10-12G 1 y10017e10v12g.htm FEDERAL HOME LOAN BANK OF NEW YORK FEDERAL HOME LOAN BANK OF NEW YORK
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UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10

 

GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

 

FEDERAL HOME LOAN BANK OF NEW YORK

Exact name of registrant as specified in its charter
     
Federally chartered corporation
  13-6400946
State or other jurisdiction of incorporation or organization
  (I.R.S. employer identification number)
         
101 Park Avenue
  10178    
New York, NY
  (Zip Code)
(Address of principal executive offices)
       

(212) 681-6000
(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act: None

Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $100

 
 

 


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 ORGANIZATION CERTIFICATE
 BY-LAWS
 PFI AGREEMENT
 ACQUIRED MEMBER ASSETS REGULATIONS
 TYPICAL PURCHASE AGREEMENT
 CORPORATE GOVERNANCE COMMITTEE CHARTER
 CORPORATE GOVERNANCE GUIDELINES
 SEVERANCE PAY POLICY
 EXECUTIVE INCENTIVE PLAN
 DIRECTORS' COMPENSATION PLAN
 FINANCIAL INSTITUTION THRIFT PLAN
 COMPREHENSIVE RETIREMENT PROGRAM
 RETIREE MEDICAL BENEFITS PLAN
 BENEFIT EQUALIZATION PLAN

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ITEM 1. BUSINESS

General

The Federal Home Loan Bank of New York (“FHLBNY” or “the Bank”) is a federally chartered corporation, exempt from federal, state and local taxes except real property taxes. It is one of twelve district Federal Home Loan Banks (“FHLBanks”). The FHLBanks are U.S. government-sponsored enterprises (“GSEs”), organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”). Each FHLBank is a cooperative owned by member institutions located within a defined geographic district. The members purchase capital stock in the FHLBank and receive dividends on their capital stock investment. The FHLBNY’s defined geographic district includes New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. The FHLBNY provides a readily available, low-cost source of funds for its member institutions. The FHLBNY does not have any wholly or partially owned subsidiaries, nor does it have an equity position in any partnerships, corporations, or off-balance-sheet special purpose entities.

The FHLBNY is a cooperative. Members of the cooperative must purchase FHLBNY stock according to regulatory requirements. The business of the cooperative is to provide liquidity for our members (primarily in the form of advances) and to provide a return on their investment in FHLBNY stock in the form of a quarterly dividend. Since the members are both stockholders and customers, there is a trade-off between providing value to them via low pricing for advances with a relatively lower dividend versus higher advances pricing with a relatively higher dividend. This means that the FHLBNY is managed to deliver balanced value to members, rather than to maximize either advance volume through low pricing or profitability.

All federally insured depository institutions, insured credit unions and insurance companies engaged in residential housing finance can apply for membership in the FHLBank in their district, as can all community financial institutions. For the quarter ended June 30, 2004, the latest period for which data is available, community financial institutions are defined as FDIC-insured depository institutions having average total assets of $548 million or less over the preceding three-year period. All members are required to purchase capital stock in the FHLBNY as a condition of membership. A member of another FHLBank or a financial institution that is not a member of any FHLBank may also hold FHLBNY stock as a result of having acquired an FHLBNY member. As a result of these requirements, the FHLBNY conducts business with related parties in the normal course of business. As is the nature of a cooperative, the FHLBNY considers all members as related parties in addition to other FHLBanks.

The FHLBNY’s primary business is making collateralized loans, known as “advances,” to members, and is the primary focus of the Bank’s operations and also the principal factor that impacts the financial condition of the FHLBNY. The FHLBNY also serves the public through its mortgage programs, which enable FHLBNY members to liquefy certain mortgage loans by selling them to the Bank. The FHLBNY also provides members and non-members that have acquired members with such correspondent services as safekeeping, wire transfers, depository and settlement services.

The FHLBNY combines private capital and public sponsorship to provide its member financial institutions with a reliable flow of credit and other services for housing and community development. By supplying additional liquidity to its members, the FHLBNY enhances the availability of residential mortgages and community investment credit.

The FHLBNY is supervised and regulated by the Federal Housing Finance Board (“Finance Board”), which is an independent agency in the executive branch of the U.S. government. The Finance Board ensures that the FHLBNY carries out its housing and community development mission, remains

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adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner. However, while the Finance Board establishes regulations governing the operations of the FHLBanks, the Bank functions as a separate entity with its own management, employees and board of directors.

The FHLBNY obtains its funds from several sources. A primary source is the sale of FHLBank debt instruments to the public. The issuance and servicing of consolidated obligations are performed by the Office of Finance, a joint office of the FHLBanks established by the Finance Board. These debt instruments are known as consolidated obligations, since they represent the joint and several obligations of all the FHLBanks. Additional sources of FHLBNY funding are member deposits, other borrowings, and the issuance of capital stock. Deposits may come from member financial institutions and federal instrumentalities.

The FHLBNY’s website is www.fhlbny.com. The FHLBNY has adopted, and posted on its website, a Code of Business Conduct and Ethics applicable to all its employees.

Market Area

The FHLBNY’s market area is the same as its membership district—New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. Institutions that are members of the FHLBNY must have their principal places of business within this market area but may also operate elsewhere. The FHLBNY had 300 and 302 members, respectively, at March 31, 2005 and December 31, 2004.

Based on present laws and regulations, the number of financial institutions eligible for membership in the market area is limited. In its district, there are 858 banks, thrifts and credit unions that are eligible for membership, but have not joined. Of these, the FHLBNY considers only a limited number as attractive candidates for membership. An attractive candidate for membership is an institution that is likely to do sufficient advances business with the FHLBNY within a reasonable period of time so that the stock it is required to purchase will not dilute the dividend on the existing members’ stock. Characteristics that identify attractive candidates included an established practice of wholesale funding, high loan to deposit ratios, strong asset growth, sufficient qualified collateral and management that has used the FHLBNY’s advances during previous employment.

The FHLBNY actively markets membership to attractive candidates through personal calling and promotional materials. We estimate the number to be between 30 to 50. We compete for their membership by explaining to them the relative low interest rates that the FHLBNY charges to members for advances. Institutions join the Bank primarily for access to a reliable source of liquidity. Advances are an attractive source of liquidity because they permit members to liquefy relatively non-liquid assets, such as 1-4 family, multifamily and commercial real estate mortgages held in portfolio. Advances are well priced because of the FHLBNY’s access to capital markets as a Government Sponsored Entity and the FHLBNY’s strategy of providing balanced value to members.

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The following table summarizes the FHLBNY’s members by type of institution as of March 31, 2005, December 31, 2004, 2003 and 2002.

                                 
    Commercial     Thrift     Credit     Insurance  
    Banks     Institutions     Unions     Companies  
March 31, 2005
    148       125       27        
December 31, 2004
    148       127       27        
December 31, 2003
    150       132       25        
December 31, 2002
    138       136       21       1  

Business Segments

The FHLBNY manages and reports on 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. All FHLBNY’s revenues are derived from U.S. operations. A more detailed discussion of segment information is provided in the “Segment Information” section of Note 23 to Financial Statements.

The FHLBNY’s cooperative structure permits it to expand and contract with demand for advances and changes in membership. When advances are paid down, either because the member no longer needs the funds or because the member has been acquired by a non-member, the stock associated with the advance is immediately redeemed. When advances are paid before maturity, the FHLBNY collects fees that make the FHLBNY financially indifferent to the prepayment. The FHLBNY’s operating expenses are very low, about 7 bps on assets. Dividend capacity, which is a function of net income and the amount of stock outstanding, is unaffected, since future stock and future income are reduced more or less proportionately. All of this means that the FHLBNY will be able to meet its financial obligations and continue to deliver balanced value to members even if demand for advances drops significantly or if members are lost to acquisitions.

Products and Services

The FHLBNY offers to its member financial institutions certain correspondent banking services as well as safekeeping services. The fee income that is generated from these services are almost inconsequential. The FHLBNY also issues standby letters of credits on behalf of members at a fee, in amounts that are de minimus. The sum total of income derived from such services were less than $1 million for the three months ended March 31, 2005 and about $4 million for each of the prior three years. On an infrequent basis, the FHLBNY may act as an intermediary to purchase derivative instruments for members. The FHLBNY provides the Mortgage Partnership Finance® program to its members as another service. However, the FHLBNY does not expect the program to become a significant factor in its operations. The revenues derived from this program and another inactive mortgage program aggregated $16.0 million and $48.3 million for the three months ended March 31, 2005 and the year ended December 31, 2004. The revenues represented only 2.4% and 2.5% of total interest income.

The FHLBNY’s short-term investments provide immediate liquidity to satisfy members’ needs. Investments in Held-to-maturity securities, specifically mortgage-backed securities, provide additional earnings to enhance dividend potential for members. As a cooperative, the FHLBNY strives to provide its members a reasonable return on their investment in the FHLBNY’s capital stock. Interest income derived from held-to-maturity investment securities constituted 22.5% and 30.6 % of total interest income for the three months ended March 31, 2005 and 2004.

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However, advances to members are the primary focus of the FHLBNY’s operations, and is also the principal factor that impacts the financial condition of the FHLBNY. Revenue from advances to members was the largest and the most significant element in the FHLBNY’s operating results. Providing advances to members, supporting the products and associated collateral and credit operations, and funding and swapping the funds are the focus of the FHLBNY’s operations.

Advances

Advances to members constituted 74.91%, or $62.7 billion, of the FHLBNY’s $83.7 billion in total assets at March 31, 2005. In terms of revenues, interest income from advances constituted 68.73%, or $458.8 million of total interest income for the three months ended March 31, 2005. These metrics have remained relatively stable over time. Advances to members constituted 77.5%, or $68.5 billion, of the FHLBNY’s $88.4 billion in total assets at December 31, 2004. Interest income from advances constituted 63.2%, or $1.2 billion, of $1.9 billion in total interest income for the year ended December 31, 2004. At December 31, 2003, the percentage of advances to total assets was 80.7%; the percentage of interest income derived from advances to total interest income was 64.7%. Most of the FHLBNY’s critical functions are directed at supporting the borrowing needs of the FHLBNY’s members, and managing the members’ associated collateral positions, and providing member support operations.

The FHLBNY offers a wide range of credit products to help members meet local credit needs, manage interest rate risk and liquidity, and serve their communities. The Bank’s primary business is making secured loans, called advances, to its members. These advances are available as short-term and long-term loans, and as adjustable, variable-rate and fixed-rate products (including option-embedded advances and amortizing advances).

Members use advances as a source of funding to supplement their deposit-gathering activities. Advances have grown substantially in recent years because many members have not been able to increase their deposits in their local markets as quickly as they have increased their assets. To close this funding gap, members have preferred to obtain reasonably priced advances rather than increasing their deposits by offering higher rates or forgoing asset growth. Because of the wide range of advance types, terms, and structures available to them, members have also used advances to enhance their asset/liability management. As a cooperative, the FHLBNY prices advances at minimal net spreads above the cost of its funding in order to deliver value to members.

The FHLBNY’s members are required by the FHLBank Act to pledge collateral to secure their advances. Eligible collateral includes: (1) one-to-four-family and multi-family mortgages; (2) Treasury and U.S. government agency securities; (3) mortgage-backed securities; and (4) certain other collateral that is real estate-related, provided that such collateral has a readily ascertainable value and that the FHLBNY can perfect a security interest in that collateral. The FHLBNY also has a statutory lien priority with respect to certain member assets under the FHLBank Act, as well as a claim on FHLBNY capital stock held by its members.

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Highlights of the more significant types of advances offered to members follow (Income derived from each of these products are summarized in a table on page 57):

    Adjustable-Rate Credit Advances (“ARC”). An Adjustable-Rate Credit advances are medium- and long-term lending that can be pegged to one of a variety of indices, such as 1-month LIBOR, 3-month LIBOR, or Fed Funds rate. Members use an Adjustable-Rate Credit Advance to manage interest rate and basis risks by efficiently matching the interest rate index and the repricing of the characteristics of floating-rate assets and liabilities. The interest rate is set and reset (depending upon the maturity of the advance and the type of index) at a spread to that designated index. Principal is due at maturity and interest payments are due at every reset date including the final payment.
 
    Convertible Advances. Regular Convertible Advances are medium- to long-term lending that are structured so that the member sells the FHLBNY an option or a strip of options (Bermudan). If the advance is put by the FHLBNY at the end of the lockout period, the member has the option to convert the funding to an advance product of their choice at current market rates, or pay off the advance. The Repurchase Agreement Advances Convertible advance is a variation of Convertible Advance. It is competitively priced because of the additional flexibility of being collateralized with eligible securities. The interest rate is fixed on the initial advance. The advance selected after the call can be used on either a fixed- or floating-rate at the then current market rates.
 
    Fixed-Rate Advance. Fixed-Rate Advances are flexible funding tools that can be used by members to meet short-to long-term liquidity needs. Terms vary from 2-years to 30-years.
 
    Overnight Repricing Advance Program. The Overnight Line of Credit (“OLOC”) advances are short- term, flexible, readily accessible revolving lines of credit for immediate liquidity needs. Advances issued under the Overnight Letter of Credit commitments mature on the next succeeding business day at which time the advance is repaid. Interest is calculated on a 360-day basis and is charged daily, and is priced at a spread to the then-prevailing Federal funds rate.
 
    Repurchase Agreement (“Repo”) Advance. Repurchase Agreement Advances are secured by eligible securities that can be structured to have fixed or adjustable interest rates, “bullet” or quarterly interest payments, and a put option by which the FHLBNY receives an option to require payments after a predetermined lockout period. Members may use U.S Treasuries, Agency- issued debentures and mortgage-backed securities as collateral.
 
    Mortgage-Matched Advance. Mortgage-matched advances are medium- or long-term lending that are fixed- rate, with fixed amortizing schedules and are structured to match the payment characteristics of a mortgage loan or portfolio of the member. Terms offered are from one to 30 years, with constant principal and interest payments.

Letters of Credit

The FHLBNY may issue letters of credit (“Standby Letters of Credit”) on behalf of members. Standby Letters of Credit may be used to facilitate members’ residential and community lending, provide members with liquidity, or assist members with asset/liability management. Where permitted by law, members may utilize FHLBNY letters of credit to collateralize deposits made by units of state and local governments (“municipal deposits”). The FHLBNY’s underwriting and collateral requirements for securing Letters of Credit are the same as its requirements for securing advances.

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Derivatives

To assist members in managing their interest rate and basis risk in both rising and falling interest-rate environments, the FHLBNY will act as an intermediary between the member and a derivatives counterparty. Participating members must comply with the FHLBNY’s documentation requirements and meet the Bank’s underwriting and collateral requirements.

Acquired Member Assets Programs

Utilizing a risk-sharing structure, the FHLBanks are permitted to acquire certain assets from or through their members. These initiatives are referred to as Acquired Member Assets (“AMA”) programs. At the FHLBNY, the Acquired Member Assets initiative is the Mortgage Partnership Finance (“MPF”) Program, which provides members with an alternative to originating and selling long-term, fixed-rate mortgages in the secondary market. In the Mortgage Partnership Finance Program, the FHLBNY purchases conforming fixed-rate mortgages originated or purchased by its members. Members are then paid a fee for assuming a portion of the credit risk of the mortgages acquired by the FHLBNY. Members assume credit risk by providing a credit enhancement guarantee to the FHLBNY. This guarantee provides a double-A-equivalent level of creditworthiness on the mortgages. The amount of this guarantee is fully collateralized by the member. The FHLBNY assumes the remainder of the credit risk, along with the interest rate risk of holding the mortgages in its portfolio.

In a typical Mortgage Partnership Finance Program, the Participating Financial Institution sells previously closed loans to the FHLBNY. In the past, the FHLBNY has also purchased loans on a flow basis (referred to as “table- funding,” which means that the Participating Financial Institution uses the FHLBNY’s funds to make the mortgage loan to the borrower), the Participating Financial Institution closes the loan “as agent” for the FHLBNY. Flow loans are restricted to the Mortgage Partnership Finance 100 product. The Finance Board specifically authorized table funded loans in its Regulations authorizing the Mortgage Partnership Finance program and the only product initially offered for the first two years of the Mortgage Partnership Finance Program was for table funded loans. The Finance Board’s initial Resolutions were specifically extended by the Acquired Member Assets Regulations (12 CFR Part 955).

The Acquired Member Assets Regulation does not specifically address the disposition of Acquired Member Assets. The main intent of that regulation is the purchase of assets for investment rather than for trading purposes. However, the FHLBanks have the legal authority to sell Mortgage Partnership Finance loans pursuant to the grant of incidental powers in Section 12 of the FHLBank Act. Section 12(a) of the FHLBank Act specifically provides that each FHLBank “shall have all such incidental powers, not inconsistent with the provisions of this chapter, as are customary and usual in corporations generally.” General corporate law principles permit the sale of investments.

The FHLBNY also holds participation interests in residential and community development mortgage loans through its Community Mortgage Asset (“CMA”) program. Acquisitions of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001.

Mortgage Partnership Finance Program

The Mortgage Partnership Finance Program is a unique secondary mortgage market structure under which participating FHLBanks (“MPF Banks”) serve as a long-term source of liquidity to their Participating

 
1   Registered trademark of the Federal Home Loan Bank of Chicago.

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Financial Institution members (“PFIs”) who originate mortgage loans. The Mortgage Partnership Finance Banks do this by either purchasing mortgage loans after they have been originated by the participating financial institutions or, alternatively, by table funding the mortgage loans themselves. In this regard, the mortgage loans purchased or funded are held on the Mortgage Partnership Finance Bank’s balance sheet.

The current Mortgage Partnership Finance Banks are the Federal Home Loan Banks of Atlanta, Boston, Chicago, Dallas, Des Moines, New York, Pittsburgh, San Francisco and Topeka. The Federal Home Loan Bank of Chicago acts as “Mortgage Partnership Finance Provider” and provides programmatic and operational support to the Mortgage Partnership Finance Banks and their participating financial institutions. The FHLBNY received regulatory approval in 1999 and has been a participant in the Mortgage Partnership Finance Program since that date.

The FHLBNY purchases whole loans directly from participating financial institutions, typically its members, although the FHLBNY is permitted under the program to purchase loans directly from participating financial institutions that are members of another FHLBank. The Participating Financial Institution credit enhances the loan, feeds the required data into a web based system supported by the FHLBank Chicago and contracts to deliver a dollar amount and a coupon by executing a delivery commitment. The coupon rate pricing is quoted in 1/8’s, and the terms are 3, 10, 20, 30 and 45 business days out for delivery and are product specific to Fixed Rate 15, 20 & 30 years conventional loan limits and Veterans Administration (“VA”) and Federal Housing Administration (“FHA”) insured 15 & 30 years. The delivery commitment is a mandatory obligation for the participating financial institution, and is associated with a specific credit enhanced loan. Once the loan is committed to delivery, transactions are generated to charge or to credit the participating financial institution’s demand account and offsetting accounts in the books of the FHLBNY. The Participating Financial Institution has seven business days to deliver to the Mortgage Partnership Finance Custodian the Endorsed Note and copy of the mortgage a long with the proper form of assignment to complete the transaction. The Participating Financial Institution then is required to report monthly and remit loan payment activity until satisfaction of the debit.

The Mortgage Partnership Finance Provider services the loans through its back-office operations, which offers participating financial institutions a web based application to perform all sales transactions. The Mortgage Partnership Finance Provider, the FHLBank Chicago, provides “End of Day” information to the FHLBNY each business day. Contained in those files are ACH transactions to facilitate the funding of the loans through the FHLBNY’s records. The Mortgage Partnership Finance Provider also acts as a third party vendor to facilitate the generation and tracking of the loan purchases and through their agent Wells Fargo, the Master Servicer, who collects, reconciles and reports loan level activity each month from the respective participating financial institutions.

The assets acquired by the Mortgage Partnership Finance Banks under the Mortgage Partnership Finance Program generally have the net credit risk exposure equivalent to “AA” rated assets because of the credit risk sharing structure mandated by the Finance Board’s Acquired Member Asset regulation (12 CFR Part 955) (“AMA Regulation”). Mortgage Partnership Finance Program assets are qualifying conventional conforming and government (i.e., Federal Housing Administration insured and Veterans Administration guaranteed) fixed-rate mortgage loans and participations in pools of such mortgage loans, consisting of one-to-four family residential properties with maturities ranging from 5 to 30 years, which are funded by or sold to the Mortgage Partnership Finance Banks (“Mortgage Partnership Finance Loans”). The Acquired Member Assets Regulation requires Mortgage Partnership Finance Loans to be purchased by the Mortgage Partnership Finance Banks through or from participating financial institutions and to be credit enhanced in part by the participating financial institutions. Mortgage Partnership Finance Banks generally acquire whole loans from their respective participating financial institutions but may also acquire them from a member of another Mortgage Partnership Finance Bank with permission of the

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participating financial institution’s respective Mortgage Partnership Finance Bank or may acquire participations from another Mortgage Partnership Finance Bank.

The Mortgage Partnership Finance Provider establishes the eligibility standards under which an Mortgage Partnership Finance Bank member may become a participating financial institution, the structure of Mortgage Partnership Finance products and the eligibility standards for Mortgage Partnership Finance Loans, and manages the pricing and delivery mechanism for Mortgage Partnership Finance Loans. The Mortgage Partnership Finance Provider publishes and maintains the Mortgage Partnership Finance Origination Guide and Mortgage Partnership Finance Servicing Guide (together, “Mortgage Partnership Finance Guides”) which detail the guidelines participating financial institutions must follow in originating or selling and servicing Mortgage Partnership Finance Loans.

The distinctive feature of the Mortgage Partnership Finance Program, and benefit for participating financial institutions, is that rather than paying a guaranty fee to another housing- related Government Sponsored Enterprise (“GSE”), participating financial institutions are paid credit enhancement fees for sharing in the risk of loss on Mortgage Partnership Finance Loans. For the nine FHLBanks, more than 850 commercial banks, thrifts, credit unions and insurance companies are approved participating financial institutions that collectively deliver mortgage loans into the Mortgage Partnership Finance Program secured by homes in all fifty states, the District of Columbia and Puerto Rico.

The FHLBNY had 64 members at March 31, 2005 and December 31, 2004 that had been approved as participating financial institutions. During the year ended December 31, 2004, the FHLBNY has granted participation interests in the Mortgage Partnership Finance Loans it has acquired from its participating financial institution’s totaling $531.7 million on a cumulative basis to the Mortgage Partnership Finance Provider.

The Mortgage Partnership Finance Program is designed to allocate the risks of Mortgage Partnership Finance Loans among the Mortgage Partnership Finance Banks and participating financial institutions and to take advantage of their respective strengths. Participating Financial Institutions have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing participating financial institutions to originate Mortgage Partnership Finance Loans, whether through retail or wholesale operations, and to retain or acquire servicing of Mortgage Partnership Finance Loans, the Mortgage Partnership Finance Program gives control of those functions that most impact credit quality to participating financial institutions. The credit enhancement structure motivates participating financial institutions to minimize Mortgage Partnership Finance Loan losses. The Mortgage Partnership Finance Banks are responsible for managing the interest rate risk, prepayment risk and liquidity risk associated with owning Mortgage Partnership Finance Loans.

Mortgage Partnership Finance Mortgage Standards. The Mortgage Partnership Finance Guides set forth the eligibility standards for Mortgage Partnership Finance Loans. Participating financial institutions are free to use an approved automated underwriting system or to underwrite Mortgage Partnership Finance Loans manually when originating or acquiring loans though the loans must meet Mortgage Partnership Finance Program underwriting and eligibility guidelines outlined in the Mortgage Partnership Finance Origination Guide. In some circumstances, a participating financial institution may be granted a waiver exempting it from complying with specified provisions of the Mortgage Partnership Finance Guides.

The current underwriting and eligibility guidelines can be broadly summarized as follows with respect to Mortgage Partnership Finance Loans:

  Conforming loan size, which is established annually as required by the Acquired Member Assets Regulation and may not exceed the loan limits permitted to be set by the other Government

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    Sponsored Entities (e.g. Fannie Mae and Freddie Mac) each year. Mortgage Partnership Finance purchases loans that are limited to OFHEO’s single- family loan limits; fixed-rate fully amortizing loans.
 
  Fixed-rate, fully-amortizing loans with terms from 5 to 30 years;
 
  Secured by first liens on residential owner occupied primary residences and second homes; primary residences may be up to four units.
 
  Condominium, planned unit development and manufactured homes are acceptable property types as are mortgages on leasehold estates (though manufactured homes must be on land owned in fee simple by the borrower);
 
  95% maximum loan-to-value ratio (“LTV”); except for FHLBank Affordable Housing Program mortgage loans which may have loan-to-value ratios up to 100% (but may not exceed 105% total loan-to-value ratio, which compares the property value to the total amount of all mortgages outstanding against a property) and Veterans Administration and Federal Housing Administration insured Mortgage Partnership Finance Loans which may not exceed the loan-to-value ratio limits set by Federal Housing Administration and VA;
 
  Mortgage Partnership Finance Loans with loan-to-value ratios greater than 80.0% require certain amounts of mortgage guaranty insurance (“MI”), from a mortgage guaranty insurance company rated at least “AA” or “Aa” and acceptable to Standard & Poor’s Rating Services, a division of the McGraw-Hill Companies (“S&P”);
 
  Unseasoned or current production with up to 5 payments made by the borrowers;
 
  Credit reports and credit scores for each borrower; for borrowers with no credit score, alternative verification of credit is permitted;
 
  Analysis of debt ratios;
 
  Verification of income and sources of funds, if applicable;
 
  Property appraisal;
 
  Customary property or hazard insurance, and flood insurance, if applicable; from insurers acceptably rated as detailed in the Mortgage Partnership Finance Guides;
 
  Title insurance or, in those areas where title insurance is not customary, an attorney’s opinion of title;
 
  The mortgage documents, mortgage transaction, and mortgaged property must comply with all applicable laws and loans must be documented using standard Fannie Mae/Freddie Mac Uniform Instruments;
 
  Loans that are not ratable by a rating agency are not eligible for delivery under the Mortgage Partnership Finance Program; and
 
  Loans that are classified as high cost, high rate, high risk, HOEPA loans or loans in similar categories defined under predatory lending or abusive lending laws are not eligible for delivery under the Mortgage Partnership Finance Program.

Mortgage Partnership Finance Service Agreement. Mortgage Partnership Finance Loans are delivered to each Mortgage Partnership Finance Bank through the infrastructure maintained by the Mortgage Partnership Finance Provider, which includes both a telephonic delivery system and a web based delivery system accessed through the eMPF® website. The Mortgage Partnership Finance Provider has entered into an agreement (“Services Agreement”) with each of the other Mortgage Partnership Finance Banks to make the Mortgage Partnership Finance Program available to their respective participating financial institutions. The Services Agreement sets forth the terms and conditions of the Mortgage Partnership Finance Bank’s participation in the Mortgage Partnership Finance Program. The Services Agreement outlines the Mortgage Partnership Finance Provider’s agreement to provide transaction-processing services for the Mortgage Partnership Finance Banks, including acting as master servicer and master custodian for the Mortgage Partnership Finance Banks with respect to the Mortgage Partnership Finance Loans. The Mortgage Partnership Finance Provider has engaged Wells Fargo Bank N.A. as its vendor for master servicing and as the primary custodian for the Mortgage Partnership Finance Program, and has also contracted with other custodians meeting Mortgage Partnership Finance Program eligibility standards

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at the request of certain participating financial institutions. Such other custodians are typically affiliates of participating financial institutions and in some case a Participating Financial Institution acts as self-custodian.

Historically, in order to compensate the Mortgage Partnership Finance Provider for its transaction processing services, the Mortgage Partnership Finance Provider has required that each of the Mortgage Partnership Finance Banks sell to the Mortgage Partnership Finance Provider not less than a twenty-five percent (25%) participation interest in Mortgage Partnership Finance Loans funded by that Mortgage Partnership Finance Bank. Currently, all but one of the Mortgage Partnership Finance Banks compensate the Mortgage Partnership Finance Provider for its transaction processing services by paying a transactions services fee instead of granting the Mortgage Partnership Finance Provider a participation interest with respect to Mortgage Partnership Finance Loans acquired after 2003. One Mortgage Partnership Finance Bank continues to compensate the Mortgage Partnership Finance Provider for its transaction processing services by selling to that Mortgage Partnership Finance Bank not less than twenty-five percent (25%) participation interest in their Mortgage Partnership Finance Loans.

In addition to receiving participation interests as compensation for providing transaction-processing services, the Mortgage Partnership Finance Provider may purchase additional participation interests in Mortgage Partnership Finance Loans through an agreement with the relevant Mortgage Partnership Finance Bank. As such, the participation percentages in Mortgage Partnership Finance Loans may vary by each pool of Mortgage Partnership Finance Loans funded or purchased by the Mortgage Partnership Finance Bank (“Master Commitment”) by agreement of the Mortgage Partnership Finance Bank granting or selling the participation interests (the “Owner Bank”), the Mortgage Partnership Finance Provider and other Mortgage Partnership Finance Banks receiving a participation interest. In order to detail the responsibilities and obligations for all participation interests sold by an Owner Bank to the Mortgage Partnership Finance Provider or to other participating Mortgage Partnership Finance Banks, each Owner Bank has entered into a participation agreement with the Mortgage Partnership Finance Provider and, as applicable, any other participant Mortgage Partnership Finance Banks. Each participant Mortgage Partnership Finance Bank is responsible for all risk of loss commensurate with its ownership interest in the Mortgage Partnership Finance Loans in which it has a participation interest. In return, the participant Mortgage Partnership Finance Bank is entitled to its participation interest in the principal and interest collected by the Owner Bank. The Owner Bank and other participant Mortgage Partnership Finance Bank(s) are obligated to pay for each Mortgage Partnership Finance Loan their respective share of the loan funding or purchase price, credit enhancement fees, and other costs and expenses incurred.

Mortgage Partnership Finance Loans are funded through or purchased directly from Participating Financial Institution through the transactional services provided by the Mortgage Partnership Finance Provider. Under the Services Agreement between the Mortgage Partnership Finance Bank and the Mortgage Partnership Finance Provider, the Mortgage Partnership Finance Provider provides the necessary systems for participating financial institutions to deliver Mortgage Partnership Finance Loans to the Mortgage Partnership Finance Bank, establishes daily pricing for Mortgage Partnership Finance Loans, prepares reports for both the participating financial institutions and Mortgage Partnership Finance Bank, and provides necessary quality control services on purchased Mortgage Partnership Finance Loans.

The Owner Bank is responsible for evaluating, monitoring, and certifying to any participant Mortgage Partnership Finance Bank the creditworthiness of each relevant Participating Financial Institution initially, and at least annually thereafter. The Owner Bank is responsible for ensuring that adequate collateral is available to secure the credit enhancement obligations of each of its participating financial institutions arising from the origination or sale of Mortgage Partnership Finance Loans. The Owner Bank is also responsible for enforcing the participating financial institution’s obligations under the Participating Financial Institution Agreement between the Participating Financial Institution and the Owner Bank .

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Mortgage Partnership Finance Participating Financial Institution Agreement. A member (or housing associate) of an Mortgage Partnership Finance Bank must specifically apply to become a Participating Financial Institution. The Mortgage Partnership Finance Bank reviews the general eligibility of the member while the Mortgage Partnership Finance Provider reviews the member’s servicing qualifications and ability to supply documents, data and reports required to be delivered by participating financial institutions under the Mortgage Partnership Finance Program. The member and its Mortgage Partnership Finance Bank sign an Mortgage Partnership Finance Program Participating Financial Institution Agreement (“PFI Agreement”) that creates a relationship or framework for the Participating Financial Institution to do business with its Mortgage Partnership Finance Bank. The Participating Financial Institution Agreement provides the terms and conditions for the origination of the Mortgage Partnership Finance Loans to be funded or purchased by the Mortgage Partnership Finance Bank and establishes the terms and conditions for servicing Mortgage Partnership Finance Loans for the Mortgage Partnership Finance Bank.

Mortgage Partnership Finance Credit Enhancement Agreement. The Participating Financial Institution’s credit enhancement obligation (the “CE Amount”) arises under its Participating Financial Institution Agreement while the amount and nature of the obligation are determined with respect to each Master Commitment based upon the Mortgage Partnership Finance product and other criteria. Under the Acquired Member Assets Regulation, the Participating Financial Institution must “bear the economic consequences” of certain losses with respect to a Master Commitment.

The Participating Financial Institution’s Credit Enhancement Amount for a Master Commitment is equal to the loan losses for that Master Commitment in excess of the first loss account (the “FLA”), if any, up to an agreed upon amount. The final Credit Enhancement Amount is determined once the Master Commitment is closed (i.e., when the maximum amount of Mortgage Partnership Finance Loans are delivered, the maximum Credit Enhancement Amount, if any, is reached or the expiration date has occurred). Under the Mortgage Partnership Finance Program, the Participating Financial Institution’s credit enhancement may take the form of a direct liability to pay losses incurred with respect to that Master Commitment, or may require the Participating Financial Institution to obtain and pay for an Supplemental Mortgage Insurance policy insuring the Mortgage Partnership Finance Bank for a portion of the losses arising from the Master Commitment, or the Participating Financial Institution may contract for a contingent performance based credit enhancement fee whereby such fees are reduced by losses up to a certain amount arising under the Master Commitment.

Under the Acquired Member Assets Regulation, the Credit Enhancement Amount that is a Participating Financial Institution’s direct liability must be collateralized by the Participating Financial Institution in the same way that advances from the Bank are collateralized. The Participating Financial Institution Agreement provides that the Participating Financial Institution’s obligations under the Participating Financial Institution Agreement are secured along with other obligations of the Participating Financial Institution under its regular advances agreement with the Mortgage Partnership Finance Bank and further, that the Mortgage Partnership Finance Bank may request additional collateral to secure the Participating Financial Institution’s obligations.

