Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
File No. 000-51406
FEDERAL
HOME LOAN BANK OF SEATTLE
(Exact
name of registrant as specified in its charter)
Federally
chartered corporation
|
91-0852005
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1501
Fourth Avenue, Suite 1800, Seattle, WA
|
98101-1693
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (206) 340-2300
Indicate by check
mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x
No o
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x (Do
not check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No x
The registrant’s
stock is not publicly traded and is generally only issued to members of the
registrant. Such stock is issued and redeemed at par value, $100 per share, and
subject to certain regulatory and statutory limits. As of October 31, 2009, the
registrant had 1,588,642 shares of Class A capital stock and 26,367,991
shares of Class B capital stock outstanding.
FEDERAL
HOME LOAN BANK OF SEATTLE
Form
10-Q for the quarterly period ended September 30, 2009
Page
|
||
PART I.
FINANCIAL INFORMATION
|
||
Item 1.
|
Financial
Statements:
|
|
3 | ||
4 | ||
5 | ||
6 | ||
8 | ||
Item 2.
|
37 | |
Item 3.
|
73 | |
Item 4T.
|
76 | |
PART II.
OTHER INFORMATION
|
||
Item 1.
|
79 | |
Item 1A.
|
79 | |
Item 2.
|
80 | |
Item 3.
|
80 | |
Item 4.
|
80 | |
Item 5.
|
80 | |
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||
Item 6.
|
80 | |
81 |
PART
I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
FEDERAL
HOME LOAN BANK OF SEATTLE
(unaudited)
As
of
|
As
of
|
|||||||
September
30, 2009
|
December
31, 2008
|
|||||||
(in
thousands, except par value)
|
||||||||
Assets
|
||||||||
Cash and due
from banks
|
$ | 8,873 | $ | 1,395 | ||||
Interest-bearing
deposits (Other FHLBanks: $72 as of September 30, 2009)
|
72 | |||||||
Securities
purchased under agreements to resell
|
4,750,000 | 3,900,000 | ||||||
Federal funds
sold
|
5,862,300 | 2,320,300 | ||||||
Available-for-sale
securities (Note 2)
|
664,728 | |||||||
Held-to-maturity
securities*
(Note 3)
|
13,431,347 | 9,784,891 | ||||||
Advances (Note
5)
|
24,908,356 | 36,943,851 | ||||||
Mortgage loans
held for portfolio, net of allowance for credit losses of
$271
|
||||||||
and $0 as of
September 30, 2009 and December 31, 2008 (Note 6)
|
4,292,454 | 5,087,323 | ||||||
Accrued
interest receivable
|
110,054 | 241,124 | ||||||
Premises,
software, and equipment, net
|
15,376 | 14,228 | ||||||
Derivative
assets (Note 9)
|
4,237 | 31,984 | ||||||
Other
assets
|
39,607 | 36,594 | ||||||
Total
Assets
|
$ | 54,087,404 | $ | 58,361,690 | ||||
Liabilities
and Capital
|
||||||||
Liabilities
|
||||||||
Deposits:
|
||||||||
Interest-bearing
|
$ | 284,507 | $ | 582,258 | ||||
Total
deposits
|
284,507 | 582,258 | ||||||
Consolidated
obligations, net (Note 7):
|
||||||||
Discount
notes
|
21,678,303 | 15,878,281 | ||||||
Bonds
|
29,754,273 | 38,590,399 | ||||||
Total
consolidated obligations, net
|
51,432,576 | 54,468,680 | ||||||
Mandatorily
redeemable capital stock (Note 8)
|
942,156 | 917,876 | ||||||
Accrued
interest payable
|
196,722 | 337,303 | ||||||
Affordable
Housing Program (AHP)
|
10,097 | 16,210 | ||||||
Derivative
liabilities (Note 9)
|
259,278 | 235,417 | ||||||
Other
liabilities
|
34,655 | 37,621 | ||||||
Total
liabilities
|
53,159,991 | 56,595,365 | ||||||
Commitments
and contingencies (Note 13)
|
||||||||
Capital
(Note 8)
|
||||||||
Capital
stock:
|
||||||||
Class B
capital stock putable ($100 par value) - issued and
|
||||||||
outstanding
shares: 17,181 and 17,302 shares as of September 30, 2009
|
||||||||
and December
31, 2008
|
1,718,174 | 1,730,287 | ||||||
Class A
capital stock putable ($100 par value) - issued and
|
||||||||
outstanding
shares: 1,346 and 1,179 shares as of September 30, 2009
|
||||||||
and December
31, 2008
|
134,563 | 117,853 | ||||||
Total capital
stock
|
1,852,737 | 1,848,140 | ||||||
Retained
earnings (accumulated deficit)
|
70,206 | (78,876 | ) | |||||
Accumulated
other comprehensive loss (Note 8)
|
(995,530 | ) | (2,939 | ) | ||||
Total
capital
|
927,413 | 1,766,325 | ||||||
Total
Liabilities and Capital
|
$ | 54,087,404 | $ | 58,361,690 |
*
|
Estimated fair
values of held-to-maturity securities were $12,885,820 and $7,857,197
as of September 30, 2009 and December 31,
2008.
|
The accompanying
notes are an integral part of these financial statements.
