a Member Director representing the interests of New Jersey members for a new four year term commencing on January 1, 2013.
(b) Mr. Palagiano served on the Board as a Member Director representing the interests of New York members throughout 2012, and his term expired on December 31, 2012. On December 6, 2012, Mr. Palagiano was elected by our New York membership to serve as a Member Director representing the interests of New York members for a new four year term commencing on January 1, 2013.
(c) Ms. Raffaeli and Rev. Reed both served on the Board as Independent Directors representing the interests of members throughout our membership district throughout 2012, and their terms expired on December 31, 2012. On December 6, 2012, they were elected by our membership to serve as Independent Directors for new terms of four years each commencing on January 1, 2013.
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 as a member of the Assembly Banking Committee. In addition, Mr. Horn served on New Jersey’s Executive Commission on Ethical Standards as both 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, was chairman of the Bank Regulatory Committee of the Banking Law Section of the New Jersey State Bar Association, and is 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, supports his qualifications to serve on our Board as an Independent Director.
Mr. González (Vice Chair) has been Senior Executive Vice President, Banking and Financial Services, of Oriental Financial Group, Inc. and Bank member Oriental Bank & Trust since August, 2010. He was President and Chief Executive Officer of Santander BanCorp and Banco Santander Puerto Rico from October 2002 until August 2008, and served as a Director of both entities until August 2010. 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 Banco Santander Puerto Rico and in April 2002 was named President and Chief Operating Officer of both entities. 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.
Mr. Buran is Director, President and Chief Executive Officer of Bank members Flushing Savings Bank and Flushing Commercial Bank, and also of Flushing Financial Corporation, the holding company for those two institutions. He joined Flushing Savings Bank and Flushing Financial Corporation in 2001 as Chief Operating Officer and he became a Director of these entities in 2003. In 2005, he was named President and Chief Executive Officer of Flushing Savings Bank and Flushing Commercial Bank. He became a Director, as well as President & CEO, of Flushing Commercial Bank in 2007. Mr. Buran’s career spans 35 years in the banking industry, beginning with Citibank in 1977. There he held a variety of management positions, including Business Manager of their retail
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distribution in Westchester, Long Island and Manhattan, and Vice President in charge of their Investment Sales Division. Mr. Buran left Citibank to become Senior Vice President, Division Head for Retail Services of NatWest Bank and later Executive Vice President of Fleet Bank’s (now Bank of America) retail branch system in New York City, Long Island, Westchester and Southern Connecticut. He also spent time as a consultant and Assistant to the President of Carver Bank. Mr. Buran has devoted his time to a variety of charitable and not-for-profit organizations. He has been a board member of the Long Island Association, both the Nassau and Suffolk County Boy Scouts, Family and Children’s Association, EAS, Long Island University, the Long Island Philharmonic and Channel 21. He was the fundraising chairman for the Suffolk County Vietnam Veteran’s War Memorial in Farmingville, New York and has been recipient of the Boy Scouts’ Chief Scout Citizen Award. His work in the community has been recognized by Family and Children’s Association, and the Gurwin Jewish Geriatric Center. He was also a recipient of the Long Island Association’s SBA Small Business Advocate Award. Mr. Buran was honored with St. Joseph’s College’s Distinguished Service Award in 1998 and 2004. Mr. Buran also serves on the Advisory Board and is former Board President of Neighborhood Housing Services of New York City. He is a Board member of The Korean American Youth Foundation. He is also past Chairman and a current board member of the New York Bankers Association as well as a Director of New York Bankers Service Corporation. Mr. Buran also serves on the board of the Long Island Conservatory. In 2011, he was appointed to the Community Depository Institutions Advisory Council of the Federal Reserve Bank of New York. Mr. Buran was appointed to the Nassau County Interim Finance Authority by New York State Governor Andrew Cuomo on August 8, 2012. He holds a B.S. in Management and an M.B.A., both from New York University.
Ms. Estabrook has been chief executive of Elberon Development Co. in Cranford, New Jersey since 1984. It, together with its affiliated companies, owns, manages and develops approximately two million square feet of rental property. Most of the property is industrial with the remainder serving commercial and retail tenants. She previously served as a director on the board of New Brunswick Savings Bank. Since 2005, Ms. Estabrook has served as a Director of New Jersey American Water Company, Inc. Ms. Estabrook is the past chairman of the New Jersey Chamber of Commerce, served on its executive committee, and chaired its nominating committee. She also served as a member of the Lay Board of Trustees of the Delbarton School in Morristown for 15 years, including five years as chair. Until December 2012, Ms. Estabrook was a member and Secretary of the Board of Trustees of Catholic Charities, served on its Executive Committee and its Audit Committee, and chaired its Finance Committee and Building and Facilities Committees. She is presently on the Board of Overseers of the Weill Cornell Medical School, is a Trustee of Barnabas Healthcare Corp., and is also on the Board of Trustees at 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 Trustee of the Liberty Hall Museum Board at Kean University in Union, NJ and serves on the Board of Trustees of the New Jersey Performing Arts Center (NJPAC). In September 2011, she became a member of the board of managers of the Theatre Square Development Company, LLC. Ms. Estabrook’s experience in, among other areas, representing community interests in housing, and in project development, as indicated by her background described above, support her qualifications to serve on our Board as a public interest director and Independent Director.
Mr. Ficalora has been the President and Chief Executive Officer and a Director of New York Community Bancorp, Inc. (“NYCB”) since its inception on July 20, 1993. He has also been the President and Chief Executive Officer and a Director of NYCB primary subsidiaries, New York Community Bank (“New York Community”) and New York Commercial Bank (“New York Commercial”), both of which are our members, 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); he served as Chairman of these three entities until December 2010. 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. Additionally, he is a member of the Board of Directors of the American Bankers Association. He also serves on the Board of Directors of RSI Retirement Trust, Pentegra Services, Inc., and of Peter B. Cannell and Co., Inc., an investment advisory firm that became a subsidiary of New York Community in 2004. Mr. Ficalora served as a member of the Board of Directors of the Thrift Institutions Advisory Council of the Federal Reserve Board in Washington, D.C., and also served as a member of the Thrift Institutions Advisory Panel of the Federal Reserve Bank of New York. Mr. Ficalora has also 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. With respect to community activities, 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 Borough Public Library and the Queens Library Foundation Board, and serves on the Boards of Directors of the New York Hall of Science, New York Hospital-Queens, Flushing Cemetery, and on the Advisory Council of the Queens Museum of Art.
Mr. Ford has been President and Chief Executive Officer of Bank member Crest Savings Bank, headquartered in Wildwood, New Jersey, since 1993, and has served as a director since August of 2010. 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”). 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 and Finance & Investment Committees. Mr. Ford serves on the boards of the Cape Regional Medical Center Foundation and the Doo Wop
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Preservation League and has previously served as a director and treasurer of Habitat for Humanity, Cape May County, as Divisional Chairman of the March of Dimes for Atlantic and Cape May Counties and as a Director of the Atlantic Cape Community College Foundation. 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. Fulmer has 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 is also Vice Chairman of Tompkins Financial Corporation (“Tompkins Financial”), the parent company of The Bank of Castile, since 2007, and has served as President and a Director of Tompkins Financial since 2000. Since 2001, he has served as Chairman of the Board of Tompkins Insurance Agencies, Inc., a subsidiary of Tompkins Financial. He also served as Chairman of AM&M Financial Services, Inc. another subsidiary of Tompkins Financial, from 2006 until its merger with Tompkins Financial Advisors, also a subsidiary of Tompkins Financial, in January 2011. Mr. Fulmer currently serves as a Director of Tompkins Financial Advisors. In addition, since 1999, Mr. Fulmer has served as a member of the board of directors 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, Buffalo, NY, Cherry Valley Insurance Company, Buffalo, NY, and United Memorial Medical Center in Batavia, New York. Mr. Fulmer is also a board member and treasurer of WXXI Public Broadcasting Council in Rochester, NY. He is a former director of the Monroe Title Corporation and the Catholic Health 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 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 he served in that position through December 14, 2010. On January 1, 2002, he also became Chief Executive Officer. On January 1, 2005, Mr. Hermance assumed the title of Chairman in addition to his other titles. Mr. Hermance is also currently Chairman and Chief Executive Officer of Hudson City Bancorp, the parent company, which trades on the NASDAQ. Mr. Hermance serves as a member of the Board of Trustees of St. John Fisher College.
Mr. Hoy serves as Chairman of Bank member Glens Falls National Bank and Trust Company; he also served as CEO of the company through December 31, 2012. He is also Chairman of Arrow Financial Corporation, the holding company for Glens Falls National Bank and Trust Company and Bank member Saratoga National Bank and Trust Company; he served as President of the company through June 30, 2012 and CEO of the company through December 31, 2012. Mr. Hoy joined Glens Falls National Bank in 1974 as a Management Trainee and became President of the Bank on January 1, 1995. He became President of Arrow in 1996 and CEO in 1997. Mr. Hoy is a graduate of Cornell University and has been active in various banking organizations, including serving as past President of the Independent Bankers Association of New York, past Chairman of the New York Bankers Association, and past member of the American Bankers Association Board of Directors. Mr. Hoy served four years on active duty in the Navy as a Surface Warfare Officer on various destroyers, and retired after twenty years as a Commander in the U.S. Naval Reserve. He has been extremely active in his community, serving on numerous Boards and leading several community fundraising efforts. He has been recognized for his community service with the J. Walter Juckett Award from the Adirondack Regional Chambers of Commerce, the Twin Rivers Council’s Good Scout Award and the C.R. Wood Theater’s Charles R. Wood Award.
Ms. Liseno has 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. Ms. Liseno is also a trustee of the Jersey Bankers Political Action Committee (JEBPAC) of the New Jersey Bankers Association. 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. Ms. Liseno also served on the Board of Bankers Cooperative Group, Inc. She is also past president of the Central Jersey Savings League.
Mr. Lynch has 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 its formation in 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 was a member of the Board of Directors of the Pentegra Defined Benefit Plan for Financial Institutions from 1997 through 2007, and was Chair of that Board in 2004 and 2005 and Vice Chair in 2002 and 2003, and has 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. 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.
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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. Melone has 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 as a research director at The American College. Mr. Melone is a Chartered Life Underwriter, Chartered Financial Consultant and Chartered Property and Casualty Underwriter. He currently serves on the boards of Newark Museum, Newark, New Jersey, 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; and, until May of 2010, he served as chairman of the board of Horace-Mann Educators, Inc. 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 our Board as an Independent Director.
Mr. Mroz, of Haddonfield, New Jersey, is a government and public affairs consultant and lawyer. Mr. Mroz has been the sole proprietor of a government and public affairs consulting business since January 1, 2010. From January 1, 2007 until December 2009, he served as President of Salmon Ventures, Ltd, a firm with which he maintains an affiliation. Salmon Ventures 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. In his law practice he concentrates on real estate, corporate and regulatory issues. In this regard, Mr. Mroz became, as of March 1, 2011, Of Counsel to the law firm of Archer & Greiner. From April 1, 2007 through the end of February 2011, he was Of Counsel to the law firm of Gruccio, Pepper, DeSanto & Ruth. Prior to that, he was Of Counsel to the law firm of Stradley Ronon Stevens & Young, LLP for six years, until December 31, 2006. Mr. Mroz has a distinguished record of community and public service. He 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. In 2012, Mr. Mroz was appointed by New Jersey Governor Chris Christie to serve as commissioner on the Delaware River & Bay Authority, the bi-state agency which owns and operates the Delaware Memorial Bridge, Cape May-Lewes Ferry and several airports in the New Jersey — Delaware region. Mr. Mroz also is active in community affairs, serving on the board of directors for the New Jersey Alliance for Action; he also is a board member and past chairman of the 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. The legal and regulatory experience of Mr. Mroz, as indicated by his background, support his qualifications to serve on our Board as an Independent Director.
Mr. Palagiano has served as Chairman of the Board and CEO of Bank member The Dime Savings Bank of Williamsburgh (“Dime Savings”) since 1989 and of the holding company for the Bank, Dime Community Bancshares, Inc. (“Dime Community”), since its formation in 1995. He has served as a Trustee or Director of the Dime Savings since 1978. In addition, Mr. Palagiano has served on the Board of Directors of the Boy Scouts of America, Brooklyn Division since 1999, and served on the Boards of Directors of the Institutional Investors Capital Appreciation Fund from 1996 to 2006, and The Community Bankers Association of New York from 2001 to 2005. Mr. Palagiano joined Dime Savings in 1970 as an appraiser and has also served as President of both Dime Community and Dime Savings, and as Executive Vice President, Chief Operating Officer and Chief Lending Officer of Dime Savings. Prior to 1970, Mr. Palagiano served in the real estate and mortgage departments at other financial institutions and title companies.
Ms. Raffaeli has 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 served on the Board of Directors of E*Trade from 2003 through 2011 and served on the Board of American Home Financial Corporation from 1998 through 2010. She currently serves on three university and college boards. Ms. Raffaeli’s financial and other management experience, as indicated by her background described above, support her qualifications to serve on our Board as an Independent Director.
Rev. Reed is 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, and previously was the Chief Financial Officer of Greater Allen AME Cathedral, located in Jamaica, Queens, New York, from 1996 to July 2007. From 1996 to 2009, Rev. Reed was responsible for building and securing financing for over $60 million of
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affordable, senior, and commercial development projects. At GGT Development LLC, Rev. Reed continues a focus on broad based neighborhood revitalization affordable housing projects, mixed use commercial/residential projects, and other development opportunities. In 1986, Rev. Reed served as the campaign manager for Rev. Floyd H. Flake. From 1987 to 1996, Rev. Reed served as the Congressional Chief of Staff for Congressman Flake and was involved in the legislative process and debate during the formation of FIRREA. 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: Vice Chair 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; Board Member, New York Housing Conference; Board Member, Wheelchair Charities; and Board Member, African-American Real Estate Professionals of New York. Rev. Reed’s experience in representing community interests in housing, as indicated by his background described above, support his qualifications to serve on our Board as a public interest director and Independent Director.