Typically, a Participating Financial Institution will sign one Master Commitment to cover all the conventional Mortgage Partnership Finance Loans it intends to deliver to the Mortgage Partnership Finance Bank in a year. However, a Participating Financial Institution may also sign a Master Commitment for Government Mortgage Partnership Finance Loans and it may choose to deliver Mortgage Partnership Finance Loans under more than one conventional product, or using different servicing remittance options and thus have several Master Commitments opened at any one time. Master

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Commitments may be for periods shorter than one year and may be extended or increased by agreement of the Mortgage Partnership Finance Bank and the Participating Financial Institution.

The Master Commitment defines the pool of Mortgage Partnership Finance Loans for which the Credit Enhancement Amount is set so that the risk associated with investing in such pool of Mortgage Partnership Finance Loans is equivalent to investing in a “AA” rated asset without giving effect to the Mortgage Partnership Finance Bank’s obligation to incur losses up to the amount of the First Loss Account. Participating Financial Institutions deliver Mortgage Partnership Finance Loans by first obtaining a Delivery Commitment, which is a mandatory commitment of the Participating Financial Institution to sell or originate and the Mortgage Partnership Finance Bank to acquire eligible loans at a specific rate of interest (within a range of plus or minus 0.125%) having a specified term (i.e., 60 months, 61 to 180 months, 181 months to 240 months, or 241 to 360 months) within a specified time period (i.e., 3, 10, 15, 30 or 45 business days).

Prior to requesting funding for an Mortgage Partnership Finance Loan, the Participating Financial Institution must designate under which Delivery Commitment the loan will be funded and must submit certain data concerning the loan to the Mortgage Partnership Finance Program system so that a credit enhancement analysis and calculation can be completed. The designation of a Delivery Commitment then assigns the Mortgage Partnership Finance Loan to a Master Commitment so that the cumulative credit enhancement level can be determined along with the funding availability under that Master Commitment. Loans which would exceed the maximum amount of a Master Commitment or exceed the Participating Financial Institution’s maximum Credit Enhancement Amount, if any, or which would be funded after the expiration of the Master Commitment will be rejected by the Mortgage Partnership Finance Program system. In addition, except for a minimal tolerance, the amount of the Mortgage Partnership Finance Loans funded under a Delivery Commitment may not exceed the amount of the Delivery Commitment. Delivery Commitments that are not fully funded by their expiration date are subject to pair-off fees or extension fees, which protect the Mortgage Partnership Finance Bank against changes in market prices.

By delivering loan data, usually electronically through the Mortgage Partnership Finance Provider’s secure eMPF website, and requesting funding for the Mortgage Partnership Finance Loan, the Participating Financial Institution makes certain representations and warranties to the Mortgage Partnership Finance Bank which are contained in the Participating Financial Institution Agreement and in the Mortgage Partnership Finance Guides. The representations and warranties are similar to those required by Fannie Mae, Freddie Mac and in mortgage-backed securities and specifically include compliance with predatory lending laws and the integrity of the data transmitted to the Mortgage Partnership Finance Program system.

Once a Mortgage Partnership Finance Loan is funded or purchased, the Participating Financial Institution must deliver the promissory note and certain other relevant documents (“Collateral Package”) to the designated custodian. The custodian reports to the Mortgage Partnership Finance Provider whether the Collateral Package matches the funding information in the Mortgage Partnership Finance Program system and otherwise meets Mortgage Partnership Finance Program requirements. If the Participating Financial Institution does not deliver a conforming Collateral Package within the timeframes required under the Mortgage Partnership Finance Guides, it will be assessed a late fee and can be required to purchase or repurchase the Mortgage Partnership Finance Loan.

Mortgage Partnership Finance Servicing. Participating Financial Institutions generally deliver Mortgage Partnership Finance Loans on a servicing retained basis, that is, the Participating Financial Institution or its servicing affiliate retains the right and responsibility for servicing the Mortgage Partnership Finance Loans. However, certain Participating Financial Institutions may desire to sell the servicing rights under the Mortgage Partnership Finance Program’s concurrent sale of servicing option. To date, the Mortgage Partnership Finance Program has designated one servicing Participating Financial

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Institution, which is eligible to acquire servicing rights under this option. An originating Participating Financial Institution may also negotiate with other Participating Financial Institutions to purchase servicing rights, however this type of arrangement would not include direct support from the Mortgage Partnership Finance Program. The current limited options for selling Mortgage Partnership Finance Loans to the Mortgage Partnership Finance Bank on a servicing-released basis may reduce the attractiveness of the Mortgage Partnership Finance Program to potential Participating Financial Institutions that do not want to retain servicing.

The Participating Financial Institution servicer of the Mortgage Partnership Finance Loan is responsible for collecting the borrower’s monthly payments and otherwise dealing with the borrower with respect to the Mortgage Partnership Finance Loan and the mortgaged property. Monthly principal and interest payments are withdrawn from the Participating Financial Institution’s deposit account with the Mortgage Partnership Finance Bank on the 18th day of each month (or prior business day if the 18th is not a business day) based on reports the Participating Financial Institution is required to provide to the master servicer. Based on these monthly reports, the Mortgage Partnership Finance Program system generates electronic directions to the Bank’s accounting system to make the appropriate deposit or withdrawal from the Participating Financial Institution’s deposit account.

If a Mortgage Partnership Finance Loan becomes delinquent, the Participating Financial Institution is required to contact the borrower to determine the cause of the delinquency and whether the borrower will be able to cure the default. The Mortgage Partnership Finance Guides provide the limited types of forbearance plans that are permitted. If the Participating Financial Institution determines that a Mortgage Partnership Finance Loan which has become ninety days delinquent is not likely to be brought current, the Participating Financial Institution is to proceed with a foreclosure plan and commence foreclosure activities. The foreclosure plan includes determining the current condition and value of the mortgaged property and the likelihood of loss upon disposition of the property after foreclosure or in some case a deed in lieu of foreclosure. The Participating Financial Institution is required to secure and insure the property after it acquires title through the date of disposition. After submitting its foreclosure plan to the master servicer, the Participating Financial Institution provides monthly status reports regarding the progress of foreclosure and subsequent disposition activities. Upon disposition, a final report must be submitted to the master servicer detailing the outstanding loan balance, accrued and unpaid interest, the net proceeds of the disposition and the amounts advanced by the Participating Financial Institution, including principal and interest advances during the disposition period for the scheduled/scheduled remittance option. If there is a loss on the conventional Mortgage Partnership Finance Loan, the loss is allocated to the Master Commitment and shared in accordance with the risk sharing structure for that particular Master Commitment. Gains are the property of the Mortgage Partnership Finance Bank but are available to offset future losses under the Master Commitment.

Throughout the servicing process the Mortgage Partnership Finance Provider’s vendor for master servicing monitors the Participating Financial Institution’s compliance with Mortgage Partnership Finance Program requirements and makes periodic reports to the Mortgage Partnership Finance Provider. The Mortgage Partnership Finance Provider will bring any material concerns to the attention of the Mortgage Partnership Finance Bank. Minor lapses in servicing are simply charged to the Participating Financial Institution rather than allowed to be included in determining a loss on a Mortgage Partnership Finance Loan. Major lapses in servicing could result in a Participating Financial Institution’s servicing rights being terminated for cause and the servicing of the particular Mortgage Partnership Finance Loans being transferred to a new, qualified servicing Participating Financial Institution. No Participating Financial Institution’s servicing rights have been terminated for cause in the history of the Mortgage Partnership Finance Program. In addition, the Mortgage Partnership Finance Guides require each Participating Financial Institution to maintain errors and omissions insurance and a fidelity bond and to

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provide an annual certification with respect to its insurance and its compliance with the Mortgage Partnership Finance Program requirements.

Mortgage Partnership Finance Quality Assurance. The Mortgage Partnership Finance Provider conducts an initial quality assurance (“QA”) review of a selected sample from the Participating Financial Institution’s initial Mortgage Partnership Finance Loan deliveries. Thereafter periodic reviews of a sample of Mortgage Partnership Finance Loans are performed to determine whether the reviewed Mortgage Partnership Finance Loans complied with the Mortgage Partnership Finance Program requirements at the time of acquisition. A Quality Assurance letter is sent to the Participating Financial Institution noting any critical or general exception compliance matters. The Participating Financial Institution will be required to purchase or repurchase any Mortgage Partnership Finance Loan that is determined to be ineligible and for which the ineligibility cannot be cured. Any exceptions, which indicate a negative trend, are discussed with the Participating Financial Institution and could result in the suspension or termination of a Participating Financial Institution’s ability to deliver new business if the concerns are not adequately addressed.

A majority of the states, and some municipalities, have enacted laws against mortgage loans considered predatory or abusive. Some of these laws impose liability for violations on not only the originator, but also upon purchasers and assignees of mortgage loans. The Bank is taking measures that it considers reasonable and appropriate to reduce its exposure to potential liability under these laws and is not aware of any claim, action or proceeding asserting that the Bank is liable under these laws. However, there can be no assurance that the Bank will never have any liability under predatory or abusive lending laws.

Mortgage Partnership Finance Allocation of Losses and Credit Enhancement. The risk characteristics of each Mortgage Partnership Finance Loan (as detailed in data provided by the Participating Financial Institution) are analyzed by the Mortgage Partnership Finance Provider using Standard & Poor’s Rating Services’ LEVELS™ model in order to determine the amount of credit enhancement required for a loan or group of loans to be acquired by an Mortgage Partnership Finance Bank (“Mortgage Partnership Finance Program methodology”) but which leaves the decision whether or not to deliver the loan or group of loans into the Mortgage Partnership Finance Program with the Participating Financial Institution.

The Mortgage Partnership Finance Bank and Participating Financial Institution share the risk of losses on Mortgage Partnership Finance Loans by structuring potential losses on conventional Mortgage Partnership Finance Loans into layers with respect to each Master Commitment.

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The general allocation of losses is described in the table below:

Mortgage Partnership Finance Loss Layers

FLOW CHART

 
*   The First Loss Account feature is offered with all conventional mortgage loan products.

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By undertaking to credit enhance (bear the economic consequences of certain losses) each Master Commitment, the Participating Financial Institution maintains an interest in the performance of the Mortgage Partnership Finance Loans it sells to or originates and services for the Mortgage Partnership Finance Bank. This feature of the Mortgage Partnership Finance Program provides continued incentive for active management by the Participating Financial Institution to reduce credit risk in Mortgage Partnership Finance Loans and distinguishes the Mortgage Partnership Finance Program from other secondary market sale structures. Also, the Participating Financial Institution’s Credit Enhancement Amount for each Master Commitment (which includes any Supplemental Mortgage Insurance) is sized to equal the amount of expected losses in excess of the First Loss Account (at the time the Credit Enhancement Amount is established) that would need to be paid so that any losses in excess of the Credit Enhancement Amount and First Loss Account would be limited to the losses of an investor in an “AA”-rated mortgage-backed security, as determined by the Mortgage Partnership Finance Program methodology. As required by the Acquired Member Assets Regulation, the Mortgage Partnership Finance Program methodology has been confirmed by Standard & Poor’s Rating Services, a Nationally Recognized Statistical Rating Organization (“NRSRO”), as providing an analysis of each Master Commitment that is “comparable to a methodology that the Nationally Recognized Statistical Rating Organization would use in determining credit enhancement levels when conducting a rating review of the asset or pool of assets in a securitization transaction.” (12 CFR §955.3(a)). Thus the required credit enhancement determined by the Mortgage Partnership Finance Program methodology is calculated to provide to the Mortgage Partnership Finance Bank the same probability as that of an investor in an “AA”-rated mortgage-backed security of incurring losses on any Master Commitment in excess of the First Loss Account and the required Credit Enhancement Amount.

With respect to participation interests, Mortgage Partnership Finance Loan losses not absorbed by borrower’s equity or primary mortgage guaranty insurance will be applied to the First Loss Account and allocated amongst the participant’s pro rata based upon their respective participation interests. Next, losses will be applied to the Credit Enhancement Amount of the Participating Financial Institution which may include Supplemental Mortgage Insurance as indicated by the particular Mortgage Partnership Finance product in question, and finally, further losses will be shared based on the participation interests of the Owner Bank and Mortgage Partnership Finance Bank(s) in each Master Commitment. Under the Services Agreement, other than the obligation, where applicable, to sell the Mortgage Partnership Finance Provider a participation interest in Mortgage Partnership Finance Loans funded by the Owner Bank, there are no minimum sales levels.

Any portion of the Credit Enhancement Amount of a Participating Financial Institution that is not covered by Supplemental Mortgage Insurance provided by a qualified mortgage guaranty insurance company is secured by collateral pursuant to the terms of the Participating Financial Institution’s Advances Agreement with its Mortgage Partnership Finance Bank.

Mortgage Partnership Finance products. In the chart above, “Mortgage Partnership Finance Loss Layer”, the section “Allocation of Losses and Credit Enhancement” describes the general mechanics for the allocation of losses under Mortgage Partnership Finance Program. The chart below describes the particular First Loss Account and Participating Financial Institution credit enhancement obligations for each Mortgage Partnership Finance Product type.

The FHLBNY’s outstanding balance of Mortgage Partnership Finance loans at December 31, 2004 and 2003 included all product types, described below.

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Original Mortgage Partnership Finance

(FLOW CHART)

First Loss Account

  The First Loss Account starts out at zero on the day the first Mortgage Partnership Finance Loan under a Master Commitment is purchased but increases monthly over the life of the Master Commitment at a rate that ranges from 0.03% to 0.05% (3 to 5 basis points) per annum based on the month end outstanding aggregate principal balance of the Master Commitment.
 
  Over time the First Loss Account is expected to cover expected losses on a Master Commitment, though losses early in the life of the Master Commitment could exceed the First Loss Account and be charged in part to the Participating Financial Institution’s Credit Enhancement Amount.

Participating Financial Institutions Credit Enhancement Amount

  The Participating Financial Institution’s Credit Enhancement Amount is sized using the Mortgage Partnership Finance Program methodology to equal the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security, without giving effect to the First Loss Account.
 
  The Participating Financial Institution is paid a monthly credit enhancement fee, typically 0.10% (10 basis points) per annum, based on the aggregate outstanding principal balance of the Mortgage Partnership Finance Loans in the Master Commitment.

Mortgage Partnership Finance 100

(FLOW CHART)

First Loss Account

  The First Loss Account is equal to 1.00% (100 basis points) of the aggregate principal balance of the Mortgage Partnership Finance Loans funded under the Master Commitment.
 
  Once the Master Commitment is fully funded, the First Loss Account is expected to cover expected losses on that Master Commitment.

Participating Financial Institution Credit Enhancement Amount

  The Participating Financial Institution Credit Enhancement Amount is calculated using the Mortgage Partnership Finance Program methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security and the amount of the First Loss Account.
 
  The credit enhancement fee is between 0.07% and 0.10% (7 and 10 basis points) per annum of the aggregate outstanding principal balance of the Mortgage Partnership Finance Loans in the Master Commitment.
 
  In addition, the Participating Financial Institution monthly credit enhancement fee after the first two or three years becomes performance based in that it is reduced by losses charged to the First Loss Account.
 
  Under the Mortgage Partnership Finance 100 product, Participating Financial Institution originate loans as agent for the MPF Bank and the Mortgage Partnership Finance Bank provides the funds to close the loans (“table funding”). This differs from the other Mortgage Partnership Finance products in which the MPF Bank purchases loans that have already been closed by the Participating Financial Institution.

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Mortgage Partnership Finance 125

(FLOW CHART)

FLA

  The FLA is equal to 1.00% (100 basis points) of the aggregate principal balance of the MPF Loans funded under the Master Commitment.
 
  Once the Master Commitment is fully funded, the FLA is expected to cover expected losses on that Master Commitment.

PFI CE Amount

  The PFI’s CE Amount is calculated using the MPF Program methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security and the amount of the FLA.
 
  The credit enhancement fee is between 0.07% and 0.10% (7 and 10 basis points) per annum of the aggregate outstanding principal balance of the MPF Loans in the Master Commitment and is performance based in that it is reduced by losses charged to the FLA.

Mortgage Partnership Finance Plus

Original Mortgage Partnership Finance for Federal Housing Administration /VA

  Only Government Mortgage Partnership Finance Loans are eligible for sale under this product.
 
  The Participating Financial Institution provides and maintains Federal Housing Administration insurance or a Veterans Administration guaranty for the Government Mortgage Partnership Finance Loans and the Participating Financial Institution is responsible for compliance with all Federal Housing Administration or Veterans Administration requirements and for obtaining the benefit of the Federal Housing Administration insurance or the Veterans Administration guaranty with respect to defaulted Government Mortgage Partnership Finance Loans.
 
  The Participating Financial Institution’s servicing obligations are essentially identical to those undertaken for servicing loans in a Ginnie Mae security. Because the Participating Financial Institution servicing these Mortgage Partnership Finance Loans assumes the risk with respect to amounts not reimbursed by either the Federal Housing Administration or Veterans Administration, the structure results in the Mortgage Partnership Finance Banks having assets that are expected to perform the same as Ginnie Mae securities.
 
  The Participating Financial Institution is paid a monthly Government Loan fee equal to 0.02% (2 basis points) per annum based on the month end outstanding aggregate principal balance of the Master Commitment in addition to the customary 44 basis point (0.44%) per annum servicing fee that is retained by the Participating Financial Institution on a monthly basis based on the outstanding aggregate principal balance of the Mortgage Partnership Finance Loans.
 
  Only Participating Financial Institutions that are licensed or qualified to originate and service Federal Housing Administration and Veterans Administration loans and that maintain a mortgage loan delinquency ratio that is acceptable to the Mortgage Partnership Finance Provider and that is comparable to the national average and/or regional delinquency rates as published by the Mortgage Bankers Association from time-to-time are eligible to sell and service Government Mortgage Partnership Finance Loans under the Mortgage Partnership Finance Program.

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(FLOW CHART)

FLA

  The FLA is equal to an agreed upon number of basis points of the aggregate principal balance of the MPF Loans funded under the Master Commitment that is not less than the amount of expected losses on the Master Commitment.
 
  Once the Master Commitment is fully funded, the FLA is expected to cover expected losses on that Master Commitment.

PFI CE Amount

  The PFI is required to provide an SMI policy covering the MPF Loans in the Master Commitment and having a deductible initially equal to the FLA.
 
  Depending upon the amount of the SMI policy, the PFI may or may not have a separate CE Amount obligation.
 
  The total amount of the PFI’s CE Amount (including the SMI policy) is calculated using the MPF Program methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security and the amount of the FLA.
 
  The performance based portion of the credit enhancement fee is typically between 0.06% and 0.07% (6 and 7 basis points) per annum of the aggregate outstanding balance of the MPF Loans in the Master Commitment. The performance based fee is reduced by losses charge to the FLA and is delayed for one year from the date MPF Loans are sold to the MPF Bank. The fixed portion of the credit enhancement fee is typically 0.07% (7 basis points) per annum of the aggregate outstanding principal balance of the MPF Loans in the Master Commitment. The lower performance based credit enhancement fee is for Master Commitments without a direct PFI CE Amount obligation.

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The following chart provides a comparison of the Mortgage Partnership Finance products. FHLBNY has participated in all product types and its outstanding balance at March 31, 2005, December 31, 2004 and 2003 includes the products types described below.

                                             
 
              Participating                          
              Financial     Average                    
        Mortgage     Institution     Preferred     Credit           Servicing  
        Partnership     Direct Credit     Financial     Enhancement Fee           Fee to  
        Finance Bank     Enhancement     Institution Credit     to Participating     Credit     Participating  
        First Loss     Size     Enhancement     Financial     Enhancement     Financial  
  Product Name     Account *     Description     Size*     Institution     Fee Offset 1     Institution  
 
Original
Mortgage
Partnership
Finance
    3 to 5 basis points/added each year based on the unpaid balance     Equivalent to “AA”     3.17 %     9 to 11 basis points/year – paid monthly     No     25 basis
points/year
 
 
Mortgage
Partnership
Finance 100
    100 basis points fixed based on the size of the loan pool at closing     After First Loss Account to “AA”     0.88 %     7 to 10 basis points/year – paid monthly; performance based after 2 or 3 years     Yes – After first 2 to 3 years     25 basis
points/year
 
 
Mortgage
Partnership
Finance 125
    100 basis points fixed based on the size of the loan pool at closing     After First Loss Account to “AA”     0.67 %     7 to 10 basis points/year – paid monthly; performance based     Yes     25 basis
points/year
 
 
Mortgage
Partnership
Finance Plus
    Sized to equal expected losses     0-20 bps after First Loss Account and SMI     0.04 %     13 or 14 basis points/year divided between a fixed fee and a performance based (delayed for 1 year) fee; all fees paid monthly     Yes, for
performance
based fee
    25 basis
points/year
 
 
Mortgage Partnership Finance for Federal Housing Administration/Veteran’s Administration
    N/A     N/A (Unreimbursed Servicing Expenses)     N/A       2 basis points/year - paid monthly 2     N/A     44 basis points/year  
 
 
 
 
*   As of March 31, 2005 and December 31, 2004
 
1   May not exceed the First Loss Account amount for the life of the pool.
 
2   Government Loan Fee
 
    First Loss Account feature is available for only conventional mortgage products

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Correspondent Banking Services

The FHLBNY offers its members an array of correspondent banking services, including depository services, wire transfers, settlement services, and safekeeping services. Depository services include processing of customer transactions in their Overnight Investment Accounts, the interest-bearing demand deposit account each customer has with the FHLBNY. All customer-related transactions (e.g., deposits, Federal Reserve Bank settlements, advances, securities transactions, and wires) are posted to these accounts each business day. Wire transfers include processing of incoming and outgoing domestic and foreign wire transfers, including third-party transfers. Settlement services include automated clearinghouse and other transactions received through the FHLBNY’s accounts at the Federal Reserve Bank as correspondent for its members and passed through to customers’ Overnight Investment Accounts at the FHLBNY. Through a third party, the FHLBNY offers customers a range of securities custodial services, such as settlement of book entry (electronically held) and physical securities. The FHLBNY encourages members to access these products through 1Link -sm , an Internet-based delivery system developed as a proprietary service by the FHLBNY. Members access the 1Link system to obtain account activity information or process wire transfers, book transfers, security safekeeping and advance transactions.

Affordable Housing Program and Other Mission Related Programs

Federal Housing Finance Board regulation Part 952.5 (a) (Community Investment Cash Advance Programs) states in general that each FHLBank shall establish an Affordable Housing Program in accordance with part 951, and a Community Investment Program. As more fully discussed under “Tax Status”, annually, the 12 FHLBanks, including the FHLBNY, must set aside for the Affordable Housing Program the greater of $100 million or 10 percent of regulatory defined net income.

The FHLBank may also offer a Rural Development Advance program, an Urban Development Advance program, and other Community Investment Cash Advance programs.

Affordable Housing Program (“AHP”). The FHLBNY has met this requirement by allocating 10 percent of its previous year’s net income to its Affordable Housing Program each year since the inception of the program. The Affordable Housing Program helps members of the FHLBNY meet their Community Reinvestment Act responsibilities. The program gives members access to cash grants and subsidized, low-cost funding to create affordable rental and home ownership opportunities, including first-time homebuyer programs. Within each year’s Affordable Housing Program allocation, the FHLBNY has established a set-aside program for first-time homebuyers called the First Home Club sm . A total of 25% of the Affordable Housing Program allocation for 2004 has been set aside for this program. Household income qualifications for the First Home Club are the same as for the competitive Affordable Housing Program. Qualifying households can receive matched funds at a 3:1 ratio, up to $5,000, as closing cost and/or down payment assistance. Households are also required to attend counseling seminars that address personal budgeting and home ownership skills training.

Other Mission Related Activities. The Community Investment Program (“CIP”), Rural Development Advance (“RDA”), and Urban Development Advance (“UDA”) are community-lending programs that provide additional support to members in their affordable housing and economic development lending activities. These community-lending programs support affordable housing and economic development activity within low- and moderate-income neighborhoods and other activity that benefits low- and moderate-income households. Through the Community Investment Project, Rural Development Advance, and Urban Development Advance programs, the FHLBNY provides reduced-interest-rate advances to members for lending activity that meets the

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program requirements. The FHLBNY also provides letters of credit (“Letters of Credit”) in support of projects that meet the CIP, Rural Development Advance, and Urban Development Advance program requirements. These project-eligible Letters of Credit are offered at reduced fees. Providing community lending programs (Community Investment Project, Rural Development Advance, Urban Development Advance, and Letters of Credit) at advantaged pricing that is discounted from the FHLBNY’s market interest rates and fees represents an additional income allocation in support of affordable housing and community economic development efforts. In addition, overhead costs and administrative expenses associated with the implementation of the FHLBNY’s Affordable Housing and community lending programs are absorbed as general operating expenses and are not charged back to the Affordable Housing Program allocation. The foregone interest and fee income, as well as the administrative and operating cost are above and beyond the annual income contribution to the Affordable Housing Program. Loans offered under these programs are accounted for on their contractual terms consistent with standard accounting practices and no separate benefits are recorded.

Investments

The FHLBNY maintains portfolios of investments to provide additional earnings and for liquidity purposes. Investment income also bolsters the FHLBNY’s capacity to fund Affordable Housing Program projects, to cover operating expenditures, and to satisfy the REFCORP obligation. To help ensure the availability of funds to meet member credit needs, the FHLBNY maintains a portfolio of short-term investments issued by highly rated institutions. The investments include overnight Federal funds, term Federal funds, interest-bearing deposits, and certificates of deposit. The FHLBNY further enhances interest income by maintaining a longer-term investment portfolio. This portfolio may include: securities issued by the U.S. government and U.S. government agencies, as well as mortgage-backed and residential asset-backed securities issued by government-sponsored mortgage agencies or carrying the highest credit ratings from Moody’s Investors Service (“Moody’s”) or Standard & Poor’s. Investments in housing-related obligations of state and local governments and their housing finance agencies are required to carry ratings of AA or higher at time of acquisition. Housing-related obligations help to liquefy mortgages that finance low- and moderate-income housing. The long-term investment portfolio generally provides the FHLBNY with higher returns than those available in the short-term money markets.

Under the Finance Board’s Financial Management Policy, the FHLBNY is prohibited from investing in certain types of securities, including:

    Instruments such as common stock that represent ownership in an entity. Exceptions include stock in small business investment companies and certain investments targeted at low-income persons or communities;
 
    Instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks; and
 
    Non-investment-grade debt instruments. Exceptions include certain investments targeted at low-income persons or communities and instruments that were downgraded after purchase.

Finance Board Financial Management Policy limits the book-value of the FHLBNY’s investments in mortgage-backed and residential asset-backed securities, collateralized mortgage obligations, Real Estate Mortgage Investment Conduits, and other eligible asset- backed securities to not exceed 300% of the Bank’s previous month end capital on the day it purchases the securities. At the time of purchase, all securities purchased must carry the highest rating assigned by Moody’s or Standard & Poor’s. In addition, the FHLBNY is prohibited from purchasing:

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    Interest-only or principal-only stripped mortgage-backed securities;
 
    Residual-interest or interest-accrual classes of collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”);
 
    Fixed-rate or floating-rate mortgage-backed securities that on the trade date are at rates equal to their contractual caps and whose average lives vary by more than six years under an assumed instantaneous interest rate change of 300 basis points; and
 
    Non-U.S. dollar denominated securities.

Debt Financing—Consolidated Obligations

The primary source of funds for the FHLBNY is the sale of debt securities, known as consolidated obligations, in the U.S. and Global capital markets. Consolidated obligations are the joint and several obligations of the FHLBanks, backed only by the financial resources of the twelve FHLBanks. Consolidated obligations are not obligations of the United States, and the United States does not guarantee them. Moody’s has rated consolidated obligations Aaa/P-1, and Standard & Poor’s has rated them AAA/A-1+.

Although the FHLBNY is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBNY is not paid in full when due, the following rules apply: the FHLBNY may not pay dividends to, or redeem or repurchase shares of stock from, any member or non-member stockholder until the Finance Board approves the FHLBNY’s consolidated obligation payment plan or other remedy and until the FHLBNY pays all the interest or principal currently due under all its consolidated obligations. The Finance Board, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations.

To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to make the payment, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine.

Finance Board regulations state that the FHLBanks must maintain, free from any lien or pledge, the following types of assets in an amount at least equal to the face amount of consolidated obligations outstanding:

    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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The FHLBanks issue consolidated obligations through the Office of Finance (“OF”), which has authority to issue joint and several debt on behalf of the FHLBanks. Consolidated obligations are distributed through dealers selected by the OF, using various methods including competitive auction and negotiations with individual or syndicates of underwriters. Some debt issuance is in response to specific inquiries from underwriters. Many consolidated obligations are issued with the FHLBank concurrently entering into interest rate exchange agreements. To facilitate issuance, the Office of Finance may coordinate communication between underwriters, individual FHLBanks, and financial institutions executing derivative agreements with the FHLBanks.

Issuance volume is not concentrated with any particular underwriter.

The Office of Finance may reject the FHLBNY’s request, and the requests of other FHLBanks, to raise funds through the issuance of consolidated obligations on particular terms and conditions if the Office of Finance determines that its action is consistent with its Finance Board-mandated policies that require consolidated obligations to be issued efficiently and at the lowest all-in cost of funds over time. The FHLBNY has never been denied access under this policy for all periods reported.

The Office of Finance also services all outstanding debt; provides the FHLBanks with rating information received from nationally recognized statistical rating organizations (“NRSROs”) for counterparties to which the FHLBanks have unsecured credit exposure; serves as a source of information for the FHLBanks on capital market developments; administers the Resolution Funding Corporation and the Financing Corporation; and manages the FHLBanks’ relationship with the rating agencies with respect to the consolidated obligations.

Consolidated Bonds. Consolidated bonds satisfy the FHLBNY’s long-term funding requirements. Typically, the maturity of these securities ranges from one to ten years, but the maturity is not subject to any statutory or regulatory limit. Consolidated bonds can be issued and distributed through negotiated or competitively bid transactions with underwriters approved by the Office of Finance or members of a selling group.

The FHLBanks also conduct the TAP Issue Program for fixed-rate, non-callable bonds. This program combines bond issues with specific maturities by reopening these issues daily during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater secondary market liquidity.

Consolidated Discount Notes. Consolidated discount notes provide the FHLBNY with short-term funds for advances to members. These notes have maturities up to 360 days and are offered daily through a dealer-selling group. The notes are sold at a discount from their face amount and mature at par.

On a daily basis, FHLBanks may request that specific amounts of discount notes with specific maturity dates be offered by the Office of Finance for sale through the dealer- selling group. One or more other FHLBanks may also request that amounts of discount notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when dealers submit orders for the specific discount notes offered for sale. The FHLBanks receive funding based on the time of the request, the rate requested for issuance, the trade date, the settlement date and the maturity date. If all terms of the request are the same except for the time of the request, then the FHLBank may receive from zero to 100 percent of the proceeds of the sale of the discount notes issued depending on the time of the request, the maximum costs the FHLBank or other FHLBanks, if any, participating in the same issuance of discount notes are willing to pay for the discount notes, and the amount of orders for the discount notes submitted by dealers.

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Twice weekly, FHLBanks may also request that specific amounts of discount notes with fixed maturity dates ranging from four to 26 weeks be offered by the Office of Finance through competitive auction conducted with securities dealers in the discount note selling group. One or more of the FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. The FHLBanks receive funding based on their requests at a weighted average rate of the winning bids from the dealers. If the bids submitted are less than the total of the FHLBanks’ requests, an FHLBank receives funding based on that FHLBank’s capital relative to the capital of other FHLBanks offering discount notes.

Regardless of the method of issuance, the Office of Finance can only issue consolidated obligations when an FHLBank provides a request for and agrees to accept the funds.

Deposits

The FHLBank Act allows the FHLBNY to accept deposits from its members, and FHLBanks and government instrumentalities. For the FHLBNY, deposits are a source of funding. For members, deposits are a low-risk earning asset that may satisfy their regulatory liquidity requirements. The FHLBNY offers several types of deposit programs to its members, including demand and term deposits.

Retained Earnings and Dividends

The FHLBNY’s Board of Directors adopted the Retained Earnings and Dividend Policy (“Policy”) in order to: (1) establish a process to assess the adequacy of retained earnings in view of the Bank’s assessment of the financial, economic and business risks inherent in its operations; (2) establish the priority of contributions to retained earnings relative to other distributions of income; (3) establish a target level of retained earnings and a timeline to achieve the target; and (4) establish a process to ensure maintenance of appropriate levels of retained earnings. The objective of the Policy is to preserve the value of the members’ investment in the Bank.

The FHLBNY may pay dividends from retained earnings and current income. The FHLBNY’s Board of Directors may declare and pay dividends in either cash or capital stock. Dividends and the retained earnings policy of the FHLBNY are subject to Finance Board regulations and policies.

To preserve the value of the member’s investments, the level of retained earnings should be sufficient to: (1) protect the members’ paid in capital from losses related to market, credit, operational, and other risks (including legal and accounting) within a defined confidence level under normal operating conditions; and (2) provide members with a predictable dividend stream. The FHLBNY’s level of retained earnings should provide management with a high degree of confidence that reasonably foreseeable losses will not impair paid in capital thereby preserving the par value of the stock, and to supplement dividends when current earnings are low or losses occur.

As of March 31, 2005 and December 31, 2004, management determined that the amount of retained earnings necessary to achieve the objectives based on the risk profile of the FHLBNY’s balance sheet was $225.7 and $196.5 million. Actual retained earning as of March 31, 2005 and December 31, 2004 were $255.3 and $223.4 million. Management expects future dividend payout ratios to range from 80% to 100% of net income.

The Policy establishes dividend payout after determining a retained earnings target amount, based on an assessment methodology approved by the Board of Directors, that reasonably identifies and quantifies all

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material risks faced by the FHLBNY. The final dividend payout is subject to Board approval and the applicable Finance Board regulations.

The following table summarizes the impact of dividends on the FHLBNY’s retained earnings for the three months ended March 31, 2005 and 2004, and the years ended December 31, 2004, 2003 and 2002 (in thousands).