(Unaudited)
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Interest
Income
|
||||||||||||||||
Advances
|
$ | 74,354 | $ | 271,851 | $ | 358,858 | $ | 982,384 | ||||||||
Prepayment
fees on advances, net
|
1,869 | 21 | 7,502 | 21,958 | ||||||||||||
Interest-bearing
deposits
|
24 | 203 | ||||||||||||||
Securities
purchased under agreements to resell
|
1,808 | 8,357 | 6,564 | 8,730 | ||||||||||||
Federal funds
sold
|
1,965 | 58,473 | 4,813 | 186,168 | ||||||||||||
Available-for-sale
securities
|
1 | 1 | ||||||||||||||
Held-to-maturity
securities (Other FHLBanks' consolidated obligations -
|
||||||||||||||||
$0 and $23,078
for the nine months ended September 30, 2009 and 2008)
|
50,472 | 118,136 | 162,693 | 357,200 | ||||||||||||
Mortgage loans
held for portfolio
|
53,382 | 66,070 | 180,799 | 205,341 | ||||||||||||
Loans to other
FHLBanks
|
21 | 37 | ||||||||||||||
Total interest
income
|
183,874 | 522,930 | 721,432 | 1,761,819 | ||||||||||||
Interest
Expense
|
||||||||||||||||
Consolidated
obligations - discount notes
|
9,826 | 150,617 | 63,224 | 414,881 | ||||||||||||
Consolidated
obligations - bonds
|
125,992 | 320,545 | 486,982 | 1,165,367 | ||||||||||||
Deposits
|
158 | 5,264 | 885 | 19,598 | ||||||||||||
Securities
sold under agreements to repurchase
|
2,919 | 2,924 | ||||||||||||||
Mandatorily
redeemable capital stock and other borrowings
|
391 | 1,013 | ||||||||||||||
Total interest
expense
|
135,976 | 479,736 | 551,091 | 1,603,783 | ||||||||||||
Net
Interest Income Before Provision for Credit Losses
|
47,898 | 43,194 | 170,341 | 158,036 | ||||||||||||
Provision for
credit losses on mortgage loans held for portfolio
|
(14 | ) | (271 | ) | ||||||||||||
Net
Interest Income
|
47,884 | 43,194 | 170,070 | 158,036 | ||||||||||||
Other
Loss
|
||||||||||||||||
Service
fees
|
845 | 453 | 1,989 | 1,344 | ||||||||||||
Net realized
gain from sale of held-to-maturity securities
|
1,374 | |||||||||||||||
Total
other-than-temporary impairment (OTTI) loss (Note 4)
|
(84,979 | ) | (49,830 | ) | (1,240,173 | ) | (49,830 | ) | ||||||||
Portion of
OTTI losses recognized in other comprehensive loss, net
|
(45,121 | ) | 976,654 | |||||||||||||
Net OTTI loss
recognized in income
|
(130,100 | ) | (49,830 | ) | (263,519 | ) | (49,830 | ) | ||||||||
Net gain
(loss) on derivatives and hedging activities
|
2,553 | 5,557 | (8,413 | ) | 17,605 | |||||||||||
Net realized
loss on early extinguishment of consolidated obligations
|
(301 | ) | (2,541 | ) | (5,268 | ) | (25,213 | ) | ||||||||
Other (loss)
income, net
|
(15 | ) | 19 | 2 | (89 | ) | ||||||||||
Total other
loss
|
(127,018 | ) | (46,342 | ) | (275,209 | ) | (54,809 | ) | ||||||||
Other
Expense
|
||||||||||||||||
Operating:
|
||||||||||||||||
Compensation
and benefits
|
8,579 | 6,240 | 22,173 | 18,832 | ||||||||||||
Other
operating
|
5,026 | 4,478 | 13,762 | 13,564 | ||||||||||||
Federal
Housing Finance Agency
|
446 | 502 | 1,389 | 1,507 | ||||||||||||
Office of
Finance
|
494 | 575 | 1,430 | 1,462 | ||||||||||||
Provision for
credit loss on receivable
|
10,430 | 10,430 | ||||||||||||||
Other,
net
|
127 | 155 | 407 | 393 | ||||||||||||
Total other
expense
|
14,672 | 22,380 | 39,161 | 46,188 | ||||||||||||
(Loss)
Income Before Assessments
|
(93,806 | ) | (25,528 | ) | (144,300 | ) | 57,039 | |||||||||
Assessments
|
||||||||||||||||
Affordable
Housing Program
|
(2,044 | ) | 4,759 | |||||||||||||
REFCORP
|
(4,697 | ) | 33 | 10,456 | ||||||||||||
Total
assessments
|
(6,741 | ) | 33 | 15,215 | ||||||||||||
Net
(Loss) Income
|
$ | (93,806 | ) | $ | (18,787 | ) | $ | (144,333 | ) | $ | 41,824 |
The accompanying
notes are an integral part of these financial statements.