Dr. Soaries has 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 379 families to become foster parents to 770 children; helping 236 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. He is the author of dfree™ Breaking Free from Financial Slavery. Founded in 2005, his dfree™ campaign is the linchpin of a successful strategy to lead people, families, and organizations out of debt to attain financial independence. Dr. Soaries and his dfree™ strategy were the focus of the third installment of CNN’s Black in America documentary “Almighty Debt.” 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. Since February of 2011, he has served on the board of Independence Realty Trust. Dr. Soaries’ project development experience, as indicated by his background described above, support his qualifications to serve on our Board as an Independent Director.
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Executive Officers
The following sets forth the executive officers of the FHLBNY who served during 2012 and as of the date of this annual report. We have determined that our executive officers are those officers who are members of our internal Management Committee. All officers are “at will” employees and do not serve for a fixed term.
| | | | | | | | Management | |
| | | | Age as of | | Employee of | | Committee | |
Executive Officer | | Position held as of 3/25/13 | | 3/25/2013 | | Bank Since | | Member Since | |
| | | | | | | | | |
Alfred A. DelliBovi | | President & Chief Executive Officer | | 67 | | 11/30/92 | | 03/31/04 | |
Eric P. Amig | | Senior Vice President & Director of Bank Relations | | 54 | | 02/01/93 | | 01/01/09 | |
Edwin Artuz | | Senior Vice President & Director of Human Resources | | 51 | | 03/01/89 | | 01/01/13 | |
John F. Edelen | | Senior Vice President & Chief Risk Officer | | 50 | | 05/27/97 | | 01/01/11 | |
G. Robert Fusco * | | Senior Vice President, CIO & Head of Enterprise Services | | 54 | | 03/02/87 | | 05/01/09 | |
Adam Goldstein | | Senior Vice President & Head of Sales & Business Development | 39 | | 07/14/97 | | 03/20/08 | |
Paul B. Héroux | | Senior Vice President & Head of Member Services | | 54 | | 02/27/84 | | 03/31/04 | |
Peter S. Leung | | Senior Vice President & Head of Asset Liability Management | | 58 | | 01/20/04 | | 03/31/04 | |
Patrick A. Morgan** | | Senior Vice President & Chief Financial Officer | | 72 | | 02/16/99 | | 03/31/04 | |
Kevin M. Neylan | | Senior Vice President & Chief Financial Officer | | 55 | | 04/30/01 | | 03/31/04 | |
* Left employment 1/8/93; rehired 5/10/93.
** Retired on 3/30/12. Position listed as held in this table is position held as of 3/30/12.
Alfred A. DelliBovi was elected President of the Federal Home Loan Bank of New York in November 1992. As President, he serves as the Chief Executive Officer and directs our overall operations to facilitate the extension of credit products and services to our 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. Since July, 2010, Mr. DelliBovi, along with the eleven other FHLBank Presidents and five independent directors, has served as a Director of the Office of Finance of the Federal Home Loan Banks. In December 2011, Mr. DelliBovi was named to the Bipartisan Policy Center’s Housing Commission. This 17 member national commission is in the process of developing a package of realistic and actionable policy recommendations to address the nation’s troubled housing sector. 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. Amig joined us as Director of Bank Relations in February 1993. In January of 2009 he was named Head of Bank Relations. 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 to the President Pro Tempore of the Pennsylvania State Senate and was the Executive Director of the Federal/State Relations Committee of the Pennsylvania House of Representatives.
Edwin Artuz has served as Director of Human Resources since August 1, 2000; he was named as a Senior Vice President on January 1, 2013. Mr. Artuz’ role is to provide overall leadership, strategic direction, and oversight for all of the Bank’s human resources activities and operations. These activities and operations include the areas of employment, compensation, benefits, employee relations, employee and organizational training and development, performance management, employee communications, and external and internal Human Resources information systems services. Mr. Artuz also has the significant responsibility of providing support to the Compensation & Human Resources Committee of the Bank’s Board of Directors in connection with matters related to executive compensation and benefits. From January 1996 through December 1996, Mr. Artuz served as Assistant Vice President, Administrative Services and from January 1997 through July 2000, Mr. Artuz served as Vice President, Administrative Services. In this capacity, Mr. Artuz managed the Human Resources function as well as each of the following: Purchasing; Telecommunications; Facilities; Mailroom Services; Security; Reception; Insurance; and Record Retention. Mr. Artuz is currently the Chair of the Compensation Special Interest Group of the Human Resources Association of New York, an affiliate of the Society for Human Resource Management. Edwin holds a graduate degree from New York University in Human Resources Management and an undergraduate degree in History from the College of Staten Island. Prior to joining the Bank in 1989, Mr. Artuz held positions at Skadden, Arps, Slate, Meagher & Flom; Dillon, Read & Co.; and the Dime Savings Bank of New York.
John F. Edelen was named Chief Risk Officer in January 2011. In this role, Mr. Edelen directs the Bank’s enterprise-wide risk management and oversees the Financial Risk Management, Credit Risk Management, Operations Risk, Risk Analytics and Reporting, Validation and Risk Strategy, and Compliance Departments. He previously was the Director of ALM Risk Strategy and Development. Mr. Edelen joined the Bank in 1997 from Oppenheimer and Co. as a derivative products trader/analyst and held various positions of increasing responsibility within our capital markets and risk management functions. A veteran of Persian Gulf War II, Mr. Edelen served for 9 years in the U.S. Army as a Ranger and Paratrooper and commanded a unit in the 82nd Airborne Division. He
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holds an MBA from the Columbia Business School and Bachelor of Science degree from the United States Military Academy.
G. Robert Fusco was named Chief Information Officer and Head of Enterprise Services in 2009. Mr. Fusco is responsible for the Bank’s business continuity, information security, facilities, marketing, technology, telecommunications and records management services. Mr. Fusco has been with us since April 1987. During his 25 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.
Adam Goldstein was named Head of Sales and Business Development in January of 2012. In this role, he leads the sales activities for all business lines including advances, Mortgage Partnership Finance®, and Letters of Credit. In addition, he leads all business development efforts and campaigns. Mr. Goldstein joined us in June 1997 and has held a number of key positions in our sales and marketing areas. Mr. Goldstein previously served as the Head of Marketing and Sales from March 2008 through December 2011. From May 2003 through February 2008, he served as Director of Sales and Marketing. 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, in Management Practices from New York University, and in Finance from The New York Institute of Finance.
Paul B. Héroux was named Head of Member Services in March 2004; in this role, he oversees several functions, including Credit and Correspondent Services, Collateral Services and Community Investment/Affordable Housing Operations. Mr. Héroux joined in 1984 as a Human Resources Generalist and served as the Director of Human Resources from 1988 to 1990. During his tenure, 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 as well as the ABA Stonier National Graduate School of Banking. Prior to joining us, Mr. Héroux held positions at Merrill Lynch & Co. and E.F. Hutton & Co.
Peter S. Leung joined us as Chief Risk Officer in January 2004, and served in that position until December, 2010. He was named Head of Asset Liability Management in January 2011. Mr. Leung has more than twenty-six years experience in the Federal Home Loan Bank System. Prior to joining us, 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.
Patrick A. Morgan was named the Chief Financial Officer in March 2004. Mr. Morgan joined us 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. Mr. Morgan retired from the Bank on March 30, 2012.
Kevin M. Neylan was named Head of Strategy and Finance in January 2012, and became Chief Financial Officer on March 30, 2012 upon the retirement of Patrick Morgan. Mr. Neylan is also responsible for overseeing the Bank’s Strategic Planning, Human Resources and Legal functions. He was previously Head of Strategy and Business Development from January 2009 through December 2011, Head of Strategy and Organizational Performance from January 2005 to December 2008, and Director, Strategy and Organizational Performance from January 2004 to December 2004. Mr. Neylan had approximately twenty years of experience in the financial services industry prior to joining us in April 2001. He was previously 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 and a B.S. in management from St. John’s University (NY).
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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 our Board of Directors is primarily responsible for overseeing the services performed by our independent registered public accounting firm and internal audit department, evaluating our accounting policies and its system of internal controls and reviewing significant financial transactions. For the period from January 1, 2012 through the date of the filing of this annual report on Form 10-K, the members of the Audit Committee included: Jay M. Ford (Chair), Katherine J. Liseno (Vice Chair), John R. Buran, Joseph R. Ficalora, José R. González, Michael M. Horn, Thomas L. Hoy, Joseph J. Melone and Richard S. Mroz.
Audit Committee Financial Expert
Our Board of Directors has determined that for the period from January 1, 2012 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 Officer 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 we are 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. We intend 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 our 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”, or “we”, “us” or “our”) is to advance housing opportunity and local community development by maximizing the capacity of its community-based member-lenders to serve their markets.
We meet our mission by providing our members with access to economical wholesale credit and technical assistance through our credit products, mortgage finance programs, housing and community lending programs and correspondent services to increase the availability of home financing to families of all income levels.
Achieving the Bank’s Mission
We operate in a very competitive market for talent. Without the capability to attract, motivate and retain talented employees, the ability to fulfill our 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. Our employees not only have the appropriate talent and experience to execute our mission, but they also possess skill sets that are difficult to find in the marketplace. In this regard, as of December 31, 2012, we employed 272 employees, a relatively small workforce for a New York City-based financial institution that had, as of that date, $103.0 billion in assets.
Compensation & 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 & Human Resources Committee (“C&HR Committee”) of the Board of Directors (“Board”) to:
1. review and recommend to the Board changes regarding our compensation and benefits programs for employees and retirees;
2. review and approve individual performance ratings and related merit increases for our 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 Incentive Plan results and Incentive Plan award payouts;
5. advise the Board on compensation, benefits and human resources matters affecting Bank employees;
6. review and discuss with Bank management the Compensation Discussion and Analysis (“CD&A”) to be included in our 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 our executives so that we continue to retain, attract, motivate and align quality management consistent with the investment rationale and performance objectives contained in our annual business plan and budget, subject to the direction of the Board.
The Board has delegated to the C&HR Committee the authority to approve fees and other retention terms for: i) any compensation and benefits consultant to be used to assist in the evaluation of the 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 in the Corporate Governance section of our 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 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 a Named Executive Officer (“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 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 prior to the taking of final action by
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the C&HR Committee, we submit to the regulator the proposed merit-related pay increases as well as the incentive award payments. 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 C&HR Committee.
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 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 capital stock.
3. A significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome-indicators.
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 Office of Finance should promote accountability and transparency in the process of setting compensation.
While we believe that our compensation programs align well against each of these principles, we also review compensation programs annually to ensure that they continue to meet our needs.
On April 14, 2011, federal banking regulators, including the Finance Agency, jointly issued an interagency notice of proposed rulemaking to implement section 956 of the Dodd-Frank Act that, if adopted, would require, among other things, the reporting of incentive-based compensation arrangements by a “covered financial institution” (defined by the Dodd-Frank Act as a depository institution or a depository institution holding company that has $1.0 billion or more in assets), the Federal Home Loan Banks, and the Office of Finance. The proposed rules would prohibit incentive-based compensation arrangements at a covered institution that: (i) encourage a “covered person” to expose the institution to inappropriate risks by providing that person excessive compensation; or (ii) encourage inappropriate risk by the covered financial institution that could lead to a material financial loss. These prohibitions would also apply to the FHLBanks and the Office of Finance. The proposed rules, if adopted as proposed, would also require deferral of a portion of incentive-based compensation for executive officers of certain financial institutions, including the Federal Home Loan Banks and the Office of Finance.
How We Stay Competitive in the Labor Market
The C&HR Committee-recommended and Board-approved Compensation Policy acknowledges and takes into account our business environment and factors to remain competitive in the 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 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 our benefit programs.
· A philosophical determination to match officer positions one position level down versus commercial/regional banks. The rationale is that officer positions at commercial/regional banks may manage multiple business lines in multiple locations. In addition, we generally recruit senior-level positions from a ‘divisional’ level at large 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 our 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 officer positions each year. (In this regard, we use benchmarking information from Aon Consulting, Inc. 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 and welfare benefits in determining market competitiveness every third year.
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Additional factors that we take into account to remain competitive in our 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.
The Total Compensation Program
In response to the challenging economic environment in which we operate, compensation and benefits 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 our total compensation program for 2012, and are discussed in detail in Section IV below.
This CD&A provides information related to the total compensation program provided to our NEOs for 2012 — that is, our Principal Executive Officer (“PEO”), Principal Financial Officers (“PFOs”) and the three most highly-compensated executive officers other than the PEO and PFOs. The information includes, among other things, the objectives of the total compensation program and the elements of compensation provided to our NEOs. These compensation programs are not exclusive to the NEOs; they also apply to employees as explained throughout the CD&A.
I. Objectives of the total compensation program
The objectives of the total compensation program (described above) are to help motivate employees to achieve consistent and superior results over a long period of time and to provide a program that allows us to compete for and retain talent that otherwise might be lured away. Our low turnover rate and retention of our key employees is evidence that the total compensation program is working.
Compensation and Benefits Methodology
In June, 2006 the Committee engaged compensation specialists Aon Consulting, Inc., and its subsidiary, McLagan Partners, Inc. (“McLagan”), which focuses on executive compensation, to perform a broad and comprehensive review of all the compensation and benefits programs for all employees, including NEOs. To assist the C&HR Committee’s review of the process, 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 had, prior to this engagement, been retained 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 our Defined Benefit and Benefit Equalizations Plans. McLagan had also been previously engaged by the Bank for compensation consulting purposes. Aon continued providing the services listed above in 2012.)
Aon was instructed by the C&HR Committee to: (i) determine how the 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 benefit and identify ways to control these costs; (iii) determine the optimal mix of compensation and benefits; and (iv) determine if there were alternative benefit structures that should be considered. Aon was informed of our continued desire to attract, motivate and retain talented employees.
A major undertaking for Aon during the review process was to identify peer groups 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). Through Aon’s experience working with other Federal Home Loan Banks and through direct interviews with the senior management, Aon identified the current and future skill sets needed to meet the business objectives and also noted that we tended to hire employees from and lose employees to certain institutions.