                                         
    For the three months ended        
    March 31,     For the year ended December 31,  
    2005     2004     2004     2003     2002  
Retained earnings, beginning balance
  $ 223,434     $ 126,697     $ 126,697     $ 244,436     $ 177,008  
 
                                       
Net Income for the period
    59,300       27,145       161,276       45,816       234,090  
 
                             
 
                                       
 
    282,734       153,842       287,973       290,252       411,098  
 
                                       
Dividend paid*
    (27,466 )     (12,543 )     (64,539 )     (163,555 )     (166,662 )
 
                             
 
                                       
Retained earnings, ending balance
  $ 255,268     $ 141,299     $ 223,434     $ 126,697     $ 244,436  
 
                             
 
*   Dividends are not accrued; they are declared and paid in the month following the end of the quarter.

Competition

Demand for advances is affected by, among other things, the availability to members of other sources of liquidity, including deposits, and the cost of those other sources. Customer deposits are the preferred funding source for our members, with wholesale funding as a secondary source. The FHLBNY competes with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include investment banking concerns and commercial banks. Smaller members may have access to alternative wholesale funding sources through lines of credit and wholesale CD programs, while larger members may have access to these alternatives in addition to sales of securities under agreements to repurchase. Large members may also have independent access to the national and global credit markets. The availability of alternative funding sources can vary as a result of market conditions, members’ creditworthiness, availability of collateral and other factors. In aggregate, FHLBNY advances make up about 33% of the members’ wholesale funding. This indicative “market share” measure has fallen from over 50% in the last two years as the FHLBNY has increased its targeted spread on advances in order to enhance dividend capacity and speed the growth of retained earnings.

The FHLBNY also competes for funds raised through the issuance of unsecured debt in the national and global debt markets. Competitors include Fannie Mae, Freddie Mac and other Government Sponsored Entities, as well as corporate, sovereign, and supranational entities. Increases in the supply of competing debt products could, in the absence of increases in demand, result in higher debt costs or lesser amounts of debt issued at the same cost than otherwise would be the case. In addition, the availability and the cost of funds can be adversely affected by regulatory initiatives that tend to reduce certain depository institutions’ investments in debt instruments that have greater price volatility or interest-rate sensitivity than fixed-rate instruments of the same maturity. Although the available supply of funds has kept pace with the funding needs of the FHLBNY’s members as expressed through FHLBNY debt issuance, there can be no assurance that this will continue to be the case indefinitely.

The FHLBNY also competes for the purchase of mortgage loans held for investment. For single-family products, the FHLBNY competes primarily with the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The FHLBNY competes primarily on the basis of price, products, structures, and services offered.

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In addition, the sale of callable debt and the simultaneous execution of callable derivatives that mirror the debt have been an important source of competitively priced funding for the FHLBNY. Therefore, the availability of markets for callable debt and derivatives may be an important determinant of the FHLBNY’s relative cost of funds. There is considerable competition among high-credit-quality issuers in the markets for callable debt and for derivatives. There can be no assurance that the current breadth and depth of these markets will be sustained.

Competition within the FHLBanks is limited. A member with multiple-charters may operate in multiple Federal Home Loan Bank districts. If the member has a centralized treasury function, it is quite likely that there will be competition for advances. At March 31, 2005 and periods to that date, the FHLBNY is not aware of competition of this nature. One financial institution that became a member after March 31, 2005 did meet this description. However, transaction volume is not material. In addition, a limited number of members of the FHLBNY are part of a bank holding company, and could therefore be affiliated to members of another FHLBank. The amount of advances borrowed, or the amount of capital stock held is not material. Certain large financial institutions, operating in the FHLBNY’s district may borrow unsecured federal funds from other Federal Home Loan Banks. The FHLBNY’s current practice is not to permit members to borrow unsecured funds from the FHLBNY and in compliance with the current practice, the FHLBNY does not compete for member borrowing needs of unsecured federal funds. An indirect source of competition is the acquisition of a member bank by a member of another FHLBank. Under Finance Board regulations, the acquired member is no longer a member of the FHLBNY and cannot borrow additional funds from the FHLBNY. In addition, the non-member may not renew advances when they mature. Former members, who by virtue of being acquired attained non-member status, had outstanding advances aggregating $0.715 billion and $2.5 billion at March 31, 2005 and December 31, 2004, respectively. Such non-members held capital stock, which was reported as mandatorily redeemable, totalling $35.7 million and $126.6 million at March 31, 2005 and December 31, 2004, respectively.

Oversight, Audits, and Examinations

The FHLBNY is supervised and regulated by the Finance Board, which is an independent agency in the executive branch of the U.S. government. The Finance Board ensures that the FHLBNY carries out its housing and community development mission, remains adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner.

The Finance Board has five members. Four are appointed by the President of the United States, with the advice and consent of the Senate, to serve seven-year terms. The fifth member is the Secretary of the Department of Housing and Urban Development or the Secretary’s designee. The Finance Board is supported by assessments from the twelve FHLBanks, with no tax dollars or other appropriations supporting the operations of the Finance Board or the FHLBanks. To evaluate the safety and soundness of the FHLBNY, the Finance Board conducts annual and periodic on-site examinations of the Bank, as well as periodic off-site reviews. Additionally, the Finance Board requires the FHLBNY to submit monthly financial information on the Bank’s condition and results of operations.

The Government Corporation Control Act provides that, before a government corporation may issue and offer obligations to the public, the Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the way and time issued; and the selling price. The U.S. Department of the Treasury receives the Finance Board’s annual report to Congress, monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

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The FHLBNY has an internal audit department; the FHLBNY’s Board of Directors has an Audit Committee; and the independent registered public accounting firm audits the annual financial statements of the FHLBNY. The independent registered public accounting firm conducts these audits following auditing standards established by the Public Company Accounting Oversight Board. The FHLBanks, the Finance Board, and Congress all receive the audit reports. The FHLBNY must also submit annual management reports to Congress, the President, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition; a statement of operations; a statement of cash flows; a statement of internal accounting and administrative control systems; and the report of the independent registered public accounting firm on the financial statements.

The Comptroller General has authority under the FHLBank Act to audit or examine the Finance Board and the FHLBanks, including the FHLBNY, and to decide the extent to which they fairly and effectively fulfil the purposes of the FHLBank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the FHLBNY’s financial statements conducted by a registered independent public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget and the FHLBNY. The Comptroller General may also conduct his or her own audit of any financial statements of the FHLBNY.

The most recent Federal Housing Finance Board (“Finance Board”) Report of Examination (“Report”) was issued on January 4, 2005. The scope of the examination included: (1) Board of Directors and management oversight; (2) financial management, financial performance, and strategic planning; (3) interest rate risk/hedging/modelling and funding; (4) acquired member assets; (5) audit, internal controls and accounting; (6) unsecured credit: (7) advances and collateral operations; (8) payment systems; (9) business continuity planning and information technology; (10) corrective actions for the prior examination.

The Report raised a number of issues that the FHLBNY expects to address in the normal course of business. The Finance Board did not place any restrictions on the FHLBNY’s operations. In the opinion of management, the issues raised would not have a material impact on the operations of the FHLBNY, or to the financial condition for any periods reported. The regulations of the Finance Board limits access to the Report to members of the Board of Directors and those officers and employees whom the Board of Directors determines to have the need for such access. The Finance Board regulations further prohibits the Bank, or any of its directors, officers, or employees from disclosing in any manner, without prior authorization, the Report or any portion thereof to any person or organization not officially connected with the Bank as officer, director, employee, attorney or auditor.

Personnel

As of March 31, 2005 and December 31, 2004, the FHLBNY had respectively, 204 and 209 full-time employees and two part-time employees. The employees are not represented by a collective bargaining unit, and the FHLBNY considers its relationship with its employees to be good.

Tax Status

Resolution Funding Corporation (REFCORP) Assessments. Although the FHLBNY is exempt from ordinary federal, state, and local taxation except for local real estate tax, it is required to make payments to REFCORP.

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REFCORP was established by Act of Congress in 1989 to help facilitate the U.S. government’s bailout of failed financial institutions. The REFCORP assessments are used by the Treasury to pay a portion of the annual interest expense on long-term obligations issued to finance a portion of the cost of the bailout. Principal of those long-term obligations is paid from a segregated account containing zero-coupon U.S. government obligations, which were purchased using funds that Congress directed the FHLBanks to provide for that purpose.

Each FHLBank is required to pay 20 percent of income calculated in accordance with accounting principles generally accepted in the U.S. (“GAAP”) after the assessment for Affordable Housing Program, but before the assessment for the REFCORP. The Affordable Housing Program and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The Bank accrues its REFCORP assessment on a monthly basis.

The Resolution Funding Corporation has been designated as the calculation agent for Affordable Housing Program and REFCORP assessments. Each FHLBank provides their net income before Affordable Housing Program and REFCORP to the Resolution Funding Corporation, who then performs the calculations for each quarter end.

The FHLBanks will continue to pay REFCORP assessments until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. The Finance Board, in consultation with the Secretary of the Treasury, selects the appropriate discounting factors to be used in this annuity calculation. The FHLBanks use the actual payments made to determine the amount of the future obligation that has been defeased. The cumulative amount to be paid to REFCORP by the FHLBNY is not determinable at this time because it depends on the future earnings of all FHLBanks and interest rates. If the FHLBNY experienced a net loss during a quarter, but still had net income for the year, the Bank’s obligation to the REFCORP would be calculated based on the Bank’s year-to-date net income. The Bank would be entitled to a refund of amounts paid for the full year that were in excess of its calculated annual obligation. If the Bank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the REFCORP for the year.

The Finance Board is required to extend the term of the FHLBanks’ obligation to the REFCORP for each calendar quarter in which there is a deficit quarterly payment. A deficit quarterly payment is the amount by which the actual quarterly payment falls short of $75 million.

The FHLBanks’ aggregate payments through 2004 exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening its remaining term to the second quarter of 2019. The FHLBanks’ aggregate payments through 2004 have satisfied $45 million of the $75 million scheduled payment for the second quarter of 2019 and all scheduled payments thereafter. This date assumes that all $300 million annual payments required after December 31, 2004 will be made.

The benchmark payments or portions of them could be reinstated if the actual REFCORP payments of the FHLBanks fall short of $75 million in a quarter. The maturity date of the REFCORP obligation may be extended beyond April 15, 2030 if such extension is necessary to ensure that the value of the aggregate amounts paid by the FHLBanks exactly equals a $300 million annual annuity. Any payment beyond April 15, 2030 will be paid to the Department of Treasury.

Affordable Housing Program (“AHP”) Assessments. Section 10(j) of the 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,

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construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the Affordable Housing Program the greater of $100 million or 10 percent of regulatory net income. Regulatory net income is defined as GAAP net income before interest expense related to mandatorily redeemable capital stock under SFAS 150 and the assessment for Affordable Housing Program, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation determined by the Finance Board. The Affordable Housing Program and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBNY accrues this expense monthly based on its income. The FHLBank reduces the Affordable Housing Program liability as members use subsidies.

The FHLBNY charges the amount set aside for Affordable Housing Program to income and recognizes it as a liability. In periods where the FHLBNY’s regulatory income before Affordable Housing Program and REFCORP is zero or less, the amount of Affordable Housing Program liability is equal to zero, barring application of the following. The FHLBNY relieves the Affordable Housing Program liability as members use subsidies. If the result of the aggregate 10 percent calculation described above is less than $100 million for all 12 FHLBanks, then the Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before Affordable Housing Program and REFCORP to the sum of the income before Affordable Housing Program and REFCORP of the 12 FHLBanks. There was no shortfall in the first quarter of 2005, or the years 2004 and 2003.

ANY DISCUSSION OR STATEMENTS CONTAINED HEREIN INSOFAR AS THEY ADDRESS U.S. FEDERAL TAX MATTERS (WHETHER EXPLICITLY OR IMPLICITLY) ARE NOT INTENDED TO BE “COVERED OPINIONS” WITHIN THE MEANING OF U.S. TREASURY DEPARTMENT CIRCULAR 230. ACCORDINGLY, WE ARE INFORMING YOU THAT (A) THE DISCUSSION HEREIN IS NOT INTENDED AND WAS NOT WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES UNDER THE U.S. FEDERAL TAX LAWS THAT MAY BE IMPOSED ON THE TAXPAYER, (B) THE DISCUSSION HEREIN WAS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING BY US OF OUR SECURITIES, AND (C) EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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ITEM 2. FINANCIAL INFORMATION
Selected Financial Data

                                                 
    March 31,     As of December 31,  
    2005     2004     2003     2002     2001     2000  
Statement of Condition (dollars in millions, except ratios)
                                               
Investments (1)
  $ 19,255     $ 18,363     $ 14,217     $ 23,598     $ 19,200     $ 22,406  
Advances
    62,711       68,507       63,923       68,926       60,962       52,396  
Mortgage loans held for investment, net
    1,308       1,178       672       435       425       528  
Total assets
    83,677       88,439       79,230       93,606       81,240       76,600  
Deposits and other borrowings
    2,272       2,297       2,100       2,743       2,862       2,162  
Consolidated Obligations, net
    76,021       80,157       70,857       83,512       72,628       69,563  
Mandatorily Redeemable Stock
    36       127                          
AHP Liability
    83       82       93       110       105       88  
REFCORP Liability
    13       10             14       20       19  
Capital stock
    3,552       3,655       3,639       4,051       3,733       3,626  
Unrestricted Retained earnings
    254       223       127       244       177       121  
Restricted retained earnings*
    1                                
Total capital ratio (2)
    4.55 %     4.38 %     4.75 %     4.59 %     4.81 %     4.89 %
Leverage ratio (6)
    21.78       22.08       21.04       21.79       20.78       20.44  
 
*   Balance represents amount necessary to bring six different Mortgage Partnership Finance Pools of loans to double-A rating using Standards & Poors LEVELS model.
                                                         
    March 31,     For the years ended December 31,  
    2005     2004     2004     2003     2002     2001     2000  
Statements of Condition
                                                       
Averages (dollars in millions, except percentages)
                                                       
Investments (1)
  $ 18,446     $ 15,061     $ 17,642     $ 19,833     $ 20,677     $ 22,017     $ 20,076  
Advances
    65,880       64,363       65,289       70,943       64,210       54,295       46,851  
Mortgage loans held for investment, net
    1,255       712       928       527       400       475       376  
Total assets
    86,082       80,599       84,344       92,747       86,682       77,972       68,311  
Deposits and other borrowings
    2,156       2,327       1,968       2,952       2,908       2,825       1,814  
Consolidated Obligations, net (5)
    78,113       71,802       76,105       81,818       76,907       70,077       62,149  
Mandatorily Redeemable Stock
    93       337       238                          
AHP Liability
    81       89       83       105       107       97       76  
REFCORP Liability
    5       2       4       5       8       12       9  
Capital stock
    3,580       3,400       3,554       4,082       3,768       3,673       3,354  
Retained earnings
    223       124       159       193       204       129       98  
                                                         
    For the three months        
    ended March 31,     For the years ended December 31,  
    2005     2004     2004     2003     2002     2001     2000  
Operating Results (dollars in millions, except percentages)
                                                       
Net interest income (3)
  $ 97     $ 52     $ 268     $ 298     $ 389     $ 408     $ 410  
Net income (5)
  $ 59     $ 27     $ 161     $ 46     $ 234     $ 285     $ 277  
Dividends paid in cash*
  $ 27     $ 13     $ 65     $ 164     $ 167     $ 229     $ 227  
AHP expense
  $ 7     $ 3     $ 19     $ 5     $ 26     $ 32     $ 31  
Refcorp Expense
  $ 15     $ 7     $ 40     $ 11     $ 59     $ 71     $ 69  
Return on average equity
    1.55 %     0.73 %     4.34 %     1.08 %     5.89 %     7.50 %     8.02 %
Return on average assets
    0.07 %     0.03 %     0.19 %     0.05 %     0.27 %     0.37 %     0.41 %
Operating Expenses
  $ 15     $ 12     $ 51     $ 48     $ 39     $ 35     $ 34  
Weighted average dividend rate (4)
    3.05 %     1.45 %     1.83 %     5.33 %     4.51 %     6.29 %     6.95 %
Operating Expenses as a percent of average assets
    0.02 %     0.01 %     0.06 %     0.05 %     0.04 %     0.04 %     0.05 %
 
(1)   Investments include held-to-maturity securities, available-for-sale securities, interest-bearing deposits, Federal funds sold and Loans to other FHLBanks.
 
(2)   Total capital ratio is capital stock plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets at period-end.
 
(3)   Net interest income is net interest income before the provision for credit losses on mortgage loans.
 
(4)   Represents cash dividend paid, divided by weighted average capital stock outstanding.
 
(5)   See “Management’s Discussion and Analysis – Analysis of Interest Spreads”
 
(6)   Leverage ratio is the percentage of total assets minus allowance for credit losses divided by total capital.
 
*   Dividends are declared and paid within the same month.

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Supplementary financial data for each quarter for the years ended December 31, 2004, 2003 and 2002 are included in the table below (in thousands):

                                 
    2004  
    4th Quarter     3rd Quarter     2nd Quarter     1st Quarter  
Interest income
  $ 584,507     $ 496,911     $ 435,920     $ 409,634  
Interest expense
    507,037       426,950       366,859       358,939  
 
                       
 
                               
Net interest income
    77,470       69,961       69,061       50,695  
 
                       
 
                               
Provision for credit loss
                       
Non-interest income (expense)
    (1,947 )     (130 )     10,989       55  
Non-interest (expense) income
    (31,348 )     (28,650 )     (31,274 )     (23,606 )
 
                       
 
                               
Net income
  $ 44,175     $ 41,181     $ 48,776     $ 27,144  
 
                       
                                 
    2003  
    4th Quarter     3rd Quarter     2nd Quarter     1st Quarter  
Interest income
  $ 422,193     $ 505,132     $ 562,641     $ 570,476  
Interest expense
    372,559       423,096       479,825       486,451  
 
                       
 
                               
Net interest income
    49,634       82,036       82,816       84,025  
 
                       
 
                               
Provision for credit loss
          (4 )     (19 )     (57 )
Non-interest income (expense)
    2,292       (188,088 )     809       (117 )
Non-interest (expense) income
    (23,407 )     18,397       (30,593 )     (31,908 )
 
                       
 
                               
Net income
  $ 28,519     $ (87,659 )   $ 53,013     $ 51,943  
 
                       
                                 
    2002  
    4th Quarter     3rd Quarter     2nd Quarter     1st Quarter  
Interest income
  $ 638,684     $ 651,788     $ 638,739     $ 670,160  
Interest expense
    546,183       561,762       551,432       550,777  
 
                       
 
                               
Net interest income
    92,501       90,026       87,307       119,383  
 
                       
 
                               
Provision for credit loss
    203       (387 )     (19 )     (33 )
Non-interest income (expense)
    (6,028 )     (7,107 )     (4,355 )     (15,111 )
Non-interest (expense) income
    (32,302 )     (29,324 )     (29,529 )     (31,135 )
 
                       
 
                               
Net income
  $ 54,374     $ 53,208     $ 53,404     $ 73,104  
 
                       

Interim period-Infrequently occurring items recognized.

2004- During the second quarter of 2004, the FHLBNY changed its method of accounting for certain highly-effective consolidated obligation hedging relationships during each reporting period. The FHLBNY assessed the impact of this change on all prior annual periods since the adoption of SFAS 133 on January 1, 2001, and all prior quarterly periods for 2004 and 2003, and determined that had the FHLBNY applied this approach since January 1, 2001 it would not have had a material impact on the results of operations or financial condition of the FHLBNY for any of these prior reporting periods. The FHLBNY recorded a $9.3 million increase to income before assessments included in other income in net realized and unrealized gains (losses) on derivatives and hedging activities.

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2003- $1.9 billion of credit deteriorated mortgage-backed securities were sold. As a result a loss of $189.4 million was recognized and reported in the third quarter of 2003 and is reported in Non-interest Income (expense); in the same quarter, accrued assessments payable to REFCORP and to the Affordable Housing Program were reversed as a credit to Non-interest expense.

2002- Debt associated with an advance that was prepaid, was retired at a loss of $16.1 million during the first quarter of 2002.

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Management’s Discussion and Analysis

Forward-Looking Statements

Statements contained in this report, including statements describing the objectives, projections, estimates, or predictions of the Federal Home Loan Bank of New York (“FHLBNY” or “Bank”), may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or other variations on these terms or their negatives. The Bank cautions that, by their nature, forward-looking statements involve risks or uncertainties, and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized.

These forward-looking statements involve risks and uncertainties including, but not limited to, the following:

    Demand for FHLBNY advances resulting from changes in FHLBNY members’ deposit flows and credit demands;
 
    Volatility of market prices, rates, and indices or other factors that could affect the value of investments or collateral held by the FHLBNY as security for the obligations of FHLBNY members and counterparties to derivatives and similar agreements, which could result from the effects of, and changes in, various monetary or fiscal policies and regulations, including those determined by the Federal Reserve Board and the Federal Deposit Insurance Corporation;
 
    Political events, including legislative, regulatory, judicial, or other developments that affect the FHLBNY, its members, counterparties, and/or investors in the consolidated obligations of the FHLBanks, such as changes in the Federal Home Loan Bank Act or Finance Board regulations that affect FHLBNY’s operations and regulatory oversight;
 
    Competitive forces, including other sources of funding available to FHLBNY members without limitation, other entities borrowing funds in the capital markets, the ability to attract and retain skilled individuals; and general economic and market conditions.
 
    The pace of technological change and the ability to develop and support technology and information systems, including the Internet, sufficient to manage the risks of the FHLBNY’s business effectively;
 
    Changes in investor demand for consolidated obligations and/or the terms of derivatives and similar agreements, including without limitation changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities;
 
    Timing and volume of market activity;
 
    Ability to introduce new products and services and to successfully manage the risks associated with those products and services, including new types of collateral used to secure advances;
 
    Risk of loss arising from litigation filed against one or more of the FHLBanks; and
 
    Inflation/deflation.

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Business Overview

Financial Performance. As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission and its ability to provide adequate returns on the capital supplied by its members. The FHLBNY achieves this balance by delivering low-cost financing to members to help them meet the credit needs of their communities and by paying a dividend. Reflecting the FHLBNY’s cooperative nature, the FHLBNY’s financial strategies are designed to enable the FHLBNY to expand and contract in response to member credit needs. The FHLBNY invests its capital in high quality, short- and intermediate-term financial instruments. This strategy allows the FHLBNY to maintain liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. The dividends paid by FHLBNY are largely the result of the FHLBNY’s earnings on invested member capital, net earnings on member credit, mortgage loans and investments, offset in part by the FHLBNY’s operating expenses and assessments. FHLBNY’s board of directors and management determine the pricing of member credit and dividend policies based on the needs of its members.

Historical Perspective. The fundamental business of the FHLBNY is to provide member institutions and housing associates with advances and other credit products in a wide range of maturities to meet their demand. Congress created the FHLBanks in 1932 to improve the availability of funds to support home ownership. Although the FHLBanks were initially capitalized with government funds, members have provided all of the FHLBanks’ capital for over 50 years.

To accomplish its public purpose, the FHLBanks offers a readily available, low-cost source of funds, called advances, to member institutions and certain housing associates. Congress originally granted access to advances only to those institutions with the potential to make and hold long-term, amortizing home mortgage loans. Such institutions were primarily federally and state-chartered savings and loan associations, cooperative banks, and state-chartered savings banks (thrift institutions). As a result, FHLBanks and its member thrift institutions have become an integral part of the home mortgage financing system in the United States.

However, a variety of factors, including a severe recession, record-high interest rates, and deregulation, resulted in significant losses for thrift institutions in the 1980s. In response to the very significant cost borne by the American taxpayer to resolve failed thrift institutions, Congress restructured the home mortgage financing system in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Through this legislation, Congress reaffirmed the housing finance mission of the FHLBanks and expanded membership eligibility in the FHLBanks to include commercial banks and credit unions with a commitment to housing finance.

Different FHLBank Business Strategies. Each FHLBank is operated as a separate entity with its own management, employees and board of directors. In addition, all FHLBanks operate under the Finance Board’s supervisory and regulatory framework. However, each FHLBank’s management and board of directors determine the best approach for meeting its business objectives and serving its members. As such, the management and board of directors of each FHLBank have developed different business strategies and initiatives to fulfill the FHLBank’s mission, and they re-evaluate these strategies and initiatives from time to time.

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Financial Trends

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 Federal Reserve Board has raised the federal funds rate 7 times since June 30, 2004. The U.S. Federal funds rate has increased from .94 percent at December 31, 2003 to 2.31 percent at December 31, 2004 and to 2.62 percent at March 31, 2005.

Through its Federal Open Market Committee (“FOMC”), the Federal Reserve continued its policy of gently raising the federal funds target rates that began in June 2004. In 2005, the target rate was raised twice, 25 basis points on each occasion. On December 15, the target federal funds rate on overnight loans was increased by a quarter point to 2.25 percent, and the Federal Reserve reiterated its intention to raise borrowing costs at a “pace that is likely to be measured.” This followed a similar rate hike on November 11, 2004 in the rate on overnight loans between banks was raised by a quarter of point to 2 percent. On September 21, 2004, the Federal Open Market Committee had raised the federal funds rate target for the third time this year to 1.75 percent from 1.5 percent, saying that economic growth appeared to have regained some “traction.” The previous two rate hikes — 25 basis points on June 30 to 1.25 percent, and another 25 basis points on August 10 to 1.50 percent – came after a period of no change in the federal funds target of 1.00 percent at the beginning of this year.

The 3-Month LIBOR rate has increased to 3.09 percent at March 31, 2005, up from 2.56 percent at December 31, 2004 and 1.15 percent at December 31, 2003. The 3-Month LIBOR rate is the rate at which banks lend funds to each other and is a key benchmark rate for the FHLBNY. The rate has displayed some volatility over this period. The 3-Month LIBOR rate was 1.29 percent in January 2003, dropping to 1.03 percent in June 2003 and staying within a range of +/- 3 basis points until early May 2004. The rate increased to 1.18 percent at the end of May 2004, rose again in June 2004 to 1.43 percent, and then to 1.55 percent in July and 2.02 percent on September 30, 2004.

Mortgage rates, which had remained relatively flat over the past year, have begun to trend upwards. The 15-year residential mortgage rates were at 5.24 percent up from 4.79 percent at December 31, 2004, which was almost unchanged from 4.78 percent at December 31, 2003. The 30-year rate at March 31, 2005 was at 5.65 percent up from 5.36 percent at December 31, 2004 and 5.47 percent at December 31, 2003.

The following table presents changes in key rates over the course of 2003 through March 31, 2005:

                                                 
    March 31,     December 31,     November 30,     September 30,     June 30,     December 31,  
    2005     2004     2004     2004     2004     2003  
Federal Funds Rate
    2.62       2.31       1.94       1.88       1.25       0.94  
3-month LIBOR
    3.09       2.56       2.41       2.02       1.61       1.15  
Prime Rate
    5.75       5.25       5.00       4.75       4.25       4.00  
15-year residential mortgage note rate
    5.24       4.79       4.83       4.78       5.29       4.78  
30-year residential mortgage note rate
    5.65       5.36       5.39       5.37       5.87       5.47  
1- year Adjustable Rate Mortgage
    3.86       3.46       3.43       3.21       3.41       3.37  

At the short-end of the mortgage yield curve, the Adjustable Rate Mortgage yield at March 31, 2005 was up 40 basis points, the largest increase in over a quarter. At December 31, 2004, the increase over December 31, 2003 was 9 basis points.

According to the Federal Reserve Board, “the economy proved to be sufficiently resilient to maintain solid growth and moderate core inflation in 2004”. Real Global Debt Program rose 3-3/4 percent in 2004,

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compared to 4-1/2 percent in 2003, and the activity was supported on a broad front, with advances in household spending and capital spending by businesses increasing notably.

Residential investment remained robust in 2004. Real expenditures increased 5-3/4 percent, the third straight year of strong gains. Demand for housing was influenced by nominal interest rates that have remained near their lowest levels since the late 1960s. In the single-family sector, housing starts amounted to 1.6 million units in 2004, a rate faster than the already rapid pace of 1.5 million units started in 2003. In the multi-family sector, starts totalled a solid 350,000 units in 2004, a figure in line with that of the preceding several years. Sales of both new and existing single-family homes hit new highs in 2004, and home prices moved up sharply.

Impact of general level of interest rates to the FHLBNY. The level of interest rates during a reporting period impacts the FHLBNY’s profitability, due primarily to the relatively shorter-term structure of earning assets and the impact of interest rates on invested capital. As of March 31, 2005 and December 31, 2004, investments, excluding mortgage-backed securities, and state and local housing agency obligations had stated maturities of less than one year. The FHLBNY had also used derivatives to effectively change the re-pricing characteristics of a significant proportion of its advances and consolidated obligation bonds to match shorter-term LIBOR rates that re-priced at three-month intervals or less. The current low level of short-term interest rates, as represented by the overnight Federal funds target rate, has an impact on the FHLBNY’s profitability. The lower level of interest rates also directly affects the FHLBNY through lower earnings on invested capital. Compared to other banking institutions, the FHLBNY operates at comparatively low net spreads between the yield it earns on assets and its cost of liabilities. Therefore, the FHLBNY generates a relatively higher proportion of its income from the investment of member-supplied capital at the average asset yield. As a result, changes in asset yields tend to have a greater effect on FHLBNY’s profitability than they do on the profitability of other banking institutions. The FHLBNY average asset yields and the returns on capital invested in these assets largely reflect the short-term interest rate environment because the maturities of FHLBNY assets are generally short-term in nature, have rate resets that reference short-term rates, or have been hedged with derivatives in which a short-term rate is received.

Changes in rates paid on consolidated obligation debt and the spread of these rates relative to LIBOR and treasury securities may also impact FHLBNY’s profitability. The rate and price at which the FHLBNY is able to issue consolidated obligations, and their relationship to other products such as Treasury securities and LIBOR, change frequently, and are affected by a multitude of factors including overall economic conditions; volatility of market prices, rates, and indices; the level of interest rates and shape of the Treasury curve; the level of asset swap rates and shape of the swap curve; supply from other issuers (including Government Sponsored Enterprises such as Fannie Mae and Freddie Mac, supra/sovereigns, and other highly-rated borrowers); the rate and price of other products in the market such as mortgage-backed securities, repurchase agreements, and commercial paper; investor preferences; the total volume, timing, and characteristics of issuance by the FHLBNY; the amount and type of advance demand from the FHLBNY’s members; political events, including legislation and regulatory action; press interpretations of market conditions and issuer news; the presence of inflation or deflation; actions by the Federal Reserve; and currency exchange rates. There has not been a consistent market trend that has hindered or helped the FHLBNYs’ ability to issue consolidated obligations.

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Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the report period. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

The FHLBNY has identified certain accounting policies that it believes are critical because they require management to make subjective judgments about matters that are inherently uncertain and because of the likelihood those materially different amounts would be reported under different conditions or using different assumptions. These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios; estimating fair values on certain assets and liabilities, including investments classified as available-for-sale and all derivatives and associated hedged items accounted for in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities; and estimating the fair value of the collateral that members pledge for advance borrowings. These policies, estimates, and assumptions are described in greater detail in Notes to the Financial Statements included in Item 13.

Provision for Credit Losses

The provision for credit losses for advances and mortgage loans acquired under the Mortgage Partnership Finance Program represents management’s estimate of the probable credit losses inherent in these two portfolios. Determining the amount of the provision for credit losses is considered a critical accounting estimate because management’s evaluation of the adequacy of the provision is inherently subjective and requires significant estimates, including the amounts and timing of estimated future cash flows, estimated losses based on historical loss experience, and consideration of current economic trends, all of which are susceptible to change. The FHLBNY’s assumptions and judgments on its provision for credit losses are based on information available as of the date of the financial statements. Actual results could differ from these estimates.

Advances. The provision for credit losses on advances includes the following underlying assumptions that the FHLBNY uses for evaluating its exposure to credit loss: (i) management’s judgment on the creditworthiness of the members to which the FHLBNY lends funds, (ii) review and valuation of the collateral pledged by members, and (iii) evaluation of historical loss experience. The FHLBNY has policies and procedures in place to manage its credit risk effectively. These include:

    Monitoring the creditworthiness and financial condition of the institutions to which it lends funds.
 
    Reviewing the quality and value of collateral pledged by members to secure advances.
 
    Estimating borrowing capacity based on collateral value and type for each member, including assessment of margin requirements based on factors such as cost to liquidate and inherent risk exposure based on collateral type.
 
    Evaluating historical loss experience.

The FHLBNY is required by the FHLB Act and Finance Board regulations to obtain sufficient collateral on advances to protect against losses and to accept only certain collateral for advances, such as U.S. government or government-agency securities, residential mortgage loans, deposits in the FHLBNY, and other real estate-related assets.

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The FHLBNY has never experienced a credit loss on an advance. Based on management’s credit analyses, the collateral held as security for advances, and prior repayment history, the FHLBNY has not provided a provision for losses on advances as of March 31, 2005, or December 31, 2004 and 2003.

Significant changes to any of the factors described above could materially affect the FHLBNY’s provision for losses on advances. For example, the FHLBNY’s current assumptions about the financial strength of any member may change due to various circumstances, such as new information becoming available regarding the member’s financial strength or future changes in the national or regional economy. New information may require the FHLBNY to place a member on credit watch and require collateral to be delivered, adjust its current margin requirement, or provide for losses on advances.

Based on the collateral held as security for advances, management’s credit analyses, and prior repayment history, no allowance for credit losses on advances is deemed necessary by management. FHLBNY is required by Finance Board regulations to obtain sufficient collateral on advances to protect against losses, and to accept only certain collateral on its advances, such as U.S. government or government-agency securities, residential mortgage loans, deposits in the FHLBNY, and other real estate related assets.

At March 31, 2005 and December 31, 2004 and 2003, FHLBNY had rights to collateral, either loans or securities, on a member-by-member basis, with an estimated fair value in excess of outstanding advances.