(Unaudited)
For
the Nine Months Ended
|
Class
A Capital Stock*
|
Class
B Capital Stock*
|
Retained
Earnings (Accumulated
|
Accumulated
Other Comprehensive
|
||||||||||||||||||||||||
September
30, 2009 and 2008
|
Shares
|
Par
Value
|
Shares
|
Par
Value
|
Deficit)
|
Loss
|
Total
Capital
|
|||||||||||||||||||||
(amounts
and shares in thousands)
|
||||||||||||||||||||||||||||
Balance,
December 31, 2007
|
2,874 | $ | 287,449 | 21,411 | $ | 2,141,141 | $ | 148,723 | $ | (1,420 | ) | $ | 2,575,893 | |||||||||||||||
Proceeds from
sale of capital stock
|
5,678 | 567,754 | 4,021 | 402,086 | 969,840 | |||||||||||||||||||||||
Repurchase/redemption
of capital stock
|
(4,589 | ) | (458,947 | ) | (458,947 | ) | ||||||||||||||||||||||
Net shares
reclassified to mandatorily
|
||||||||||||||||||||||||||||
redeemable
capital stock
|
(632 | ) | (63,272 | ) | (63,272 | ) | ||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
41,824 | 41,824 | ||||||||||||||||||||||||||
Other
comprehensive income (Note 8)
|
159 | 159 | ||||||||||||||||||||||||||
Total
comprehensive income
|
41,983 | |||||||||||||||||||||||||||
Dividends on
capital stock:
|
||||||||||||||||||||||||||||
Cash
|
(28,235 | ) | (28,235 | ) | ||||||||||||||||||||||||
Balance,
September 30, 2008
|
3,963 | $ | 396,256 | 24,800 | $ | 2,479,955 | $ | 162,312 | $ | (1,261 | ) | $ | 3,037,262 | |||||||||||||||
Balance,
December 31, 2008
|
1,179 | $ | 117,853 | 17,302 | $ | 1,730,287 | $ | (78,876 | ) | $ | (2,939 | ) | $ | 1,766,325 | ||||||||||||||
Cumulative
effect adjustment (Notes 1 and 8)
|
293,415 | (293,415 | ) | |||||||||||||||||||||||||
Proceeds from
sale of capital stock
|
195 | 19,535 | 100 | 10,012 | 29,547 | |||||||||||||||||||||||
Net shares
reclassified to mandatorily
|
||||||||||||||||||||||||||||
redeemable
capital stock
|
(28 | ) | (2,825 | ) | (221 | ) | (22,125 | ) | (24,950 | ) | ||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
(144,333 | ) | (144,333 | ) | ||||||||||||||||||||||||
Other
comprehensive loss (Note 8)
|
(699,176 | ) | (699,176 | ) | ||||||||||||||||||||||||
Total
comprehensive loss
|
(843,509 | ) | ||||||||||||||||||||||||||
Balance,
September 30, 2009
|
1,346 | $ | 134,563 | 17,181 | $ | 1,718,174 | $ | 70,206 | $ | (995,530 | ) | $ | 927,413 | |||||||||||||||
*
Putable.
|
The accompanying
notes are an integral part of these financial statements.
(Unaudited)
For
the Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Operating
Activities
|
||||||||
Net (loss)
income
|
$ | (144,333 | ) | $ | 41,824 | |||
Adjustments to
reconcile net (loss) income to net cash (used in)
|
||||||||
provided by
operating activities:
|
||||||||
Depreciation
and amortization
|
(121,399 | ) | (232 | ) | ||||
Provision for
credit losses on mortgage loans
|
271 | |||||||
Change in net
fair value adjustment on derivative and hedging activities
|
(24,385 | ) | 145,758 | |||||
Loss on
extinguishment of consolidated obligations
|
5,269 | 25,213 | ||||||
Gain on sale
of held-to-maturity securities
|
(1,374 | ) | ||||||
Net
other-than-temporary impairment loss
|
263,519 | 49,830 | ||||||
Other
|
14 | 501 | ||||||
Net change
in:
|
||||||||
Accrued
interest receivable
|
131,067 | 135,434 | ||||||
Other
assets
|
(941 | ) | 4,923 | |||||
Accrued
interest payable
|
(140,580 | ) | (200,025 | ) | ||||
Other
liabilities
|
(9,263 | ) | (6,062 | ) | ||||
Total
adjustments
|
103,572 | 153,966 | ||||||
Net cash (used
in) provided by operating activities
|
(40,761 | ) | 195,790 | |||||
Investing
Activities
|
||||||||
Net change
in:
|
||||||||
Interest-bearing
deposits
|
32,311 | |||||||
Deposits with
other FHLBanks
|
(72 | ) | ||||||
Securities
purchased under agreements to resell
|
(850,000 | ) | (2,000,000 | ) | ||||
Federal funds
sold
|
(3,542,000 | ) | (8,931,200 | ) | ||||
Premises,
software and equipment
|
(3,723 | ) | (2,851 | ) | ||||
Available for
sale securities:
|
||||||||
Proceeds from
sales
|
1,940 | |||||||
Purchases
|
(1,940 | ) | ||||||
Held-to-maturity
securities:
|
||||||||
Net increase
in short-term
|
(5,353,000 | ) | (3,261,361 | ) | ||||
Proceeds from
maturities
|
1,748,028 | 2,867,332 | ||||||
Proceeds from
sales
|
502,093 | |||||||
Purchases of
long-term
|
(1,670,845 | ) | (1,053,324 | ) | ||||
Advances:
|
||||||||
Proceeds
|
49,869,976 | 100,682,644 | ||||||
Made
|
(38,009,029 | ) | (101,525,795 | ) | ||||
Mortgage loans
held for portfolio:
|
||||||||
Principal
collections
|
790,806 | 448,883 | ||||||
Net cash
provided by (used in) investing activities
|
3,012,452 | (12,273,579 | ) |
The accompanying
notes are an integral part of these financial statements.