Aon recommended that “Wall Street” firms not be used as benchmark peers because of an inconsistency between their business operating models and compensation models with those of the Bank. 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, as a Federally-regulated provider of liquidity to financial institutions, we operate using a low risk/return business model. Based on these considerations, Aon recommended that peer groups should be regional and commercial banks.
In addition, Aon proposed that 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 because they manage multiple business lines in multiple locations. In contrast, we only have two locations and one main business segment. Therefore, we generally recruit senior-level positions from a “divisional” level at
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commercial/regional banks as opposed to the higher “corporate” level of such organizations. The C&HR Committee and the Board agreed with these recommendations.
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 Zealand Banking Group | | Cargill | | KeyCorp |
ABN AMRO | | CIBC World Markets | | Lloyds TSB |
The Bank of Nova Scotia | | Citigroup | | M&T Bank Corporation |
Banco Santander | | Commerzbank | | Mizuho Corporate Bank, Ltd. |
Bank of Tokyo — Mitsubishi UFJ | | DVB Bank | | National Australia Bank |
Bank of America Merrill Lynch | | DZ Bank | | Rabobank Nederland |
BMO Financial Group | | Fannie Mae | | Royal Bank of Canada |
BNP Paribas | | Federal Home Loan Bank System | | Royal Bank of Scotland |
Brown Brothers Harriman | | Fifth Third Bank | | Societe Generale |
The CIT Group | | Freddie Mac | | Standard Chartered Bank |
Capital One | | GE Commercial Finance | | Sumitomo Mitsui Banking Corporation |
| | HSBC Bank | | SunTrust Banks |
| | HSBC Global Banking & Markets | | TD Securities |
| | ING Bank | | Wells Fargo Bank |
| | JP Morgan Chase | | WestLB |
| | | | Westpac Banking Corporation |
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:
· cash compensation was generally below our peer groups and heavily weighted towards base pay (Note: We are prohibited by law from offering equity-based compensation and we do not offer long-term incentives);
· added together, cash compensation and retirement-related benefits were slightly above our peers (and heavily weighted towards benefits);
· added together, cash compensation, retirement-related benefits and health and welfare benefits were generally above our peers and heavily weighted towards benefits; and
· the mix of compensation and benefits was consistent with our risk-averse culture.
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 current compensation and benefits program which stressed fixed compensation over variable to support our 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.
To better align the total compensation program with our peer group, Aon recommended, and the Board approved, changes to the retirement plan for certain active employees effective as of July 1, 2008, and changes to the 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. The changes to the 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 our peer group has 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 C&HR 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 independent of management and employees.
In accordance with the Board-approved Compensation Policy, we evaluate the value of total compensation delivered to employees including base pay, incentive compensation, retirement and health and welfare benefits in determining market competitiveness every third year after the date we completed the final implementation of Board-approved
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total compensation program design changes — namely July 1, 2008. The most recent review of our total compensation program commenced in September 2011 and a preliminary report was submitted by Aon (“Aon Report”) to the C&HR Committee at its meeting on February 10, 2012 for its review. The C&HR Committee agreed to continue to review and discuss the Aon Report during 2012 as they wanted to first consider the effects of implementing a deferred incentive compensation plan for its NEO’s in 2012. The Bank’s deferred incentive plan was approved by the FHFA on May 3, 2012 and made effective retrospectively as of January 1, 2012.
In November 2012, the C&HR Committee requested that Aon provide updated market data for its report, update the Total Rewards Study on employee compensation and benefits and present recommendations to the C&HR Committee before the end of 2013.
II. The 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 our competitors
The total compensation program is designed to attract, retain and motivate employees and to reward employees based on overall performance achievement as compared to the goals and individual employee performance. We also strive to ensure that our employees are compensated fairly and consistent with employees in our peer group.
All of the elements of the total compensation program are available to all employees, including NEOs, except with respect to: 1) the Incentive Plan; 2) Deferred Incentive Compensation Plan and 3) the Nonqualified plan. Participation in the Incentive Plan are offered to all exempt (non-hourly) employees. Exempt employees constituted 89% of all employees as of year-end 2012.
Participation in the Deferred Incentive Compensation Plan is mandatory for members of the Bank’s Management Committee.
Participation in the Benefit Equalization Plan, the nonqualified 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 Nonqualified Plan Committee.
All exempt employees are eligible to receive annual incentive awards through participation in the Incentive Plan. These awards are based on a combination of 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.
We are prohibited by law from offering equity-based compensation, and we do not currently offer long-term incentives. However, many of the firms in our peer groups do offer these types of compensation. Our 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 effectively compete for talent. Senior and mid-level employees are generally long-tenured and would not want to endanger their pension benefits to achieve a short-term financial gain.
We do not structure any of our compensation plans in a way that inappropriately encourages risk taking. As described in Section IV A 2 below, the rationale for having the equally-weighted Bankwide goals of Return and Risk within the Incentive Plan is to motivate management to take a balanced approach to managing risks and returns in the course of managing the business, while at the same time ensuring that we fulfill our mission.
In addition, the 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 compensation philosophy and the structure of the compensation programs helps to ensure that the compensation paid to employees at termination of employment is aligned with the interest of our shareholders.
III. The elements of total compensation
The 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 DB BEP) and (c) health and welfare programs and other benefits which are listed in Section IV C below.
IV. Explanation of why we provide each element of total compensation
Our 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 we provide competitive compensation necessary to retain and motivate current employees while attracting the talent needed to successfully execute 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 peer group for benchmarking at the 50th percentile of total compensation (a) cash compensation (i.e., base salary, and, for
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exempt employees, “variable” or “at risk” short-term incentive compensation); (b) retirement-related benefits; and (c) 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 benefit programs.
· A philosophical determination to match 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 addition, we generally recruit 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 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 officer positions each year.
· A commitment to evaluate the value of total compensation delivered to employees including base pay, incentive compensation, retirement and health and welfare benefits in determining market competitiveness every third year.
Additional factors that we will take into account during the benchmarking process to ensure we remain competitive in our 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.
It should be noted that, due to the fact that we conduct detailed benchmarking for only one-third of the officer positions on an annual basis with respect to cash compensation, the effectiveness of the benchmarking program can be demonstrated only once every three years. However, NEOs are benchmarked every year and the effectiveness of the benchmarking program could be demonstrated annually.
2009 Compensation Benchmarking Analysis
We performed our annual benchmarking analysis in October 2009 of 24 officer positions using compensation data (base pay and incentive compensation) from Aon. Aon reported that benchmarking compensation in 2009 was, in general, complicated as a result of an aberration in the poor financial performance of regional/commercial banks, the resultant decreases in compensation in the financial market and our strong financial results. Aon reviewed the results with the view that our conservative compensation philosophy limits the upside in incentive compensation by capping incentive pay as a percentage of base salary while bonuses provided by competitors 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” while limiting the amount of compensation increases when markets are strong.
As a result, management decided to propose to the C&HR Committee that there be no market adjustments for 2010 to the salaries of the officer positions that were benchmarked in 2009. The C&HR Committee agreed, and decided that if the information related to benchmarked compensation in 2010 was similar to the results of 2009, then the compensation structure and benchmarking process should be reviewed and may need to change to reflect the market.
2010 Compensation Benchmarking Analysis
In its continuing effort to annually benchmark approximately one-third of officers with respect to cash compensation, in 2010 management engaged McLagan to perform a benchmarking analysis of 29 officer positions. NEOs are counted as part of the one-third every year.
Out of the 29 positions benchmarked, 25 positions were matched by McLagan. Two of the NEO positions for which a position match was not identified were for the Head of Member Services and the Head of Strategy and Business Development. The difficulty in matching these positions illustrates the unique nature of the business and structure of our business.
McLagan submitted and discussed a report on the results of its officer benchmarking analysis (“Analysis”) to the C&HR Committee at its December 2010 meeting. The C&HR Committee did not completely agree with the Analysis with regards to the peer groups, and comparable position matches within our peer group, that was used in the Analysis by McLagan. Therefore, it was agreed that the entire benchmarking process would be reviewed in 2011 as there were many positions that do not fit position descriptions at our peer groups and that the Bank has very complex transactions performed by professionals who would not have equivalents at a divisional level at one of our peer groups.
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McLagan recommended increases to the salaries of four officer positions, none of which were NEO’s. McLagan also proposed certain amendments to the Board-approved Compensation Policy (“Policy”). The C&HR Committee approved the proposed salary increases but deferred acting on the proposed changes to the Policy because the C&HR Committee planned to review the total rewards philosophy in 2011 and will review the Policy for changes at the same time.
2011 Compensation Benchmarking Methodology
McLagan began reporting directly to the C&HR Committee in 2011. In September 2011, the benchmarking methodology was refined and approved by the C&HR Committee for use during the review of the Bank’s total compensation program. The preliminary result of the review of the Bank’s total compensation program was submitted to the C&HR Committee in February 2012.
2012 Compensation Benchmarking Analysis
A preliminary report (“Aon Report”) on the results of our total compensation program was submitted by Aon to the C&HR Committee at its meeting on February 10, 2012 for its review. The C&HR Committee agreed to suspend the total compensation review while the Bank implemented the deferred incentive compensation plan for the Bank’s NEOs in 2012. The deferred incentive plan was approved by the FHFA on May 3, 2012 and made effective retrospectively to January 1, 2012.
In November 2012, the C&HR Committee restarted the total compensation review by requesting that Aon provide updated market data for its report and present its results to the C&HR Committee. The results will be presented to the C&HR Committee in April 2013. The C&HR Committee then plans to study the results and have Aon complete the review. The C&HR Committee and the Board will review Aon’s analysis and make decisions about any changes to plans before the end of 2013.
To comply with the Finance Agency requirement that the Federal Home Loan Banks 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, we submitted the proposed merit increase percentages for 2012 performance for the NEOs in November. In addition, to help support the proposed merit increases, the Finance Agency required that a compensation benchmarking analysis be submitted. The analysis was performed by McLagan. The results of the benchmarking analysis are discussed in section A. 1 below.
The following is an explanation of why we 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 business strategies.
In addition to the benchmarking process provided for in the Compensation Policy as described above, a performance-based merit increase program exists for all employees, including NEO’s, that have a direct impact on base pay. Generally, employees receive merit increases on an annual basis. Such merit increases are based upon the achievement of a performance rating of “Outstanding,” “Exceeds Requirements,” or “Meets Requirements” 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 November of 2012, the C&HR Committee determined that merit-related officer base pay increases for 2013 would be 2.5% for officers rated ‘Meets Requirements’; 3.0% for officers rated ‘Exceeds Requirements’; and 4.0% for officers rated ‘Outstanding’ for their performance in 2012.
To comply with the Finance Agency requirement that the FHLBanks submit all compensation actions involving a 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, we submitted the proposed merit increase percentages for 2012 performance for the NEOs in November. In addition, to help support the proposed merit increases, the Finance Agency required that a compensation benchmarking analysis be submitted. The analysis was performed by McLagan.
McLagan used three peer groups in establishing competitive market pay:
(1) Commercial Banks (former “bulge bracket” investment banks were specifically excluded). Data for the Metro New York area was used where available;
(2) Federal Home Loan Banks; and
(3) Publicly-available proxy data for banks with assets between $5B and $20B
When benchmarking executives using the Commercial Bank peer group, McLagan benchmarked the Bank’s NEOs at one level down from the Bank’s positions, i.e., our Chief Risk Officer (“CRO”) was benchmarked using Divisional Heads as the relevant comparison (e.g., Senior Function Manager of Credit Risk and Market Risk rather than the peer’s overall CRO). When using the Federal Home Loan Bank system or the $5-$20 billion peer group, McLagan benchmarked at the same level as the Bank’s position (e.g., CRO).
McLagan also used salary rank from the proxies from publicly-traded banks. Salary rank compares a firm’s top paid incumbents against the market’s top paid incumbents regardless of position.
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Per the Bank’s compensation philosophy, McLagan used median data as the initial benchmark statistic for commercial banks and proxy benchmarks and the high quartile is used for the Federal Home Loan Bank system benchmarks. Higher/lower benchmark statistics were used to account for larger/smaller responsibilities. The value of retirement plans and other benefits, including the defined benefit plans were not represented in this analysis and will be addressed in the total compensation review as stated above. (Please note that these benefits are incorporated in the benchmarking of total compensation which 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.)
The results of the compensation benchmarking analysis and the proposed merit increases for the NEOs were submitted to the Finance Agency in November 2012 and in December 2012; we received a “non-objection” letter to pay the merit increases, effective January 1, 2013.
A representative list of the peer group that was used in the compensation benchmarking analysis is set forth in the table below.