Mortgage Loans Acquired Under Mortgage Partnership Finance Program . The provision for credit losses on mortgage loans includes the following assumptions used to evaluate the FHLBNY’s exposure to credit loss: (i) management’s judgment on the eligibility of members to participate in the program, (ii) evaluation of credit exposure on purchased loans, and (iii) valuation of loss exposure and historical loss experience.

The FHLBNY has policies and procedures in place to manage its credit risk effectively. These include:

    Evaluation of members to ensure that they meet the eligibility standards for participation in the Mortgage Partnership Finance Program.
 
    Evaluation of the purchased loans to ensure that they are qualifying conventional, conforming fixed rate, first lien mortgage loans with fully amortizing loan terms of up to 30 years, secured by owner-occupied, single-family residential properties.
 
    Estimation of loss exposure and historical loss experience to establish an adequate level of loss reserves.

The FHLBNY maintains an allowance on mortgage loans acquired under the Mortgage Partnership Finance Program at levels that management believes to be adequate to absorb estimated losses inherent in the total mortgage portfolio. Setting the level of reserves requires significant judgment and regular evaluation by management. Many factors, including delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions, are important assumptions in estimating mortgage loan losses. The use of different estimates or assumptions as well as changes in external factors could produce materially different allowance levels.

The FHLBNY places a mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBNY records cash payments received on non-accrual loans as interest income and a reduction of principal.

Allowance for loan losses on mortgage loans, which are either classified under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due, are separated from the aggregate pool.

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If adversely classified, or on non-accrual status, reserves for mortgage loans, except Federal Housing Administration and Veterans Administration insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses greater than $1,000 are fully reserved. Federal Housing Administration and Veterans Administration insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicer defaulting on their obligations. Federal Housing Administration and Veterans Administration mortgage loans, if adversely classified, will have reserves established only in the event of a default of a Participating Financial Institution. Reserves are based on the estimated costs to recover any uninsured portion of the Mortgage Partnership Finance loan.

Mortgage loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the FHLBNY will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreements.

Management of the FHLBNY identifies inherent losses through analysis of the conventional loans (not Federal Housing Administration and Veterans Administration insured loans) that are not classified. In the absence of historical loss data, the practice is to look at loss histories of pools of loans at other financial institutions with similar characteristics to determine a reasonable basis for loan loss allowance. Management continues to evaluate this practice for appropriateness.

The FHLBNY also holds participation interest in residential and community development mortgage loans through its Community Mortgage Asset (“CMA”) program. Acquisitions of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001, and the outstanding balance of Community Mortgage Asset loans was down to $11.4 and $12.4 million at March 31, 2005 and December 31, 2004. If adversely classified, Community Mortgage Asset loans will have additional reserves established based on the shortfall of the underlying estimated liquidation value of collateral to cover the remaining balance of the loan. Reserve values are calculated by subtracting the estimated liquidation value of the collateral (after-sale value) from the current remaining balance of the Community Mortgage Asset Loan. If the reserve value indicates a potential loss greater than 5%, an additional reserve will be created for any potential loss greater than 5%.

Management performs periodic reviews of its portfolio to identify the losses inherent within the portfolio and to determine the likelihood of collection of the portfolio. The FHLBNY has established an allowance for credit losses in the amount of $541,000 as of March 31, 2005, and $507,000 as of December 31, 2004, and 2003.

Fair Values

As of March 31, 2005, December 31, 2004 and 2003, certain of the FHLBNY’s assets and liabilities, including investments classified as available-for-sale securities are presented in the Statements of Condition at their estimated fair values. Many of these financial instruments and the collateral that members pledge for advance borrowings lack an available liquid trading market as characterized by frequent transactions between a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant assumptions and various valuation techniques have been used by the FHLBNY for the purpose of determining estimated fair values. Changes in these assumptions, calculations and techniques could significantly affect FHLBNY’s financial position and results of operations. Thus, the fair values may not represent the actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future. Although the FHLBNY uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. FHLBNY continually refines its assumptions and valuation

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techniques and methodologies to better reflect market indications. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions.

The FHLBNY does not have a significant amount of assets and liabilities that are measured for fair value using “highly subjective techniques and analysis”. Valuation is a significant element of the FHLBNY’s financial results of operations and changes in the fair values of certain assets and liabilities could have disproportionate effect on the financial condition of the FHLBNY, which as a cooperative is sensitive to such effects. Accordingly, the FHLBNY places significant emphasis on the measurement process.

For each major category of assets and liabilities measured at fair value at March 31, 2005 and December 31, 2004, the FHLBNY has segregated fair value amounts into four disclosure levels:

1. Fair value amounts determined using quoted prices for identical assets and liabilities in active markets (Level 1).

    Approximately 5 percent of assets (State or local housing agency obligations, available-for-sale mortgage-backed securities, certain variable rate mortgage-backed securities, and certain mortgage-backed securities backed by manufactured homes) are valued using market pricing and a combination of dealer, market maker, or other external pricing source.

2. Fair value amounts determined using quoted prices for similar assets and liabilities in active markets, adjusted for differences between assets and liabilities being measured and other similar assets or liabilities (Level 2 Estimates).

    The fair values derived from the use of Level 2 estimates are not material.

3. Fair value amounts are determined by the use of multiple valuation techniques and other available market inputs (Level 3 Estimates).

    All of the FHLBNY’s asset securities are marketable and can, theoretically, be priced using open market quotes. However, they generally do not have enough liquidity and would require special quotes from market makers. The fair values of about 95% of mortgage-backed securities and 100% of mortgage loans are computed using market information (pricing and spreads) as inputs to standard option valuation models.
 
    The fair values of all derivatives are valued using market information, including forward rates and expected volatilities, as inputs to standard option valuation models.
 
    With regard to the FHLBNY’s liabilities, the consolidated obligations do have a secondary market but there are limits to its liquidity and the FHLBNY’s ability to obtain timely quotes, particularly with regard to option-embedded issues that are seldom traded. Therefore, FHLBNY prices its bonds off of the current consolidated obligations market curve, which has a daily active market. The fair values of consolidated obligation debt (bonds and discount notes) are computed using standard option valuation models using market data: 1) CO debt curve that is available to the public and published by the Office of Finance, and 2) LIBOR curve and volatilities.
 
    Variable rate advances are valued with market spreads, volatilities and using standard option valuation models.

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4. Fair value amounts are determined by the use of entity inputs within Level 3 Estimates that represent an entity’s own internal estimates and assumptions as a practical expedient where market inputs are not available (Level 4 Estimates).

    Fixed-rate advances with or without put options are valued with internal assumptions and using standard valuation models.

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Accounting for Derivatives

Accounting for derivatives includes the following assumptions and estimates by the FHLBNY: (i) assessing whether the hedging relationship qualifies for hedge accounting under SFAS 133 (ii) assessing whether an embedded derivative should be bifurcated under SFAS 133 (iii) calculating the estimated effectiveness of the hedging relationship, (iv) evaluating exposure associated with counterparty credit risk, and (v) estimating the fair value of the derivatives. The FHLBNY’s assumptions and judgments include subjective estimates based on information available as of the date of the financial statements and could be materially different based on different assumptions, calculations, and estimates.

The FHLBNY accounts for derivatives in accordance with SFAS 133. The FHLBNY specifically identifies the hedged asset or liability and the associated hedging strategy. Prior to execution of each transaction, the FHLBNY documents the following items:

    Hedging strategy
 
    Identification of the item being hedged
 
    Determination of the accounting designation under SFAS 133
 
    Determination of method used to assess the effectiveness of the hedge relationship
 
    Assessment that the hedge is expected to be effective in the future if designated as a hedge under SFAS 133

All derivatives are recorded on the Statements of Condition at their fair value and designated as either fair value or cash flow hedges for SFAS 133-qualifying hedges or as non-SFAS 133-qualifying hedges (economic hedges). Any changes in the fair value of a derivative are recorded in current period earnings or other comprehensive income, depending on the type of hedge designation.

In addition, the FHLBNY evaluates all transactions to determine whether an embedded derivative exists based on the guidance of SFAS 133. The evaluation includes reviewing the terms of the instrument to identify whether some or all of the cash flows or the value of other exchanges required by the instrument are similar to a derivative and should be bifurcated from the host contract. If it is determined that an embedded derivative should be bifurcated, the FHLBNY measures the fair value of the embedded derivative separately from the host contract and records the changes in fair value in earnings.

Assessment of Effectiveness. Highly effective hedging relationships that use interest rate swaps as the hedging instrument and that meet criteria under SFAS 133 may qualify for the “short-cut” method of assessing effectiveness. The short-cut method allows the FHLBNY to make the assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. No further evaluation of effectiveness is performed for these hedging relationships unless a critical term is changed.

For a hedging relationship that does not qualify for the short-cut method, the FHLBNY measures its effectiveness using the “long-haul” method, in which the change in fair value of the hedged item must be measured separately from the change in fair value of the derivative. The FHLBNY designs effectiveness testing criteria based on its knowledge of the hedged item and hedging instrument that were employed to create the hedging relationship. The FHLBNY uses regression analyses or other statistical analyses to evaluate effectiveness results, which must fall within established tolerances. Effectiveness testing is performed at inception and on at least a quarterly basis for both prospective considerations and retrospective evaluations.

Hedge Discontinuance. When a hedging relationship fails the effectiveness test, the FHLBNY immediately discontinues hedge accounting. In addition, the FHLBNY discontinues hedge accounting

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when it is no longer probable that a forecasted transaction will occur in the original expected time period and when a hedged firm commitment no longer meets the required criteria of a firm commitment. The FHLBNY treats modifications of hedged items (e.g., reduction in par amounts, change in maturity date, change in strike rates) as a termination of a hedge relationship. The FHLBNY records the effect of discontinuance of hedges to earnings in “Net realized and unrealized gain (loss) on derivatives and hedging activities.”

Accounting for Hedge Ineffectiveness. The FHLBNY quantifies and records in Other income the ineffective portion of its hedging relationships. Ineffectiveness for fair value hedging relationships is calculated as the difference in the change in fair value of the hedging instrument and the change in fair value of the hedged item that is attributable to the risk being hedged. 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 fair value of the anticipated hedged item.

Credit Risk for Counterparties. The FHLBNY is subject to credit risk as a result of nonperformance by counterparties to the derivative agreements. All extensions of credit to counterparties that are members of the FHLBNY are fully secured by eligible collateral. The FHLBNY also enters into master netting arrangements and bilateral security agreements with all active non-members derivative counterparties, which provide for delivery of collateral at specified levels to limit the FHLBNY’s net unsecured credit exposure to these counterparties. The FHLBNY makes judgments on each counterparty’s creditworthiness and estimates of collateral values in analyzing its credit risk for nonperformance by counterparties.

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Accounting and Reporting Developments

The impact of recently issued accounting standards and interpretations are more fully discussed in Note 2, Accounting adjustments, Changes in Accounting Principles, and Recently issued Accounting Standards, in Notes to Financial Statements, under Item 13.

Change in Accounting Principle – Amortization and accretion on premiums and discounts on mortgage loans have been computed by the contractual method in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (“FAS 91”), beginning in the quarter ended March 31, 2005. Previously, amortization and accretion of premiums and discounts was computed using the retrospective method with estimated life, which requires a retrospective adjustment each time the FHLBNY changes the estimated remaining life of the mortgage loans. The retrospective method is intended to correct prior period reported amounts as if the new estimate had been known since the original acquisition date of the mortgage loans. While both methods are acceptable under GAAP, we believe that the contractual method is preferable because under the contractual method, the income effects of premiums and discounts are recognized in a manner that is reflective of the actual behavior of the mortgage loans during the period in which the behavior occurs without regard to changes in estimates based on assumptions about future borrower behavior. As a result of the change in accounting principle, income of $1.1 million, before assessments, was recorded on January 1, 2004 as a cumulative effect of change in accounting principle.

Adoption of SFAS 150. The FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”) in May 2003. This statement establishes a standard for how certain financial instruments with characteristics of both liabilities and equity are classified in the financial statements and provides accounting guidance for, among other things, mandatorily redeemable financial instruments.

The FHLBNY adopted SFAS 150 as of January 1, 2004 as it met the definition of a non-public entity as defined in SFAS 150. In analyzing the conclusion regarding the appropriate effective date applicable, the FHLBNY considered the FASB guidance regarding the application of the effective dates to nonpublic entities as outlined in FAS 150 and in FSP FAS 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. For mandatorily redeemable financial instruments of a nonpublic entity, FAS 150 was effective for existing or new contracts for fiscal periods beginning after December 15, 2003. FSP FAS 150-3 extended the effective date for mandatorily redeemable financial instruments issued by nonpublic entities that were not SEC registrants or otherwise met the definition as defined in footnote 1 of that standard. FAS 150 defines a nonpublic entity as “any entity other than one (a) whose equity securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including securities quoted only locally or regionally, (b) that makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market, or (c) that is controlled by an entity covered by (a) or (b)”.

The FHLBank System is comprised of twelve FHLBanks, which are separate cooperatives whose member financial institutions own all of the capital stock in each respective FHLBank. Member shares are not and will not be publicly traded and cannot be purchased or sold except between an FHLBank and its members and only at their $100 per share par value. The FHLBanks are each in

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the process of registering their capital stock with the SEC, but not for the purpose of any public sale of those equity securities, which is prohibited by law. Based on the characteristics of the FHLBNY’s stock and the definition in FAS 150 of a nonpublic entity, the FHLBNY concluded that the FHLBanks, including the FHLBNY are nonpublic entities. This conclusion is based on the fact that the FHLBNY does not have any equity securities which trade in a public market; future filings with the SEC are not in anticipation of the sale of equity securities in a public market, as the FHLBanks, including the FHLBNY, are prohibited by law from ever doing so; and the FHLBanks are not controlled by an entity which has equity securities traded or contemplated to be traded in a public market.

An adoption date of January 1, 2004 is also consistent with the transition rules of FAS 150 as they apply to a calendar year-end SEC registrant that had public debt outstanding but whose equity was not publicly traded. Applying FAS 150 on this date would make the FHLBNY’s financial statements consistent with all other entities that do not have publicly traded equity but that have either publicly traded debt or are otherwise deemed an SEC registrant.

Proposed rule under EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In March 2004, the FASB reached a consensus regarding the application of an impairment model to determine whether investments are other-than-temporarily impaired. The provisions of this rule are required to be applied prospectively to all current and future investments accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. On September 15, 2004, the FASB issued proposed FASB Staff Position (FSP) EITF 03-1-a Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments” (“FSP EITF 03-1-a”) to provide guidance on the application of paragraph 16 of EITF 03-1 to debt securities that are impaired because of interest rate and/or sector spread increases. On September 30, 2004, the FASB issued FSP EITF Issue 03-1-1 Effective Date of Paragraphs 10- 20 of EITF Issue No. 03-1, “The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments” (“FSP EITF 03-1-1”), which deferred the effective date of the impairment measurement and recognition provisions contained in specific paragraphs of EITF 03-1 and expanded the scope of proposed FSP EITF 03-1-a to include all securities, not only debt securities. The comment period for proposed FSP EITF 03-1-a ended on October 29, 2004 and the effective date has been deferred indefinitely. The deferral of the effective date for paragraphs 10-20 of EITF 03-1 as reported in FSP EITF 03-1-1 will be superseded concurrently with the final issuance of proposed FSP EITF Issue 03-1-a.

The FHLBNY does not expect the new rules to have a material impact on its results of operations at the time of adoption. The FHLBNY purchases investments for its held-to-maturity portfolio only when it has the intent and financial ability to hold the investments to maturity.

Accounting for share based payments. In December 2004, the FASB issued SFAS 123R, which revises SFAS 123 and supersedes APB 25. In March 2005, the SEC issued SAB 107, which provides interpretive guidance on SFAS 123R. Accounting and reporting under SFAS 123R is generally similar to the SFAS 123 approach. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R permits adoption using one of two methods – modified prospective or modified retrospective. The FHLBNY does not expect this rule to have any impact on its results of operation.

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Operating Results — Three Months Ended March 31, 2005 and 2004

Highlights

As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission and its obligation to provide adequate returns on capital supplied by its members. The FHLBNY strives to achieve this balance by providing low-cost financing to its members to help them meet their funding needs and paying a dividend that reflects the interest rate environment and fairly compensates the members for the use of their capital. Reflecting its cooperative nature, the FHLBNY’s financial strategies are designed to enable it to expand and contract in response to member credit needs.

Net Income more than doubled to $59.3 million in the three months ended March 31, 2005 from $27.1 million in the comparative quarter in 2004. Net earnings per share of capital for the three months ended March 31, 2005 was $1.65 up from $0.80 for the comparative quarter in 2004. Net interest income was $97.4 million for the three months ended March 31, 2005, up from $52.0 million for the comparable quarter in 2004. Other expenses was $16.2 million for the three months ended March 31, 2005, up from $13.5 million for the comparable quarter in 2004.

Net interest spread, the difference between interest earnings from assets and interest expenses paid on liabilities grew to 29.2 basis points during the three months ended March 31, 2005 from 10.9 basis points in the comparable quarter in 2004.

Balance sheet size averaged $86.1 billion during the three months ended March 31, 2005 compared to $80.6 billion a during the first quarter in 2004. During the three months ended March 31, 2005, par value of advances to members averaged $64.8 billion compared to $63.5 billion during the year ended December 31, 2004. Investments in mortgage-backed securities averaged $11.3 billion compared to $10.0 billion during the three months ended March 31, 2005 and 2004, respectfully. Investments in short-term securities, Federal Funds sold, and interest-bearing deposits averaged $6.1 billion during the three months ended March 31, 2005 compared to $3.9 billion in the comparable quarter in 2004.

Retained earnings at March 31, 2005 grew to $253.9 million from $223.4 million at December 31, 2004. The Dividend rate in the quarter ended March 31, 2005 was 3.05% compared to 1.45% in the comparable quarter in 2004.

Net Interest Income

Net income for the three months ended March 31, 2005 at $59.3 million increased by $27.1 million compared to the three months ended March 31, 2004. The significant increase is attributable to three factors.

  1.   First, net interest spread was compressed during the first quarter of 2004 from the carrying costs of high-priced liabilities that were associated with $1.9 billion in long-term mortgage- backed securities sold in the third quarter of 2003 because of deteriorating creditworthiness of those securities. The effort to restructure the liabilities and reduce the high-priced funding was still not complete until later.
 
  2.   Second, the resulting pre-assessment loss of $189.4 million from the sale caused the FHLBNY to eliminate dividend payment during the fourth quarter of 2003. Lack of a dividend may have caused members not to renew longer-term advances at maturity. Demand was concentrated around shorter-term advances with lower interest margins. Term lending, at relatively higher spreads, declined in the three months ended March 31, 2004.

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  3.   Third, the FHLBNY replaced $1.9 billion of the higher-yielding, mortgage-backed securities that were sold primarily with variable- rate securities with significantly lower margins.

During the three months ended March 31, 2005, the FHLBNY continued to benefit from selective increases in advance pricing instituted in 2004. While the FHLBNY’s overall cost of liabilities has increased by about 90 basis points, the yields from advances have grown by 114 basis points. This also partly reflects the FHLBNY’s decision last year to withdraw certain advance products yielding marginal profits, or not widely utilized by members, and to hold prices in very competitive products, such as Repurchase Agreement Advances (which are collateralized by eligible securities) rather than compete by lowering price. These benefits, which were not fully realized last year, have been a principal factor in the significant gains in margins and yields during the three months ended March 31, 2005. Yields from investments in variable rate mortgage-backed securities have increased in a rising interest rate environment and have contributed to the growth in net interest income. The spread compression from high-coupon debt in the first quarter of 2004 has been effectively dealt with and was no longer a factor during the three months ended March 31, 2005. In line with the general increase in the interest rate environment, the FHLBNY’s cost of funding has also increased, but the increase has been contained and has been relatively lower than the increase in the yields from interest earnings assets. This has been another factor contributing to the increase in net interest income. Increase in investor demand for FHLBank debt has continued to push down the relative funding cost of new issuances. Coupons for longer-term debt issuances have declined. The cost of swapped-out callable debt has also declined relative to LIBOR. These factors together with more advantageous advance pricing have been primary drivers in the results of operations for the three months ended March 31, 2005.

Provision for Credit Losses

During the three months ended March 31, 2005, the FHLBNY recorded a provision of $34,000 against its mortgage loans held for investment based on identification of inherent losses under an allowance policy described more fully in the section Critical Accounting Policies and Estimates. The FHLBNY experienced no charge-offs during the three months ended March 31, 2005 or 2004. The allowance for credit losses against mortgage loans stood at $541,000 at March 31, 2005 and $507,000 at December 31, 2004 and March 31, 2004. The FHLBNY believes the current allowance for loan losses is adequate to reflect the losses inherent in the FHLBNY’s mortgage loan portfolio.

The FHLBNY’s credit risk from advances at March 31, 2005 and December 31, 2004 were concentrated in commercial banks and savings institutions. All advances were fully collateralized during their entire term. In addition, borrowing members had pledged their stock of the FHLBNY as additional collateral for advances. The FHLBNY has not experienced any losses on credit extended to any member since its inception. Based on the collateral held as security and prior repayment history, no allowance for losses is currently deemed necessary.

Non-Interest Income

Non-interest income consists primarily of fees from various correspondent services provided to members, fees earned on standby letters of credit, realized and unrealized net gains and losses from derivatives and hedging activities. Non-interest income aggregated a loss of ($1,559,000) for the three months ended March 31, 2005. This compares with a gain of $55,000 for the comparable period in 2004. Service fees earned for both periods totalled $1,100,000. For the three months ended March 31, 2005, the net from derivatives and hedging activities total a gain of $1,055,000 compared to a loss of $1,094,000 in the first quarter of 2004. The net includes both realized and unrealized gains and losses from derivatives and hedging activities. During the three months ended March 31, 2005, the FHLBNY retired consolidated

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obligation bonds and recorded a loss of $3,760,000. The bonds retired were associated with assets that had been prepaid.

Non-Interest Expense

Non-interest expense consists of operating expenses and costs allocated to the FHLBNY by the Office of Finance and the Finance Board to cover their operating expenses. Non-interest expenses totaled $16.2 million for the three months ended March 31, 2005 compared with $13.5 million for the comparable quarter in 2004. The increase was primarily attributable to significant increases in pension and supplemental retirement plans, medical insurance costs and consulting fees related to the implementation of Sarbanes-Oxley. Operating expenses include the administrative and operating costs of providing advances to members, managing the investment portfolios and mortgage programs, and providing correspondent services to members.

Expenses allocated by the Office of Finance and the Finance Board to the FHLBNY totalled $1.5 million for the three months ended March 31, 2005 and $1.4 million for the comparable period in 2004. The Finance Board is the regulator of the FHLBanks, including the FHLBNY. The Office of Finance is a joint office of the 12 FHLBanks that facilitates the issuance and servicing of consolidated obligation bonds and discount notes on behalf of the 12 FHLBanks.

Assessments

Each FHLBank is required to set aside a proportion of earnings to fund its Affordable Housing Program and to satisfy its Resolution Funding Corporation assessment. These are more fully described under the section “Tax Status”.

For the three months ended March 31, 2005, the FHLBNY accrued $14.8 million towards its obligations to the Resolution Trust Corporation, and $6.8 million in the comparable period in 2004. The Affordable Housing Program contribution was $6.7 million for the three months ended March 31, 2005 compared to $3.3 million for the same period of 2004. Assessments are analogous to a tax on income and the increase reflects the increase in pre-assessment income for the three months ended March 31, 2005 compared to the comparable period in 2004.

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Financial Condition: Highlights March 31, 2005 versus December 31, 2004

Total assets at March 31, 2005 stood at $83.7 billion, down from $88.4 billion at December 31, 2004. The primary driver of the decline was outstanding advances at March 31, 2005 compared to December 31, 2004.

Advances

The book value of advances to members stood at $62.7 billion at March 31, 2005, down from $68.5 billion at December 31, 2004. Approximately $650 million of the change was attributable to a decline in the fair value basis of certain hedged fixed-rate advances in a rising interest rate environment. Adjustable-rate advances were down by $1.8 billion primarily because one non-member (who was previously a member) withdrew maturing advances. By Finance Board regulations, non-members are to liquidate their advances in an orderly manner. Advances to non-members totaled $0.715 billion at March 31, 2005, and $2.532 billion at December 31, 2004. Capital stock held by non-members totaled $35.7 million at March 31, 2005 and $126.7 million at December 31, 2004. The FHLBNY expects these advances to be repaid at maturity and further expects the capital stock outstanding (which is held by the non-members and pledged to the FHLBNY as additional collateral) to be redeemed or repurchased, pro rata, as advances are repaid. The extinguishment of these advances and capital stock is expected to have the effect of reducing proportionately the FHLBNY’s revenues and net interest income, and consequently its assessments (analogous to tax). The effect on the FHLBNY’s return on equity is not expected to be significant due to the proportionate reduction of assets and capital in approximate proportion to the FHLBNY’s total assets and total capital, over the remaining life of the non-member advances.

Short-term, fixed-rate advances outstanding at March 31, 2005 were $4.4 billion, down from $7.8 billion at December 31, 2004. We believe a small number of members have allowed their balance sheets to decline by lowering their leverage targets in view of the uncertainties surrounding the interest rate environment, and have utilized the flexible short-term advances to achieve their balance sheet objectives. Repurchase Agreement Advances, which are secured by eligible securities, are also down to $18.7 billion at March 31, 2005 from $19.5 billion at December 31, 2004. The product continued to face very strong pricing pressure and demand varies depending on market appetite for securities in the securities repurchase market. The FHLBNY has not reduced its prices and lost some of its market share as a result. The FHLBNY has continued its policy of balancing its need for a reasonable return with making low-cost advances to its members.

Investment Securities

At March 31, 2005, the FHLBNY maintained an investment portfolio of held-to-maturity securities, consisting of privately issued mortgage-backed and asset-backed securities, collectively referred to as “MBS,” that were rated “Aaa” by Moody’s or “AAA” by Standard and Poor’s, and mortgage-pass-throughs and Real Estate Mortgage Investment Conduit bonds issued by government sponsored mortgage agencies. In addition, the FHLBNY had investments in primary public and private placements of taxable obligations of state and local housing finance authorities that were rated at least “Aa” by Moody’s or “AA” by Standard and Poor’s.

Mortgage-backed securities at March 31, 2005 stood at $10.4 billion, down slightly from $10.8 billion at December 31, 2004. Purchases of new securities were kept at a level a step below pay-downs. As a percentage of total assets, the portfolios at the two dates are almost at the same level. This is as expected as acquisition of mortgage-backed securities is limited to 300% of capital at the time of acquisition. Investment in mortgage-backed securities provides a reliable income stream.

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Investments in state and local housing finance bonds at $1.0 billion as of March 31, 2005 as compared to $1.1 billion at December 31, 2004. There were no acquisitions during the three months ended March 31, 2005. Estimated fair value was $1.1 billion, slightly in excess of book value. Investments help to liquefy mortgages that finance low- and moderate-income housing.

At March 31, 2005, the FHLBNY also maintained a portfolio of available-for-sale securities, consisting exclusively of mortgage-backed securities. Acquisitions were held to a level just below pay-downs, and as result, the portfolio of $678.6 million was slightly below $713.4 million at December 31, 2004.

The fair value of held-to-maturity securities, which are primarily fixed rate securities at March 31, 2005 and December 31, 2004, are based on securities dealers’ market values or derived from quoted market prices of similar mortgage loans. Fair values of fixed-rate securities are affected by changes in market interest rates. The FHLBNY conducted a review and evaluation of the securities portfolio to determine if the decline, if any, in the fair value of any security below its carrying value is other than temporary. The FHLBNY generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with the FHLBNY’s experience. The FHLBNY has both the intent and financial ability to hold the temporarily impaired securities until recovery of their value.

Short-term investments

High-quality, short-term investments such as Federal funds and short-term securities in the form of certificates of deposits were held at March 31, 2005 and December 31, 2004, and provided the liquidity necessary to meet member credit needs and to provide a reasonable return on the FHLBNY’s members’ short-term deposits. Both short- and long-term investments are used by the FHLBNY to employ excess capital when advance demand is insufficient to generate returns on capital for its members.

Mortgage loans held-for-investment

Mortgage loans held-for-investment, before allowance for credit losses, increased to $1.3 billion at March 31, 2005 from $1.2 billion at December 31, 2004. Acquisitions, net of run-offs were about $129.0 million during the first quarter in 2005, compared to $94.8 million in the first quarter of 2004.

Deposits

At March 31, 2005, the FHLBNY’s deposit liabilities were comprised of demand and other term deposits predominantly from members and some from eligible entities, as well as collateral from derivatives counterparties. Deposits from members and eligible entities at March 31, 2005 totalled $2.3 billion, unchanged from $2.3 billion at December 31, 2004. Cash collateral held by the FHLBNY at March 31, 2005 totalled $.5 billion compared to $1.1 billion at December 31, 2004, and the decline reflects the change in net unrealized gain position of certain derivative contracts with counterparties.

Consolidated Obligation Liabilities

The FHLBNY continued to fund its assets through the use of consolidated obligation bonds and to a lesser extent by consolidated obligation discount notes. These instruments, unadjusted for changes in fair values, aggregated $76.4 billion at March 31, 2005. Together, they financed 91.3% of the $83.7 billion total assets at March 31, 2005, virtually unchanged from 90.8% at December 31, 2004. At December 31, 2004, these instruments aggregated $80.3 billion and funded a majority of $88.4 billion in total assets. Reported carrying values of consolidated obligations at March 31, 2005 included net unrealized fair value basis gains of $371.5 million compared to $161.4 million at December 31, 2004. These unrealized gains

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are almost entirely offset by unrealized losses on the associated derivatives that hedge the consolidated obligation bonds at March 31, 2005 and December 31, 2004.

Included in the outstanding balances of total consolidated obligations are discounts notes, which have maturities of one year or less. These aggregated $16.1 billion at March 31, 2005, compared to $19.6 billion at December 31, 2004, and were mostly utilized in funding short-term advances, some long-term advances and investments with short-term repricing intervals, and money market investments. The decline in the usage reflects the relatively lower cost of issuing callable debt with an associated interest rate derivative with matching terms.

At March 31, 2005, the FHLBNY has continued to issue callable consolidated obligation bonds for a significant percentage of its funding needs. Callable bonds totaled $22.9 billion, representing 38.0% of the par value of all bonds, compared to $20.2 billion, or 33.3% of the par value of all bonds at December 31, 2004. The issuance of a callable bond and the execution of an associated interest rate swap with mirrored call options results in funding at a lower cost than the FHLBNY would otherwise achieve. The continued attractiveness of the issuance of callable bonds and the simultaneous swapping with a derivative instrument depends on price relationships in both the bond and the derivatives markets.

The FHLBNY also converts at the time of issuance, certain simple fixed-rate bonds into a floating-rate bond with the simultaneous execution of interest rate swaps that will convert the cash flows of the fixed-rate bond to conventional adjustable rate instruments tied to an index, typically LIBOR. The aggregate amount of consolidated obligation bonds that were swapped, including callable and non-callable bonds, totalled $36.9 billion, or 61.3 % of bonds outstanding at March 31, 2005, compared with $34.3 billion, or 56.6% at December 31, 2004. The change reflects a relative increase in swapped callable bonds, and an indication of more attractive executions for such instruments during the three months ended March 31, 2005.

Mandatorily Redeemable Stock

The FHLBNY adopted SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, “ (“FAS 150”) as of January 1, 2004. Shares of capital stock covered by FAS 150 were reclassified to liabilities at fair value. Unpaid dividends related to capital stock classified as liability were accrued at the expected dividend rate and reported as interest expense. At December 31, 2004, the FHLBNY reclassified $126.6 million to a liability. The stocks were held by banks that had attained non-member status by virtue of being acquired by non-members in 2002. At March 31, 2005, the liability declined to $35.7 million. During the three months ended March 31, 2005, a significant portion of advance borrowing to one non-member matured. In accordance with Finance Board regulations non-members cannot renew their advance borrowings at maturity. Since advances are typically associated with the holding of FHLBNY stock, the decline in advances resulted in a proportionate decline in stock that was considered a liability under the FAS 150.

Capital Stock

Each member is required to purchase FHLBNY stock based upon the amount of the member’s residential mortgage loans, its total assets or its outstanding advances borrowed from the FHLBNY. Under the current regulations, borrowing members must hold capital stock equal to the greater of 1 percent of their mortgage assets, or 5 percent of their advance outstanding. Total capital stock was $3.6 billion at March 31, 2005, a decline from the $3.7 billion level at December 31, 2004. These levels also closely approximate the averages outstanding for the three months ended March 31, 2005 and twelve months ended December 31, 2004. During 2004 and the three months ended March 31, 2005, the FHLBNY at its discretion routinely redeemed, on a semi-monthly basis, amounts of capital stock that were in excess of

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members’ advance borrowing requirements. As a result, changes in the level of capital stock are generally in line with changes in the borrowing patterns of members.

Retained Earnings

Unrestricted retained earnings stood at $253.9 million at March 31, 2005, up from $223.4 million at December 31, 2004. A dividend of 3.05%, or $22.2 million was paid on January 31, 2005 to members, based on the weighted average stock outstanding during the quarter ended December 31, 2004. Dividends are paid in arrears and are declared and paid in the month following the end of the quarter. A dividend of 4.7% was paid on April 30, for the three months ended March 31, 2005.

The FHLBNY has reclassified $1,343,000 to “restricted retained earnings” as of March 31, 2005. The amount represents the unpaid principle balance of certain acquired mortgages with a credit rating below an established minimum. The amount of “restricted retained earnings will decline as the balance on those mortgage assets decline or until the FHLBNY converts to its new capital plan in the fourth quarter of 2005. The restrictions on the FHLBNY’s retained earnings had no impact on the results of operations.

Capital Ratios

Finance Board regulations generally allow the FHLBanks, including the FHLBNY, to hold assets up to 21 times capital. However, a FHLBank whose average non-mortgage assets as defined in the Finance Board’s regulations that do not exceed 11 percent of its average total assets may hold assets in amounts up to 25 times capital. The FHLBNY was eligible for the higher asset-based leverage limit of 25 to 1 at March 31, 2005, and December 31, 2004. The FHLBNY’s asset-based leverage was 22.08 to 1 at March 31, 2005, and 22.1 to 1 at December 31, 2004.