FEDERAL
HOME LOAN BANK OF SEATTLE
STATEMENTS
OF CASH FLOWS – (CONTINUED)
(Unaudited)
For
the Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Financing
Activities
|
||||||||
Net change
in:
|
||||||||
Deposits
|
$ | (281,392 | ) | $ | 436,372 | |||
Securities
sold under agreements to repurchase
|
262,000 | |||||||
Net proceeds
from issuance of consolidated obligations:
|
||||||||
Discount
notes
|
780,550,600 | 868,082,639 | ||||||
Bonds
|
18,875,945 | 22,713,728 | ||||||
Payments for
maturing and retiring consolidated obligations:
|
||||||||
Discount
notes
|
(774,645,157 | ) | (852,762,078 | ) | ||||
Bonds
|
(27,493,087 | ) | (26,849,512 | ) | ||||
Proceeds from
issuance of capital stock
|
29,547 | 969,840 | ||||||
Net payments
on consolidated obligations transferred to other FHLBanks
|
(287,230 | ) | ||||||
Payments for
repurchase of capital stock
|
(458,947 | ) | ||||||
Payments for
redemption of mandatorily redeemable capital stock
|
(669 | ) | ||||||
Cash dividends
paid
|
(28,235 | ) | ||||||
Net cash (used
in) provided by financing activities
|
(2,964,213 | ) | 12,078,577 | |||||
Net increase
in cash and cash equivalents
|
7,478 | 788 | ||||||
Cash and cash
equivalents at beginning of the period
|
1,395 | 1,197 | ||||||
Cash and cash
equivalents at end of the period
|
$ | 8,873 | $ | 1,985 | ||||
Supplemental
Disclosures
|
||||||||
Interest
paid
|
$ | 691,673 | $ | 1,803,418 | ||||
AHP
payments
|
$ | 6,113 | $ | 5,244 | ||||
REFCORP
payments
|
$ | 20,212 | ||||||
Transfers from
mortgage loans held for portfolio to real estate owned
|
$ | 1,438 | $ | 238 | ||||
Transfers of
investments from held-to-maturity to available-for-sale
|
$ | 664,728 |
The accompanying
notes are an integral part of these financial statements.
CONDENSED NOTES TO FINANCIAL STATEMENTS – (UNAUDITED)
NOTE
1. BASIS OF PRESENTATION, USE OF ESTIMATES, SIGNIFICANT ACCOUNTING
POLICIES, AND RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
Basis
of Presentation
These unaudited
financial statements and condensed notes should be read in conjunction with the
2008 audited financial statements and related notes (2008 Audited Financials)
included in the 2008 annual report on Form 10-K of the Federal Home Loan Bank of
Seattle (Seattle Bank). These unaudited financial statements and condensed notes
have been prepared in conformity with accounting principles generally accepted
in the United States (GAAP) for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair statement of the financial condition, operating results,
and cash flows for the interim periods presented have been included. The
financial condition as of September 30, 2009 and December 31, 2008 and the
operating results for the three and nine months ended September 30, 2009 are not
necessarily indicative of the condition or results that may be expected as of or
for the year ending December 31, 2009. In connection with our preparation
of these unaudited financial statements and condensed notes, we evaluated
subsequent events after the statement of condition date of September 30, 2009
through November 12, 2009, which is the date the financial statements were
issued.
Use
of Estimates
The preparation of
financial statements in accordance with GAAP requires management to make
assumptions and estimates that affect the reported amounts recorded or disclosed
in the financial statements. Actual results could differ from our
estimates.
Significant
Accounting Policies
Classification of Investment
Securities
The Seattle Bank
classifies as held-to-maturity (HTM) debt securities for which it has both the
ability and intent to hold to maturity and carries them at amortized cost.
Certain other debt securities are classified as available-for-sale (AFS) and
carried at their estimated fair values.
In
accordance with accounting guidance related to accounting for debt securities,
changes in circumstances may cause the Seattle Bank to change its previously
asserted intent to hold a certain security to maturity without calling into
question its intent to hold other debt securities to maturity in the future.
Accordingly, the sale or transfer of a HTM security due to certain changes in
circumstances, such as evidence of significant deterioration in the issuer’s
creditworthiness, is not considered to be inconsistent with its original
classification.
On
September 30, 2009, we transferred certain of our private-label
mortgage-backed securities (PLMBS) with an amortized cost of $1.2 billion and a
fair value of $664.7 million from our HTM portfolio to AFS portfolio (see
Notes 2 and 3). Upon transfer, the carrying value of these securities was
increased by $108.2 million (and recorded in other comprehensive income) to
reflect the securities at fair value. These transferred
PLMBS had other-than-temporary impairment (OTTI) losses recognized
during the quarter ended September 30, 2009, which we
believe evidences a significant decline in the issuers’ creditworthiness.