Market Data Participants — Commercial Banks and FHLBanks
ABN AMRO Securities (USA) LLC | DnB Bank | Lloyds Banking Group |
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AIB Capital Markets | DnB NOR Markets, Inc. | M&T Bank Corporation |
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Ally Financial Inc. | DVB Bank | Macquarie Bank |
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Amegy Bank | DZ Bank | Mizuho Corporate Bank, Ltd. |
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Australia & New Zealand Banking Group | Espirito Santo Investment | National Australia Bank |
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Banco Bilbao Vizcaya Argentaria | Fannie Mae | National Bank of Arizona |
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Banco Itau | Federal Home Loan Bank of Atlanta | Natixis |
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Banco Santander | Federal Home Loan Bank of Boston | Nevada State Bank |
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Bank Hapoalim | Federal Home Loan Bank of Chicago | Nord/LB |
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Bank of America | Federal Home Loan Bank of Cincinnati | Nordea Bank |
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Bank of Ireland Corporate Banking | Federal Home Loan Bank of Dallas | OCBC Bank |
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Bank of the West | Federal Home Loan Bank of Des Moines | One West Bank |
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Bank of Tokyo - Mitsubishi UFJ | Federal Home Loan Bank of Indianapolis | Pacific Capital Bank N.A. |
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Bayerische Landesbank | Federal Home Loan Bank of New York | PNC Bank |
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BBVA Compass | Federal Home Loan Bank of Pittsburgh | Rabobank Nederland |
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BMO Financial Group | Federal Home Loan Bank of San Francisco | RBS/Citizens Bank |
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BNP Paribas | Federal Home Loan Bank of Seattle | Regions Financial Corporation |
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BOK Financial Corporation | Federal Home Loan Bank of Topeka | Royal Bank of Canada |
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Branch Banking & Trust Co. | Fifth Third Bank | Sallie Mae |
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California Bank & Trust | First Financial Bancorp | Societe Generale |
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Capital One | First Niagara | Sovereign Bank |
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China Construction Bank | First Tennessee Bank/ First Horizon | Standard Bank |
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China International Capital Corporate | FNB Omaha | Standard Chartered Bank |
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China Merchants Bank | Freddie Mac | SunTrust Banks |
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CIBC World Markets | GE Capital | Susquehanna International Group |
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Citigroup | Helaba Landesbank Hessen-Thuringen | SVB Financial Group |
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City National Bank | HSBC | TD Securities |
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Comerica | ING | The Bank of Nova Scotia |
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Commerzbank | Itau Unibanco | The CIT Group |
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Crédit Agricole CIB | JP Morgan | The Norinchukin Bank, New York Branch |
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Credit Industriel et Commercial | KBC Bank | The Private Bank |
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Dexia | KeyCorp | UniCredit |
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United Bank for Africa Plc | Landesbank Baden-Wuerttemberg | Union Bank, N.A. |
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Wells Fargo Bank | Webster Bank | Wells Fargo Bank |
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Westpac Banking Corporation | Zions Bancorporation | |
Market Data Participants — Assets between $5B - $20B
BancFirst Corp. | First Midwest Bancorp Inc. | SVB Financial Group |
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BancorpSouth Inc. | FirstMerit Corp. | TCF Financial Corp. |
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Bank of Hawaii Corp. | Fulton Financial Corp. | Texas Capital Bancshares Inc. |
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BankUnited Inc. | Glacier Bancorp Inc. | Trustmark Corp. |
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BBCN Bancorp Inc. | Hancock Holding Co. | UMB Financial Corp. |
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Boston Private Financial | IBERIABANK Corp. | Umpqua Holdings Corp. |
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CapitalSource Inc. | International Bancshares Corp. | United Bankshares Inc. |
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Cathay General Bancorp | MB Financial Inc. | United Community Banks Inc. |
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Chemical Financial Corp. | National Penn Bancshares Inc. | Valley National Bancorp |
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Citizens Republic Bancorp Inc. | NBT Bancorp Inc. | Webster Financial Corp. |
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CVB Financial Corp. | Old National Bancorp | WesBanco Inc. |
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Doral Financial Corp. | PacWest Bancorp | Westamerica Bancorp. |
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F.N.B. Corp. | PrivateBancorp Inc. | Western Alliance Bancorp |
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First BanCorp. | Prosperity Bancshares Inc. | Wintrust Financial Corp. |
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First Commonwealth Financial | Provident Financial Services | |
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First Financial Bancorp. | Signature Bank | |
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First Interstate BancSystem | Susquehanna Bancshares Inc. | |
2. Incentive Plan
I. Overview of the 2012 Plan
The objective of the Bank’s 2012 Incentive Compensation Plan (“Plan”) is to motivate employees to take actions that support the Bank’s strategies and lead to the attainment of the Bank’s business plan and fulfillment of its mission. The 2012 Plan is also intended to help retain employees by affording them the opportunity to share in the Bank’s performance results. The 2012 Plan seeks to accomplish these objectives by linking annual cash payout award opportunities to Bank performance and to individual performance. All salaried exempt employees are eligible to participate in the 2012 Plan. Awards under the 2012 Plan, if any, will be calculated based upon performance during 2012 and will ordinarily be paid to participants on or before March 14, 2013, subject to regulatory approval and the deferral feature for Management Committee participants discussed below. The 2012 Plan was developed in accordance with Advisory Bulletin 2009-AB-02 and other guidance received from the Finance Agency.
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II. Bankwide Goals — Weighting Based on Employee Rank
We believe 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 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 were rated as “Exceeds Requirements” or “Outstanding” on their individual performance evaluations received an additional 3% or 6%, respectively, of their base salary added to their Incentive Plan award for the 2010 Plan year. In 2011, we removed the additional 3% and 6% award for employees’ superior annual performance ratings from the Incentive Plan and instead included it as a cash payout based on the annual performance evaluation rating. This cash payout for a superior performance rating will not result in an increase to base salaries.
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.
Award Calculation
Bankwide goals are established to address the Bank’s business operations and mission. Actual results of each goal are compared against the three benchmarks (threshold, target and maximum) that were established for the Incentive Plan year. The Incentive Plan Participant receives a payout based on the benchmark level that is met for each goal. For example, the incentive compensation opportunity rate is set such that the employee will earn 15% of salary if weighted result of all goals are at threshold, 30% if at target and 60% if at maximum.
The actual results for each goal may fall between two benchmark levels. When this happens, the payout figures are interpolated for results that fall between the two applicable ranges; either threshold and target, or target and maximum. For example, if the actual results fall between target and maximum, the Incentive Plan Participant will receive the payout for achieving target plus an additional amount for the excess over target. This calculation is performed for each Bank-wide goal. For each goal, there is no payout if the actual result does not reach the threshold, and the payout is capped at maximum. Individual performance goals apply the same methodology except that they are weighted at 10% for NEOs.
Measurements Used by the 2012 Plan
The Bankwide goals are designed to help management focus on what it needs to succeed, and the Bankwide goals are approved by the Board. The 2012 Bankwide goals are organized into three broad categories and are presented in the charts below. The charts contain:
· a description of each of the goals and their respective weightings as a percentage of the Bankwide goals;
· an explanation of each Bankwide goal measure and how each goal meets its stated purpose; and
· actual results of each goal along with the Bankwide goal benchmarks (threshold, target and maximum) that were established.
Actual results illustrate the benchmark levels that were achieved in 2012 for each of the Bankwide goals.
2012 Incentive Compensation Plan Measures and Results
Business Effectiveness Goal
Bankwide Goals
(Measure and calculation of measure) | | How Goal
Meets Stated
Purpose | | Weighting | | Threshold | | Target | | Maximum | | Results | |
BUSINESS EFFECTIVENESS (1) | | | | 80% of Bankwide Goal | | | | | | | | | |
Return Component Dividend Capacity as forecasted in the 2012 business plan. Dividend Capacity is calculated as net income, divided by average capital stock. The Bank’s goal is to reward management for financial results that are generally controllable by management. Therefore, we adjust net income to eliminate the impact of items such as unrealized fair value changes on derivatives and associated hedged instruments. | | Earnings provide value for shareholders through the ability to add to retained earnings and to pay a dividend. | | 40% | | 4.14 | % | 4.87 | % | 5.84 | % | 5.67 | % |
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Risk Component - Risk level arising from expected changes in the balance sheet and the business environment as measured by a designated portion of retained earnings. The intent of this requirement is to measure the target level of market, credit and operations risk exposures within the balance sheet versus the actual level during the year. The measurement is favorable whenever it is below the calculation of measure. | | Lowering the Bank’s risk profile provides a level of assurance that unexpected losses will not impair members’ investment in the Bank and serves to preserve the par value of membership stock. | | 30% | | $ | 469.8mm | | $ | 403.4mm | | $ | 361.5mm | | $ | 359.1mm | |
Risk Component — Market value of Equity to Capital Stock Ratio (MVE/CS) | | Supports protecting the par value of membership stock | | 10% | | 100 | % | 105 | % | 110 | % | 114.1 | % |
(1) Business Effectiveness comprises both Return and Risk Goals. The Return and Risk Goals 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 we understand them, i.e., to have management achieve forecasted returns while managing risks to stay within prescribed risk parameters. Plan participants employed in the Risk Management Group have a higher weighting on the “Risk” component of the Business Effectiveness goal category than Plan participants that are not employed in the Risk Management Group. Risk Management Group participants have a 30% weight on the return and 50% weight on the risk. The change in the weightings of the Business Effectiveness goal is to help ensure that the Bank places more emphasis on risk metrics for the Risk Management Group.
The Risk Goals are intended to encourage management to balance those actions taken to enhance earnings (i.e., Dividend Capacity) with actions that are needed to appropriately manage risk levels in the business. Preserving the value of member paid-in capital and providing a predictable dividend are important ways that the Bank helps to provide value to stockholders.
Growth Effectiveness Goal
Bank wide Goals
(Measure and calculation of measure) | | How Goal Meets
Stated Purpose | | Weighting | | Threshold | | Target | | Maximum | | Results | |
GROWTH EFFECTIVENESS (2) | | | | 10% of Bankwide Goals | | | | | | | | | |
Number of New Member Institutions | | Positions the Bank for future growth and aligns with philosophy of being an “advances bank” | | 2.5% | | 6 | | 9 | | 18 | | 9 | |
Number of New/Previously Inactive Borrowers | | Positions the Bank for future growth and aligns with philosophy of being an “advances bank” | | 3.5% | | 13 | | 18 | | 36 | | 44 | |
Advance Volume- Average Balance of Advances | | Aligns with philosophy of being an “advances bank” | | 1.5% | | $ | 48.8B | | $ | 59.1B | | $ | 72.7B | | $ | 72.3B | |
Market Share — Calculated by comparing members’ outstanding advances against a pool of alternative wholesale funding sources. | | Helps the Bank gauge its competitive position against a variety of wholesale funding alternatives used by members. Strengthens the franchise as an “advances bank”. | | 2.5% | | 36.4 | % | 43.11 | % | 53.13 | % | 43.50 | % |
| | | | | | | | | | | | | | | | | |
(2) The Bank’s Growth Effectiveness goal is intended to “plant the seeds” for future growth. Our district has historically been subject to a high level of merger and acquisition activity, and we consistently have had the least, or second least, number of members of all the FHLBs. Increasing the number of new members and increasing the number of new and returning borrowing members is a method employed to help manage the risk of the Bank having fewer members and borrowers in the future.
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Community Investment Effectiveness Goal
Bank wide Goals
(Measure and calculation of measure) | | How Goal Meets
Stated Purpose | | Weighting | | Threshold | | Target | | Maximum | | Results | |
COMMUNITY INVESTMENT EFFECTIVENESS (3) | | | | 10% of Bankwide Goal | | 1 | | 3 | | 5 | | | |
Total Dollar Volume of Community Lending Program Commitments Issued | | Supports the provision of liquidity to members for housing and community development activities | | 2.0 | % | $ | 405mm | | $ | 450mm | | $ | 520mm | | $ | 1,083mm | |
Total Dollar Volume of Community Investment Related Transactions & Investment | | Supports the provision of liquidity for housing and community development activities. Includes investments in Housing Finance Agency bonds. | | 1.0 | % | $ | 260mm | | $ | 290mm | | $ | 335mm | | $ | 754mm | |
Number of New Members Participating in the Bank’s First-Time Home Buyer Program | | Supports the provision of grant funding for first time home buyers | | 1.0 | % | 3 | | 5 | | 8 | | 3 | |
Number of Members Participating in the Letter of Credit Program | | Supports the provision of liquidity for housing and community development activities | | 1.5 | % | 30 | | 34 | | 44 | | 42 | |
Dollar Amount of Letters of Credit Issued | | Supports the provision of liquidity for housing and community development activities | | 1.5 | % | $ | 19.0B | | $ | 20.0B | | $ | 21.0B | | $ | 46.B | |
Number of New Members Participating in the MPF Program | | Supports the provision of a secondary market vehicle for member-originated mortgages | | 1.0 | % | 4 | | 7 | | 11 | | 12 | |
Community Investment Related Outreach and Technical Assistance Activities | | Supports the promotion, understanding and use of the Bank’s housing and community lending programs | | 2.0 | % | 53 | | 58 | | 68 | | 70 | |
(3) The Goal was implemented as a composite of several programs and activities as all of these components contribute to how the Bank achieves its mission-related housing and community development activities.
Overall the weighted average result for Bankwide goals was 85.7% above target. The weighted average result for the Risk Management Group was 87.5% above target. Payments are interpolated between the target and maximum amounts.
Clawback Provision
Beginning with the 2010 IC Plan, we added a clawback provision to the Incentive Plan that states:
“Any undue incentives paid to a Participant with a rank of Vice President or higher based on the achievement of financial or operational goals within this Plan that subsequently are deemed by the Bank to be inaccurate, misstated or misleading shall be recoverable from such Participant by the Bank. Inaccurate, misstated and/or misleading achievement of financial or operational goals shall include, but not be limited to, overstatements of revenue, income, capital, return measures and/or understatements of credit risk, market risk, operational risk or expenses. The value of any benefits delivered or accrued related to the undue incentive (i.e., the amount of the incentive over and above what should have been paid to the Participant barring inaccurate, misstated and/or misleading achievement of financial or operational goals) shall be reduced and/or recovered by the Bank to the fullest extent possible. Participants shall be responsible for the repayment of any such excess incentive payments as described in this paragraph upon demand by the Bank.”
2012 Deferred Incentive Compensation Plan
A deferred incentive compensation plan was implemented effective retrospectively January 1, 2012 for members of the Bank’s Management Committee after having been approved by the FHFA on May 3, 2012. Such deferred compensation plan provides that the ICP function as outlined above; however, payments made to Management Committee members under the ICP are deferred and will be made as described below.
Deferral Component for Management Committee Members
The 2012 Plan provides that 50% of the Total Communicated Award (as defined below), if any, under the 2012 Plan communicated to Management Committee participants (which includes the named executive officers) will ordinarily be paid by March 14, 2013. The remaining 50% will be deferred (the “Deferred Incentive Award”), subject to certain additional conditions specified in the 2012 Plan, such that 33 1/3% of the Deferred Incentive Award will ordinarily be paid within the first two and a half weeks of March 2014, 2015 and 2016, respectively. Each deferred
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payment may be increased or decreased by 25% based on the Bank’s performance on MVE as outlined in the table below. An employee who terminates employment with the Bank other than for “good reason” or who is terminated by the Bank for “cause” (each as defined in the 2012 Plan) will forfeit any portion of the Deferred Incentive Award that has not yet been paid upon such termination. In addition, the Deferred Incentive Award will be paid in full in connection with a “change in control” (as defined in the 2012 Plan).