Derivative Instruments

Derivative instruments are important tools that we use to manage interest rate risk and restructure interest rates on both the debt (consolidated obligations bonds and discount notes) and advances. The FHLBNY, to a limited amount, also uses interest rate swaps to hedge changes in interest rates prior to debt issuance, and essentially lock in the FHLBNY’s funding cost. The FHLBNY does not take speculative positions with derivatives or any other financial instruments, or trade derivatives for short-term profits. The FHLBNY does not have any special purpose entities or any other types of off-balance sheet conduits. Interest income and interest expense from interest rate swaps used for hedging are recorded with interest on the instrument being hedged. The notional amounts of derivatives are not recorded as assets and liabilities on the balance sheet; rather, the fair value of all derivatives is recorded as either derivative asset or derivative liability on the balance sheet. 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, which the FHLBNY does not do). FHLBNY and derivatives counterparties use notional amounts to calculate cash flows to be exchanged, and the notional amounts is significantly greater than the potential market or credit loss that could result from such transactions. The fair value of derivatives in a gain position is a more meaningful measure of the FHLBNY’s current market exposure on derivatives.

At March 31, 2005, the notional amounts of derivatives outstanding were $69.6 billion, an increase over the $66.1 billion at December 31, 2004. Notional amounts outstanding at December 31, 2003 were $62.1 billion. Derivative contracts in a gain position at March 31, 2005 totaled $11.6 million, compared to $11.1 million and $59.2 billion at December 31, 2004 and 2003. The FHLBNY mitigated its exposure at March 31, 2005 and December 31, 2004 by requiring derivatives counterparties to pledge cash collateral of $0.5

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million and $1.1 million at those dates. Derivative liabilities at March 31, 2005 stood at $869.4 million compared to $1.4 billion at December 31, 2004.

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Financial Highlights: Years ended December 31, 2004 versus 2003

The FHLBNY was successful in rebuilding retained earnings, improving profit margins, and restoring a modest level of dividend. Net income of $161.3 million for the year ended December 31, 2004 rebounded from 2003 net income of $45.8 million. In late 2003, the FHLBNY sold $1.9 billion of credit-deteriorated mortgage-backed and residential asset-backed securities and realized a loss of $189.4 million from sale. No dividend was paid in January 2004 for the quarter ended December 31, 2003. Dividends have since been restored to levels that balance the FHLBNY’s goal of providing its stockholders an economic return on their investment in the FHLBNY’s capital stock, and the FHLBNY’s goal of re-building its retained earnings. These financial objectives are aligned to the FHLBNY’s public mission and its obligation of providing low-cost financing to its stockholders to help them meet their credit needs. As a cooperative, owned by its member-shareholders, these financial and mission related objectives remain as key drivers in the FHLBNY’s strategy.

Net interest spread of $268.5 million for 2004 was down from $298.4 million in 2003. Yields from investments declined as pay-downs and maturities reduced higher-yielding assets, which were replaced by lower coupon fixed rate and variable rate securities that were all triple-A rated. Average capital outstanding, a source of earnings for the FHLBNY, declined to $3.8 billion during 2004 compared to $4.1 billion in 2003. This was somewhat offset by improved margins from selective increases in advance pricing, sacrificing volume for profitability, and withdrawing those products where members could obtain more competitively priced funds for their credit needs. The FHLBNY focused on products where it could deliver funds with structures and terms that provided the most benefit to the member and improved the FHLBNY’s margins.

The balance sheet grew from $79.2 billion at December 31, 2003 to $88.4 billion at December 31, 2004, as management restored traditional leverage to capital. At the end of 2003, leverage ratios were intentionally pulled back after the large loss in the 3rd quarter of 2003.

Advance volumes have been restrained as a result of pricing policies, and FHLBNY’s management and the board of directors believe that the balance is appropriate. Merger activity resulted in about $4.5 billion in maturing advances that were not replaced by one large member that was acquired in 2002 by a non-member and attained non-member status by being acquired by a member of another FHLBank. Nonetheless, advances volume has grown by a significant factor compared to the latter part of 2003, and this has mostly been from large members’ seeking mainly adjustable rate funds from the FHLBNY.

Interest margin from investment in mortgage-backed and asset backed-securities, and the return from investing funds generated from member capital have traditionally provided the FHLBNY with earnings that have been passed on to members in the form of dividends. In the aftermath of the loss from sale of securities in the 3rd quarter of 2003, the management of the FHLBNY has placed certain restrictions on acquisition of mortgage-backed securities. No asset-backed or commercial mortgage-backed securities may be acquired under current practice. Only variable rate securities that are triple-A rated at the time of acquisition may be added to the newly established available-for-sale portfolio, and only triple-A rated mortgage-backed securities may be added to the held-to-maturity securities portfolio. At year-end, short-term investments were up compared to 2003. Substantial liquidity allows the FHLBNY to expand or contract in response to members’ credit needs or to repay excess capital.

Mortgage loans have increased by just over $500 million, from $0.7 billion at December 31, 2003 to $1.2 billion at December 31, 2004, compared to an increase in total assets over the same period of $9.2 billion. Management expects similar restrained volume growth of mortgage loans in the future. The increase is

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from purchases in the Mortgage Partnership Finance program. The Community Mortgage Asset pilot program is down to $12.4 million and further activity was suspended in 2001.

Balance sheet funding remains almost entirely by issuance of consolidated obligations which accounted for 94.8 % of liabilities at December 31, 2004 compared to 93.9 % at December 31, 2003, an indication that the FHLBNY continues to rely on the issuances of consolidated obligations for its basic funding source. The use of discount notes remains at levels seen in 2003. The relatively lower usage of discount notes reflects alternative issuance of callable debt swapped to a variable interest rate.

The FHLBNY’s capital stock increased as a result of increases in advances volume and stood at $3.7 billion at December 31, 2004, including mandatorily redeemable capital stock, compared to $3.6 billion at December 31, 2003. Throughout 2004, the FHLBNY continued to redeem, on a weekly basis, amounts of stock that were in excess of member’s minimum investment requirements. Retained earnings jumped from $126.7 million at December 31, 2003 to $223.4 million at December 31, 2004, partly reflecting the increase in net income for the year and partly the FHLBNY’s policy to reduce dividends to a level that would balance it’s need to increase retained earnings and still maintain a competitive dividend.

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Financial Condition : March 31, 2005, December 31, 2004, and December 31, 2003

Advances

Advances to members, the FHLBNY’s principal line of business, increased despite the loss of significant advances to institutions that are no longer members of the FHLBNY. These former members have been acquired by institutions that do not qualify for membership in the FHLBNY since they are located outside the FHLBNY’s district. Under FHFB regulations, the FHLBNY may not offer advances to non-members; however, FHLBNY may permit advances to a member that is acquired by a non-member to remain outstanding until maturity. The FHLBNY has been successful by diversifying its source of advances amongst its smaller members and by reaching out to certain larger members who have been less active in borrowing from the FHLBNY. Compared to other FHLBanks, concentration of advances among the largest borrowers at the FHLBNY is relatively low. This diversification of advances has been a significant achievement, and sustaining it will be an important goal for the FHLBNY in the future.

Discussions with respect to changes in outstanding advances to members at March 31, 2005 compared to December 31, 2004 are highlighted on page 52 (Financial Condition Highlights: March 31, 2005 versus December 31, 2004).

In 2004, management selectively increased pricing on a broad range of advance offerings to its members, eliminated one advance product that was only marginally profitable and not in great demand by members, and maintained pricing discipline on all advance transactions rather than compete for volume by lowering prices. These tactical strategies were carefully crafted to trade off volume for profitability, which in turn would enhance retained earnings. The management of the FHLBNY believes it has been successful in the implementation of the strategy.

Advances to members reported at book value increased by $4.6 billion from $63.9 billion at December 31, 2003 to $68.5 billion at December 31, 2004. Par value of advances, a measure of economic activity, grew by $5.5 billion on a year-over-year basis. The increase was somewhat offset by market rate driven decline in the fair value basis (as required under SFAS 133) associated with hedged advances of $0.9 billion, and is explained by hedged fixed rate advances falling in value as market rates rose.

The analysis and discussion that follow exclude the impact of SFAS 133 valuation basis adjustments because changes in valuations do not reflect demand for advances from the members of the FHLBNY. The level of fair value is influenced principally by changes in interest rates and the level of hedging activity, factors that do not illustrate economic demand for advances by members. Management believes the demand for advances did bottom out in December 2003 when the balance at par averaged $61.0 billion. Since the resumption of dividend payments in January 2004, advances have grown strongly, despite over $4 billion of required paydowns by acquired members who were prohibited from renewing maturing advances. From an average par of $61.0 billion during December 2003, the average par for the six months ended June 30, 2004 improved to $62.5 billion, despite the loss of advances from one large acquired member. The growth trend continued through the third quarter of 2004, and averaged $62.9 billion through September 30, 2004. The twelve-month 2004 average reached $63.5 billion, and the average for the month of December 2004, a key indicator, stood at $67.3 billion, confirming a positive trend.

Demand was strong for longer-term, adjustable-rate LIBOR-based advances (“ARC”), particularly those with repricing intervals of one to three months. During the second quarter of 2004, about $2.0 billion in maturing Adjustable-Rate Credit Advances were not replaced by a former member. This was almost entirely offset by demand for Adjustable-Rate Credit Advances by other members. Outstanding

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Adjustable-Rate Credit Advances of $10.8 billion at December 31, 2003 declined marginally to $10.1 billion at June 30, 2004 as result. Demand kept pace and outstanding Adjustable-Rate Credit Advances increased significantly at the end of the third quarter 2004 to $12.7 billion and to end the year 2004 at $13.9 billion as a result of increased borrowing needs of a few large members with an appetite for LIBOR-based funding. Because the loss of the advances occurred in the first half of 2004, and the offsetting gains in the latter part of the year, the annual average for the year 2004, the key factor that drives interest income for ARCs, was at $11.5 billion down from the comparable annual average in 2003 of $12.4 billion. The full impact of the incremental gains in the latter part of 2004 will be seen in 2005.

Member appetite was healthy for short-term fixed rate advances, and volumes were up substantially. Outstanding balance grew from $4.4 billion at December 31, 2003 to $6.9 billion at June 30, 2004 as members that paid down short-term advances in order to reduce holding of FHLBNY stock during the fourth quarter of 2004 resumed borrowing with resumption of dividend payments. Demand eased in the third quarter of 2004 as short-term rate increases restrained member appetite for new short-term borrowing. Demand for short-term fixed rate funds was up again in the third quarter of 2004 and outstanding balance increased to $7.8 billion.

Demand for short-term advances, with maturities ranging from overnight to less than a year, has fluctuated because such advances tend to closely reflect members’ short-term liquidity needs. In June 2004, the FHLBNY withdrew one of its overnight advance products that was indexed to the Federal funds rate, because of declining member utilization and the very modest return it provided for the Bank.

The volume of Repurchase Agreement Advances, a type of advance secured by eligible securities, has fluctuated over the years. This product type has been under intense competitive pressure and has declined from an average outstanding of $22.9 billion during 2003 to an average of $19.2 billion in 2004, and ended the year 2004 at an outstanding balance of $19.5 billion. An extremely competitive pricing environment and the Bank’s desire to maintain pricing discipline explains most of the fluctuations in the volume of Repurchase Agreement Advances. Competition in the securities repurchase market varies widely, depending on participants’ preference in acquiring specific securities. Another factor is members’ preferences for their balance sheet mix and the securities they have available to pledge as collateral to secure Repurchase Agreement Advances. As members liquidate their securities or allow securities to run off their books at maturity, they have fewer securities to pledge as collateral for Repurchase Agreement borrowings. Conversely, as members increase their securities holdings, demand for Repurchase Agreement borrowings increases.

A significant part of the advances to members is in the form of convertible advances, which entail one or more put options sold by the member to the FHLBNY. These options allow the FHLBNY to convert the advance, with its existing fixed rate, to a new advance of the member’s choice, priced at the then-current market rate, or, if the member prefers, to terminate the advance. A convertible advance is priced at substantially lower rates than that of a comparable maturity advance with no conversion feature. Typically, convertible advances are hedged with swaps that mirror option terms of the advance, and the option is sold to the swap counterparty. Convertible advances have been on the decline in recent years. Outstanding balance was $24.5 billion at December 31, 2004 compared to $26.5 billion and $28.8 billion at December 31, 2003, and 2002. Nonetheless, they constituted a significant percentage of the total advances outstanding: 36.4% and 42.9% at December 31, 2004 and 2003. Some of the growth in other advance products is due to members’ choices of a different advance type at conversion or maturity of a convertible.

Member appetite for longer term, fixed-rate advances was uneven in 2004. Demand from smaller members that prefer to match fund specific longer-term assets was strong. Typically, the size of the transactions also was small, so that these were largely offset by paydowns by larger members. As a

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result, net outstanding balance in this category at December 31, 2004 has declined from levels at same time 2003.

Under Finance Board regulations, a member attains non-member status by being acquired by a member of another FHLBank or a non-member. Current regulations require an orderly liquidation of advances. In recent years, two large member-borrowers of the FHLBNY were acquired by members of another FHLBank and advances associated have either been repaid, or are in the process of repayment in the normal course of business, without any significant impact to the FHLBNY’s financial condition or its operations.

Advances — Product Types

The following table summarizes the more significant advance product types (dollar in thousands):

                                                 
    March 31, 2005     December 31, 2004     December 31, 2003  
            Percentage             Percentage             Percentage  
    Amounts     of total     Amounts     of total     Amounts     of total  
Adjustable Rate Credit — ARCs
  $ 12,075,099       19.44 %   $ 13,891,305       20.65 %   $ 10,775,890       17.45 %
Fixed rate Advances*
    25,006,976       40.26 %     24,116,211       35.86 %     25,340,399       41.03 %
Repurchase (Repo) Agreement
    18,698,547       30.10 %     19,526,844       29.03 %     19,341,419       31.31 %
Short-Term Advances
    4,411,680       7.10 %     7,761,630       11.54 %     4,449,251       7.20 %
Mortgage Matched Advances
    974,724       1.57 %     1,032,075       1.53 %     974,873       1.58 %
Overnight Line of Credit (OLOC) Advances
    847,023       1.36 %     841,225       1.25 %     778,258       1.26 %
All other categories
    101,343       0.16 %     95,336       0.14 %     103,990       0.17 %
 
                                   
 
                                               
Total par value of advances
  $ 62,115,392       100.00 %   $ 67,264,626       100.00 %   $ 61,764,080       100.00 %
     
 
*   Includes putable advances

With uncertainties in a rising interest rate environment, demand for short-term fixed rate advances was down during the three months ended March 31, 2005. Fixed-rate advances, Adjustable-Rate Credit Advances, and Repurchase Agreement Advances constituted the significant product types in 2004 and 2003.

The following tables summarize interest income from advance products, before the impact of interest rate swaps (in thousands):

                                         
    For the three months ended     For the year Ended  
    March 31,     March 31,     December, 31     December, 31     December, 31  
    2005     2004     2004     2003     2002  
ARC Advances
  $ 86,221     $ 32,640       188,119       166,775       239,315  
Fixed Advances
    258,615       273,407       1,071,656       1,237,177       1,313,752  
Short Term Advances
    38,260       13,892       97,134       72,349       78,344  
Community Investment Advances
    1,266       1,236       4,777       5,310       5,621  
Overnight Line of Credit Advances
    6,739       1,906       10,310       7,410       6,494  
Affordable Housing Program Advances
    87       129       460       567       600  
Repurchase Agreement Advances
    204,905       204,770       807,557       897,264       912,514  
Mortgage Match Securities
    9,750       9,927       40,532       42,115       41,634  
 
                             
 
                                       
Total Interest Income
  $ 605,843     $ 537,907     $ 2,220,545     $ 2,428,967     $ 2,598,274  
 
                             

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Advance — Maturities and Coupons

The FHLBNY had advances outstanding, including Affordable Housing Program advances, as summarized below by year of maturity (dollar amounts in thousands):

                                                 
    March 31, 2005     December 31, 2004     December 31, 2003  
            Weighted             Weighted             Weighted  
            Average             Average             Average  
    Amount     Rate     Amount     Rate     Amount     Rate  
Overdrawn demand deposit accounts
  $ 68       3.65 %   $ 237       4.75 %   $        
Due in one year or less
    17,265,070       3.40 %     23,111,281       2.90 %     19,054,973       2.12 %
Due after one year through two years
    6,961,137       3.52 %     7,583,635       3.38 %     9,428,476       3.22 %
Due after two years through three years
    11,845,737       3.35 %     7,967,893       3.05 %     5,712,807       3.31 %
Due after three years through four years
    5,233,914       4.36 %     8,435,962       3.79 %     3,341,100       3.89 %
Due after four years through five years
    2,814,564       5.08 %     2,300,288       4.91 %     5,424,315       4.44 %
Thereafter
    17,994,902       4.50 %     17,865,330       4.65 %     18,802,409       4.76 %
 
                                         
 
                                               
Total par value
    62,115,392       3.88 %     67,264,626       3.62 %     61,764,080       3.50 %
 
                                               
Discount on AHP advances*
    (744 )             (786 )             (1,066 )        
Net premium on advances*
    1,620               1,784               2,450          
SFAS 133 hedging adjustments*
    594,824               1,241,863               2,157,720          
 
                                         
 
                                               
Total
  $ 62,711,092             $ 68,507,487             $ 63,923,184          
 
                                         
 
*   Discount on Affordable Housing Program advances are amortized to interest income on a straight-line basis, results of which closely approximated the level-yield method, and were not significant for all periods reported. Amortization of fair value basis adjustments were a charge to interest income and amounted to ($0.2) million for the three months ended March 31, 2005 and 2004. Amortization of fair value basis adjustments was a charge to interest income and amounted to ($0.4) million and ($1.3) million for the years ended December 31, 2004 and 2003. All other amortization charged to interest income aggregated ($0.2) million for the three months ended March 31, 2005 and 2004. All other amortization charged to interest income aggregated ($0.7) million and ($0.3) million for the years ended December 31, 2004 and 2003.

Approximately 72.2%, or $44.9 billion, of the par value of advances at March 31, 2005 had a remaining maturity greater than one year. Approximately 65.6%, or $44.2 billion of the par value of advances outstanding at December 31, 2004 had a remaining maturity greater than one year, compared to 69.1%, or $42.7 billion at December 31, 2003.

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Advances — Interest Rate Terms

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

                                                 
    March 31, 2005     December 31, 2004     December 31, 2003  
            Percentage             Percentage             Percentage  
    Amount     of total     Amount     of total     Amount     of total  
Fixed-rate
  $ 50,040,226       80.56 %   $ 53,373,084       79.35 %   $ 50,975,990       82.53 %
Variable-rate
    10,326,973       16.63 %     11,959,522       17.78 %     9,141,090       14.80 %
Variable-rate capped
    1,748,193       2.81 %     1,932,020       2.87 %     1,647,000       2.67 %
 
                                   
 
                                               
Total par value
  $ 62,115,392       100.00 %   $ 67,264,626       100.00 %   $ 61,764,080       100.00 %
 
                                   

Fixed-rate borrowings remained popular with members, although the percentage declined somewhat as members with an appetite for adjustable-rate LIBOR-based funding increased their borrowings. Variable-rate capped advances were also popular with some members who purchased cap options from the FHLBNY to limit their interest exposure in a rising rate environment. The FHLBNY has offsetting purchased cap options that mirror the terms of the caps sold to members, eliminating FHLBNY’s exposure. Variable-rate advances were mainly indexed to LIBOR.

The following summarizes variable advances by reference-index type (in thousands).

                         
    March 31,     December 31,     December 31,  
    2005     2004     2003  
LIBOR indexed
  $ 11,957,249     $ 13,791,055     $ 10,740,540  
Federal Funds
    117,500       100,137       35,000  
Prime
    350       350       350  
FHLBank Discount Rate
                12,200  
 
                 
 
                       
 
  $ 12,075,099     $ 13,891,542     $ 10,788,090  
 
                 

Advances — Maturity or Next Call Date

The following table summarizes advances by year of maturity or next call date (in thousands):

                         
    March 31, 2005     December 31, 2004     December 31, 2003  
Overdrawn demand deposit accounts
  $ 68     $ 237     $  
Due in one year or less
    34,096,582       39,671,293       37,657,829  
Due after one year through two years
    10,394,943       10,042,141       9,074,033  
Due after two years through three years
    12,244,058       9,475,176       7,357,562  
Due after three years through four years
    3,043,114       5,718,400       4,160,400  
Due after four years through five years
    884,864       804,388       2,478,153  
Thereafter
    1,451,763       1,552,991       1,039,103  
 
                 
 
                       
Total par value
  $ 62,115,392     $ 67,264,626     $ 61,767,080  
 
                 

The FHLBNY offers convertible advances for which, the FHLBNY effectively purchases a put option from the member. If the advance is put by the FHLBNY at the end of the lockout period, the member has the option to convert the borrowing to an advance product of their choice, which allows the FHLBNY to convert the advance from fixed-rate to floating-rate if interest rates increase. FHLBNY had convertible advances outstanding of $25.1 billion at March 31, 2005 and $24.5 billion and $26.5 billion at December 31, 2004 and 2003, respectively.

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While on a contractual basis (Advance maturities table), about 27.8% of the par value of advances at March 31, 2005 will mature within one year, the put option, purchased from members and exercisable by the FHLBNY, on an option exercise basis, about 54.9% of advances are potentially putable within one year. At December 31, 2004, on a contractual basis, about 34.4% of advances will mature within one year. With put options purchased from members with convertible advances, about 58.9% of advances were potentially putable by the FHLBNY within one year.

The most significant impact of call options is in the maturity band of five years and greater. Based on contractual maturity, the percentage at March 31, 2005 was 29.0%, compared to 2.3% on a putable basis. At December 31, 2004, the contractual basis was 26.6%; if put options are exercised by the FHLBNY, the percentage beyond five years declines to only 2.3%. Compared to December 31, 2003, the percentage trends remain virtually unchanged, reflective of a consistent risk management outlook and policy.

Investments

The FHLBNY invests in securities authorized by Finance Board policies and regulations. The Bank maintains substantial investments in high-quality short- and intermediate-term financial instruments.

Total FHLBNY investments consisted of investment securities classified as held-to-maturity, available-for-sale securities, interest-bearing deposits, certificates of deposits, and Federal funds sold. Finance Board regulations prohibit the FHLBNY from trading in investment securities, and the FHLBNY does not operate trading accounts.

The largest component of the held-to-maturity securities, with an amortized cost of $10.5 billion at March 31, 2005 and $10.8 billion and $10.2 billion at December 31, 2004 and 2003, was comprised of investments in mortgage-backed and asset-backed securities, collectively referred to as “MBS.” All these securities were rated triple-A by a nationally recognized statistical rating organization (“NRSRO”). The FHLBNY’s remaining held-to-maturity investments at March 31, 2005 consisted of $1.1 billion in housing-related obligations of state and local governments and their housing agencies (“HFA”), almost unchanged from December 31, 2004 and 2003. These obligations carried a rating of double-A or higher. Estimated fair values of held-to-maturity securities were in excess of book values.

During 2004, the FHLBNY established an available-for-sale investment classification and acquired variable-rate mortgage-backed securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation. (“Freddie Mac”). Neither Fannie Mae nor Freddie Mac are agencies of the U.S. Government nor are their securities guaranteed by the U.S. Government. All securities were rated triple-A by a Nationally Recognized Statistical Rating Organization

At March 31, 2005, investments in certificates of deposits and Federal funds sold have increased, reflecting a continuation of the trend to maintain liquidity for its members borrowing needs. Investments in certificates of deposits and Federal funds at December 31, 2004 were also higher than the level on December 31, 2003. At December 2003, the FHLBNY allowed its money market investments to decline after management adopted a policy of lowering balance sheet leverage. Since then, leverage has been gradually increased, allowing for increased investment levels in short-term money investments. Historically, the FHLBNY has been a major provider of Federal funds, allowing the FHLBNY to warehouse and provide balance sheet liquidity to meet unexpected member borrowing demands.

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Book Value of Investment portfolio

The following table summarizes changes in investment categories (including available-for-sale investments) between December 31, 2004 and March 31, 2005 (dollars in thousands):

                                 
                    March 31, 2005  
                    vs.  
                    December 31, 2004  
    March 31,     December 31,     Dollar     Percentage  
    2005     2004     Variance     Variance  
State or local housing agency obligations
  $ 1,045,908     $ 1,056,982     $ (11,074 )     (1.05 %)
Mortgage- backed securities
    11,142,583       11,527,055       (384,472 )     (3.34 %)
 
                       
 
                               
Total investment securities
    12,188,491       12,584,037       (395,546 )     (3.14 %)
 
                               
Interest- bearing deposits
    3,976,271       2,806,870       1,169,401       41.66 %
Federal funds sold
    3,090,000       2,972,000       118,000       3.97 %
 
                       
 
                               
Total investments Book Values
  $ 19,254,762     $ 18,362,907     $ 891,855       4.86 %
                   

The following table summarizes changes in investment categories (including available-for-sale investments) between December 31, 2003 and December 31, 2004 (dollars in thousands):

                                 
                    December 31, 2004  
                    vs.  
                    December 31, 2003  
    December 31,     December 31,     Dollar     Percentage  
    2004     2003     Variance     Variance  
State or local housing agency obligations
  $ 1,056,982     $ 1,164,486     $ (107,504 )     (9.23 %)
Mortgage- backed securities
    11,527,055       10,194,881       1,332,174       13.07 %
 
                       
 
                               
Total investment securities
    12,584,037       11,359,367       1,224,670       10.78 %
 
                               
Interest- bearing deposits
    2,806,870       1,654,603       1,152,267       69.64 %
Federal funds sold
    2,972,000       1,143,000       1,829,000       160.02 %
 
                       
 
                               
Total investments Book Values
  $ 18,362,907     $ 14,156,970     $ 4,205,937       29.71 %
                   

Fair value of investments was in excess of book value for each date shown.

Composition of Available-for-sale securities

Available-for-sale securities were composed of mortgage-backed securities in the amount of $679 million and $713 million at March 31, 2005 and December 31, 2004, respectively. There were no available-for-sale securities as of December 31, 2003.

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Investment Securities — Counterparty ratings, policies and practices

All the mortgage-backed securities held by the FHLBNY were rated triple-A by a Nationally Recognized Statistical Rating Organization. At March 31, 2005, about 39.7% of state and local housing-finance agency bonds were rated triple-A, and 60.3% were double-A. At December 31, 2004, 35.5% were rated triple-A, and 64.5% double-A. Certificates of deposit with original maturities of no more than six months totalled $3.4 billion at March 31, 2005 and $1.7 billion at December 31, 2004. Deposits pledged with derivatives counterparties as collateral were $0.5 billion at March 31, 2005 and $1.1 billion at December 31, 2004. All derivatives counterparties were rated single-A or better, and the FHLBNY has collateral agreements with its derivatives counterparties, which mitigates the credit exposure. Overnight and term Federal funds sold amounted to $3.1 billion at March 31, 2005 and $2.9 billion at December 31, 2004.

Finance Board regulations limit investment in housing-related obligations of state and local governments and their housing finance agencies to obligations that carry ratings of double-A or higher. Finance Board regulations further limit the mortgage-backed and asset-backed investments of each FHLBank to 300% of that FHLBank’s capital. The FHLBNY was within the 300% limit for all periods reported. The FHLBNY’s Held-to-maturity and Available-for-sale securities consisted of mortgage-backed and residential asset-backed securities, and housing finance agency bonds.

The FHLBNY does not preclude or specifically seek out investments any differently than it would in the normal course of acquiring securities for investments, unless it is prohibited by existing regulations. The FHLBNY’s practice is to not lend unsecured funds, including overnight Federal funds sold and certificates of deposits, to members. Unsecured lending to members is not prohibited by Finance Board regulations or Board of Directors’ approved policy. The FHLBNY is prohibited from purchasing a consolidated obligation issued directly, but may acquire consolidated obligations for investment in the secondary market after the bond settles.

The FHLBNY’s investment in Mortgage-backed securities during all periods reported complied with FHLBNY Board-approved policy of acquiring mortgage-backed securities issued or guaranteed by the government-sponsored housing enterprises, or prime residential mortgages rated triple-A by both Moody’s and Standard & Poor’s rating services. The Board of Directors of the FHLBNY has directed management to purchase only Government Sponsored Enterprises issued mortgage-backed securities, and triple A rated prime-residential mortgage-backed securities. This policy represents the continuation of a cautious approach to investing in mortgage-backed securities. In the third quarter of 2003, the FHLBNY sold approximately $1.9 billion of mortgage-backed securities in response to the deteriorating creditworthiness of these securities, mainly backed by manufactured homes. These securities were rated triple-A when purchased and later were downgraded. Selective acquisition explains the levelling off of mortgage-backed securities investments even as total assets have risen by over $9.2 billion. Total investments in mortgage- and asset- backed securities were $10.5 billion, $11.5 billion and $10.2 billion at March 31, 2005, December 31, 2004 and 2003, respectively.

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Mortgage- and Asset-backed Securities

Composition of FHLBNY’s mortgage- and asset-backed securities was as follows (in thousands):

                         
    March 31, 2005     December 31, 2004     December 31, 2003  
U.S. government sponsored entity residential mortgage-backed securities
  $ 4,693,303     $ 4,867,676     $ 1,218,189  
U.S. agency residential mortgage-backed securities
    210,346       217,710       27,142  
Home equity loans
    2,731,618       3,165,078       5,628,195  
Non-federal agency residential mortgage-backed securities
    976,297       655,964       503,074  
Non-federal agency commercial mortgage-backed securities
    2,115,459       2,188,732       2,305,857  
Manufactured Housing loans
    415,560       431,895       512,424  
 
                 
 
                       
Total mortgage-backed and asset- backed securities
  $ 11,142,583     $ 11,527,055     $ 10,194,881  
 
                 

(Excludes fair value gains of available-for-sale investments of about $2.5 and $2.2 million at March 31, 2005 and December 31, 2004, respectively).

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Investment Ratings

The following tables set forth the FHLBNY’s investments by rating category at March 31, 2005 (in thousands):

                                 
            NRSRO Ratings- March 31, 2005  
    Amount     AAA     AA     A  
Issued, guaranteed or insured by:
                               
Pools of Mortgages
                               
Fannie Mae
  $ 2,281     $ 2,281     $     $  
Freddie Mac
    632       632              
 
                       
 
                               
Total pools of mortgages
    2,913       2,913              
 
                       
 
                               
Collateralized Mortgage Obligations (CMOs)/Real Estate Mortgage Investment Conduits (REMICs)
                               
Fannie Mae
    725       725              
Freddie Mac
    1,055       1,055              
Ginnie Mae
    210       210              
 
                       
 
                               
Total CMOs/REMICs
    1,990       1,990              
                   
 
                               
Non-GSE MBS
                               
CMOs/REMICs
    976       976              
Commercial mortgage-backed securities
    2,115       2,115              
 
                       
 
                               
Total non-federal-agency MBS
    3,091       3,091              
 
                       
 
                               
Asset-Backed Securities
                               
Manufactured housing (insured)
    416       416              
Home equity loans (insured)
    1,386       1,386              
Home equity loans (uninsured)
    1,345       1,345              
 
                       
 
                               
Total asset-backed securities
    3,147       3,147              
 
                       
 
                               
Total mortgage-backed securities
  $ 11,141     $ 11,141     $     $  
 
                       
 
                               
Other
                               
State and local housing finance agency obligations
  $ 1,046     $ 415     $ 631     $  
Interest-bearing deposits
    3,976       16       3,084       876  
Overnight Federal funds
    3,090             1,540       1,550  
Loans to other FHLB
                       
 
                       
 
                               
Total other
  $ 8,112     $ 431     $ 5,255     $ 2,426  
 
                       

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The following tables set forth the FHLBNY’s investments by rating category at December 31, 2004 (in thousands):

                                 
            NRSRO Ratings - December 31, 2004  
    Amount     AAA     AA     A  
Issued, guaranteed or insured by:
                               
Pools of Mortgages
                               
Fannie Mae
  $ 2,370,522     $ 2,370,522     $     $  
Freddie Mac
    656,542       656,542              
 
                       
 
                               
Total pools of mortgages
    3,027,064       3,027,064              
 
                       
 
                               
Collateralized Mortgage Obligations (CMOs)/Real Estate Mortgage Investment Conduits (REMICs)
                               
Fannie Mae
    759,270       759,270              
Freddie Mac
    1,081,342       1,081,342              
Ginnie Mae
    217,710       217,710              
 
                       
 
                               
Total CMOs/REMICs
    2,058,322       2,058,322              
                   
 
                               
Non-GSE MBS
                               
CMOs/REMICs
    655,964       655,964              
Commercial mortgage-backed securities
    2,188,732       2,188,732              
 
                       
 
                               
Total non-federal-agency MBS
    2,844,696       2,844,696              
 
                       
 
                               
Asset-Backed Securities
                               
Manufactured housing (insured)
    431,895       431,895              
Home equity loans (insured)
    3,165,078       3,165,078              
Home equity loans (uninsured)
                       
 
                       
 
                               
Total asset-backed securities
    3,596,973       3,596,973              
 
                       
 
                               
Total mortgage-backed securities
  $ 11,527,055     $ 11,527,055     $     $  
 
                       
 
                               
Other
                               
State and local housing finance agency obligations
  $ 1,056,982     $ 374,842     $ 682,140     $  
Interest-bearing deposits
    2,806,870       19,170       653,938       2,133,762  
Overnight Federal funds
    2,972,000                   2,972,000  
 
                               
 
                       
 
                               
Total other
  $ 6,835,852     $ 394,012     $ 1,336,078     $ 5,105,762  
 
                       

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The following tables set forth the FHLBNY’s investments by rating category at December 31, 2003 (in thousands):

                                 
            NRSRO Ratings- December 31, 2003  
    Amount     AAA     AA     A  
Issued, guaranteed or insured by:
                               
Pools of Mortgages
                               
Fannie Mae
  $ 745,523     $ 745,523     $     $  
Freddie Mac
    440,375       440,375              
 
                       
 
                               
Total pools of mortgages
    1,185,898       1,185,898              
 
                       
 
                               
Collateralized Mortgage Obligations (CMOs)/Real Estate Mortgage Investment Conduits (REMICs)
                               
Fannie Mae
    25,443       25,443              
Freddie Mac
    6,848       6,848              
Ginnie Mae
    27,142       27,142              
 
                       
 
                               
Total CMOs/REMICs
    59,433       59,433              
                     
 
                               
Non-GSE MBS
                               
CMOs/REMICs
    503,074       503,074              
Commercial mortgage-backed securities
    2,305,857       2,305,857              
 
                       
 
                               
Total non-federal-agency MBS
    2,808,931       2,808,931              
 
                       
 
                               
Asset-Backed Securities
                               
Manufactured housing (insured)
    512,424       512,424              
Home equity loans (insured)
    2,590,258       2,590,258              
Home equity loans (uninsured)
    3,037,937       3,037,937              
 
                       
 
                               
Total asset-backed securities
    6,140,619       6,140,619              
 
                       
 
                               
Total mortgage-backed securities
  $ 10,194,881     $ 10,194,881     $     $  
 
                       
 
                               
Other
                               
State and local housing finance agency obligations
  $ 1,164,486     $ 457,755     $ 706,731     $  
Interest-bearing deposits
    1,654,603       32,689       853,470       768,444  
Overnight Federal funds
    1,143,000             353,000       790,000  
Loans to other FHLB
    60,000       60,000              
 
                       
 
                               
Total other
  $ 4,022,089     $ 550,444     $ 1,913,201     $ 1,558,444  
 
                       

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Market Value — Held-to-maturity Securities

Market value of Held-to-maturity securities was as follows (in thousands):

                                 
    March 31, 2005  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
State or local housing agency obligations
  $ 1,045,908     $ 19,769     $     $ 1,065,677  
Mortgage-backed securities
    10,463,964       137,753       (92,795 )     10,508,922  
 
                       
 
                               
Total
  $ 11,509,872     $ 157,522     $ (92,795 )   $ 11,574,599  
 
                       
                                 
    December 31, 2004  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
State or local housing agency obligations
  $ 1,056,982     $ 26,669     $ (718 )   $ 1,082,933  
Mortgage-backed securities
    10,813,692       220,060       (21,808 )     11,011,944  
 
                       
 
                               
Total
  $ 11,870,674     $ 246,729     $ (22,526 )   $ 12,094,877  
 
                       
                                 
    December 31, 2003  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
State or local housing agency obligations
  $ 1,164,486     $ 33,269     $ (508 )   $ 1,197,247  
Mortgage-backed securities
    10,194,881       361,756       (5,596 )     10,551,041  
 
                       
 
                               
Total
  $ 11,359,367     $ 395,025     $ (6,104 )   $ 11,748,288  
 
                       

Contractual Maturities — Held-to-maturity Securities

The amortized cost and estimated fair value of Held-to-maturity securities by contractual maturity are shown below (in thousands). Expected maturities of certain securities, including mortgage-backed securities, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees. The FHLBNY has the intent and ability to hold Held-to-maturity securities until maturity.