We transferred the securities to the AFS portfolio to increase our
financial flexibility with respect to these securities.
For a description
of the Seattle Bank's other significant accounting policies, see Note 1 in our
2008 Audited Financials included in our 2008 annual report on Form
10-K.
Recently
Issued or Adopted Accounting Standards
In
June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards
CodificationTM
(Codification or FASB ASC) as the sole source of authoritative, nongovernmental
GAAP, except for rules and interpretive releases of the Securities and Exchange
Commission (SEC), which remain authoritative for SEC registrants. The FASB will
no longer issue new standards in the form of Statements, FASB Staff Positions,
or Emerging Issues
Task Force Abstracts. Instead it will issue Accounting Standards Updates (ASUs).
An ASU will not be considered authoritative in its own right, but will serve to
update the Codification, provide background information about the guidance, and
provide the basis for conclusion on the change(s) in the Codification. As the
Codification is not intended to change or alter existing GAAP, our adoption of
the Codification effective September 30, 2009 had no impact on our financial
condition, results of operations, or cash flows. Technical references to GAAP in
these condensed notes to the financial statements are provided using the new
FASB ASC numbering system.
In
August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures (ASU 2009-05). ASU 2009-05 amends FASB ASC 820, Fair Value Measurements and
Disclosures, to reduce ambiguity in financial reporting when measuring
the fair value of liabilities. The guidance in the update is effective for the
Seattle Bank for the fourth quarter of 2009. We do not expect ASU
2009-05 to have a significant effect on our financial condition, results of
operations, or cash flows.
We
adopted guidance issued by the FASB in May 2009 and subsequently codified in
FASB ASC 855, Subsequent
Events. FASB ASC 855 establishes general standards of accounting and
disclosure for events that occur after the statement of condition date but
before financial statements are issued or available to be issued. FASB ASC 855
sets forth the period after the date of the statement of condition date during
which management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements and also
addresses the circumstances under which an entity should recognize events or
transactions occurring after the statement of condition date and the disclosures
that an entity should make. Our adoption of this guidance effective June 30,
2009 had no effect on our financial condition, results of operations, or cash
flows.
In
June 2009, the FASB issued guidance relating to the accounting for transfers of
financial assets, which eliminates the concept of a qualifying special-purpose
entity, changes the requirements for derecognizing financial assets, and
requires additional disclosures to provide greater transparency about transfers
of financial assets, including securitization transactions, and an entity’s
continuing involvement in and exposure to the risks related to transferred
financial assets. This guidance is effective in the first quarter of 2010 for
the Seattle Bank. We are currently evaluating this guidance to determine its
impact on our financial condition, results of operations, and cash
flows.
In
June 2009, the FASB issued guidance relating to the consolidation of variable
interest entities (VIEs). This guidance replaces the quantitative-based risks
and rewards calculation for determining which enterprise has a controlling
financial interest in a VIE using an approach that focuses on identifying which
enterprise has the power to direct the activities of a VIE and the obligation to
absorb losses of the entity or the right to receive benefits from the entity.
Additionally, the guidance provides more timely and useful information about an
enterprise’s involvement with a VIE. This guidance is effective for the Seattle
Bank in the first quarter of 2010. We are currently evaluating this guidance to
determine its impact on our financial condition, results of operations, and cash
flows.
In
February 2008, the FASB issued guidance which delayed the effective date of FASB
ASC 820 by one year for non-financial assets and liabilities, except for items
that are recognized or disclosed in the financial statements on a recurring
basis. Application of FASB ASC 820 as of January 1, 2009 to our non-financial
assets and liabilities, which consisted primarily of real estate owned, did not
have a significant effect on our financial condition, results of operations, and
cash flows.
We
also adopted new guidance which clarifies the application of FASB ASC 820 when
there is no active market or where the price inputs being used represent
distressed sales and provides additional direction for estimating fair value
when the volume and level of activity for the asset or liability have
significantly decreased and for identifying transactions that are not orderly.
Our adoption of this guidance for the quarter ended March 31, 2009, had no
material impact on our financial condition, results of operations, or cash
flows.
We
adopted new guidance affecting FASB ASC 825, Financial Instruments, which
requires disclosures about the fair value of financial instruments, including
disclosure of the method(s) and significant assumptions used to estimate fair
value, in interim as well as annual financial statements. We adopted this
guidance for the quarter ended March 31, 2009, with no effect on our financial
condition, results of operations, cash flows, or existing interim
disclosures.
In
April 2009, the FASB issued guidance affecting FASB ASC 320, Investments – Debt and Equity
Securities, which amends GAAP for debt securities regarding OTTI. The
guidance clarifies the interaction of the factors to be considered when
determining whether a debt security is other-than-temporarily impaired and
changes the presentation and calculation of the OTTI on debt securities in the
financial statements. In addition, the guidance expands and increases the
frequency of existing disclosures about OTTI and requires new disclosures
concerning the significant inputs used in determining a credit loss, as well as
a rollforward of credit losses each period. If the fair value
of a debt security is less than its amortized cost basis, an entity must assess
whether (a) it has the intent to sell the debt security or (b) it is more likely
than not that it will be required to sell the debt security before its
anticipated recovery. If either of these conditions is met, an OTTI on the
security must be recognized in the statement of income for the difference
between the fair value of the debt security and its amortized cost
basis.