In the chart below, the following terms have the following definitions:
“Total Communicated Award” means the total amount of the incentive award (if any) under the Plan communicated to Management Committee Participants;
“Current Communicated Incentive Award” means 50 percent of the Total Communicated Award; and
“Deferred Incentive Award” means the remaining 50 percent of the Total Communicated Award.
Payment | | Description | | Payment Year | |
Current Communicated Incentive Award | | 50% of the Total Communicated Award | | 2013 | * |
Deferred Incentive Award installment | | Up to 33 1/3% of the Deferred Incentive Award | | 2014 | ** |
Deferred Incentive Award installment | | Up to 33 1/3% of the Deferred Incentive Award | | 2015 | ** |
Deferred Incentive Award installment | | Up to 33 1/3% of the Deferred Incentive Award | | 2016 | ** |
*Payment shall ordinarily be made on or before March 14, 2013.
**Payment shall ordinarily be made within the first two and a half weeks of March in the year indicated.
The Current Communicated Incentive Award at maximum shall not exceed 100 percent of the participant’s base salary.
The “Performance Scorecard” below shall be used for determining the payment of Deferred Incentive Awards:
Performance
Measure | | Threshold
75% of Deferred
Incentive Award
Installment | | Target
100% of Deferred
Incentive Award
Installment | | Maximum
125% of Deferred
Incentive Award
Installment | |
Market Value of Equity to Par Value of Capital Stock | | 95 | % | 100 | % | 105 | % |
The actual results may fall between two benchmark levels. When this happens, the payout figures are interpolated for results that fall between the two applicable ranges; either threshold and target, or target and maximum.
B. Retirement Benefits
Introduction
The Qualified Defined Benefit Plan, Qualified Defined Contribution Plan, and the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan, were elements of the Bank’s total compensation program in 2012 intended to help encourage the accumulation of wealth by consistent and superior results from, qualified employees, including NEOs, over a long period of time.
These benefits (in addition to the Health and Welfare Programs and Other Benefits noted in Section IV C below) were part of our 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 we do not offer.
The Qualified Defined Benefit Plan was amended for eligible employees as of July 1, 2008 and, as a consequence, the terms of the DB BEP for certain employees also changed as of that date, since the DB BEP mirrors the structure of the Qualified Defined Benefit Plan.
In 2010, the Board approved the establishment of a Thrift Restoration Plan and a Profit Sharing Plan for certain members of former nonqualified plans.
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Thrift Restoration Plan
Starting in 2010 and thereafter, the former participants of a terminated nonqualified Deferred Compensation program, who would have been otherwise eligible for a match in the amount of 6% of base pay in excess of IRS limitations ($250,000 for 2012), will continue to receive an additional annual cash payment in an amount equal to 6% of the base pay in excess of the IRS limitation.
Profit Sharing Plan
In 2010 and thereafter, the former participants of a terminated nonqualified Profit Sharing Plan, a provision of 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 included as income for calculating the benefits for the Qualified Defined Benefit Plan.
The Nonqualified Plan Committee administers various operational and ministerial matters pertaining to the Benefit Equalization 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, our Chief Financial Officer, and the 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.
i) Qualified Defined Benefit Plan
The Pentegra Qualified Defined Benefit Plan for Financial Institutions (“DB Plan”) is an IRS-qualified defined benefit plan which covers all employees who have achieved four months of service. The DB Plan is part of a multiple-employer defined benefit program administered by Pentegra Retirement Services.
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; short-term incentives for participants of the deferred incentive compensation plan is defined as the Total Communicated Award. 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. In addition, for the Non-Grandfathered participants, the 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.
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.
For purposes of the above table, please note the following definitions:
Benefit Multiplier — The annuity paid from the 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 —The 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
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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, any accrued benefits prior to July 1, 2008, the accrued Benefit Multiplier mirrors the Grandfathered Employees at 2.5%. For benefits accrued 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.
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 is 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 guaranteed 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:
Early retirement under the plan is available after age 45.
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.
Earnings under the 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 2012 was $250,000.
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, a non-qualified retirement plan that in many respects mirrors the DB Plan.
The primary objective of the DB BEP is to ensure that participants receive the full benefit to which they would have been entitled under the DB Plan in the absence of limits on maximum benefit levels imposed by the IRC.
The DB BEP utilizes the identical benefit formulas applicable to the DB Plan. In the event that the benefits payable from the DB Plan have been reduced or otherwise limited by government regulations, the employee’s “lost” benefits are payable under the terms of the DB BEP.
The DB BEP is an unfunded arrangement. However, we established a grantor trust 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.
iii) Qualified Defined Contribution Plan
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 following three full calendar months of employment.
An employee may contribute 1% to 100% of base salary into the DC Plan, up to IRC limitations. The IRC limit for 2012 was $17,000 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. If an employee contributes at least 3% of base salary, the Bank provides a match of 3% of base salary. After completing three years of employment, the match is 4.5% of base salary and after five years of employment 6% of base salary. Contributions of less than 3% of base salary receive a match of 2% of the employee’s base salary or $34.61 per pay period (whichever is less).
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C. Health and Welfare Programs and Other Benefits
In addition to the foregoing, we offer 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 plans. 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.
Retiree Medical
We offer 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 service when they retire from active service.
Under the Plan as in effect from May 1, 1995 until December 31, 2007, retirees who retire before age 62 pay the full premium for the coverage they had as employees until they attain age 62. Thereafter, they contribute a percentage of the 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:
| | Percentage of Premium | |
Completed Years of 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 previously 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), we 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, our contribution toward the premium for the coverage of the Medicare-eligible individual will be reduced to $25 per month 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. 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%. 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 we provide medical coverage to a retired employee and collect from the retiree a monthly fixed dollar portion of the premium for the coverage elected by the employee.
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Defined Dollar Plan — A medical plan in which we provide medical coverage to a retired employee up to a fixed cost for the coverage elected by the employee and the retiree assumes all costs above the 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 attained 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 | | $5,400/$3,000 | |
15 years of service after age 45 | | 62.5% for Post-62 | | $8,100/$4,500 | |
20 years of service after age 45 | | 75% for Post-62 | | $10,800/$6,000 | |
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
The Group Term Life insurance provides a death benefit of twice an employee’s annual salary (including incentive compensation) at no cost to the employee other than taxation of the imputed value of coverage in excess of $50,000.
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 Split Dollar life insurance program, as consideration for their assigning to the Bank their portion of their Split Dollar life insurance policy. The Split Dollar life insurance program was terminated in 2003.
This Additional Term Life Insurance policy is paid by the Bank; however, each individual owns the policy. We 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 $1,000 increments up to a maximum of $20,000.
Business Travel Accident Insurance
Business Travel Accident insurance provides a death benefit while traveling on Bank business, outside of the normal commute, 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
We provide supplemental short-term disability coverage at no cost to the employee. This coverage provides 66.67% (up to a maximum of $1,000 per week) of a person’s salary while they are on disability leave. Once state disability coverage is confirmed, we reduce 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, and mass transit expenses and parking expenses associated with commuting. The administrative costs for these accounts are paid by the Bank.
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Employee Assistance Program
Employee assistance counseling is available at no cost to employees. This is a Bank provided benefit that allows employees to anonymously speak to a 3rd party provider regarding various issues such as stress, finance, smoking cessation, weight management and personal therapy.
Educational Development Assistance
Educational Development Assistance provides tuition reimbursement, subject to the satisfaction of certain conditions.
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
There is a formal Board-approved Severance Plan covering all employees who work twenty or more hours a week, and have at least one year of employment, and whose employment was terminated for specific reasons outlined in the Severance Plan.
Service Award
We provide employees, including NEOs, who are employed at the Bank for 10 years or more with a service award. This award is presented after 10 years in increments of 5 years. The award ranges from $250 - $1,000.
Perquisites
Perquisites represent expenditures totaling less than $10,000 for the year 2012 per NEO.
V. Explanation of how we determine the amount and, where applicable, the formula for each element of compensation
Please see Section IV directly above for an explanation of the mechanisms used to determine employee compensation.
VI. Explanation of how each element of compensation and the decisions regarding that element fit into the overall compensation objectives and affect decisions regarding other elements of compensation
The Committee believes it has developed a unified, coherent system of compensation. The 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.
Together, these components comprised the total compensation program for 2012, and they are discussed in detail in Section IV above.
Our overall objectives with regard to our compensation and benefits program are to motivate employees to achieve consistent and superior results over a long period of time, and to provide a program that allows us to compete for and retain talent that otherwise might be lured away. Section IV of the CD&A above describes how each element of the compensation objectives and the decisions regarding each such element fit within such objectives.
As we make 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.
We note 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 C&HR Committee of the Board of Directors 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,
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the C&HR Committee recommended to the Board that the Compensation Discussion and Analysis be included in the annual report on Form 10-K for the year 2012.
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
Vincent F. Palagiano
RISKS ARISING FROM COMPENSATION PRACTICES
We do not believe that risks arising from the compensation policies with respect to its employees are reasonably likely to have a material adverse effect on the Bank. We do not structure any of our compensation plans in a way that inappropriately encourages risk taking to achieve payment.
Our business model operates on a low return/low risk basis. One of the important characteristics of our culture is appropriate attention to risk management. We have established procedures with respect to risk which are reviewed frequently by entities such as our regulator, external audit firm, Risk Management Group, and Internal Audit Department.
In addition, we have a Board and associated Committees that provide governance. The compensation programs are reviewed annually by the C&HR Committee to ensure they follow the goals.
The structure of our compensation programs provides evidence of the balanced approach to risk and reward in our culture. The rationale for the structure of the Incentive Plan and its goals is to motivate management to take a balanced approach to managing risks and returns in the course of managing the business, while at the same time ensuring that we fulfill our mission. Beginning in 2004, we implemented a goal structure related to the Incentive Plan that provided for a balanced focus on risk and return. The Business Effectiveness Goal component of the Incentive Plan is intended to incent management to balance actions to enhance earnings (i.e., Return goal) with actions to maintain appropriate risk levels in the business (i.e., Risk goal). The Business Effectiveness Goal is designed to require an estimation of the exposure to risks associated with our day to day operations. The Return and Risk Goals are linked and create a beneficial tension through the tradeoffs in managing one versus the other. These goals are weighted at 40% each, except the Risk Management group weighted at 30% and 50% respectively; this motivates management to act in ways that are aligned with the Board’s wishes to have us achieve forecasted returns while managing risks within the prescribed risk parameters. In addition, this set of goals will not motivate management to increase returns if it requires imprudently increasing risk.
We operate with a philosophy that all our employees are risk managers and are, therefore, responsible for managing risk. It is true that we have separated operational management from risk oversight, and those employees who work in the Risk Management Group have a special responsibility to identify, measure, and report risk. However, all employees need to be aware of and responsible for managing risks at the Bank, and to consider the risk implications of their decisions. To do otherwise is to relegate the management of risks to a small number of professionals and allow other managers to believe that managing risks is not part of their jobs. In our view, such an approach could lead to imprudent risk-taking and may erode the firm’s value over time.
In addition, we are prohibited by law from offering equity-based compensation, and we do not currently offer long-term incentives. However, many of the firms in our peer group do offer these types of compensation. The total compensation program takes into account the existence of these other types of compensation by offering defined benefit and defined contribution plans to help effectively compete for talent. The 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 we believe that these employees would not want to endanger their pension benefits by inappropriately stretching rules to achieve a short-term financial gain. By definition, these programs are reflective of the risk adverse culture.
The Finance Agency also has issued certain compensation principles, one of which is that executive compensation should be consistent with sound risk management and preservation of the par value of FHLBank stock. Also, the Finance Agency reviews all executive compensation plans relative to these principles and such other factors as the Finance Agency determines to be appropriate, including the 2012 Incentive Plan, prior to their becoming effective.
Thus, the general risk-averse culture, which is reflected in the compensation policy, leads us to believe that any risks arising from the compensation policies with respect to our employees are not reasonably likely to have a material adverse effect.
Compensation Committee Interlocks and Insider Participation
The following persons served on the C&HR Committee during all or some of the period from January 1, 2012 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, Vincent F. Palagiano, and C. Cathleen Raffaeli. During this period, no interlocking relationships existed between any member of the Bank’s Board of Directors or the C&HR Committee and any
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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 C&HR Committee listed above is or was formerly an officer or our employee.