                                                 
    March 31, 2005     December 31, 2004     December 31, 2003  
    Amortized     Estimated     Amortized     Estimated     Amortized     Estimated  
    Cost     Fair Value     Cost     Fair Value     Cost     Fair Value  
Due in one year or less
  $     $     $     $     $     $  
Due after one year through five years
                                   
Due after five years through ten years
    48,063       49,372       48,063       50,156       67,332       70,563  
Due after ten years
    997,845       1,016,305       1,008,919       1,032,777       1,097,154       1,126,684  
 
                                   
 
    1,045,908       1,065,677       1,056,982       1,082,933       1,164,486       1,197,247  
 
                                               
Mortgage-backed securities
    10,463,964       10,508,921       10,813,692       11,011,944       10,194,881       10,551,041  
 
                                   
 
                                               
Total
  $ 11,509,872     $ 11,574,598     $ 11,870,674     $ 12,094,877     $ 11,359,367     $ 11,748,288  
 
                                   

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Held-to-maturity, non-mortgage-backed securities had the following maturity characteristics:

                         
    March 31, 2005     December 31, 2004     December 31, 2003  
Non-mortgage-backed securities
                       
Due in one year or less
    0.00 %     0.00 %     0.00 %
Due after one year through five years
    0.00 %     0.00 %     0.00 %
Due after five years through ten years
    4.60 %     4.55 %     5.78 %
Due after ten years
    95.40 %     95.45 %     94.22 %

Held-to-maturity, mortgage- and- asset- backed securities had the following maturities (in thousands):

                                                 
    March 31, 2005     December 31, 2004     December 31, 2003  
    Amortized     Estimated     Amortized     Estimated     Amortized     Estimated  
    Cost     Fair Value     Cost     Fair Value     Cost     Fair Value  
Mortgage-backed securities
                                               
Due in one year or less
  $     $     $     $     $     $  
Due after one year through five years
    1,464,838       1,549,371       1,512,286       1,632,348       984,411       1,077,053  
Due after five years through ten years
    15,622       15,712       17,402       17,641       660,645       746,269  
Due after ten years
    8,983,503       8,943,837       9,284,004       9,361,955       8,549,825       8,727,719  
 
                                   
 
                                               
Total mortgage-backed securities
  $ 10,463,963     $ 10,508,920     $ 10,813,692     $ 11,011,944     $ 10,194,881     $ 10,551,041  
 
                                   
 
*   Mortgage-backed securities were allocated, based on contractual principal maturities assuming no prepayment.

Contractual maturities of certain mortgage-backed securities will differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Market Value — Available-for-sale Securities

Market value of Available-for-sale securities was as follows (in thousands):

                                 
    March 31, 2005  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Mortgage-backed securities
  $ 676,093     $ 2,527     $     $ 678,620  
 
                       
 
                               
Total
  $ 676,093     $ 2,527     $     $ 678,620  
 
                       
                                 
    December 31, 2004  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Mortgage-backed securities
  $ 711,123     $ 2,240     $     $ 713,363  
 
                       
 
                               
Total
  $ 711,123     $ 2,240     $     $ 713,363  
 
                       

There were no Available-for-sale securities at December 31, 2003.

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Contractual Maturities — Available-for-sale Securities

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity, are shown below (in thousands):

                                 
    March 31, 2005     December 31, 2004  
    Amortized     Estimated     Amortized     Estimated  
    Cost     Fair Value     Cost     Fair Value  
Due in one year or less
  $     $     $     $  
Due after one year through five years
                       
Due after five years through ten years
                       
Due after ten years
    676,093       678,620       711,123       713,363  
 
                       
 
                               
Total
  $ 676,093     $ 678,620     $ 711,123     $ 713,363  
 
                       

Contractual maturities of certain mortgage-backed securities will differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Mortgage Loans

During the three months ended March 31, 2005, the FHLBNY added $162.9 million in new loans; run-offs totalled $33.9 million in the period. The total portfolio of mortgage-loans comprised of Mortgage Partnership Finance and Community Mortgage Asset loans, which has not been active since 2002, and has declined steadily over time to $11.3 million at March 31, 2005 compared to $12.4 million at December 31, 2004 and $27.4 million at March 31, 2004.

At December 31, 2004, mortgage loans (before allowance for credit losses) increased by $506.4 million to $1.2 billion at December 31, 2004, from December 31, 2003, while total assets increased by over $9.2 billion. This is a restrained increase, and the FHLBNY expects its Mortgage Partnership Finance purchases to grow only moderately in the future to provide its members another option in place of selling to other housing Government Sponsored Entities. The increases were entirely from purchases of Mortgage Partnership Finance loans under the initiative referred to as the Acquired Member Assets program. The FHLBNY’s decision to purchase and retain all of its members’ production rather than sharing this production with another FHLBank has achieved modest and controlled growth over the year. A member with a relatively large production has also joined the program, and the production volume from this source has been another factor in the relative growth of the mortgage loan portfolio. Nevertheless, the FHLBNY does not expect its Mortgage Partnership Finance portfolio to become a large portion of its assets.

Collateral types and general description of the primary mortgage loans are as follows:

    Mortgage Partnership Finance single-family fully amortizing residential loans comprise of “Fixed 15” years or less, greater than 15 years but less than or equal to 20 years and greater than 20 years but less than or equal to 30 years maturity. Property types consist of 1-4 family attached, detached, and planned unit developments, condominiums, and non-mobile manufactured housing properties.
 
    Multi-family portfolio consists of “Ten-year balloon” notes collateralized by multi-family units from 5 to 1000 units in the metropolitan area of New York. These participations were purchased under Community Mortgage Asset program, which has been suspended indefinitely and the portfolio is running off. Loans were underwritten to debt service coverage not to be less than 125% and loan to value not to exceed 75%.

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    The non-residential loan is a community development syndication loan with four banks participating. Citicorp, Carver Federal, Chase Manhattan Development Corp and the FHLBNY. The FHLBNY’s prorated share is 40%. The property is collateralized by a retail building of approximately 50,000 square feet occupied by a grocery store as the single tenant.

Limitations on the Mortgage Partnership Finance portfolio are the loan lending limits established by Office of Federal Housing Enterprise Oversight.

Mortgage Loans by loss layer structure types.

Original Mortgage Partnership Finance - The first layer of losses are applied to the First Loss Account provided by the Bank. The member then provides a credit enhancement up to “AA” rating equivalent. Loan losses beyond the first two layers, though a remote possibility, would be absorbed by the FHLBNY.

Mortgage Partnership Finance 100 - The first layer of losses are applied to the First Loss Account provided by the Bank. Losses incurred in the First Loss Account are deducted from credit enhancement fees payable to the member after the third year. The member then provides a credit enhancement up to “AA” rating equivalent less the amount placed in the FLA. Loan losses beyond the first two layers, though a remote possibility, would be absorbed by the FHLBNY.

Mortgage Partnership Finance 125 - The first layer of losses are applied to the First Loss Account provided by the Bank. Losses incurred in the First Loss Account are deducted from the credit enhancement fees payable to the member. The member then provides a credit enhancement up to “AA” rating equivalent less the amount placed in the FLA. Loan losses beyond the first two layers, though a remote possibility, would be absorbed by the Bank.

Mortgage Partnership Finance Plus - The first layer of losses are applied to the First Loss Account 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. 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. Any losses that exceed the Credit Enhancement obligation, though a remote possibility, would be absorbed by the Bank .

Mortgage Partnership Finance for Federal Housing Administration /VA - The Participating Financial Institution provides and maintains Federal Housing Administration insurance or Veterans Administration insurance for Federal Housing Administration/VA mortgage loans; the Participating Financial Institution is responsible for compliance with all Federal Housing Administration /VA requirements and for obtaining the benefit of the Federal Housing Administration insurance or the Veterans Administration insurance with respect to defaulted mortgage loans.

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The following tables summarizes Mortgage Partnership Finance Loans by loss layer structure product types (in thousands)

                                 
    March 31, 2005     December 31, 2004     December 31, 2003     December 31, 2002  
Original MPF
  $ 117,304     $ 113,155     $ 74,940     $ 11,557  
MPF 100
    47,373       46,617       40,158       20,224  
MPF 125
    475,827       455,477       382,783       259,251  
MPF 125 Plus
    627,980       522,375       98,597       3,262  
Other
    18,369       20,631       38,818       82,518  
 
                       
 
                               
 
  $ 1,286,853     $ 1,158,255     $ 635,296     $ 376,812  
 
                       

Participating Financial Institutions may use whichever underwriting system they choose. While Mortgage Partnership Finance loans generally conform to criteria for sale such as used by Freddie Mac and Fannie Mae, in addition, each loan is created or sold only if the lender is willing to share in the management of that loan’s credit risk. Participating Financial Institutions contact the Federal Home Loan Bank of Chicago, the Mortgage Partnership Finance provider, to credit enhance and sell loans into the Mortgage Partnership Finance program. The credit enhancement software used by the Mortgage Partnership Finance provider for Mortgage Partnership Finance analyzes the risk characteristics of each loan and determines the amount of credit enhancement required, but the decision whether to deliver the loan into the Mortgage Partnership Finance Program is made solely by the Participating Financial Institution.

Most Participating Financial Institutions service loans on an actual/actual form of remittance. That remittance requires the Participating Financial Institution to remit whatever amounts it collects. Participating Financial Institutions participating in the Mortgage Partnership Finance Plus and Mortgage Partnership Finance for Federal Housing Administration/VA products must service loans on a scheduled/scheduled form of remittance. That remittance requires the Participating Financial Institution to remit each month whatever scheduled interest and scheduled principal payments are due, whether the amounts are collected. The Participating Financial Institution must remit scheduled interest and scheduled principal whether or not mortgage payments are received.

The FHLBNY also holds participation interests in residential and community development mortgage loans through its pilot Community Mortgage Asset (“CMA”) program. Acquisitions of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001. Participation interests in Community Mortgage Asset loans are reviewed at least annually.

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Mortgage Loans by Loan Type

Mortgage loans held for portfolio were as follows (dollar amounts in thousands):

                                                 
    March 31, 2005     December 31, 2004     December 31, 2003  
    2005     Percentage     2004     Percentage     2003     Percentage  
Real Estate:
                                               
Fixed medium-term single-family mortgages
  $ 555,0584       2.8 %   $ 516,666       44.2 %   $ 283,300       42.6 %
Fixed long-term single-family mortgages
    731,3635       6.4 %     641,730       54.8 %     352,140       52.9 %
Multi-family mortgages
    8,475       0.7 %     9,493       0.8 %     27,081       4.1 %
Non-residential mortgages
    2,757       0.2 %     2,771       0.2 %     2,824       4.0 %
 
                                   
 
                                               
Total par value
    1,297,653       100.0 %     1,170,660       100.0 %     665,345       100.0 %
 
                                   
 
                                               
Net unamortized premiums
    15,832               13,294               6,736          
Net unamortized discounts
    (5,365 )             (4,882 )                      
Basis adjustment
                  (482 )             70          
 
                                         
 
                                               
Total mortgage loans held for investment
  $ 1,308,120             $ 1,178,590             $ 672,151          
 
                                         
                         
    March 31, 2005     December 31, 2004     December 31, 2003  
Federal Housing Administration and Veteran Administration insured loans
  $ 18,370     $ 20,632     $ 38,819  
Conventional loans
    1,268,051       1,137,765       596,621  
Others
    11,232       12,264       29,905  
 
                 
 
                       
Total par value
  $ 1,297,653     $ 1,170,661     $ 665,345  
 
                 

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Mortgage Loans – Past Due

In the FHLBNY’s outstanding net mortgage loans held for portfolio, nonperforming loans and loans 90 days or more past due and accruing interest were as follows (in thousands):

                         
            December 31,  
    March 31, 2005     2004     2003  
Mortgage loans held for portfolio, net of provisions for credit losses
  $ 1,307,578     $ 1,178,083     $ 671,644  
 
                 
 
                       
Nonperforming mortgage loans held for portfolio
  $ 1,004     $ 519     $ 115  
 
                 
 
                       
Mortgage loans held for portfolio past due 90 days or more and still accruing interest
  $ 1,544     $ 1,898     $ 2,732  
 
                 

Mortgage Loans – Non-Performing

The FHLBNY’s interest contractually due and actually received for nonperforming loans were as follows (in thousands):

                                         
    For the three months ended        
    March 31,     For the year ended December 31,  
    2005     2004     2004     2003     2002  
Interest contractually due during the period
  $ 22     $ 48     $ 51     $ 30     $ 24  
Interest actually received during the period
          46       51       29       22  
 
                             
 
                                       
Shortfall
  $ 22     $ 2     $     $ 1     $ 2  
 
                             

At March 31, 2005, loans in foreclosure totaled $69 thousand. Loans in foreclosure decreased to $0.3 million on December 31, 2004 from $0.4 million on December 31, 2003. The FHLBNY does not have any real estate owned.

Mortgage Loans – Credit Losses

The FHLBNY had no charge-off experience during periods reported. Roll-forward of the allowance account was as follows (in thousands):

                                         
    For the three months ended     For the years ended  
    March 31,     December 31,  
    2005     2004     2004     2003     2002  
Balance, beginning of period
  $ 507     $ 507     $ 507     $ 428     $ 193  
 
                                       
Charge offs
                             
Recoveries
                             
 
                             
Net charge- off
                             
Provision for credit losses
    34                   79       235  
 
                             
 
                                       
Balance, end of period
  $ 541     $ 507     $ 507     $ 507     $ 428  
 
                             

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Deposits

The FHLBNY operates deposit programs for the benefit of its members. Deposits are primarily short term in nature, with the majority maintained in demand accounts that reprice daily based upon rates prevailing in the overnight Federal funds market. Depositor demand, primarily driven by members’ liquidity preferences, is the primary determinant of the level of deposits. At March 31, 2005, member deposits of $2.2 billion remained almost unchanged from December 31, 2004, which was up a little to $2.3 billion compared to $2.1 billion at December 31, 2003.

Debt Financing Activity and Consolidated Obligations

Consolidated obligations, which are the joint and several obligations of the FHLBanks, are the principal funding source for the FHLBNY’s operations, and consist of consolidated bonds and consolidated discount notes. Generally, discount notes are consolidated obligations with maturities up to 360 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.

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 Board. Each FHLBank independently determines its participation in each issuance of consolidated obligations, based on, among other factors, its own funding and operating requirements, maturities, interest rates, and other terms available for consolidated obligations in the market place. Although the FHLBNY is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the FHLBNY is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all the FHLBanks. The FHLBanks, including the FHLBNY, have emphasized diversification of funding sources and channels as the need for funding from the capital markets has grown.

The two major debt programs offered by the Office of Finance are the Global Debt Program and the TAP. The FHLBNY participates in both programs.

The Global Debt Program provided $98.9 billion and $86.3 billion of term funding at par in 2004 and 2003 for the 12 FHLBanks. The Global Debt Program (“GDP”) provides the FHLBanks with the ability to distribute debt into multiple primary markets across the globe. The FHLBank global debt issuance facility has been in place since July 1994. FHLBank global bonds are known for their variety and flexibility; all can be customized to meet changing market demand with different structures, terms and currencies. Global Debt Program bonds are available in maturities ranging from one year to 30 years, with the majority of global issues between one and five years. The most common Global Debt Program structures are bullets, floaters (both callable and non-callable) and fixed-rate callable bonds, with maturities of one through ten years. Issue sizes are typically from $500 million to $5 billion, and individual bonds can be reopened to meet additional demand. Bullets are the most common global bonds, particularly in sizes of $3 billion or larger.

In mid-1999, the Office of Finance implemented the TAP issue program on behalf of the FHLBanks. This program consolidates domestic bullet bond issuance through daily auctions of common maturities by reopening previously issued bonds. Effectively, the program has reduced the number of separate FHLBanks bullet issues, and individual issues have grown as large as $1 billion. The increased issue sizes have a number of market benefits for investors, dealers and the 12 FHLBanks. TAP issues have improved market awareness, expanded secondary market trading opportunities, improved liquidity and stimulated greater demand from investors and dealers seeking high-quality Government Sponsored Enterprises securities with Treasury-like characteristics. The TAP issues follow the same 3-month quarterly cycles used for the issuance of “on-the-run” Treasury securities, and also have semi-annual coupon payment dates (February 15 and August 15 or May 15 and November 15), which coincide with the Treasury

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conventions. The coupon and settlement dates for new issues are determined by the timing of the first auction during a given quarter. In 2004, TAP issuance was $33.7 billion, up from $29.8 billion from 2003.

The FHLBanks 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.

General Terms Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest rate resets. These indices include the London Interbank Offered Rate (LIBOR), Constant Maturity Treasury (CMT), 11th District Cost of Funds Index (COFI), and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed and variable-rate bonds may also contain certain features that may result in complex coupon payment terms and call options. When the FHLBNY cannot use such complex coupons to hedge its assets, FHLBNY enters into derivatives transactions containing offsetting features that effectively convert the terms of the bond to those of a simple variable- or fixed-rate bond.

These consolidated obligations, beyond having fixed- or variable-rate coupon payment terms, may also be Optional Principal Redemption Bonds (callable bonds) that the FHLBNY may redeem in whole or in part at its discretion on predetermined call dates, according to the terms of the bond offerings. With respect to interest payments, consolidated bonds may also have the following terms:

Step-up Bonds generally pay interest at increasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the FHLBNY to call the bonds at its option on the step-up dates.

Zero-Coupon Bonds are long-term discounted instruments that earn a fixed yield to maturity or the optional principal redemption date. All principal and interest are paid at maturity or on the optional principal redemption date, if exercised prior to maturity. There were no zero-coupon bonds outstanding at March 31, 2005, or December 31, 2004 and 2003.

At March 31, 2005, consolidated obligation debt of $76.3 billion, was comprised of $60.2 billion of amortized book value of bonds and $16.1 billion of discount notes on a historical cost basis. The comparable number at December 31, 2004, was $60.7 for bonds and $19.6 for discount notes. Associated basis adjustments as a result of net fair value gains and losses from hedging the debt are discussed below.

The majority of bonds outstanding at March 31, 2005, and December 31, 2004 and 2003 were at fixed rates. About $54.0 billion par amount of bonds at March 31, 2005 were fixed-rate, and represented 89.7% of the par amount. At December 31, 2004, the comparable number was $53.6 billion at par (88.5%) were at fixed-rate coupons at December 31, 2004, compared to $47.5 billion at December 31, 2003. The FHLBNY may convert, at the time of issuance of certain fixed-rate bonds, into floating-rate bonds with the simultaneous execution of interest rate swaps, or may issue bonds with call options that are exercisable by the FHLBNY as discussed below.

The FHLBNY makes extensive use of derivatives to restructure interest rates on consolidated obligations to better match its funding needs, and to reduce funding costs. The FHLBNY also uses derivatives to manage the risk arising from changing market prices and volatility of a fixed coupon bond by matching the cash flows of the bond with the cash flows of a derivative, and making the FHLBNY indifferent to changes in market conditions. The FHLBNY may also issue bonds with call options exercisable by the FHLBNY. At March 31, 2005, callable bonds made up 38.1% of the par amount of bonds, or $23.0 billion. Callable bonds comprised of 33.4% of par value, or $20.2 billion at December 31, 2004 compared

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to 23.2%, or $12.5 billion, at December 31, 2003. Typically, callable bonds are hedged by an offsetting mirror-image derivative with identical call options and other terms. The reported carrying value of hedged consolidated bonds is adjusted for changes in their fair value (“fair value basis” or “fair value”) that are attributable to the risk being hedged in accordance with hedge accounting rules. Amounts reported for consolidated obligation bonds in the accompanying statements of condition include fair value basis. At March 31, 2005, the fair value basis of hedged bonds included $371.5 million in unrealized gains. At December 31, 2004, the fair value basis of hedged bonds amounted to $161.3 million in unrealized gains, compared to fair value unrealized loss of $281.3 million at December 31, 2003. The unrealized gains and losses were substantially offset by changes in the fair value of the associated derivatives in all periods reported. Changes in fair value basis reflect changes in the term structure of interest rates, the shape of the yield curve at the measurement dates and the value of call options of convertible bonds.

On a par basis, consolidated bonds funded 71.9% of assets at March 31, 2005, while consolidated obligation discount notes funded 19.2%. Funding strategy has remained constant over the years with some marginal changes. On a par basis, consolidated bonds funded 68.5% of assets at December 31, 2004, compared to 67.7% at December 31, 2003. Consolidated obligation discount notes funded 22.2% and 21.2% at the same dates. These percentages reflect the FHLBNY’s preference for the longer-maturity instruments. Discount notes are a significant funding source for advances with short-term maturities or short-term repricing intervals, for convertible advances, and for money-market investments.

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Consolidated Obligation Bonds – Maturity and Coupons

The following table summarizes the consolidated bonds outstanding by year of maturity (in thousands):

                                                 
    March 31, 2005     December 31, 2004     December 31, 2003  
            Weighted             Weighted             Weighted  
            Average             Average             Average  
Maturity   Amount     Rate     Amount     Rate     Amount     Rate  
1 year or less
  $ 26,382,735       2.91 %   $ 25,348,025       2.64 %   $ 15,611,780       3.39 %
over 1 year through 2 years
    14,025,845       3.33 %     16,297,480       3.41 %     15,914,075       2.86 %
over 2 years through 3 years
    8,977,100       3.55 %     8,688,675       3.54 %     10,291,170       3.90 %
over 3 years through 4 years
    4,761,670       4.12 %     4,561,750       4.00 %     5,104,750       3.97 %
over 4 years through 5 years
    2,791,900       3.97 %     2,227,200       3.89 %     3,407,900       4.17 %
over 5 years through 6 years
                    1,028,350       4.57 %     1,226,100       4.20 %
Thereafter
    3,287,050       5.01 %     2,434,650       5.14 %     2,078,600       5.18 %
 
                                         
 
                                               
Total par value
    60,226,300               60,586,130               53,634,375          
Bond premiums
    95,785               112,768               158,398          
Bond discounts
    (19,486 )             (19,957 )             (20,002 )        
SFAS 133 fair value adjustments
    (358,288 )             (161,370 )             281,283          
Deferred net gains on terminated hedges
    (3,983 )             (2,215 )             (2,185 )        
 
                                         
 
                                               
Total
  $ 59,940,328             $ 60,515,356             $ 54,051,869          
 
                                         

Consolidated Obligation Bonds – Maturity or Next Call Date

The following table summarizes the consolidated bonds outstanding by year of maturity or next call date (in thousands):

                         
    March 31, 2005     December 31, 2004     December 31, 2003  
Year of Maturity or next call date
                       
Due or callable in one year or less
  $ 41,821,235     $ 37,897,285     $ 25,354,280  
Due or callable after one year through two years
    8,745,845       12,616,220       14,461,575  
Due or callable after two years through three years
    4,589,100       4,948,175       7,871,170  
Due or callable after three years through four years
    2,917,670       3,202,750       2,542,250  
Due or callable after four years through five years
    1,098,400       696,700       2,637,900  
Thereafter
    1,054,050       1,225,000       767,200  
 
                 
 
                       
Total par value
  $ 60,226,300     $ 60,586,130     $ 53,634,375  
 
                 

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Composition of Bonds By Type

The following table summarizes the composition of consolidated obligation bonds outstanding (in thousands):

                         
    March 31, 2005     December 31, 2004     December 31, 2003  
Fixed-rate, Non-callable
  $ 35,205,040     $ 34,635,470     $ 35,022,275  
Fixed-rate, Callable
    18,728,760       19,001,260       12,453,000  
Step Ups
    4,268,000       1,260,000       50,000  
Single-index Floating Rate
    2,024,500       5,689,400       6,109,100  
 
                 
 
                       
Total par value
  $ 60,226,300     $ 60,586,130     $ 53,634,375  
 
                 

Discount Notes Outstanding

The following table summarizes composition of discount notes outstanding (dollar amounts in thousands):

                         
                    Weighted  
    Book     Par     Average  
    Value     Value     Interest Rate  
March 31, 2005
  $ 16,080,634     $ 16,112,082       2.62 %
 
                 
 
                       
December 31, 2004
  $ 19,641,626     $ 19,670,201       1.90 %
 
                 
 
                       
December 31, 2003
  $ 16,804,767     $ 16,819,977       0.99 %
 
                 

Discount notes are short-term instruments with maturities ranging from overnight to 360 days. Through a sixteen-member selling group, the Office of Finance, acting on behalf of the twelve Federal Home Loan Banks, offers discount notes. In addition, the FHLBanks offer discount notes in four standard maturities in two auctions each week. The FHLBNY uses discount notes to fund short-term advances, longer-term advances with short repricing intervals, convertible advances and money market investments.

At March 31, 2005, discounts notes funded 19.2% of assets, down from 22.2% at December 31, 2004. The percentage range from a low 20s to mid 20s is fairly typical for most of the periods reported. The importance of the instrument to the FHLBNY in its day-to day operations is best illustrated by measuring the annual cash flows generated by discount note issuances. For the year 2004, the FHLBNY issued $961.6 billion and retired $958.8 billion of discount notes. Cash flows from consolidated bonds were $22.6 billion in the same period. These statistics are indicative of the fact that discount notes are mainly used for overnight funding and term discount notes are a relatively smaller component of the FHLBNY’s financing strategy.

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Capital and Retained Earnings

Under the terms of the FHLBank Act as amended by the Gramm-Leach-Bliley Act, members are required to maintain a minimum investment in the stock of their FHLBank in accordance with a capital structure plan approved by the Finance Board. The minimum investment may be determined by one or more of the requirements, specified in the FHLBank Act, or by other provisions approved by the Finance Board. The FHLBNY’s new Capital Plan has been approved by the Finance Board, but has not yet converted to a new capital structure. Until this occurs, borrowing members must hold capital stock equal to the greater of 1 percent of their mortgage assets, or 5 percent of their advances outstanding.

During most of 2003 and all of 2004, and through the three months ended March 31, 2005, the FHLBNY, in its discretion routinely redeemed capital on a monthly basis in 2003 and bi-weekly in 2004 and 2005, in amounts that were in excess of members’ minimum investment requirements. Members’ requests for redemption of excess capital are typically honored the same day as the request. When the excess is with respect to a non-member, the redemption of excess capital occurs typically on the same day as when the advance matures or is prepaid. The practice of redeeming excess capital on a monthly basis began in February 2003, in preparation for the implementation of the new capital plan. In mid-2004, periodic redemption date was changed from end of month to mid month, and in the last quarter of 2004, redemption of capital that exceeded requirements by $1 million was added to the redemption practice. As a result, decreases and increases in capital stock remain generally in line with changes in the borrowing patterns of members.

Accordingly, the decrease in capital stock to $3.6 billion is in line with the decline in advances outstanding at March 31, 2005, and the increase in capital stock at December 31, 2004 is also consistent with the increase in the par amount of advances year-over-year. Capital stock including mandatorily redeemable stock grew to $3.7 billion at December 31, 2004 from $3.6 billion on December 31, 2003. About $126.6 million of the capital was classified as mandatorily redeemable stock at December 31, 2004 in accordance with SFAS 150, which the FHLBNY adopted on January 1, 2004.

Another component of capital is retained earnings. The FHLBNY is building its retained earnings to further strengthen its financial condition. The Finance Board has recently mandated that all Federal Home Loan Banks increase their levels of retained earnings. In line with this guidance, unrestricted retained earnings at the FHLBNY grew to $253.9 million at March 31, 2005, up from $223.4 million at December 31, 2004, and $126.7 million at December 31, 2003.

The FHLBNY has reclassified $1,343,000 to “restricted retained earnings” as of March 31, 2005, representing the unpaid principal balance of certain acquired mortgages with a credit rating below an established minimum. The amount of the “restricted retained earnings” will decline as the balance on those assets declines or until the FHLBNY converts to its new capital structure plan in the fourth quarter of 2005. The restriction on the FHLBNY’s retained earnings had no impact on the results of operations.

As a cooperative, the FHLBNY seeks to maintain a balance between its public policy mission of providing low-cost funds to its members, and to provide its members with adequate returns on their capital invested in FHLBNY stock. The FHLBNY also has to balance those needs with the Finance Board’s mandate that all Federal Home Loan Banks increase their levels of retained earnings. The FHLBNY’s dividend policy takes all three factors into consideration — the need to enhance retained earnings while reasonably compensating members for the use of their capital, and to provide low-cost advances. The Board of Directors and management eliminated dividend payment normally due on October 31, 2003 as result of a significant loss incurred in the third quarter of 2003, when the FHLBNY sold $1.9 billion of credit-deteriorated mortgage-backed securities at a loss of $189.4 million.

Dividend payments were resumed in 2004. Since then, four cash dividends were paid on schedule during

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2004 and the first quarter of 2005. On January 31, 2005, the first dividend of $3.05 per share ($27.5 million) was paid for the quarter ended December 31, 2004. Cash dividends paid aggregated $1.83 per share or $64.5 million during 2004, and $3.97 per share or $163.6 million in 2003. Dividend rate in 2002 was $4.51 per share or $166.7 million. The reduced payouts reflect the FHLBNY’s desire to enhance retained earnings while reasonably compensating members for the use of their capital. A more detailed history of dividend payments is available under Item 9, Market Place Price and Dividends on Registrant’s Common Equity and Related Stockholder Matters.

Affordable Housing Program and other Mission Related Activities .

The Affordable Housing Program helps members of the FHLBNY meet their Community Reinvestment Act responsibilities by providing members access to cash grants and subsidized, low-cost funding to create affordable rental and home ownership opportunities, including first-time homebuyer programs.

Annually, it is the FHLBNY’s goal to commit the full amount of its required contribution to the Affordable Housing Program. As stated in section 951.15 of the Affordable Housing Program regulations, “If a Bank fails to use or commit the full amount it is required to contribute to the Program in any year pursuant to section 951.2, 90 percent of the unused or uncommitted amount shall be deposited by the Bank in an Affordable Housing Reserve Fund established and administered by the Finance Board. The remaining 10 percent of the unused and uncommitted amount retained by the Bank should be fully used up or committed to the Bank during the following year, and any remaining portion must be deposited in the Affordable Housing Reserve Fund.” Since the inception of the program, the FHLBNY has met its annual goal of committing the full amount of its required contribution and has never been required to deposit funds into an Affordable Housing Reserve Fund.