In
instances in which a determination is made that a credit loss (defined in FASB
ASC 320 as the difference between the present value of the cash flows expected
to be collected and the amortized cost basis) exists but the entity does not
intend to sell the debt security and it is not more likely than not that the
entity will be required to sell the debt security before the anticipated
recovery of its amortized cost basis (i.e., the previous amortized cost basis
less any current-period credit loss), the guidance changes the presentation and
amount of the OTTI recognized in the statement of income. In these instances,
the impairment is separated into (a) the amount related to the credit loss and
(b) the amount related to all other factors. The amount of the total OTTI
related to the credit loss is recognized in earnings. The amount of the total
OTTI related to all other factors (i.e., the “non-credit” component) is
recognized in other comprehensive income and is amortized over the remaining
life of the debt security as an increase in the carrying value of the security
(with no effect on earnings unless the security is subsequently sold or there
are additional decreases in cash flows expected to be collected). Previously, in
all cases, if an impairment was determined to be other than temporary, an
impairment loss was recognized in earnings in an amount equal to the entire
difference between the security’s amortized cost basis and its fair
value.
We
early adopted this guidance as of January 1, 2009, and recognized the effects of
application as a change in accounting principle. To reclassify the non-credit
component of OTTI recognized in prior periods, we recorded a $293.4 million
cumulative effect adjustment, as an increase to our retained earnings at January
1, 2009, with a corresponding adjustment to accumulated other comprehensive
loss. Application of the new guidance increased our net loss by $45.1 million
and decreased our net loss by $976.7 million for the three and nine months ended
September 30, 2009; these amounts represent the non-credit portion of our total
OTTI losses for these periods. The guidance also increased financial statement
disclosures (see Note 4).
We
adopted new guidance affecting FASB ASC 815, Derivatives and Hedging,
which requires enhanced disclosures on the effects of derivative instruments and
hedging activities on an entity’s financial position, financial performance, and
cash flows. Our adoption of this guidance as of January 1, 2009 resulted in
additional financial statement disclosures (see Note 9), but did not impact our
financial condition, results of operations, or cash flows.
NOTE
2. AVAILABLE-FOR-SALE SECURITIES
On
September 30, 2009, we transferred certain of our PLMBS with an amortized
cost of $1.2 billion and a fair value of $664.7 million from our HTM
portfolio to AFS. Upon transfer, the carrying value of these securities was
increased by $108.2 million (and recorded in other comprehensive loss) to
reflect the securities at fair value. The transferred PLMBS had OTTI
losses recognized during the three months ended September 30, 2009, which
the Seattle Bank considers to be evidence of a significant deterioration in
the issuers' creditworthiness. The Seattle Bank transferred the securities
to the AFS portfolio to increase its financial flexibility with
respect to these securities.
Major
Security Types
The following table
summarizes our AFS securities as of September 30, 2009.
As
of September 30, 2009
|
||||||||||||||||
AFS
Securities
|
Amortized Cost
Basis (1)
|
OTTI
Recognized in Other Comprehensive Loss
|
Gross
Unrealized Gains
|
Estimated
Fair Value
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Residential
Mortgage-Backed Securities
|
||||||||||||||||
Private-label
|
$ | 1,248,485 | $ | 692,000 | $ | 108,243 | $ | 664,728 | ||||||||
Total
|
$ | 1,248,485 | $ | 692,000 | $ | 108,243 | $ | 664,728 |
(1)
|
In accordance
with the FASB’s new accounting guidance for OTTI, the amortized cost basis
includes unpaid principal balance, unamortized purchase premiums and
discounts, and previous other-than-temporary impairments recognized in
earnings.
|
The amortized cost
of our PLMBS classified as AFS includes net purchase discounts of $18,000,
credit losses of $198.4 million and OTTI related accretion adjustments of
$381,000 as of September 30, 2009.
As
of September 30, 2009, we held $412.0 million of AFS securities originally
purchased from members or affiliates of members who own more than 10% of our
total outstanding capital stock and outstanding mandatorily redeemable capital
stock or members with representatives serving on our Board of Directors (Board).
These securities were transferred from our HTM portfolio on September 30, 2009.
See Note 12 for additional information concerning these related
parties.
The following table
presents a reconciliation of the accumulated other comprehensive loss related to
AFS securities as of September 30, 2009.
As
of
|
||||
Accumulated
Other Comprehensive Loss Related to AFS Securities
|
September
30, 2009
|
|||
(in
thousands)
|
||||
OTTI loss
recognized in accumulated other comprehensive loss
|
$ | 692,000 | ||
Subsequent
unrealized changes in fair value
|
(108,243 | ) | ||
Accumulated
other comprehensive loss related to AFS securities
|
$ | 583,757 |
Unrealized
Losses on Available-for-Sale Securities
The following table
summarizes our AFS securities with gross unrealized losses, aggregated by major
security type and length of time that individual securities have been in a
continuous unrealized loss position as of September 30, 2009. The unrealized
losses include other-than-temporary impairments recognized in other
comprehensive loss and gross unrecognized holding gains and losses, as
applicable.