Executive Compensation
The table below summarizes the total compensation earned by each of the Named Executive Officers (“NEO”) for the years ending December 31, 2012, December 31, 2011 and December 31, 2010 (in whole dollars):
Summary Compensation Table for Fiscal Years 2012, 2011 and 2010
| | | | | | | | | | | | | | Change in | | | | | |
| | | | | | | | | | | | | | Pension Value | | | | | |
| | | | | | | | | | | | | | and Nonqualified | | | | | |
| | | | | | | | | | | | Non-Equity | | Deferred | | All Other | | | |
| | | | | | | | | | | | Incentive | | Compensation | | Compensation | | | |
| | | | | | | | | | | | Plan | | (2),(3) | | (4), (5),(6),(7),(8),(9),(10),(11),(12) | | | |
| | | | Salary | | | | Stock | | Option | | Compensation | | (B),(C) | | (D), (E) ,(F), (G), (H), (I), (J), (K), (L) | | | |
Name and Principal Position | | Year | | (13) (14) (15) | | Bonus | | Awards | | Awards | | (1) (A) (a) | | (b),(c),(d),(e),(f) | | (g), (h), (i), (j), (k), (l), (m), (n) | | Total | |
| | | | | | | | | | | | | | | | | | | |
Alfred A. DelliBovi | | 2012 | | $ | 763,415 | | — | | — | | — | | $ | 541,013 | | $ | 1,149,000 | | $ | 124,514 | | $ | 2,577,942 | |
President & | | 2011 | | $ | 709,263 | | — | | — | | — | | $ | 523,180 | | $ | 1,444,000 | | $ | 120,417 | | $ | 2,796,860 | |
Chief Executive Officer (PEO) | | 2010 | | $ | 678,721 | | — | | — | | — | | $ | 526,090 | | $ | 1,434,998 | | $ | 69,177 | | $ | 2,708,986 | |
| | | | | | | | | | | | | | | | | | | |
Peter S. Leung | | 2012 | | $ | 483,393 | | — | | — | | — | | $ | 256,926 | | $ | 664,000 | | $ | 73,121 | | $ | 1,477,440 | |
Senior Vice President, | | 2011 | | $ | 453,443 | | — | | — | | — | | $ | 250,858 | | $ | 792,000 | | $ | 80,512 | | $ | 1,576,813 | **** |
Head of Asset Liability Management | | 2010 | | $ | 438,109 | | — | | — | | — | | $ | 248,119 | | $ | 458,721 | | $ | 36,545 | | $ | 1,181,494 | |
| | | | | | | | | | | | | | | | | | | |
Paul B. Héroux | | 2012 | | $ | 343,713 | | — | | — | | — | | $ | 182,685 | | $ | 595,000 | | $ | 102,706 | | $ | 1,224,104 | |
Senior Vice President, | | 2011 | | $ | 322,417 | | — | | — | | — | | $ | 178,371 | | $ | 822,000 | | $ | 100,225 | | $ | 1,423,013 | |
Head of Member Services | | 2010 | | $ | 311,514 | | — | | — | | — | | $ | 176,423 | | $ | 428,561 | | $ | 93,205 | | $ | 1,009,703 | |
| | | | | | | | | | | | | | | | | | | |
Patrick A. Morgan ** | | 2012 | | $ | 95,037 | | — | | — | | — | | — | | $ | 680,000 | | $ | 14,302 | | $ | 789,339 | |
Senior Vice President, | | 2011 | | $ | 341,885 | | — | | — | | — | | $ | 189,141 | | $ | 375,000 | | $ | 49,633 | | $ | 955,659 | |
Chief Financial Officer (PFO) | | 2010 | | $ | 330,324 | | — | | — | | — | | $ | 187,076 | | $ | 274,232 | | $ | 35,078 | | $ | 826,710 | |
| | | | | | | | | | | | | | | | | | | |
John F. Edelen * | | 2012 | | $ | 346,466 | | — | | — | | — | | $ | 185,788 | | $ | 356,000 | | $ | 96,495 | | $ | 984,749 | |
Senior Vice President, | | 2011 | | $ | 325,000 | | — | | — | | — | | $ | 179,800 | | $ | 343,000 | | $ | 81,014 | | $ | 928,814 | |
Chief Risk Officer | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Kevin M. Neylan *** | | 2012 | | $ | 364,129 | | — | | — | | — | | $ | 193,537 | | $ | 378,000 | | $ | 64,570 | | $ | 1,000,236 | |
Senior Vice President, | | 2011 | | — | | — | | — | | — | | — | | — | | — | | — | |
Chief Financial Officer (PFO) | | 2010 | | $ | 321,280 | | — | | — | | — | | $ | 181,954 | | $ | 250,146 | | $ | 44,062 | | $ | 797,442 | |
Footnotes for Summary Compensation Table for the Year Ending December 31, 2012
(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”. The Bank established a deferred compensation component for the Incentive Compensation Plan starting in 2012. The amount represented here is the Total Communicated Award of Incentive Compensation. [Refer to section A.2 (Cash Compensation; Incentive Plan - 2012 Deferred Incentive Compensation Plan) of the Compensation Discussion and Analysis for further details].
(2) Change in Pension Value for the Pentegra Defined Benefit Plan for Financial Institutions:
A. DelliBovi — $199,000
P. Leung — $181,000
P. Héroux — $220,000
P. Morgan — $184,000
J. Edelen — $122,000
K. Neylan — $136,000
(3) Change in Pension Value for the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan:
A. DelliBovi — $950,000
P. Leung — $483,000
P. Héroux — $375,000
P. Morgan — $496,000
J. Edelen — $234,000
K. Neylan — $242,000
(4) For all NEOs, includes these items for all employees: amount of funds matched 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 medical insurance premium, payment of dental insurance premium, payment of vision insurance premium and payment of employee assistance program premium.
(5) For A. DelliBovi, includes costs associated with personal usage of company leased automobile $2,710.
(6) For K. Neylan, includes payment of this item for all eligible officers: officer physical examination.
(7) For A. DelliBovi and K. Neylan, includes payment of this item for all eligible employees: service award.
(8) For A. DelliBovi and P. Héroux, includes payment of this item: payment of supplemental individual term life insurance premium.
(9) For P. Héroux and K. Neylan, includes payment of this item for all employees: fitness center reimbursement.
(10) For all NEO’s except J. Edelen, includes payment for the replacement plan for the Nonqualified Defined Contribution Portion of the BEP.
(11) For P. Héroux $40,063 and J. Edelen, $40,384 includes payment for the replacement plan for the Nonqualified Profit Sharing Plan.
(12) Payment for an additional award due to the employee receiving a rating of “Exceed Requirements” or “Outstanding” on their performance review. These amounts are based upon a 3% or 6% payment as found in the Section A.2 of the CD&A as determined by the C&HRC for the President and by the President with respect to all other NEOs:
A. DelliBovi — $45,805
P. Leung — $14,502
P. Morgan — n/a
P. Héroux — $10,311
J. Edelen — $10,394
K. Neylan — $10,924
(13) Figures represent salaries approved by our Board of Directors for the year 2012.
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**P. Morgan retired from the CFO position on March 30, 2012. His board approved annual salary was $353,851; the salary actually paid was $95,037.
***K. Neylan was promoted to CFO in 2012 upon the retirement of P. Morgan. He was not an NEO for the year 2011.
****The amount of “All Other Compensation” for P. Leung for 2011 was incorrectly reported as $68,012. The amount should have been reported as $80,512 to include the $12,500 reimbursement for financial counseling costs reported in footnote (K) for 2011. As a result, the “Total” amount of compensation for Mr. Leung was also incorrectly reported as $1,564,313; that amount should have been $1,576,813. These amounts have been corrected in this 2012 Form 10-K. No other changes relating to this matter are necessary.
Footnotes for Summary Compensation Table for the Year Ending December 31, 2011
(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 — $251,000
P. Leung — $278,000
P. Morgan — $158,000
P. Héroux — $393,000
J. Edelen — $197,000
(C) Change in Pension Value for the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan:
A. DelliBovi — $1,193,000
P. Leung — $514,000
P. Morgan —$217,000
P. Héroux — $429,000
J. Edelen — $146,000
(D) For all NEO, includes these items for all employees: amount of funds matched 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.
(E) For A. DelliBovi, includes costs associated with personal usage of company leased automobile $5,527.
(F) For P. Héroux includes payment of this item for all eligible officers: officer physical examination.
(G) For A. DelliBovi and P. Héroux, includes payment of this item: payment of supplemental individual term life insurance premium.
(H) For P. Héroux,, includes payment of this item for all employees: fitness center reimbursement.
(I) For all NEO’s except J. Edelen, includes payment for the replacement plan for the Nonqualified Defined Contribution Portion of the BEP.
(J) For P. Héroux $39,035 and J. Edelen $28,273, includes payment for the replacement plan for the Nonqualified Profit Sharing Plan.
(K) For A. DelliBovi $250 and P. Leung $12,500, includes a payment for Reimbursement for Financial Counseling Costs Incurred in 2011 for Participants in Terminated Plans.
(L) Payment for an additional award due to the employee receiving a rating of “Exceed Requirements” or “Outstanding” on their performance review. These amounts are based upon a 3% or 6% payment as found in the Section A.2 of the CD&A as determined by the C&HRC for the President and by the President with respect to all other NEOs:
A. DelliBovi — $42,556
P. Leung — $13,603
P. Morgan — $10,257
P. Héroux — $9,673
J. Edelen — $9,750
* J. Edelen is a new NEO in 2011
(14) Figures represent salaries approved by our Board of Directors for the year 2011.
Footnotes for Summary Compensation Table for the Year Ending December 31, 2010
(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 — $228,000
P. Leung — $143,000
P. Morgan — $109,000
P. Héroux — $181,000
K. Neylan — $98,000
(c) Change in Pension Value for the Nonqualified Defined Benefit Portion of the Benefit Equalization Plan:
A. DelliBovi — $1,106,000
P. Leung — $292,000
P. Morgan — $158,000
P. Héroux — $229,000
K. Neylan — $129,000
(d) Change in Nonqualified Defined Compensation Earnings of the BEP:
A. DelliBovi — $100,998
P. Leung — $18,602
P. Morgan —$7,232
P. Héroux — $15,712
K. Neylan — $23,146
(e) Change in Nonqualified Deferred Compensation Plan Earnings:
P. Leung — $5,119
(f) Change in Nonqualified Profit Sharing Plan Earnings:
P. Heroux — $2,849
(g) For all NEO, includes these items for all employees: amount of funds matched 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.
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(h) For A. DelliBovi, includes value of leased automobile $9,620.
(i) For A. DelliBovi, and P. Leung, includes payment of this item for all eligible officers: officer physical examination.
(j) For A. DelliBovi and P. Héroux, includes payment of this item: payment of term life insurance premium.
(k) For P. Heroux and for K. Neylan, includes payment of this item for all employees: fitness center reimbursement.
(l) All participants received a payment for the replacement plan for the Nonqualified Defined Contribution Portion of the BEP.
(m) For P. Heroux $37,719, includes payment for the replacement plan for the Nonqualified Profit Sharing Plan.
(n) For A. DelliBovi $9,013, P. Heroux $11,952, and K. Neylan $3,825, includes a payment for Reimbursement for Financial Counseling Costs Incurred in 2010 for Participants in Terminated Plans.
(For further information regarding footnotes l, m, & n directly above, please review the information included in the section entitled “Nonqualified Deferred Compensation” below)
(15) Figures represent salaries approved by our Board of Directors for the year 2010.
The following table sets forth information regarding all incentive plan award opportunities made available to NEO for the fiscal year 2012 (in whole dollars):
Grants of Plan-Based Awards for Fiscal Year 2012
Grants of Plan-Based Awards for Fiscal Year 2012 |
| | | | | | | | | | | | | | | | All Other | | All Other | | Exercise | | Grant |
| | | | | | | | | | | | | | | | Stock | | Option | | or | | Date |
| | | | | | | | | | | | | | | | Awards: | | Awards: | | Base | | Fair Value |
| | | | Estimated Future Payouts | | Estimated Future Payouts | | Number of | | Number of | | Price of | | of Stock |
| | | | Under Non-Equity Incentive | | Under Equity Incentive | | Shares of | | Securities | | Option | | and Option |
| | Grant | | Plan Awards (2) (3) | | Plan Awards | | Stock | | Underlying | | Awards | | Awards |
Name | | Date (1) | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum | | or Units | | Options | | ($/Sh) | | ($/Sh) |
Alfred A. DelliBovi | | 3/22/2012 | | $ | 167,951 | | $ | 305,366 | | $ | 580,196 | | — | | — | | — | | — | | — | | — | | — |
| | | | | | | | | | | | | | | | | | | | | | |
Peter S. Leung | | 3/22/2012 | | $ | 79,760 | | $ | 145,018 | | $ | 275,534 | | — | | — | | — | | — | | — | | — | | — |
| | | | | | | | | | | | | | | | | | | | | | |
Paul B. Héroux | | 3/22/2012 | | $ | 56,713 | | $ | 103,114 | | $ | 195,916 | | — | | — | | — | | — | | — | | — | | — |
| | | | | | | | | | | | | | | | | | | | | | |
Patrick A. Morgan * | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — |
| | | | | | | | | | | | | | | | | | | | | | |
John F. Edelen | | 3/22/2012 | | $ | 57,167 | | $ | 103,940 | | $ | 197,486 | | — | | — | | — | | — | | — | | — | | — |
| | | | | | | | | | | | | | | | | | | | | | |
Kevin M. Neylan | | 3/22/2012 | | $ | 60,081 | | $ | 109,239 | | $ | 207,554 | | — | | — | | — | | — | | — | | — | | — |
(1) On this date, the Board of Directors’ C&HR Committee approved the 2012 Incentive Plan. 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 NEO with respect to their individual performance.
(3) Amounts represent potential awards under the 2012 Incentive Plan.
*P. Morgan retired from the CFO position on March 30, 2012.