The total Affordable Housing Program assessment liability for the three months ended March 2005 is $6,663,000, which represents 10% of the regulatory net income as defined. The assessment liability for the twelve months ended December 31, 2004 was $18,643,000. In 2005, the FHLBNY will continue its practice of allocating 25% of the Affordable Housing Program assessment, $4.7 million, to the First Home Club sm (“FHC”) set-aside program. The First Home Club is a non-competitive, matching grant program for first-time homebuyers. The balance of the Affordable Housing Program assessment, approximately $14 million, is allocated to the competitive Affordable Housing Program. During the first quarter of 2005, the FHLBNY announced its first of two competitive Affordable Housing Program offerings scheduled for the year. Approximately half of the competitive Affordable Housing Program allocated funds, $7 million, is made available for each offering. Additional Affordable Housing Program funds that have been either recaptured or de-obligated from existing projects due to lack of demonstrated need or due to compliance issues, may be re-allocated to either or both offerings. The FHLBNY expects to complete the scoring process for the first offering during the second quarter of 2005.

In 2004, the FHLBNY held one competitive Affordable Housing Program offering due to the significant decrease of available Affordable Housing Program funds. This decrease in Affordable Housing Program funds was directly attributable to the FHLBNY’s financial performance in 2003. The $5.1 million allocated to the Affordable Housing Program for 2004 included $3.8 million for the competitive Affordable Housing Program and $1.3 million for the First Home Club program. Prior to the 2004 competitive offering, an additional $3.1 million in Affordable Housing Program funds were either recaptured or de-obligated from existing projects due to lack of demonstrated need or due to compliance issues. These recaptured or de-obligated funds were added to the total Affordable Housing Program funds available for the 2004 competitive process, bringing the available amount up to $6.9 million.

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Affordable Housing Program Assessments

Assessments are a fixed percentage of net income after the required payment to REFCORP and before adjustment for dividends associated with mandatorily redeemable capital stock reported as an expense under SFAS 150, which was adopted on January 1, 2004. If the FHLBNY incurs a loss for the year, no assessment or assessment credit is due or accrued. For the three months ended March 31, 2005, Affordable Housing Program assessments totaled $6.7 million, compared to $3.3 million for the comparable three months in 2004. The Affordable Housing Program assessment for the year ended December 31, 2004 was $18.6 million, compared to $5.1 million for 2003. Because the Affordable Housing Program contribution is calculated as a percentage of net income, the changes in Affordable Housing Program expense reflect changes in FHLBNY net income.

Other Mission Related Activities

Additionally, each FHLBank offers community-lending programs that support affordable housing and economic development activity within low- and moderate-income areas or that benefit low- and moderate-income households. The Community Investment Program (“CIP”) primarily supports affordable housing that benefits households with incomes at or below 115 percent of area median income. Community Investment Program can also be used for economic development projects that are located in low- and moderate-income areas, or that benefit families with incomes at or below 80 percent of area median income. The Rural Development Advance (“RDA”) and the Urban Development Advance (“UDA”) are community-lending programs that support economic development activity within rural and urban communities. Rural Development Advances must be used to benefit households with incomes that are at 115% or less of area median income, while Urban Development Advances must be used to benefit households that are at 100% or less of area median income. The FHLBNY offers these programs (Community Investment Program, Rural Development Advances, and Urban Development Advances) as reduced interest-rate advances to members on a project-specific basis, or for portfolio lending activity that meets the program income requirements. The FHLBNY also provides Standby Letters of Credit (“LOC”) in support of projects that meet the Community Investment Program, Rural Development Advance, or Urban Development Advance program requirements. These project-eligible Letters of Credit are also offered at reduced fees.

Unlike the Affordable Housing Program, applications for Community Investment Program-Rural Development Advance-, and Urban Development Advance-qualifying advances, or project-eligible letters of credit (“Letters of Credit”), are not subject to competitive scoring and may be submitted and funded at any time. Annually, the FHLBNY establishes quantitative targeted community lending performance goals for economic development activities as part of its Community Lending Plan. For 2005, the FHLBNY has established an economic development goal of $20.6 million in new commitments for economic development advances. As of March 31, 2005, it had issued a $9.4 million commitment in support of an economic development project. In addition, during the three months ended March 31, 2005, the FHLBNY funded $7.2 million of advances under various community lending programs (Community Investment Program, Rural Development Advance, Urban Development Advance). In 2004, the FHLBNY surpassed its economic development goal of $8 million by committing a total of $18.7 million in advances to 9 economic development projects in the district. For 2005, the FHLBNY has established a goal to originate new economic development commitments of $20.6 million. During 2004, the FHLBNY funded $8.2 million in Rural Development Advance, Urban Development Advance and Community Investment Program advances. Through the FHLBNY’s regular advance programs, regular advances with similar terms are typically priced from 23 to 26 basis points above the FHLBNY’s cost of funds. However, Community Investment Program -, Rural Development Advance-, and Urban Development Advance -qualifying advances were priced at 6 basis points during 2004, and 7 basis points in 2005, above our cost of funds. In addition to these discounted advances, a $3.9 million Letter of Credit was

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issued, on behalf of a member, for an economic development project that met the requirements of the Community Investment Program. Community Investment Program-, Rural Development Advance-, and Urban Development Advance-qualifying Letter of Credit receive 12.5 basis point discount from the normal per annum fee for Standby Letters of Credit.

Providing community lending programs (Community Investment Program, Rural Development Advance, Urban Development Advance, and Letters of Credit) at advantaged pricing that is discounted from the FHLBNY’s market interest rates and fees represents an additional income allocation in support of affordable housing and community economic development efforts. In addition, overhead costs and administrative expenses associated with the implementation of the FHLBNY’s Affordable Housing and community lending programs were absorbed as general operating expenses and are not charged back to the Affordable Housing Program 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 Affordable Housing Program.

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Analysis of Operating Results: 2004 and 2003

Results of operations for the three months ended March 31, 2005 compared to the same period in 2004 are explained starting on page 49.

Net Income for the year ended December 31, 2004 increased by $115.5 million to $161.3 million from net income of $45.8 million in 2003. The 2003 results included a realized, pre-assessment loss of $189.4 million loss from sale of $1.9 billion in credit-deteriorated, mortgage and asset-backed securities. To restore profitability, management put in place three primary strategies. First, increase pricing on its advance offering to members that would balance the FHLBNY’s desire for healthier spreads and maintain competitive pricing available to members for similar structures and terms. Pricing increases were implemented over time and in consultation with the FHLBNY’s Board of Directors. Second, the FHLBNY stopped offering products yielding marginal profits, or not widely utilized by members. Third, management decided to not compete on pricing for those products that it deemed would be marginally profitable. These products and the associated strategies are more fully described under the section – Advances. The anticipated benefits are being realized and the full impact will be realized over time as outstanding advances mature and the FHLBNY books new advances at the Bank’s new pricing standards. Comparative analysis of operating results for the two years ended December 31, 2003 and 2002 are discussed on page 89.

Beside employing asset oriented plans to increase margins, the FHLBNY has also been active in dealing with high-coupon debt originally issued to fund the mortgage-backed securities sold which remained on the balance sheet after $1.9 billion of securities had been sold in the 3rd quarter of 2003. As interest rates in the market declined in the last quarter of 2003 and the beginning of 2004, the FHLBNY began to redeem expensive callable debt.

The FHLBNY earns a significant portion of its income from member capital. As the level of capital declines, the level of earnings declines as well. Average capital for the year 2003 was $4.3 billion, while the average capital, including mandatorily redeemable capital stock, for 2004 was $3.8 billion. Until well into the second quarter of 2004, many market yields were at their historical lows, and the combination of lower rates in the early part of 2004 and lower member capital has had a negative impact on earnings.

Adoption of SFAS 150 on January 1, 2004 resulted in the reclassification of $6.5 million in dividends paid to certain non-member stockholders as interest expense. This expense includes $1.3 million in cumulative effect of a change in adopting the accounting principle and is reported in the Statement of Income for 2004.

Net income for 2004 benefited from a $9.3 million gain before assessments ($6.9 million gain net of assessments) when the FHLBNY changed its manner of assessing the effectiveness of certain hedging relationships, and a cumulative adjustment was recorded in 2004. Under SFAS 133, all derivatives are recorded at fair value and the FHLBNY recognizes unrealized losses or gains on derivative positions, whether or not offsetting gains or losses on the underlying assets or liabilities being hedged are permitted to be recognized. Therefore, SFAS 133 introduces the potential for timing differences between income recognition from assets or liabilities and the income effect of hedge transactions intended to mitigate interest-rate risk and cash flow variability. In addition, the adoption of SFAS 133 has led to more volatility in reported earnings due to changes in market prices and interest rates because the FHLBNY may use certain hedge strategies that do not qualify for hedge accounting treatment under SFAS 133 accounting rules. Net realized and unrealized gains and losses on derivatives and hedging activities were a gain of $8.3 million in 2004, a loss of $0.8 million in 2003, and a loss of $9.7 million in 2002.

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Net interest income provides the basic earning power of the FHLBNY. For the year ended December 2004, the FHLBNY earned $268.5 million in net interest income—the interest income from the Bank’s interest-earning assets minus the interest cost of financing those assets. By comparison, in 2003, the FHLBNY earned $298.4 million in net interest income.

Member capital is a source of funds that is invested by the FHLBNY to generate interest income with no offsetting interest expense. The FHLBNY frequently redeems excess capital stock, which lowers average capital outstanding, in turn lowering the potential to earn interest income, but ensuring the efficient deployment of capital and maximizing the potential dividend.

Other Income, Other Expenses, and Assessments: 2004 and 2003

Other income for the year ended December 31, 2004 was $9.0 million. This category reported a loss of $185.1 million in 2003. Comparability between 2004 and 2003 is less meaningful because of a $189.4 million realized loss on the sale of credit-deteriorated mortgage-backed securities in the third quarter of 2003. Other income for 2004 includes a $4.2 million loss on redemption of certain high-coupon consolidated obligation bonds. Net income from correspondent banking services provided to members was $4.8 million. Realized and unrealized gains and losses from hedging activities are included in Other income, and except for the one-time catch up adjustment of $9.3 million discussed previously, reported numbers are fully comparable to 2003. While more volatility is expected as a result of SFAS 133, the FHLBNY believes its hedging strategies are well balanced and makes it largely indifferent to the movement of market interest rates.

Other expenses for 2004 were somewhat higher than 2003 because of higher aggregate Operating expenses. The 2003 expenses were also reduced by the receipt of $1.8 million in insurance proceeds associated with the destruction of the FHLBNY’s headquarters facility on September 11, 2001. These are more fully discussed in subsequent sections. Assessments for the Affordable Housing Program (“AHP”) and the Resolution Funding Corporation (“REFCORP”) are a fixed percentage of income, and change in accordance with fluctuations in net income. The assessments for 2003 were reduced as a result of a realized loss of $189.4 million from sale of mortgage-backed securities .

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Analysis of Operating Results: 2003 and 2002

Net income decreased by 80.4 percent to $45.8 million in 2003 from $234.1 million in 2002. Net interest income after mortgage loan loss provision decreased 23.3 percent to $298.4 million in 2003 from $389.0 million in 2002. The decline in net interest income was due to both the lower yield on assets and the narrower net spread between the cost of funding and the yield on assets. Average assets of $92.0 billion during 2003 were 7.0 percent higher than the $86.0 billion average during 2002. In the third quarter of 2003, certain held-to-maturity securities were sold in response to the deteriorating creditworthiness of those securities. The sales resulted in a realized loss of $189.4 million, and a net loss for the third quarter. As a result of the loss, no dividend was paid to the FHLBNY stockholders for that quarter. A dividend from fourth-quarter 2003 earnings was paid in January 2004. Operating expenses, which were $47.7 million in 2003, were up 22.3 percent from $39.0 million in 2002. Assessments for the operation of the Finance Board and the Office of Finance increased by $565,000. Assessments for the Affordable Housing Program (“AHP”) and payments to the Resolution Funding Corporation (“REFCORP”), both of which are based on net income, declined by $68.0 million.

Advances grew sharply during the first half of 2003, peaking at $74.0 billion during June. As interest rates began to rise during the second half of 2003, the level of mortgage refinancing activity declined, and advances fell from June through December, ending the year at $63.9 billion, down $5.0 billion, or 7.3 percent, from year-end 2002. Also contributing to the decline in advances was the repayment of $2.0 billion in advances held by non-member institutions as a result of their acquisition of one or more of the FHLBNY’s borrowing members. In addition, the absence of a dividend resulting from the third-quarter loss may have caused some members to repay advances and reduce their capital stock investment in the Bank.

Short-term investments decreased to $2.8 billion at December 31, 2003, down from $10.6 billion at December 31, 2002. This decline, most of which took place during the first nine months of 2003, was in anticipation of the conversion to a new Capital Plan and the redemption of capital stock that would be in excess of member requirements under that Plan. Total assets declined 15.4 percent to $79.2 billion at December 31, 2003, from $93.6 billion at December 31, 2002. This decline reflected the lower level of advances described above and the somewhat lower leverage during the fourth quarter of 2003 that resulted from the reduction in short-term investments. Deposits declined to $2.1 billion at year-end 2003 from $2.7 billion at year-end 2002 as members appeared to draw down these funds to meet their own liquidity needs. Capital stood at $3.8 billion at December 31, 2003, compared with $4.3 billion at December 31, 2002, reflecting the redemption of excess capital stock as a result of the net decline in outstanding advances.

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Analysis of Net Interest Income: Three months ended March 31, 2005 and 2004; Years ended December 31, 2004, 2003, and 2002

The principal sources of revenue for the FHLBNY are interest income from advances, investments and mortgage loans acquired from members. The principal expenses of the FHLBNY are interest paid on consolidated obligations, Affordable Housing Program and REFCORP assessments, and operating expenses.

The following table summarizes key changes in the components of net interest income for the three months ended March 31, 2005 and 2004 (dollar amounts in thousands):

                                 
    For the three months ended              
    March 31,     Dollar     Percentage  
    2005     2004     Variance     Variance  
Interest Income
                               
Advances
  $ 458,763     $ 265,509     $ 193,254       72.79 %
Mortgage loans held for portfolio
    149,945       125,123       24,822       19.84 %
Other
    58,818       19,002       39,816       209.54 %
 
                       
 
                               
Total interest income
    667,526       409,634       257,892       62.96 %
 
                       
 
                               
Interest Expense
                               
Consolidated obligations
    557,298       351,551       205,747       58.53 %
Other
    12,785       6,082       6,703       110.21 %
 
                       
 
                               
Total interest expense
    570,083       357,633       212,450       59.40 %
 
                       
 
                               
Net interest income before mortgage loan loss provision
  $ 97,443     $ 52,001     $ 45,442       87.39 %
 
                       

The following table summarizes key changes in the components of net interest income for the years ended December 31, 2004, and 2003 (dollar amounts in thousands):

                                 
    For the years ended              
    December 31,     Dollar     Percentage  
    2004     2003     Variance     Variance  
Interest Income
                               
Advances
  $ 1,247,568     $ 1,292,990     $ (45,422 )     (3.51 %)
Mortgage loans held for portfolio
    48,291       29,099       19,192       65.95 %
Other
    631,113       738,366       (107,253 )     (14.53 %)
 
                       
 
                               
Total interest income
    1,926,972       2,060,455       (133,483 )     (6.48 %)
 
                       
 
                               
Interest Expense
                               
Consolidated obligations
    1,631,221       1,733,663       (102,442 )     (5.91 %)
Other
    27,259       28,269       (1,010 )     (3.57 %)
 
                       
 
                               
Total interest expense
    1,658,480       1,761,932       (103,452 )     (5.87 %)
 
                       
 
                               
Net interest income before mortgage loan loss provision
  $ 268,492     $ 298,523     $ (30,031 )     (10.06 %)
 
                       

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The following table summarizes key changes in the components of net interest income for the years ended December 31, 2003 and 2002 and December 31, 2002 and 2001 (dollar amounts in thousands):

                                 
    For the years ended              
    December 31,     Dollar     Percentage  
    2003     2002     Variance     Variance  
Interest Income
                               
Advances
  $ 1,292,990     $ 1,684,716     $ (391,726 )     (23.25 %)
Mortgage loans held for portfolio
    29,099       26,413       2,686       10.17 %
Other
    738,366       888,242       (149,876 )     (16.87 %)
 
                       
 
                               
Total interest income
    2,060,455       2,599,371       (538,916 )     (20.73 %)
 
                       
 
                               
Interest Expense
                               
Consolidated obligations
    1,733,663       2,167,227       (433,564 )     (20.01 %)
Other
    28,269       42,926       (14,657 )     (34.14 %)
 
                       
 
                               
Total interest expense
    1,761,932       2,210,153       (448,221 )     (20.28 %)
 
                       
 
                               
Net interest income before mortgage loan loss provision
  $ 298,523     $ 389,218     $ (90,695 )     (23.30 %)
 
                       
                                 
    For the years ended              
    December 31,     Dollar     Percentage  
    2002     2001     Variance     Variance  
Interest Income
                               
Advances
  $ 1,684,716     $ 2,584,644     $ (899,928 )     (34.82 %)
Mortgage loans held for portfolio
    26,413       34,129       (7,716 )     (22.61 %)
Other
    888,242       1,250,503       (362,261 )     (28.97 %)
 
                       
 
                               
Total interest income
    2,599,371       3,869,276       (1,269,905 )     (32.82 %)
 
                       
 
                               
Interest Expense
                               
Consolidated obligations
    2,167,227       3,353,476       (1,186,249 )     (35.37 %)
Other
    42,926       107,404       (64,478 )     (60.03 %)
 
                       
 
                               
Total interest expense
    2,210,153       3,460,880       (1,250,727 )     (36.14 %)
 
                       
 
                               
Net interest income before mortgage loan loss provision
  $ 389,218     $ 408,396     $ (19,178 )     (4.70 %)
 
                       

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Analysis of Interest Spreads

Interest spreads measure the basic earnings power of the FHLBNY, and this measure is presented in the analysis that follows on the economics of the Bank’s interest earning assets and interest costing liabilities.

On the generally accepted accounting principles in the U.S. basis, the net interest spread for the three months ended March 31, 2005 was significantly higher at 28.5 basis points compared to 11.4 basis points in the comparable period in 2004. Net interest on earning assets in the period ended March 2005 was 47 basis points, well ahead of 26 basis points in the same period in 2004. The improvements were a result of actions implemented during 2004, primarily pricing increases on advances offered to members.

Net interest spread for the year ended December 31, 2004 was 17.4 basis points, almost unchanged from 17.7 basis points in 2003, but substantially down from 27.6 basis points in 2002. The net interest spread in 2002 included net prepayment fees of $40.4 million, while comparable fee income in 2004 and 2003 were $6.4 million and $8.1 million. During the historically low rates in 2002, members opted to incur prepayment fee penalties and repay advances before their contractual maturity dates to take advantage of low prevailing rates and refinance their borrowings. Refinancing slowed in 2003 and 2004 as rates moved up and customers of member banks were less inclined to refinance their own loans.

The FHLBNY’s net interest spread began 2004 at low levels. Various factors were the cause. High-coupon mortgage-backed securities were sold in late 2003 and the associated debt could not be re-aligned or redeemed immediately. New purchases of mortgage-backed securities were deferred and the volume of advances was down after the dividend was not paid in October 2003. Starting in February 2004, advance volume began to grow after payment of the dividend was resumed in January 2004. Issuance of discount notes and bonds at advantageous execution levels provided margin improvements. In March 2004, and thereafter, the FHLBNY reduced the amount of expensive, high-coupon debt that remained on the balance sheet after the sale of $1.9 billion of mortgage-backed securities in late 2003.

The impact of interest rate swaps on yields. The yield on interest-earning assets rose by 107 basis points and the cost of liabilities rose by 90 basis points in the three months ended March 31, 2005, compared to March 31, 2004. The yield on both interest earning assets and interest costing liabilities rose about 4 basis points in 2004, compared to 2003. Reported yields do not necessarily equal the coupons on the instruments. The FHLBNY uses derivatives extensively to change the yield and optionality characteristics of the underlying hedged instruments. When fixed-rate debt is issued by the FHLBNY and hedged with an interest rate swap, it effectively converts the debt into a simple floating-rate bond, typically resulting in a funding at an advantageous price. Similarly, the FHLBNY makes fixed-rate advances to members and may hedge the advance with a pay-fixed, receive variable interest rate swap that effectively converts the fixed-rate asset to one that floats with prevailing LIBOR rates. This is illustrated by a comparison of weighted average coupon (“WAC”) of 3.49% on the average par advances of $63.5 billion, and an after swap yield of 1.94% on a similar basis during 2004. This compares to a weighted average coupon of 3.56% and an after swap yield of 1.88% in 2003. On a year-to-date average, about $30.9 billion of advances were swapped from fixed-rates to LIBOR, representing 48.6% of average par value of advances outstanding in 2004. The comparable percentage in 2003 was also 48.6%. On average, about $33.2 billion of advances were swapped of a total average par of $88.3 billion during 2003.

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The following table summarizes the impact of interest rate swaps on gross interest income and interest expense for the three months ended March 31, 2005 and 2004, and for the years ended December 31, 2004, 2003 and 2002 (in thousands):

                                         
    For the three months ended        
    March 31,     For the years ended December 31,  
    2005     2004     2004     2003     2002  
Gross interest income before adjustment for interest rate swaps
  $ 819,127     $ 681,439     $ 2,900,021     $ 3,197,213     $ 3,551,726  
Net interest adjustment for interest rate swaps
    (151,601 )     (271,805 )     (973,049 )     (1,136,758 )     (952,355 )
 
                             
 
                                       
Total interest income reported
  $ 667,526     $ 409,634     $ 1,926,972     $ 2,060,455     $ 2,599,371  
 
                             
 
                                       
Gross interest expense before adjustment for interest rate swaps
  $ (598,495 )   $ (497,551 )   $ (2,107,988 )   $ (2,391,360 )   $ (2,956,227 )
Net interest adjustment for interest rate swaps
    28,413       139,918       449,520       629,428       746,074  
 
                             
 
                                       
Total interest expense reported
  $ (570,082 )   $ (357,633 )   $ (1,658,468 )   $ (1,761,932 )   $ (2,210,153 )
 
                             

Yields from investments. Yields from investments declined primarily because of management’s decision to acquire variable rate mortgage-backed securities for its available-for-sale portfolio and to purchase fixed-rate mortgage-backed securities at their then prevailing low market coupons. Also, high-coupon mortgage-backed securities assets sold in late 2003 were replaced in the fourth quarter of 2003 and the first quarter of 2004 with lower-yielding securities, primarily 15-year and 30-year “agency” mortgage-backed securities. The decline in yields was a trade-off between yields and credit quality. Certain mortgage-backed securities purchased in late 2003 at premiums paid down faster than predicted and the resulting amortization drove down yields.

Cost of debt. The average cost of debt for the three months ended March 31, 2005 (consolidated obligations) was 285 basis points, up from 196 basis points in the comparable period in 2004. In the same period, 3-month LIBOR rose by about 150 basis points to 309 basis points. While 3-month LIBOR rose from 1.15% at December 31, 2003 to 2.56% on December 31, 2004, the 10-year Treasury rate, which was 4.25% at December 31, 2004, dropped by 3 basis points to 4.22% at December 31, 2004. Rates for FHLBank debt in the longer end of the curve (10-years and beyond) have declined. Investor demand for FHLBank debt has pushed down the relative funding cost of new issuances, and swapped debt funding further reduced funding costs.

FHLBNY’s fixed-rate debt averaged a weighted average coupon of 3.86% in 2003 compared to 3.40% in 2004. Asset mix changed between 2003 and 2004. Variable rate debt, a relatively small percentage of the debt mix of the FHLBNY, had a weighted average coupon of 1.34% in 2004 compared to 1.13% in 2003. The sharp decrease is partly attributable to greater debt issuances in the first half of the year, when rates were still relatively low, to finance a rapid growth in balance sheet, from an average of $76.5 billion in January 2004 to $82.7 billion in June 2004. The FHLBNY continued to make significant use of interest rate swaps to alter the fixed-rate coupons of consolidated obligation bonds to variable rate coupons, primarily LIBOR. On average, about 60.0% of fixed-rate coupon debt was swapped to LIBOR during 2004, compared to 56.1% in 2003. On an after-swap basis, the overall cost of debt increased by 2 basis points to 2.12% for 2004.

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Spread and Yield Analysis: Three Months ended March 31, 2005 and 2004 (dollar amounts in millions)

                                                 
    For the three months ended  
    March 31, 2005     March 31, 2004  
            Interest                     Interest        
    Average     Income/     Rate     Average     Income/     Rate  
(dollars in millions)   Balance     Expense     (Annualized)     Balance     Expense     (Annualized)  
Earning Assets:
                                               
Advances
  $ 65,880     $ 459       2.79 %   $ 64,363     $ 266       1.65 %
Interest-earning deposits
    3,750       23       2.45 %     3,034       8       1.05 %
Fed Funds Sold
    2,319       14       2.41 %     857       2       0.93 %
Investments
    12,378       155       5.01 %     11,170       125       4.48 %
Mortgage and other loans, net
    1,255       17       5.42 %     727       9       4.95 %
 
                                       
Total interest-earning assets
    85,582       668       3.12 %     80,151       410       2.05 %
 
                                       
 
                                               
Funded By:
                                               
Consolidated obligations
    78,113       557       2.85 %     71,803       352       1.96 %
Interest-bearing deposits and other borrowings
    2,250       13       2.31 %     2,326       6       1.03 %
 
                                       
Total interest-bearing liabilities
    80,363       570       2.84 %     74,129       358       1.93 %
Capital and other non-interest-bearing funds
    5,220             0.00 %     6,022             0.00 %
 
                                       
 
                                               
Total Funding
  $ 85,583       570             $ 80,151       358          
 
                                       
 
                                               
Net Interest Spread
          $ 98       0.285 %           $ 52       0.114 %
 
                                       
 
                                               
Net Interest margin
                    0.470 %                     0.260 %
(Net interest income/Earning assets)
                                               

Net interest spread, the difference between the yield on earning assets and costing liabilities grew to 28.5 basis points for the three months ended March 31, 2005, compared to 11.4 basis points during the comparable period in 2004. The yield on advances improved by 114 basis points while the overall cost of liabilities increased by 91 basis points in the same two periods. This is primarily the result of pricing changes set in 2004 to improve interest spreads and over all profitability. Two other factors have also contributed to the improvement. First, consolidated obligation spreads have improved for the benefit of the FHLBanks, resulting in better execution of funding. Second, substantially all of high-costing debt that was in place during early 2004 which was creating significant spread compression during the first half of 2004, has since been retired.

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Rate and Volume Analysis: Three Months ended March 31, 2005 and 2004

The Rate and Volume Analysis shows the changes in interest income, interest expense, and net interest income that were due to changes in volumes and rates.

The following table summarizes changes in net interest income from changes in rates and volumes between the three months ended March 31, 2005 and 2004 (in millions).

                         
    For the three months ended  
    March 31, 2005 vs. March 31, 2004  
    Increase (decrease)  
    Volume     Rate     Total  
Interest Income
                       
Advances
  $ 6.3     $ 187.0     $ 193.3  
Interest-earning deposits
    1.8       14.0       15.8  
Federal funds sold
    3.7       8.5       12.2  
Investments
    13.5       16.3       29.8  
Mortgage loans
    6.0       0.9       6.9  
Other loans
    (0.2 )           (0.2 )
 
                 
Total interest income
    31.1       226.7       257.8  
 
                       
Interest Expense
                       
Consolidated obligations
    30.9       174.9       205.8  
Deposits and borrowings
    (0.2 )     6.7       6.5  
 
                 
 
                       
Total interest expense
    30.7       181.6       212.3  
 
                 
 
                       
Changes in Net Interest Income
  $ 0.4     $ 45.1     $ 45.5  
 
                 

Changes in spread have been attributable to changes in rates and pricing as discussed. Volume has contributed very little to the growth in the net interest spread during the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Advance volume has declined but positive rate changes have had a significant positive impact. Rate changes from investments have been positive. Two factors explain this. Coupons have widened in line with the general increase in the interest rate environment as new investments are added to replace pay-downs. Also, during the first quarter of 2004, the FHLBNY risk appetite, in the aftermath of the loss in 2003, was generally to acquire variable rate securities, which are typically low yielding. Under current practice, the FHLBNY will replace pay-downs of mortgage-backed securities with Government Sponsored Enterprise (“GSE”) issued securities and securities backed by prime residential property.

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Spread and Yield Analysis: Years ended December 31, 2004, 2003 and 2002.

The following analysis present average balances and yields for the major categories of earning assets and funding sources.

                                                                         
    For the years ended  
    December 31, 2004     December 31, 2003     December 31, 2002  
            Interest                     Interest                     Interest        
    Average     Income/             Average     Income/             Average     Income/        
(dollars in millions)   Balance     Expense     Rate     Balance     Expense     Rate     Balance     Expense     Rate  
Earning Assets:
                                                                       
Advances
  $ 65,289     $ 1,248       1.91 %   $ 70,942     $ 1,293       1.82 %   $ 64,209     $ 1,685       2.62 %
Interest-earning deposits
    4,461       61       1.37 %     5,547       67       1.21 %     6,327       114       1.80 %
Federal funds sold
    1,094       16       1.50 %     1,350       16       1.22 %     2,666       46       1.74 %
Investments
    12,087       553       4.58 %     12,936       652       5.04 %     11,683       725       6.21 %
Mortgage loans
    928       48       5.20 %     528       29       5.51 %     400       26       6.60 %
Other loans
    7       1       1.89 %     68       3       3.75 %     67       3       4.49 %
 
                                                     
Total interest-earning assets
    83,866       1,927       2.30 %     91,371       2,060       2.26 %     85,352       2,599       3.04 %
 
                                                     
 
                                                                       
Funded By:
                                                                       
Consolidated obligations
    76,105       1,631       2.14 %     81,817       1,734       2.12 %     76,907       2,167       2.82 %
Interest-bearing deposits and other borrowings
    1,969       27       1.38 %     2,976       28       0.95 %     2,908       43       1.48 %
 
                                                     
Total interest- bearing liabilities
    78,074       1,658       2.12 %     84,793       1,762       2.08 %     79,815       2,210       2.77 %
 
                                                               
Capital and other non-interest-bearing funds
    5,792                   6,578                   5,537              
 
                                                           
 
                                                                       
Total Funding
  $ 83,866       1,658       1.98 %   $ 91,371       1,762       1.93 %   $ 85,352       2,210       2.59 %
 
                                                           
 
                                                                       
Net Interest Spread
          $ 269       0.174 %           $ 298       0.177 %           $ 389       0.276 %
 
                                                           
 
                                                                       
Net Interest margin (Net interest income/Earning Assets)
                    0.321 %                     0.326 %                     0.455 %
 
                                                                 

Net interest spread has remained virtually unchanged between 2003 and 2004. In 2004, the negative impact of declining investment yields was offset by selective pricing increases in advance products, and improved execution of FHLBank bonds in the debt market. Interest spread in 2002 was 27.6 basis points, and included $40.4 million in prepayment fees paid my members to prepay advances and to refinance their borrowings at then low prevailing rates.

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Rate and Volume Analysis: Years ended December 31, 2004, 2003 and 2002.

Asset volumes in 2004 were lower, and largely related to decline in advance volume. Advances grew sharply during the first half of 2003, peaking at $74.0 billion during June. Through the early part of 2004, demand for advances declined but volume gradually picked up starting in the middle of the first quarter of 2004. Investment volume declined in 2004 compared to 2003 in part because of lower balance sheet leverage, and in part, because the replacement of $1.9 billion in securities sold in late 2003 was undertaken in gradual steps through 2004.

The negative effect of declining volume was only partly offset by increased advance pricing. Yields from investments declined. Investments in variable-rate, available-for-sale, and mortgage-backed securities during 2004 yielded modest spreads. Variable rate assets generally lag behind changes in the interest rate environment because most repricing intervals are on a lagging basis. Debt funding was executed at more advantageous yields and provided positive rate impact in 2004 compared to 2003.

                         
    For the year ended  
    December 31, 2004 vs. December 31,2003  
    Increase (decrease)  
(in millions)   Volume     Rate     Total  
Interest Income
                       
Advances
  $ (103.0 )   $ 57.6     $ (45.4 )
Interest-earning deposits
    (13.1 )     7.1       (6.0 )
Federal funds sold
    (3.1 )     3.1        
Investments
    (42.8 )     (55.9 )     (98.7 )
Mortgage loans
    22.1       (2.9 )     19.2  
Other loans
    (2.4 )     (0.1 )     (2.5 )
 
                 
Total interest income
    (142.3 )     9.0       (133.4 )
 
                       
Interest Expense
                       
Consolidated obligations
    (121.0 )     18.6       (102.4 )
Deposits and borrowings
    (9.6 )     8.6       (1.0 )
 
                 
 
                       
Total interest expense
    (130.6 )     27.2       (103.4 )
 
                 
 
                       
Changes in Net Interest Income
  $ (11.7 )   $ (18.2 )   $ (30.0 )
 
                 
                         
    December 31, 2003 vs. December 31, 2002  
    Increase (decrease)  
(in millions)   Volume     Rate     Total  
Interest Income
                       
Advances
  $ 176.7     $ (568.4 )   $ (391.7 )
Interest-earning deposits
    (14.0 )     (32.6 )     (46.6 )
Federal funds sold
    (22.9 )     (7.0 )     (29.9 )
Investments
    77.8       (150.7 )     (72.9 )
Mortgage and other loan participations, net
    8.4       (5.7 )     2.7  
Other loans
    0.01       (0.5 )     (0.5 )
 
                 
Total interest income
    226.0       (764.9 )     (538.9 )
 
                       
Interest Expense
                       
Consolidated obligations
    138.4       (571.9 )     (433.5 )
Deposits and borrowings
    1.0       (15.7 )     (14.7 )
 
                 
 
                       
Total interest expense
    139.4       (587.6 )     (448.2 )
 
                 
 
                       
Changes in Net Interest Income
  $ 86.6     $ (177.3 )   $ (90.7 )
 
                 

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Other Income

The following table sets forth the main components of Other income for the three months ended March 31, 2005 and 2004, and the years ended December 31, 2004, 2003 and 2002 (in thousands):

                                         
    For the three months ended     For the years ended  
    March 31,     December 31,  
    2005     2004     2004     2003     2002  
Other income:
                                       
Service fees
  $ 1,141     $ 1,149     $ 4,751     $ 4,936     $ 4,103  
Net realized and unrealized gain (loss) derivatives and hedging activities
    1,055       (1,094 )     8,274       (827 )     (9,712 )
Net realized gain (loss) from sale of held-to-maturity securities
                        (189,226 )      
Other, net
    (3,755 )           (4,059 )           (26,994 )
 
                             
 
                                       
Total other income
  $ (1,559 )   $ 55     $ 8,966     $ (185,117 )   $ (32,603 )
 
                             

For the three months ended March 31, 2005, the FHLBNY recorded realized losses of $3,760,000 from the early redemption of consolidated obligation bonds. The debt retired were associated with advances and some mortgage-backed securities that had been prepaid. There were no similar retirements in the three months ended March 31, 2004. Service fees from correspondent banking services provided to members remained unchanged. During the three months ended March 31, 2005, derivatives designated as economic hedges gained $1.5 million, compared to a small loss of $0.2 million in the comparable three months in 2004. The remaining gain was attributable to positive change in the measurement of ineffectiveness of the hedged assets and liabilities.