As
of September 30, 2009
|
||||||||||||||||
12
months or more
|
Total
|
|||||||||||||||
AFS
Securities in Unrealized Loss Positions
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
||||||||||||
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Residential
Mortgage-Backed Securities
|
||||||||||||||||
Other-than-temporarily
impaired private-label
|
$ | 664,728 | $ | 583,757 | $ | 664,728 | $ | 583,757 | ||||||||
Total
|
$ | 664,728 | $ | 583,757 | $ | 664,728 | $ | 583,757 |
Redemption
Terms
The amortized cost
and estimated fair value of AFS securities by contractual maturity as of
September 30, 2009 are shown below. Expected maturities of some securities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment fees.
As
of September 30, 2009
|
||||||||
Amortized
|
Estimated
|
|||||||
Year
of Maturity
|
Cost
Basis
|
Fair
Value
|
||||||
(in
thousands)
|
||||||||
Residential
Mortgage-Backed Securities
|
||||||||
Due after 10
years
|
$ | 1,248,485 | $ | 664,728 | ||||
Total
|
$ | 1,248,485 | $ | 664,728 |
Credit
Risk
A
detailed discussion of credit risk on our PLMBS, including those classified as
AFS, and our assessment of OTTI of such securities is included in Note
4.
NOTE
3. HELD-TO-MATURITY SECURITIES
For accounting
policies and additional information concerning HTM securities, see Notes 1
and 5 in our 2008 Audited Financials included in our 2008 annual report on Form
10-K.
On
September 30, 2009, the Seattle Bank transferred certain PLMBS
from its HTM portfolio to its AFS portfolio (see Note 2).
Major
Security Types
The following
tables summarize our HTM securities as of September 30, 2009 and
December 31, 2008.
As
of September 30, 2009
|
|||||||||||||||||||||
OTTI
|
|||||||||||||||||||||
Recognized
in
|
Gross
|
Gross
|
|||||||||||||||||||
Held-to-Maturity
Securities
|
Amortized
Cost Basis
(1)
|
Other
Comprehensive Loss
|
Carrying
Value (2)
|
Unrecognized
Holding
Gains
(3)
|
Unrecognized Holding
Losses (3)
|
Estimated
Fair Value
|
|||||||||||||||
(in
thousands)
|
|||||||||||||||||||||
Certificates
of deposit (4)
|
$ | 6,603,000 | $ | $ | 6,603,000 | $ | 409 | $ | (48 | ) | $ | 6,603,361 | |||||||||
Other U.S.
agency obligations (5)
|
53,010 | 53,010 | 783 | (85 | ) | 53,708 | |||||||||||||||
Government-sponsored
enterprises (6)
|
595,233 | 595,233 | 54,937 | 650,170 | |||||||||||||||||
State or local
housing agency obligations
|
4,460 | 4,460 | 4,460 | ||||||||||||||||||
Subtotal
|
7,255,703 | 7,255,703 | 56,129 | (133 | ) | 7,311,699 | |||||||||||||||
Residential
Mortgage-Backed Securities
|
|||||||||||||||||||||
Government-sponsored
enterprises (6)
|
3,134,024 | 3,134,024 | 35,902 | (12,450 | ) | 3,157,476 | |||||||||||||||
Other U.S.
agency obligations(5)
|
4,386 | 4,386 | 85 | 4,471 | |||||||||||||||||
Private-label
|
3,445,419 |
(408,185)
|
3,037,234 | 56,854 | (681,914 | ) | 2,412,174 | ||||||||||||||
Subtotal
|
6,583,829 |
(408,185)
|
6,175,644 | 92,841 | (694,364 | ) | 5,574,121 | ||||||||||||||
Total
|
$ | 13,839,532 | $ |
(408,185)
|
$ | 13,431,347 | $ | 148,970 | $ | (694,497 | ) | $ | 12,885,820 |
As
of December 31, 2008
|
|||||||||||||||
Gross
|
Gross
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
||||||||||||
Held-to-Maturity
Securities
|
Cost
Basis
(2)
|
Gains
(3)
|
Losses
(3)
|
Fair
Value
|
|||||||||||
(in
thousands)
|
|||||||||||||||
Other U.S.
agency obligations (5)
|
$ | 64,164 | $ | 876 | $ | (68 | ) | $ | 64,972 | ||||||
Government-sponsored
enterprises (6)
|
875,604 | 62,480 | 938,084 | ||||||||||||
State or local
housing agency obligations
|
5,700 | 1 | 5,701 | ||||||||||||
Other (7)
|
1,250,000 | 1,118 | 1,251,118 | ||||||||||||
Subtotal
|
2,195,468 | 64,475 | (68 | ) | 2,259,875 | ||||||||||
Residential
Mortgage-Backed Securities
|
|||||||||||||||
Government-sponsored
enterprises (6)
|
1,997,942 | 12,855 | (24,074 | ) | 1,986,723 | ||||||||||
Other U.S.