Incentive Compensation Plan Opportunity Table for Fiscal Year 2012
The table below provides information regarding the total incentive compensation amount awarded to NEOs based on Bankwide goal results (in whole dollars).
| | | | Bankwide Component | | Individual | | | | | | | | | |
| | | | (90% of Opportunity) | | Component | | | | | | | | | |
| | 2012 | | (1) | | (10% of | | Actual Result | |
| | Annual Salary | | Threshold | | Target | | Maximum | | Opportunity) | | (2) | |
| | | | | | | | | | | | | | | | Total | | Current | |
| | | | | | | | | | Individual | | Bankwide | | Individual | | Communicated | | Communicated | |
| | | | | | | | | | Performance | | Component | | Component | | Award | | Incentive Award | |
| | | | Bank Performance | | at Target | | (3) | | (4) | | (5) | | (6) | |
President | | | | 20 | % | 40 | % | 80 | % | 40 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Alfred A. DelliBovi | | $ | 763,415 | | $ | 137,415 | | $ | 274,829 | | $ | 549,659 | | $ | 30,537 | | $ | 510,476 | | $ | 30,537 | | $ | 541,013 | | $ | 270,506 | |
President & Chief Executive Officer | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Other NEOs | | | | 15 | % | 30 | % | 60 | % | 30 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Peter S. Leung | | $ | 483,393 | | $ | 62,258 | | $ | 130,516 | | $ | 261,032 | | $ | 14,502 | | $ | 242,424 | | $ | 14,502 | | $ | 256,926 | | $ | 128,463 | |
Senior Vice President, Head of Asset Liability Management | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Paul B. Héroux | | $ | 343,713 | | $ | 46,401 | | $ | 92,802 | | $ | 185,605 | | $ | 10,311 | | $ | 172,374 | | $ | 10,311 | | $ | 182,685 | | $ | 91,343 | |
Senior Vice President, Head of Member Services | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Patrick A. Morgan* | | $ | 353,851 | | — | | — | | — | | — | | — | | — | | — | | — | |
Senior Vice President, Chief Financial Officer | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
John F. Edelen | | $ | 346,466 | | $ | 46,773 | | $ | 93,546 | | $ | 187,092 | | $ | 10,394 | | $ | 175,394 | | $ | 10,394 | | $ | 185,788 | | $ | 92,894 | |
Senior Vice President, Chief Risk Officer | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Kevin M. Neylan | | $ | 364,129 | | $ | 49,157 | | $ | 98,315 | | $ | 196,630 | | $ | 10,924 | | $ | 182,613 | | $ | 10,924 | | $ | 193,537 | | $ | 96,768 | |
Senior Vice President, Chief Financial Officer | | | | | | | | | | | | | | | | | | | |
(1) Each NEO’s Incentive Compensation is made up of two components: Bankwide goals (90%) and Individual Performance (10%)
(2) Overall weighted average result for Bankwide goals was 85.7% above target, for the Risk Management Group it was 87.5% above target. Payments are interpolated between the target and maximum amounts.
(3) The Bankwide component is calculated as follows: Annual Salary multiplied by Bankwide component Percentage multiplied by Target percentage multiplied by (1plus the overall weighted average results [85.7% or 87.5% as mentioned in note 2 above]).
(4) Individual component is calculated as follows: Annual Salary multiplied by Individual Component multiplied by Target percentage. (When participants received an Individual Component award, the award amount is at Target.)
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(5) There may be small differences in the calculated payout amounts due to rounding.
(6) The Bank established a deferred compensation component for the Incentive Compensation Plan starting in 2012. The amount represented here is the Current Communicated Award of Incentive Compensation. The Current Communicated Incentive Award is the actual payout received by the NEO in 2013 for performance in 2012. [Refer to section A.2 (Cash Compensation; Incentive Plan - 2012 Deferred Incentive Compensation Plan) of the Compensation Discussion and Analysis for further details].
*P. Morgan retired from the CFO position on March 30, 2012.
Employment Arrangements
We are an “at will” employer and does not provide written employment agreements to any of its employees. However, employees, including NEO, 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., 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. 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 NEO are as follows (in whole dollars):
| | 2013 | | 2012 | |
| | (1) | | (2) | |
| | | | | |
Alfred A. DelliBovi | | $ | 793,952 | | $ | 763,415 | |
Peter S. Leung | | $ | 497,895 | | $ | 483,393 | |
Paul B. Héroux | | $ | 354,024 | | $ | 343,713 | |
Patrick A. Morgan * | | — | | $ | 353,851 | |
John F. Edelen | | $ | 356,860 | | $ | 346,466 | |
Kevin M. Neylan | | $ | 375,053 | | $ | 364,129 | |
The 2013 increases in the base salaries of the NEOs from 2012 were based on their 2012 performance.
(1) Figures represent salaries approved by our Board of Directors for the year 2013.
(2) Figures represent salaries approved by our Board of Directors for the year 2012.
*Patrick Morgan retired from the CFO position on March 30, 2012.
A performance-based merit increase program exists for all employees, including NEO’s, that have 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 November of 2012, the C&HR Committee determined that merit-related officer base pay increases for 2013 would be 2.5% for officers rated ‘Meets Requirements’; 3.0% for officers rated ‘Exceeds Requirements’; and 4.0% for officers rated ‘Outstanding’ for their performance in 2012.
Short-Term Incentive Compensation Plan (“Incentive Plan”)
Refer to section IV.A.2 (Cash Compensation; Incentive Plan - 2012 Deferred Incentive Compensation Plan) of the Compensation Discussion and Analysis for further details.
Qualified Defined Contribution Plan
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 following three full calendar months of employment.
An employee may contribute 1% to 100% of base salary into the DC Plan, up to IRC limitations. The IRC limit for 2012 was $17,000 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. If an employee contributes at least 3% of base salary, the Bank provides a match of 3% of base salary. After completing three years of employment, the match is 4.5% of base salary and after five years of employment 6% of base salary. Contributions of less than 3% of base salary receive a match of 2% of the employee’s base salary or $34.61 per pay period (whichever is less).
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Additional Information
Additional information about compensation and benefits are provided in the discussions immediately following the below pension and compensation tables.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
AND OPTION EXERCISES AND STOCK VESTED
The tables disclosing (i) outstanding option and stock awards and (ii) exercises of stock options and vesting of restricted stock for NEO are omitted because all employees 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 NEO, 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 | |
| | | | 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 | | 19.75 | | $ | 1,834,000 | | — | |
| | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | 19.75 | | $ | 7,072,000 | | — | |
| | | | | | | | | |
Peter S. Leung | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | 15.50 | | $ | 1,162,000 | | — | |
| | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan (3) | | 15.50 | | $ | 2,105,000 | | — | |
| | | | | | | | | |
Paul B. Héroux | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | 28.50 | | $ | 1,626,000 | | — | |
| | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | 28.50 | | $ | 1,732,000 | | — | |
| | | | | | | | | |
Patrick A. Morgan * | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | 12.83 | | $ | 1,126,000 | | $ | 59,000 | |
| | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | 12.83 | | $ | 1,468,000 | | $ | 75,000 | |
| | | | | | | | | |
John F. Edelen | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | 15.25 | | $ | 727,000 | | — | |
| | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | 15.25 | | $ | 535,000 | | — | |
| | | | | | | | | |
Kevin M. Neylan | | Pentegra Defined Benefit Plan for Financial Institutions Qualified Plan | | 11.33 | | $ | 729,000 | | — | |
| | Nonqualified Defined Benefit Portion of the Benefit Equalization Plan | | 11.33 | | $ | 848,000 | | — | |
(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.
(2) As of 12/31/12.
(3) Mr. Leung’s 15.5 years of credited service includes 3.6 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 8.9 years of credited service working for the Federal Home Loan Bank of New York
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*Patrick Morgan retired from the CFO position on March 30, 2012 and elected to begin receiving a distribution from the qualified defined benefit plan and nonqualified defined benefit plan in 2012. The amounts listed under “Payment During Last Fiscal Year” is the total amount of distribution Mr. Morgan received in 2012.
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”) is an IRS-qualified defined benefit plan which covers all employees who have achieved four months of service. The DB Plan is part of a multiple-employer defined benefit program administered by Pentegra Retirement Services.
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; short-term incentives for participants of the deferred incentive compensation plan is defined as the Total Communicated Award. 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. In addition, for the Non-Grandfathered participants, the 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.
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.
For purposes of the above table, please note the following definitions:
Benefit Multiplier — The annuity paid from the 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 —The 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, any accrued benefits prior to July 1, 2008, the accrued Benefit Multiplier mirrors the Grandfathered Employees at 2.5%. For benefits accrued 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.
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 is 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 guaranteed payment provided to single retirees under the formula. Effective July 1, 2008, the DB Plan provides single Non-
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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:
Early retirement under the plan is available after age 45.
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.
Earnings under the 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 2012 was $250,000.
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, a non-qualified retirement plan that in many respects mirrors the DB Plan.
The primary objective of the DB BEP is to ensure that participants receive the full benefit to which they would have been entitled under the DB Plan in the absence of limits on maximum benefit levels imposed by the IRC.
The DB BEP utilizes the identical benefit formulas applicable to the DB Plan. In the event that the benefits payable from the DB Plan have been reduced or otherwise limited by government regulations, the employee’s “lost” benefits are payable under the terms of the DB BEP.
The DB BEP is an unfunded arrangement. However, we established a grantor trust 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.
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 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 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.
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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.
The following table describes estimated severance payout information for each NEO assuming that severance would have occurred on December 31, 2012: (amounts in whole dollars)
| | Number of Weeks Used to | | 2012 Annual | | | |
| | Calculate Severance Amount | | Base Salary | | Severance Amount | |
| | | | | | | |
Alfred A. DelliBovi | | 36 | | $ | 763,415 | | $ | 528,518 | |
Peter S. Leung | | 32 | | $ | 483,393 | | $ | 297,473 | |
Paul B. Héroux | | 36 | | $ | 343,713 | | $ | 237,955 | |
Patrick A. Morgan* | | 36 | | $ | 353,851 | | $ | 244,974 | |
John F. Edelen | | 36 | | $ | 346,466 | | $ | 239,861 | |
Kevin M. Neylan | | 36 | | $ | 364,129 | | $ | 252,089 | |
*Patrick Morgan retired from the CFO position on March 30, 2012.
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 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 than 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, 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.
Life insurance premiums paid on behalf of employees on severance are paid monthly, coinciding with the monthly invoice processing.
Other Potential Post-Employment Payments
The Bank maintains no arrangements which contain “change in control” provisions.
DIRECTOR COMPENSATION
The following table summarizes the compensation paid by us to each of our Directors for the year ended December 31, 2012 (whole dollars):
| | | | | | | | | | Change in Pension | | | | | |
| | | | | | | | | | Value and | | | | | |
| | Fees | | | | | | Non-Equity | | Nonqualified | | All | | | |
| | Earned or | | Stock | | Option | | Incentive Plan | | Deferred Compensation | | Other | | | |
Name | | Paid in Cash | | Awards | | Awards | | Compensation | | Earnings | | Compensation | | Total | |
| | | | | | | | | | | | | | | |
Michael M. Horn | | $ | 100,000 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 100,000 | |
José R. González | | 85,000 | | — | | — | | — | | — | | — | | 85,000 | |
John R. Buran | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
Anne E. Estabrook | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
Joseph R. Ficalora | | 85,000 | | — | | — | | — | | — | | — | | 85,000 | |
Jay M. Ford | | 85,000 | | — | | — | | — | | — | | — | | 85,000 | |
James W. Fulmer | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
Ronald E. Hermance, Jr. | | 66,112 | | — | | — | | — | | — | | — | | 66,112 | |
Thomas L. Hoy | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
Katherine J. Liseno | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
Kevin J. Lynch | | 85,000 | | — | | — | | — | | — | | — | | 85,000 | |
Joseph J. Melone | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
Richard S. Mroz | | 85,000 | | — | | — | | — | | — | | — | | 85,000 | |
Vincent F. Palagiano | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
C. Cathleen Raffaeli | | 85,000 | | — | | — | | — | | — | | — | | 85,000 | |
Edwin C. Reed | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
DeForest B. Soaries, Jr. | | 75,000 | | — | | — | | — | | — | | — | | 75,000 | |
Total Fees | | $ | 1,351,112 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,351,112 | |
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 that were amended as a result of the Housing and Economic Recovery Act of 2008 (“HERA”) to remove a statutory cap on director compensation. In sum, the applicable statutes and regulations now allow each FHLBank to pay its directors reasonable compensation
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and expenses, subject to the authority of the Director of the Finance Agency to object to, and to prohibit prospectively, compensation and/or expenses that the Director of the Finance Agency determines are not reasonable. The Director Compensation Policy provides that directors shall be paid a meeting fee for their attendance at meetings of the Board of Directors up to a maximum annual compensation amount as set forth in the Director Compensation Policy.
In initially determining reasonable compensation for our directors in the aftermath of HERA for the year 2009, we utilized the results of a study of FHLBank System director compensation prepared by McLagan. The director compensation that was established by the Board under the 2010 Director Compensation Policy also reflected this analysis. In 2010, McLagan performed another director compensation study for the FHLBanks, which helped formed the basis for our Board’s determination of 2011 director compensation. In December 2011, the Board determined that the 2011 director compensation structure remained appropriate and did not require adjustment for 2012. In December 2012, the Board again determined that the director compensation structure continued to remain appropriate and did not require adjustment for 2013.
Below are tables summarizing the Director fees established by the Board and the annual compensation limits that were set by the Board for 2012. Following these tables are additional tables summarizing the Director fees established by the Board and the annual compensation limits set by the Board for 2013.
Director Fees — 2012 (in whole dollars)
Position | | Fees For Each Board
Meeting Attended (Paid
Quarterly
in Arrears)* | |
Chairman | | $ | 11,111 | |
Vice Chairman | | $ | 9,444 | |
Committee Chair ** | | $ | 9,444 | |
All Other Directors | | $ | 8,333 | |
Director Annual Compensation Limits — 2012 (in whole dollars)
Position | | Annual Limit | |
Chairman | | $ | 100,000 | |
Vice Chairman | | $ | 85,000 | |
Committee Chair | | $ | 85,000 | |
All Other Directors | | $ | 75,000 | |
Director Fees — 2013 (in whole dollars)
Position | | Fees For Each Board
Meeting Attended (Paid
Quarterly
in Arrears)* | |
Chairman | | $ | 11,111 | |
Vice Chairman | | $ | 9,444 | |
Committee Chair ** | | $ | 9,444 | |
All Other Directors | | $ | 8,333 | |
Director Annual Compensation Limits — 2013 (in whole dollars)
Position | | Annual Limit | |
Chairman | | $ | 100,000 | |
Vice Chairman | | $ | 85,000 | |
Committee Chair | | $ | 85,000 | |
All Other Directors | | $ | 75,000 | |
* The numbers in this column represent payments for each of eight meetings attended. If a ninth meeting is attended, payments for the ninth meeting shall be as follows: Chairman, $11,112; Vice Chairman, $9,448; Committee Chair, $9,448; and all other Directors, $8,336.
** 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 do not receive any additional compensation if they serve as a Chair of one or more Board Committees.