Comparison of 2004 to 2003 is rendered less meaningful because of the loss of $189.4 million in 2003 from sale of credit-deteriorated mortgage-backed securities. Hedging unrealized and realized gains benefited from a one-time adjustment of $9.3 million in June 2004, from a change in the manner of assessing the effectiveness of certain highly effective liability hedges. Correspondent service fees are comparable. Service fee income is derived mainly from safekeeping, check processing and other correspondent banking services offered to members (mainly through third-party service providers). Other, net loss of $4.1 million in 2004, and $27.0 million in 2002, are primarily a loss from the retirement of debt associated with advance prepayments. Prepayment fees received in 2002 totalled $40.4 million and are reported in interest income from advances.

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Other Expenses

The category Other expenses consists of operating expenses that include administrative and overhead costs, as well as allocated expenses from the Finance Board and the Office of Finance. The Finance Board is the regulator of the FHLBanks. The Office of Finance is a joint office of the FHLBanks that is funded by the FHLBanks.

The following table sets forth the main components of Other expenses for the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003 and 2002 (in thousands):

                                         
    For the three months ended     For the years ended  
    March 31,     December 31,  
    2005     2004     2004     2003     2002  
Other expenses:
                                       
Operating
  $ 14,652     $ 12,103     $ 51,103     $ 47,749     $ 39,014  
Finance Board and Office of Finance
    1,521       1,406       4,812       4,964       4,399  
Other, net
                      (1,746 )     (5,656 )
 
                             
 
                                       
Total other expenses
  $ 16,173     $ 13,509     $ 55,915     $ 50,967     $ 37,757  
 
                             

Operating Expenses

The following table sets forth the major categories of Operating expenses for the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003 and 2002 (in thousands):

                                         
    For the three months ended     For the years ended  
    March 31,     December 31,  
    2005     2004     2004     2003     2002  
Salaries and employee benefits
  $ 9,495     $ 7,884     $ 34,042     $ 29,811     $ 26,095  
Temporary workers
    120       21       202       868       173  
Occupancy
    858       854       3,505       3,504       2,556  
Depreciation and leasehold improvements
    1,035       922       3,990       2,936       2,635  
Computer service agreements and contractual service
    1,356       1,094       3,233       2,169       2,338  
Professional fees
    529       49       728       1,870       537  
Legal
    245       267       862       1,142       961  
Other
    1,014       1,012       4,541       5,449       3,719  
 
                             
 
                                       
Total operating expenses
  $ 14,652     $ 12,103     $ 51,103     $ 47,749     $ 39,014  
 
                             

Operating expenses include the administrative and operating costs of providing advances, managing the investment portfolios and mortgage programs, and providing correspondent services.

Increases in pension and post-retirement benefit plan expenses were a major factor in the rise in operating expenses in all periods reported. In addition, the FHLBNY has also strengthened its risk management function with the addition of key personnel in that group. Operating expenses for the three months ended March 31, 2005 rose by 21.0% compared to the same period in 2004 as result of increases in salaries and benefits which grew by 20% in the same period. Pension cost has been increasing rapidly. The FHLBNY has also added several positions in its risk management functions. Operating expenses for the year ended December 31, 2004 rose by 7.0% from 2003, and 31.0% from 2002. Significant increases in benefits expenses and higher pension liabilities in all three years were the result of changes in assumptions, primarily lower discount rates and higher forecasted medical costs for future years. These expenses have grown by almost $1.0 million in 2004 compared to 2003. Medical insurance costs have risen by just under $0.5 million in 2004 compared to 2003. Occupancy expenses were up reflecting the higher cost of its new

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headquarters facility. Professional and contractual services in 2003 included organizational consulting expenses.

Director’s Compensation

In accordance with the Finance Board’s regulations, the Bank has established a formal policy governing the compensation and expense reimbursement provided to its directors. Fees are paid for attendance at Board meetings only. The director compensation arrangements for 2005 and 2004 are set forth below:

                                 
    Meeting Fee     Annual Limit  
    (in whole dollars)     (in whole dollars)  
Position   2005     2004     2005     2004  
Chairman
  $ 3,545     $ 3,426     $ 28,362     $ 27,405  
Vice Chairman
    2,836       2,741       22,692       21,924  
Director
    2,127       2,056       17,019       16,443  

In addition, the Bank reimburses directors for necessary and reasonable travel, subsistence, and other related expenses incurred in connection with the performance of their official duties. For expense reimbursement purposes, directors’ “official duties” include:

  Meetings of the Board and Board committees,

  Meetings requested by the Federal Housing Finance and Federal Home Loan Bank System committees,

  Meetings of the Council of Federal Home Loan Banks and its committees,

  Attendance at other events on behalf of the Bank with prior approval of the Board of Directors.

Compensation paid to directors totaled $261,000 and $279,000 in 2004 and 2003. Reimbursed travel and related expenses were $88,000 and $72,000 in 2004 and 2003.

Affordable Housing Program (“AHP”) Assessments

The following tables provides roll-forward information with respect to changes in Affordable Housing Program liabilities for the three months ended March 31, 2005 and 2004, and years ended December 31, 2004, 2003, and 2002 (in thousands)

                                         
    March 31, 2005     For the years ended December 31,  
    2005     2004     2004     2003     2002  
Beginning balance
  $ 81,580     $ 92,541     $ 92,541     $ 109,848     $ 104,674  
Additions from current year’s assessments
    6,663       3,311       18,643       5,091       26,010  
Net disbursements for grants and programs
    (5,218 )     (9,457 )     (29,604 )     (22,398 )     (20,836 )
 
                             
 
                                       
Ending balance
  $ 83,025     $ 86,395     $ 81,580     $ 92,541     $ 109,848  
 
                             

The FHLBNY fulfills its Affordable Housing Program obligations primarily through direct grants to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBNY sets aside for the Affordable Housing Program 10 percent of regulatory net income. Regulatory net income is defined as reported net income before interest expense related to mandatorily redeemable capital stock under SFAS 150 and the

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assessment for Affordable Housing Program, but after the assessment for REFCORP. The FHLBNY relieves the Affordable Housing Program liability as grants and subsidies are provided to members.

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Loan Portfolio — Credit Risk and Concentration Risk

The FHLBNY incurs credit risk—the risk of loss due to default—in its lending, investing, and hedging activities. It has instituted processes to help manage and mitigate this risk. Despite such processes, some amount of credit risk will always exist. Such external events as severe economic downturns, declining real estate values (both residential and non-residential), changes in monetary policy, adverse events in the capital markets, and other developments, could lead to member and counterparty defaults or impact the creditworthiness of investments. Such events could have a negative impact upon the FHLBNY’s income and financial performance.

The FHLBNY closely monitors the creditworthiness of the institutions to which it lends. The FHLBNY also closely monitors the quality and value of both the assets that are pledged as collateral by its customers, and the securities that the Bank purchases under agreements to resell. The FHLBNY periodically assesses the mortgage underwriting and documentation standards of its borrowing members. In addition, the FHLBNY has collateral policies and restricted lending procedures in place to manage its exposure to those customers experiencing difficulty in meeting their capital requirements or other standards of creditworthiness. The FHLBNY has not experienced any losses on credit extended to any member or counterparty since its inception. The FHLBank Act affords any security interest granted to the FHLBNY by a member, or any affiliate of such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party) having the rights of a lien creditor. However, the FHLBNY’s security interest is not entitled to priority over claims and rights that (1) would be entitled to priority under applicable law, or (2) are held by a bona fide purchaser for value or by parties that are secured by actual perfected security interests.

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. Within the collateral portfolio, 81% is concentrated in mortgage loans (63% in one-to-four- family mortgages, 11% in multi-family mortgages and 6% in commercial mortgages), and 19% is concentrated in Government, Agency and other mortgage-backed securities. The FHLBNY has the right to take such steps, as it deems necessary to protect its secured position on outstanding loans, including requiring additional collateral (whether or not such additional collateral would otherwise be eligible to secure a loan). The FHLBNY also has a statutory lien under the FHLBank Act on the capital stock of its members, which serves as further collateral for members’ indebtedness to the FHLBNY. As of December 31, 2004, the FHLBNY had a collateralization rate (total FHLBNY obligations of all members as a percent of total unpaid balance of collateral pledged) of 221% on its total portfolio of outstanding member obligations. The collateralization rate varies by individual member. In all cases, sufficient collateral has been pledged to cover each member’s outstanding obligations with the FHLBNY.

The FHLBNY has established asset classification and reserve policies. All adversely classified assets of the FHLBNY will have a reserve established for probable losses. Based upon the collateral held as security and prior repayment histories, no allowance for losses on advances is currently deemed necessary by management.

The FHLBNY uses methodologies to identify and measure credit risk arising from: Creditworthiness risk arising from members, counterparties, and other entities; Collateral risk arising from type, quality, and lien status; and Concentration risk arising from borrower, portfolio, geographic area, industry, or product type.

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Creditworthiness Risk — Advances

The FHLBNY’s potential exposure to creditworthiness risk arises from the deterioration of the financial health of FHLBNY members, counterparties and other entities that provide services to the FHLBNY. The FHLBNY manages its exposure to the creditworthiness of members by monitoring their collateral and advance levels daily and by analyzing their financial health each quarter. The FHLBNY does business only with investment-grade counterparties, and the FHLBNY’s Board of Directors reviews a management analysis of each counterparty’s financial health prior to approval. The Board also reviews an analysis of each counterparty annually. Management monitors counterparties on an ongoing basis for significant business events, including ratings actions taken by nationally recognized statistical rating organizations. All approved derivatives counterparties must enter into a master International Swaps and Derivatives Association (“ISDA”) agreement with the FHLBNY, and, in addition, execute the Credit Support Annex to the International Swaps and Derivatives Association agreement that provides for collateral support at predetermined thresholds.

Collateral Risk — Advances

The FHLBNY is exposed to collateral risk when it is unable to perfect its interest in pledged collateral, or when the liquidation value of pledged collateral does not fully cover the FHLBNY’s exposure. The FHLBNY manages this risk by pricing collateral on a weekly basis, performing on-site reviews of pledged mortgage collateral from time to time and reviewing pledged portfolio concentrations on a quarterly basis. The FHLBNY requires that members pledge a specific amount of excess collateral above the par amount of their outstanding obligations. Members provide the FHLBNY with reports of pledged collateral, and the FHLBNY evaluates the eligibility and value of the pledged collateral.

The FHLBNY’s loan and collateral agreements give the FHLBNY a security interest in assets held by borrowers that is sufficient to cover their obligations to the FHLBNY. The FHLBNY may supplement this security interest by imposing additional reporting, segregation or delivery requirements on the borrower. The FHLBNY assigns specific collateral requirements to a borrower, based on a number of factors. These include, but are not limited to: (1) the borrower’s overall financial condition; (2) the degree of complexity involved in the pledging, verifying, and reporting of collateral between the borrower and the FHLBNY, especially when third-party pledges, custodians, outside service providers and pledges to other entities are involved; and (3) the type of collateral pledged.

The FHLBNY has also established 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 fair market value at least equal to the borrower’s current collateral maintenance level.

Drawing on current industry standards, the FHLBNY establishes collateral valuation methodologies for each collateral type and calculates the fair market value of the pledged collateral to determine whether a borrower has satisfied its collateral maintenance requirement. The FHLBNY adjusts fair market values on a weekly basis.

The FHLBNY makes additional market value adjustments to a borrower’s pledged mortgage collateral, based on the results of an on-site review. This review involves a qualitative assessment of risk factors that includes an examination of legal documentation, credit underwriting and loan-servicing practices on mortgage collateral. The FHLBNY has developed the on-site review process to more accurately value

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each borrower’s pledged mortgage portfolio based on current secondary-market standards. The results of the review may lead to adjustments in the estimated fair market value of pledged collateral. The FHLBNY may also make additional market value adjustments to a borrower’s pledged mortgage collateral based on the quality and accuracy of the automated data provided to the FHLBNY.

Collateral Coverage of Advances

All member obligations with the FHLBNY must be fully collateralized throughout their entire term. The market value of collateral pledged to cover the $62.1 billion par value in outstanding advances as of March 31, 2005 totalled $150.1 billion, consisting of $122.0 billion in market value of eligible mortgages and $28.1 billion in market value of eligible securities, including cash collateral.

As of March 31, 2005, other outstanding member obligations totalling $139.9 million were collateralized by an additional $821.5 million of pledged collateral. The pledged collateral comprised of $759.1 million in mortgage loans and $62.4 million in securities and cash collateral. The outstanding member obligations consisted of $129.9 million of standby letters of credit (“LOC”); $1.0 million of collateralized value of outstanding derivatives, and $8.9 million representing the members’ credit enhancement guarantee amount (“MPFCE”) on loans sold to the FHLBNY through the Mortgage Partnership Finance program. The FHLBNY’s underwriting and collateral requirements for securing Letters of Credit are the same as its requirements for securing advances.

The total of collateral pledged to the FHLBNY includes excess collateral pledged above the FHLBNY’s minimum collateral requirements. These minimum requirements range from 103% to 125% of outstanding advances, based on the collateral type. It is not uncommon for members to maintain excess collateral positions with the FHLBNY for future liquidity needs. Based on several factors (e.g.; advance type, collateral type or member financial condition) members are required to comply with specified collateral requirements, including but not limited to, a detailed listing of pledged mortgage collateral and/or delivery of pledged collateral to FHLBNY or its designated collateral custodian(s). For example, all pledged securities collateral must be delivered to the FHLBNY’s nominee name at Citibank, N.A., its securities safekeeping custodian. Mortgage collateral that is required to be in the FHLBNY’s possession is typically delivered to the FHLBNY’s Jersey City, NJ facility. However, in certain instances, delivery to an FHLBNY approved custodian may be allowed.

As of March 31, 2005, of the $150.1 billion in pledged collateral securing all outstanding member obligations, $28.1 billion was in the FHLBNY’s physical possession or that of its safekeeping agent(s); $121.9 billion was specifically listed; and $29.3 million was permitted by the FHLBNY to be physically retained by the borrowing member without detailed reporting required.

Credit Risk — Advances

While the FHLBNY has never experienced a credit loss on an advance, the expanded eligible collateral for Community Financial Institutions and non-member housing associates provides the potential for additional credit risk for the FHLBNY. The management of the FHLBNY has the policies and procedures in place to appropriately manage this credit risk. There were no past due advances and all advances were current at December 31, 2003 and 2004. Management does not anticipate any credit losses, and accordingly, the FHLBNY has not provided an allowance for credit losses on advances.

The FHLBNY’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of March 31, 2005, the FHLBNY had advances of $103.8 million to Washington Mutual Bank, FA, a member of the FHLBank of San Francisco, representing .167% of total advances outstanding. These advances were acquired by Washington Mutual Bank, FA as a result of its acquisition of The Dime Savings Bank of New York, FSB. The FHLBNY also had advances of $23.5 billion

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outstanding to five member institutions, representing 37.80% of total advances outstanding at March 31, 2005. The FHLBNY held sufficient collateral to cover the advances to these institutions, and the FHLBNY does not expect to incur any credit losses.

Concentration Risk — Advances

The FHLBNY’s potential exposure to concentration risk arises from concentration levels of borrowers, counterparties, other service providers, specific investment sectors, and advance types.

Advances and Mortgage – Loans: Overview

The following table sets forth the FHLBNY’s loan portfolios as of March 31, 2005 and the years ended December 31, 2004, 2003, and 2002 (in thousands).

                                 
    March 31, 2005     December 31, 2004     December 31, 2003     December 31, 2002  
Advances
  $ 62,711,092     $ 68,507,487     $ 63,923,184     $ 68,926,073  
 
                       
Mortgage loans before allowance for credit losses
  $ 1,308,119     $ 1,178,590     $ 672,151     $ 435,561  
 
                       
 
                               
Non- performing mortgage loans
  $ 1,004     $ 519     $ 115     $ 129  
 
                       
 
                               
Mortgage loans past due 90 days or more and still accruing interest
  $ 1,820     $ 1,898     $ 2,732     $ 7,428  
 
                       

FHLBNY considers loans that are over 90 days past due (excluding Federal Housing Administration and Veteran’s Administration insured loans) as impaired. Veterans Administration insured loans aggregating $1.5 million, $1.9 million and $2.7 million were past due 90 days or more at March 31, 2005, December 31, 2004 and 2003, respectively. No other loans or advances were impaired at March 31, 2005, December 31, 2004 and 2003.

Allowance for Credit Losses – Mortgage Loans

The FHLBNY has never experienced a loss from its advances or its mortgage loan portfolio. The following table presents allowances for credit losses (in thousands):

                                         
    For the three months ended     For the years ended  
    March 31,     December 31,  
    2005     2004     2004     2003     2002  
Balance, beginning of period
  $ 507     $ 507     $ 507     $ 428     $ 193  
 
                                       
Charge offs
                             
Recoveries
                             
 
                             
Net charge- off
                             
Provision for credit losses
    34                   79       235  
 
                             
 
                                       
Balance, end of period
  $ 541     $ 507     $ 507     $ 507     $ 428  
 
                             

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The First Loss account memorializes the first tier of credit exposure that the FHLBNY is responsible for. It is not an indication of inherent losses in the loan portfolio, and is not a loan loss reserve. The FHLBNY is responsible for losses up to this “first loss level”. Losses beyond this layer are absorbed through credit enhancement provided by the member participating in the Mortgage Partnership Finance Program (“MPF”). All residual credit exposure is FHLBNY’s responsibility. During the year ended December 31, 2002, one conventional loan was foreclosed and the PFI took title to the property and sold the property. As a result of the foreclosure, the FHLBNY incurred a loss of $3 thousand which represented the amount of residual loss for which the FHLBNY was responsible under the “first loss layer”. Under the terms of the MPF 125 product type, the FHLBNY exercised its right to offset the $3 thousand loss incurred in the “first loss layer” from subsequent credit enhancement fees paid to the Participating Financial Institution (“PFI”). In the foreclosure, we assume the borrower lost the equity in the property. We base this on our knowledge that the borrower had a down-payment on the property in the amount of $40 thousand, which was lost upon foreclosure. There was no primary mortgage insurance required on this loan. Since inception of the program, in 1999, there were four other loans that foreclosed. The FHLBNY had a 1% interest in the four loans and incurred no losses.

In limited circumstances, the FHLBNT may require the PFI to repurchase loans. When a PFI fails to comply with the requirements of the PFI Agreement, MPF Guides, applicable law or terms of mortgage documents, the PFI may be required to repurchase the MPF Loans which are impacted by such failure. Reasons for which a PFI could be required to repurchase an MPF Loan may include but are not limited to MPF Loan in-eligibility, failure to perfect collateral with an approved custodian, a servicing breach, fraud, or other misrepresentation.

For FHA and VA insured MPF Loans, in the three years ended December 31, 2004, 2003 and 2002, the PFIs repurchased 39 loans for a total of $3.6 million in 2002. There have been no repurchases in any periods after 2002. These repurchases may have been permissive repurchases allowed under the MPF Guides or for the same reasons as described above for conventional MPF Loans. The Bank has not experienced any losses related to the repurchase of FHA and VA insured MPF Loans.

For conventional MPF Loans, in the three years ended December 31, 2004, 2003 and 2002, the PFIs were required to repurchase 2, 6 and 2 loans for a total of $173 thousand, $904 thousand and $493 thousand, respectively. There were no repurchases for the three months ended March 31, 2005 or 2004. The FHLBNY has not experienced any losses related to these conventional MPF Loan repurchases.

Risk from Concentration of Advances

The FHLBNY’s potential credit risk from advances is concentrated in its activity with commercial banks and savings institutions. In extending credit to a member, the FHLBNY adheres to specific credit policy limits approved by its Board of Directors. The FHLBNY has not established limits for the concentrations of specific types of advances, but management reports the activity in advances to the Board each month. Each quarter, management reports the concentrations of convertible advances made to individual members.

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Top Five Advance Holders

The following table summarizes the top five advance holders as of March 31, 2005 and December 31, 2004 (in thousands).

                         
            March 31, 2005  
                    Percent of  
    City   State   Advances     Advances**  
North Fork Bank
  Mattituck   NY   $ 6,200,015       10.00 %
New York Community Bank
  Westbury   NY     5,502,988       8.90 %
HSBC Bank USA, National Association
  Buffalo   NY     5,011,890       8.10 %
Manufactures and Traders Trust Company*
  Buffalo   NY     3,679,067       5.90 %
Independence Community Bank*
  Brooklyn   NY     3,078,000       5.00 %
 
                   
 
          $ 23,471,960       37.90 %
 
                   
                         
            December 31, 2004  
                    Percent of  
    City   State   Advances     Advances**  
GreenPoint Bank
  New York   NY   $ 5,125,015       7.60 %
HSBC Bank USA
  Buffalo   NY     5,011,786       7.50 %
New York Community Bank
  Westbury   NY     4,644,290       6.90 %
Independence Community Bank*
  New York   NY     3,958,000       5.90 %
Manufacturers and Traders Trust Company*
  Buffalo   NY     3,529,333       5.20 %
 
                   
 
          $ 22,268,424       33.10 %
 
                   
 
*   Officer of member bank also served on the Board of Directors of the FHLBNY in 2004.
 
**   Percentage calculated on par value of advances before adjustment for SFAS 133.

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Credit Risk from Mortgage Loans held-for-portfolio

Through the Mortgage Partnership Finance program, the FHLBNY invests in home mortgage loans originated by or through members or approved state and local housing finance agencies (“housing associates”). The FHLBNY purchases these mortgages loans under the Finance Board’s Acquired Member Assets (“AMA”) regulation. These assets may include whole loans eligible to secure advances (excluding mortgages above the conforming-loan limit); whole loans secured by manufactured housing; or bonds issued by housing associates.

In the Mortgage Partnership Finance program, the FHLBNY purchases conventional mortgage loans from its participating members, herein after referred to as Participating Financial Institutions (“PFI”). Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) insured loans purchased aggregate about 1.4% and 1.8% of the remaining outstanding mortgage loans held for investment at March 31, 2005 and December 31, 2004.

The FHLBNY bases its provision for credit losses on its estimate of probable credit losses inherent in the Mortgage Partnership Finance portfolio as of the balance sheet date. The estimates are based on a variety of factors, including performance history and analysis of industry standards for similar mortgage portfolios. Credit risks take into account the private mortgage insurance, but not the “first loss” accounts and other credit enhancement features that accompany the Mortgage Partnership Finance loans to provide credit assurance to the FHLBNY.

Participating Financial Institutions Risk

The members or housing associates that are approved as Participating Financial Institutions (“PFI”) continue to bear a significant portion of the credit risk through credit enhancements that they provide to the FHLBNY. The Acquired Member Assets regulation requires that these credit enhancements be sufficient to protect the FHLBNY from excess credit risk exposure. Specifically, the FHLBNY exposure must be no greater than it would be with an asset rated in the fourth-highest credit rating category by a Nationally Recognized Statistical Rating Organization, or such higher rating category as the FHLBNY may require. The Mortgage Partnership Finance program is constructed to provide the Bank with assets that are credit-enhanced to the second-highest credit rating category (double -A).

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The top five plus all other Participating Financial Institutions and the outstanding Mortgage Partnership Finance loans balances at March 31, 2005 and December 31, 2004 are listed below (dollar amounts in thousands):

                 
    March 31, 3005  
    Mortgage     Percent of Total  
    Loans     Mortgage Loans  
Manufactures and Traders Trust Company
  $ 630,929       49.04 %
Astoria Federal Savings and Loan Association
    284,136       22.08 %
Elmira Savings and Loan F.A.
    119,269       9.27 %
Ocean First Bank
    37,785       2.94 %
The Lyons National Bank
    27,999       2.18 %
All others
    186,442       14.49 %
 
           
 
               
Total
  $ 1,286,560       100.00 %
 
           
                 
    December 31, 2004  
    Mortgage     Percent of Total  
    Loans     Mortgage Loans  
Manufactures and Traders Trust Company
  $ 525,619       45.38 %
Astoria Federal Savings and Loan Association
    272,979       23.57 %
Elmira Savings and Loan. F.A.
    115,779       10.00 %
Ocean First Bank
    31,220       2.70 %
The Lyons National Bank
    26,049       2.25 %
All others
    186,609       16.11 %
 
           
 
               
Total
  $ 1,158,255       100.00 %
 
           

Potential Credit Losses Mortgage Loans

The par value of mortgage loans held for investment outstanding as of March 31, 2005, December 31, 2004 and 2003 was comprised of Federal Housing Administration and Veteran Administration insured loans totaling $18,370,000, $20,632,000 and $38,818,000, respectively and conventional and other loans totaling $1,279,855,000 , $1,150,029,000 and $626,527,000, respectively. The FHLBNY and the Participating Financial Institution share the credit risks of the uninsured Mortgage Partnership Finance loans by structuring potential credit losses into layers. Collectibility of the loans is first supported by liens on the real estate securing the loan. For conventional mortgage loans, additional loss protection is provided by private mortgage insurance (“PMI”) required for Mortgage Partnership Finance loans with a loan-to-value ratio of more than 80% at origination, which is paid for by the borrower. Credit losses are first absorbed by FHLBNY up to the level of the First Loss Account (“FLA”), for which the maximum exposure is estimated to be $12.5 and $11.7 million and $5.6 million at March 31, 2005 and December 31, 2004 and 2003. The FHLBNY is entitled to recover any “first losses” incurred from the member up to the amount of credit enhancement fees paid by the FHLBNY to the member. The member is responsible for the second loss layer, estimated to be $8.9 million and $8.0 million and $5.4 million at March 31, 2005 and December 31, 2004 and 2003. The FHLBNY is again responsible for any residual losses.

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The following table provides roll-forward information with respect to the First Loss Account (actual dollars).

                                         
    For the three months ended March 31,     For the year ended December 31,  
    2005     2004     2004     2003     2002  
Beginning balance
  $ 11,710,000     $ 5,607,000     $ 5,607,000     $ 3,367,000     $ 1,384,000  
Additions
    787,517       1,119,382       6,103,000       2,240,000       1,983,000  
Charge-offs
                             
Recoveries
                             
 
                             
 
                                       
Ending balance
  $ 12,497,517     $ 6,726,382     $ 11,710,000     $ 5,607,000     $ 3,367,000  
 
                             

The aggregate amount of First Loss Account 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 Participating Financial Institution. The credit enhancement held by Participating Financial Institutions ensures that the lender retains a credit stake in the loans it originates. For managing this risk, Participating Financial Institutions receive monthly “credit enhancement fees” from the FHLBNY.

Credit Enhancement Mortgage Loans

The amount of the credit enhancement is computed with the use of a Standard & Poor’s model to determine the amount of credit enhancement necessary to bring a pool of uninsured loans to “AA” credit risk. The credit enhancement becomes an obligation of the Participating Financial Institution. For taking on the credit enhancement obligation, the Participating Financial Institution receives a credit enhancement fee that is paid by the FHLBNY. For certain Mortgage Partnership Finance products, the credit enhancement fee is accrued and paid each month. For other Mortgage Partnership Finance products, the credit enhancement fee is accrued monthly and is paid monthly after the FHLBNY has accrued 12 months of credit enhancement fees. Credit enhancement fees paid for the three months ended March 31, 2005 and 2004 and years ended December 31, 2004, 2003, and 2002 were $116 thousand and $67 thousand, $114 thousand and $200 thousand. In 2002, a de minimus amount of loss from a single loan was recognized and credit enhancement fee of $3 thousand was recouped from the Participating Financial Institution. Other than this amount, the FHLBNY has not incurred any losses in any periods reported and accordingly no recoveries from credit enhancement fees paid were necessary.

The portion of the credit enhancement that is an obligation of the Participating Financial Institution must be fully secured with pledged collateral. A portion of the credit enhancement may also be covered by insurance, subject to limitations specified in the Acquired Member Assets regulation. Each member or housing associate that participates in the Mortgage Partnership Finance program must meet financial performance criteria established by the FHLBNY. In addition, each approved participant must have a financial review performed by the FHLBNY on an annual basis.

The second layer is that amount of credit obligations that the Participating Financial Institution has taken on which will equate the loan to a double -A rating. The FHLBNY pays a Credit Enhancement fee to the Participating Financial Institution for taking on this obligation. The FHLBNY assume all residual risk.

As of March 31, 2005 and December 31, 2004, the FHLBNY held Mortgage Partnership Finance loans secured by real estate in 46 states. At December 31, 2004, there is a concentration of loans (75.7% by numbers of loans, and 73.7% by amounts outstanding) in New York State, which is to be expected since the largest two Participating Financial Institutions are located in New York. There is nothing in the New York State financial outlook that indicates that this concentration presents an undue risk.

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The FHLBNY also holds participation interests in residential and community development mortgage loans through its pilot Community Mortgage Asset (“CMA”) program. Acquisitions of participations under the Community Mortgage Asset program were suspended indefinitely in November 2001. Participation interests in Community Mortgage Asset loans are reviewed at least annually.

Allowance for loan losses. - Management performs periodic reviews of its portfolio to identify the losses inherent within the portfolio and to determine the likelihood of collection of the portfolio. Mortgage loans, that are either classified under regulatory criteria (Special Mention, Sub-standard, or Loss) or past due, are separated from the aggregate pool, and evaluated separately for impairment.

If adversely classified, or on non-accrual status, reserves for mortgage loans, except Federal Housing Administration and Veterans Administration insured loans, are analyzed under liquidation scenarios on a loan level basis, and identified losses greater than $1,000 are fully reserved. Federal Housing Administration and Veterans Administration insured mortgage loans have minimal inherent credit risk; risk generally arises mainly from the servicer defaulting on their obligations. Federal Housing Administration and Veterans Administration mortgage loans, if adversely classified, will have reserves established only in the event of a default of a Participating Financial Institution. Reserves are based on the estimated costs to recover any uninsured portion of the Mortgage Partnership Finance loan.

Management of the FHLBNY identifies inherent losses through analysis of the conventional loans (not Federal Housing Administration and Veterans Administration insured loans) that are not classified or past due. In the absence of historical loss data, the practice is to look at loss histories of pools of loans, at other financial institutions, with similar characteristics to determine a reasonable basis for loan loss allowance. Management continues to evaluate this practice for appropriateness.

The FHLBNY also holds participation interest in residential and community development mortgage loans thorough its pilot Community Mortgage Asset (“CMA”) program. Acquisition of participations under the Community Mortgage Asset program was suspended indefinitely in November 2001, and was down to $11.4 at March 31, 2005 and $12.4 million at December 31, 2004. If adversely classified, Community Mortgage Asset loans will have additional reserves established based on the shortfall of the underlying estimated liquidation value of collateral to cover the remaining balance of the Community Mortgage Asset loan. Reserve values are calculated by subtracting the estimated liquidation value of the collateral (after sale value) from the current remaining balance of the Community Mortgage Asset Loan.

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Derivatives

Interest rate swaps, swaptions, and cap and floor agreements (collectively, derivatives) enable the FHLBNY to manage its exposure to changes in interest rates by adjusting the effective maturity, repricing frequency, or option characteristics of financial instruments. The FHLBNY uses derivatives in three ways: (1) as fair value or cash flow hedges of an underlying financial instrument or a forecasted transaction; (2) as economic hedges to offset derivatives positions (e.g., caps) sold to members; and (3) as asset/liability management tools. The FHLBNY uses derivatives to adjust the interest rate sensitivity of consolidated obligations to more closely approximate the sensitivity of assets or to adjust the interest rate sensitivity of advances to more closely approximate the sensitivity of liabilities. In addition, the FHLBNY uses derivatives to offset embedded options in assets and liabilities, to hedge the market value of existing assets and liabilities and anticipated transactions and to reduce funding costs.

Hedge Effectiveness

Under SFAS 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective portion of the hedge. Those methods must be consistent with the entity’s approach to managing risk. At inception and during the life of the hedging relationship, the hedge is expected to be highly effective in offsetting changes in the hedged item’s fair value or the variability in cash flows attributable to the hedged risk.

Effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item relating to the risk being hedged. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an ongoing basis. Any ineffective portions are to be recognized in earnings immediately, regardless of the type of hedge. An assessment of effectiveness is required whenever financial statements or earnings are reported, and at least once every three months.

FHLBNY considers hedge effectiveness in two ways:

  Prospective assessment. Upon designation of the hedging relationship and on an ongoing basis, FHLBNY will be required to demonstrate that it expects the hedging relationships to be highly effective. This is a forward-looking relationship consideration.
 
  Retrospective assessment. At least quarterly, FHLBNY will be required to determine whether the hedging relationship was highly effective in offsetting changes in fair value or cash flows through the date of the periodic assessment. This is an evaluation of the past experience.

FHLBNY uses a statistical method commonly referred to as regression analysis to analyze how a single dependent variable is affected by the changes in one (or more) independent variable. 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 as a better methodology for measuring the strength of empirical relationships, and assessing the probability of hedge effectiveness. The FHLBNY tests the effectiveness of the hedges by regressing the changes in the net present value of future cash flows (“NPV”) of the derivative against changes in the net present value of the hedged transaction, typically an advance or a cons