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Director Compensation Policy: Director Expenses
The Director Compensation Policy also authorizes us 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 2012 (whole dollars):
| | Directors’ Expenses | |
| | Reimbursed | |
Name | | (Paid in Cash) | |
| | | |
Michael M. Horn | | $ | 8,515 | |
José R. González | | 16,452 | |
John R. Buran | | — | |
Anne E. Estabrook | | 5,493 | |
Joseph R. Ficalora | | 6,630 | |
Jay M. Ford | | 5,115 | |
James W. Fulmer | | 9,544 | |
Ronald E. Hermance, Jr. | | — | |
Thomas L. Hoy | | 4,106 | |
Katherine J. Liseno | | 3,015 | |
Kevin J. Lynch | | 3,243 | |
Joseph J. Melone | | 1,932 | |
Richard S. Mroz | | 5,930 | |
Vincent F. Palagiano | | 1,409 | |
C. Cathleen Raffaeli | | 4,144 | |
Edwin C. Reed | | 8,140 | |
DeForest B. Soaries, Jr. | | 3,010 | |
Total Directors’ Expenses Reimbursed | | $ | 86,678 | |
Total expenses incurred by us for our Board expenses, including amounts reimbursed in cash to Directors, totaled $183.7 thousand, $168.6 thousand and $127.1 thousand in 2012, 2011 and 2010, respectively.
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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 our capital stock. As such, we do 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 our outstanding capital stock (shares in thousands) as of February 28, 2013 and December 31, 2012:
| | | | Number | | Percent | |
| | February 28, 2013 | | of Shares | | of Total | |
Name of Beneficial Owner | | Principal Executive Office Address | | Owned | | Capital Stock | |
| | | | | | | |
Citibank, N.A. | | 399 Park Avenue, New York, NY 10043 | | 8,716 | | 18.73 | % |
Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | 7,290 | | 15.66 | |
New York Community Bank* | | 615 Merrick Avenue, Westbury, NY 11590 | | 4,033 | | 8.67 | |
Hudson City Savings Bank, FSB* | | West 80 Century Road, Paramus, NJ 07652 | | 3,565 | | 7.66 | |
| | | | | | | |
| | | | 23,604 | | 50.72 | % |
| | | | Number | | Percent | |
| | December 31, 2012 | | of Shares | | of Total | |
Name of Beneficial Owner | | Principal Executive Office Address | | Owned | | Capital Stock | |
| | | | | | | |
Citibank, N.A. | | 399 Park Avenue, New York, NY 10043 | | 9,166 | | 19.02 | % |
Metropolitan Life Insurance Company | | 200 Park Avenue, New York, NY 10166 | | 7,347 | | 15.24 | |
New York Community Bank* | | 615 Merrick Avenue, Westbury, NY 11590 | | 4,337 | | 9.00 | |
Hudson City Savings Bank, FSB* | | West 80 Century Road, Paramus, NJ 07652 | | 3,565 | | 7.39 | |
| | | | | | | |
| | | | 24,415 | | 50.65 | % |
* At February 28, 2013 and December 31, 2012, an officer of this member bank also served on the Board of Directors of the FHLBNY.
The following table sets forth information with respect to capital stock outstanding to members whose officers or directors served as Directors of the FHLBNY as of December 31, 2012, the most practicable date for the information provided (shares in thousands):
| | | | | | | | Number | | Percent | |
| | | | | | | | of Shares | | of Total | |
Name | | Director | | City | | State | | Owned | | Capital Stock | |
| | | | | | | | | | | |
New York Community Bank | | Joseph R. Ficalora | | Westbury | | NY | | 4,337 | | 9.00 | % |
Hudson City Savings Bank, FSB | | Ronald E. Hermance, Jr. | | Paramus | | NJ | | 3,565 | | 7.39 | |
The Dime Savings Bank of Williamsburg | | Vincent F. Palagiano | | Brooklyn | | NY | | 450 | | 0.93 | |
Oritani Bank | | Kevin J. Lynch | | Township of Washington | | NJ | | 449 | | 0.93 | |
Flushing Savings Bank, FSB | | John R. Buran | | Lake Success | | NY | | 423 | | 0.88 | |
Oriental Bank and Trust | | Jose Ramon Gonzalez | | San Juan | | PR | | 384 | | 0.80 | |
New York Commerical Bank | | Joseph R. Ficalora | | Westbury | | NY | | 103 | | 0.21 | |
Glens Falls National Bank & Trust Co | | Thomas L. Hoy | | Glens Falls | | NY | | 40 | | 0.08 | |
Crest Saving Bank | | Jay M. Ford | | Wildwood | | NJ | | 28 | | 0.06 | |
The Bank of Castile | | James W. Fulmer | | Castile | | NY | | 26 | | 0.05 | |
Metuchen Savings Bank | | Katherine J. Liseno | | Metuchen | | NJ | | 6 | | 0.01 | |
| | | | | | | | | | | |
| | | | | | | | 9,811 | | 20.34 | % |
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.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
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 are not 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 may extend credit to members whose officers or directors may serve as directors of the FHLBNY. In addition, the FHLBNY may also extend credit to members who own more than 5% of the FHLBNY’s stock. All products and services extended by the FHLBNY to such members are provided at market terms and conditions that are no more favorable to them than the terms and conditions of comparable transactions with other members. Under the provisions of Section 7(j) of the FHLBank Act (12 U.S.C. § 1427(j)), the Bank’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 19. Related Party Transactions, in the audited financial statements 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 (along with the Chief Audit Officer) 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.
Director Independence
In General
During the period from January 1, 2012 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 elected by the Bank’s members who are not 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
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independence standards, regardless of whether they serve on the Audit Committee. From January 1, 2012 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, 2012 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.
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., John R. Buran, Joseph R. Ficalora, Jay M. Ford, James W. Fulmer, José R. González, Ronald E. Hermance, Thomas L. Hoy, Katherine J. Liseno, Kevin J. Lynch and Vincent F. Palagiano) 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, 2012 through and including the date of this annual report on Form 10-K (John R. Buran, Joseph R. Ficalora, Jay M. Ford, José R. González, Thomas L. Hoy, and Katherine J. Liseno) 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, 2012 through and including the date of this annual report on Form 10-K (Michael M. Horn, Joseph J. Melone and Richard S. Mroz) were independent under the NYSE independence standards for audit committee members.
Section 10A(m) of the 1934 Act
In addition to the independence rules and standards above, on July 30, 2008, the Housing and Economic Recovery Act of 2008 amended the Securities Exchange Act of 1934 to require the Federal Home Loan Banks to comply with the rules issued by the SEC under Section 10A(m) of the 1934 Act, which includes a substantive independence rule prohibiting a director from being a member of the Audit Committee if he or she is an “affiliated person” of the Bank as defined by the SEC rules (i.e., the person controls, is controlled by, or is under common control with, the Bank). All Audit Committee members serving in 2012 met and all current Audit Committee members meet the substantive independence rules under Section 10A(m) of the 1934 Act.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the fees paid to our independent registered public accounting firm, PricewaterhouseCoopers, LLP (“PwC”), during years ended December 31, 2012, 2011 and 2010 (in thousands):
| | Years ended December 31, | |
| | 2012 (a) | | 2011 (a) | | 2010 (a) | |
| | | | | | | |
Audit Fees | | $ | 969 | | $ | 937 | | $ | 835 | |
Audit-related Fees | | 61 | | 49 | | 66 | |
Tax Fees | | 19 | | — | | 20 | |
All Other Fees | | 84 | | 260 | | 4 | |
Total | | $ | 1,133 | | $ | 1,246 | | $ | 925 | |
(a) The 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 $54 thousand, $58 thousand and $56 thousand, for 2012, 2011 and 2010, 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 are primarily related to review of various accounting matters in 2012, and consultation services for the review of payroll operations and tax compliance in 2011.
Policy on Audit Committee Pre-approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm.
We have 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, 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.”
3. Exhibits
No. | | Exhibit
Description | | Filed with 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 | | | | 8-K | | 000-51397 | | 8/5/2011 |
| | | | | | | | | | |
10.01 | | Bank 2011 Incentive Compensation Plan*(a) | | | | 10-Q/A | | 000-51397 | | 10/13/2011 |
| | | | | | | | | | |
10.02 | | Bank 2012 Incentive Compensation Plan (a) | | | | 10-Q | | | | 5/11/2012 |
| | | | | | | | | | |
10.03 | | 2011 Director Compensation Policy (a) | | | | 10-K | | 000-51397 | | 3/25/2011 |
| | | | | | | | | | |
10.04 | | 2012 Director Compensation Policy (a) | | | | 10-Q | | 000-51397 | | 5/11/2012 |
| | | | | | | | | | |
10.05 | | 2013 Director Compensation Policy (a) | | X | | | | | | |
| | | | | | | | | | |
10.06 | | Bank Severance Pay Plan (a) | | | | 10-K | | 000-51397 | | 3/25/2011 |
| | | | | | | | | | |
10.07 | | Bank Amended and Restated Severance Pay Plan (a) | | X | | | | | | |
| | | | | | | | | | |
10.08 | | Qualified Defined Benefit Plan (a) | | X | | | | | | |
| | | | | | | | | | |
10.09 | | Qualified Defined Contribution Plan (a) | | X | | | | | | |
| | | | | | | | | | |
10.10 | | Bank Amended and Restated Benefit Equalization Plan (a) | | | | 10-Q | | 000-51397 | | 5/12/2011 |
| | | | | | | | | | |
10.11 | | Thrift Restoration Plan (a) | | | | 10-Q | | 000-51397 | | 8/12/2010 |
| | | | | | | | | | |
10.12 | | Bank Profit Sharing Plan (a) | | | | 10-Q | | 000-51397 | | 8/12/2010 |
| | | | | | | | | | |
10.13 | | Bank Amended and Restated Profit Sharing Plan (a) | | X | | | | | | |
| | | | | | | | | | |
10.14 | | Compensatory Arrangements for Named Executive Officers (a) | | X | | | | | | |
| | | | | | | | | | |
10.15 | | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement | | | | 8-K | | 000-51397 | | 6/27/2006 |
| | | | | | | | | | |
10.16 | | Amended Joint Capital Enhancement Agreement among the Federal Home Loan Banks | | | | 8-K | | 000-51397 | | 8/5/2011 |
| | | | | | | | | | |
12.01 | | Computation of Ratio of Earnings to Fixed Charges | | X | | | | | | |
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18.01 | | PricewaterhouseCoopers Preferability Letter | | X | | | | | | |
| | | | | | | | | | |
31.01 | | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
| | | | | | | | | | |
31.02 | | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
| | | | | | | | | | |
32.01 | | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
| | | | | | | | | | |
32.02 | | Certification of the 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 | | | | | | |
| | | | | | | | | | |
101.01 | | The following financial information from the Bank’s Annual Report on Form 10-K for the year ended December 31, 2012, is formatted in XBRL interactive data files: (i) Balance Sheets at December 31, 2012 and December 31, 2011; (ii) Statements of Income for the three years ended December 31, 2012, 2011 and 2010; (iii) Statements of Comprehensive Income for the three years ended December 31, 2012, 2011 and 2010; (iv) Statements of Capital for the three years ended December 31, 2012, 2011 and 2010; (v) Statements of Cash Flows for the three years ended December 31, 2012, 2011and 2010; and (vi) Notes to Financial Statements for the three years ended December 31, 2012, 2011 and 2010. Pursuant to Rule 406T of Regulation S-T, the | | X | | | | | | |
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| | interactive data files contained in Exhibit 101.01 are deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise not subject to the liability of that section. | | | | | | | | |
Notes:
* | Confidential treatment has been requested 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, 2013
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 | | President and Chief Executive Officer | | March 25, 2013 |
Alfred A. DelliBovi | | | | |
(Principal Executive Officer) | | | | |
| | | | |
/s/ Kevin M. Neylan | | Senior Vice President and Chief Financial Officer | | March 25, 2013 |
Kevin M. Neylan | | | | |
(Principal Financial Officer) | | | | |
| | | | |
/s/ Backer Ali | | Vice President and Controller | | March 25, 2013 |
Backer Ali | | | | |
(Principal Accounting Officer) | | | | |
| | | | |
/s/ Michael M. Horn | | Chairman of the Board of Directors | | March 25, 2013 |
Michael M. Horn | | | | |
| | | | |
/s/ José R. González | | Vice Chairman of the Board of Directors | | March 25, 2013 |
José R. González | | | | |
| | | | |
/s/ John R. Buran | | Director | | March 25, 2013 |
John R. Buran | | | | |
| | | | |
/s/ Anne Evans Estabrook | | Director | | March 25, 2013 |
Anne Evans Estabrook | | | | |
| | | | |
/s/ Joseph R. Ficalora | | Director | | March 25, 2013 |
Joseph R. Ficalora | | | | |
| | | | |
/s/ Jay M. Ford | | Director | | March 25, 2013 |
Jay M. Ford | | | | |
| | | | |
/s/ James W. Fulmer | | Director | | March 25, 2013 |
James W. Fulmer | | | | |
| | | | |
/s/ Ronald E. Hermance, Jr._ | | Director | | March 25, 2013 |
Ronald E. Hermance, Jr. | | | | |
| | | | |
/s/ Thomas L. Hoy | | Director | | March 25, 2013 |
Thomas L. Hoy | | | | |
| | | | |
/s/ Katherine J. Liseno | | Director | | March 25, 2013 |
Katherine J. Liseno | | | | |
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Table of Contents
/s/ Kevin J. Lynch | | Director | | March 25, 2013 |
Kevin J. Lynch | | | | |
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/s/ Joseph J. Melone | | Director | | March 25, 2013 |
Joseph J. Melone | | | | |
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/s/ Richard S. Mroz | | Director | | March 25, 2013 |
Richard S. Mroz | | | | |
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/s/ Vincent F. Palagiano | | Director | | March 25, 2013 |
Vincent F. Palagiano | | | | |
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/s/ C. Cathleen Raffaeli | | Director | | March 25, 2013 |
C. Cathleen Raffaeli | | | | |
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/s/ Edwin C. Reed | | Director | | March 25, 2013 |
Edwin C. Reed | | | | |
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/s/ DeForest B. Soaries, Jr. | | Director | | March 25, 2013 |
DeForest B. Soaries, Jr. | | | | |
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