agency obligations (5)
|
4,759 | 10 | (19 | ) | 4,750 | ||||||||||
Private-label
|
5,586,722 | (1,980,873 | ) | 3,605,849 | |||||||||||
Subtotal
|
7,589,423 | 12,865 | (2,004,966 | ) | 5,597,322 | ||||||||||
Total
|
$ | 9,784,891 | $ | 77,340 | $ | (2,005,034 | ) | $ | 7,857,197 |
(1)
|
In accordance
with the FASB’s new accounting guidance for OTTI, effective January 1,
2009, the amortized cost basis includes unpaid principal balance,
unamortized purchase premiums and discounts, and previous
other-than-temporary impairments recognized in
earnings.
|
(2)
|
In accordance
with the FASB’s new accounting guidance for OTTI, effective January 1,
2009, the carrying value of HTM securities represents amortized cost after
adjustment for any non-credit related impairment (including subsequent
accretion) recognized in other comprehensive loss. As of December 31,
2008, carrying value equaled amortized cost.
|
(3)
|
Gross
unrecognized holding gains/(losses) represent the difference between fair
value and carrying value, while gross unrealized gains (losses) represent
the difference between fair value and amortized cost.
|
(4)
|
Consists of
certificates of deposit that meet the definition of a debt
security.
|
(5)
|
Primarily
consists of Government National Mortgage Association (Ginnie Mae) or Small
Business Association (SBA) investment pools.
|
(6)
|
Primarily
consists of debt securities issued by Federal Home Loan Mortgage
Corporation (Freddie Mac), Federal National Mortgage Association (Fannie
Mae), or Tennessee Valley Authority (TVA).
|
(7)
|
Consists of
promissory notes guaranteed by the Federal Deposit Insurance Corporation
(FDIC) under the Temporary Liquidity Guarantee Program
(TLGP).
|
The amortized cost
of our MBS investments classified as HTM included net purchase discounts of
$33.8 million, credit losses of $73.8 million and OTTI related accretion
adjustments of $257,000 as of September 30, 2009. As of December 31,
2008, the amortized cost of our MBS investments classified as HTM included net
purchase discounts of $23.0 million.
As
of September 30, 2009, we had $7.0 million par value in securities pledged as
collateral to banks and major broker-dealers under bilateral collateral
agreements that cannot be sold or repledged.
As
of September 30, 2009 and December 31, 2008, we held $948.1 million and
$938.8 million of HTM securities purchased from members or affiliates of members
who own more than 10% of our total outstanding capital stock and outstanding
mandatorily redeemable capital stock or members with representatives serving on
our Board. See Note 12 for additional information concerning these related
parties.
Unrealized
Losses on Held-to-Maturity Securities
The following tables summarize our HTM
securities with gross unrealized losses, aggregated by major security type and
length of time that individual securities have been in a continuous unrealized
loss position as of September 30, 2009 and December 31, 2008. The
unrealized losses include other-than-temporary impairments recognized in other
comprehensive loss and gross unrecognized holding losses.
As
of September 30, 2009
|
||||||||||||||||||||||||
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Held-to-Maturity
Securities in Unrealized Loss Positions
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
||||||||||||||||||
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Certificates
of deposit
|
$ | 1,751,952 | $ | (48 | ) | $ | $ | $ | 1,751,952 | $ | (48 | ) | ||||||||||||
Other U.S.
agency obligations (1)
|
6,564 | (23 | ) | 6,874 | (62 | ) | 13,438 | (85 | ) | |||||||||||||||
Subtotal
|
1,758,516 | (71 | ) | 6,874 | (62 | ) | 1,765,390 | (133 | ) | |||||||||||||||
Residential
Mortgage-Backed Securities
|
||||||||||||||||||||||||
Government-sponsored
enterprises (2)
|
1,317,307 | (8,124 | ) | 183,924 | (4,326 | ) | 1,501,231 | (12,450 | ) | |||||||||||||||
Temporarily
impaired private-label
|
10,544 | (23 | ) | 1,872,920 | (681,891 | ) | 1,883,464 | (681,914 | ) | |||||||||||||||
Other-than-temporarily
impaired private-label
|
400,724 | (408,185 | ) | 400,724 | (408,185 | ) | ||||||||||||||||||
Subtotal
|
1,327,851 | (8,147 | ) | 2,457,568 | (1,094,402 | ) | 3,785,419 | (1,102,549 | ) | |||||||||||||||
Total
|
$ | 3,086,367 | $ | (8,218 | ) | $ | 2,464,442 | $ | (1,094,464 | ) | $ | 5,550,809 | $ | (1,102,682 | ) | |||||||||
As
of December 31, 2008
|
||||||||||||||||||||||||
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Held-to-Maturity
Securities in Unrealized Loss Positions
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
Estimated
|
Unrealized
|
||||||||||||||||||
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Other U.S.
agency obligations (1)
|
$ | 8,107 | $ | (68 | ) | $ | $ | $ | 8,107 | $ | (68 | ) | ||||||||||||
Subtotal
|
8,107 | (68 | ) | 8,107 | (68 | ) | ||||||||||||||||||
Residential
Mortgage-Backed Securities
|
||||||||||||||||||||||||
Other U.S.
agency obligations (1)
|
4,118 | (19 | ) | 4,118 | (19 | ) | ||||||||||||||||||
Government-sponsored
enterprises (2)
|
536,268 | (15,380 | ) | 429,243 | (8,694 | ) | 965,511 | (24,074 | ) | |||||||||||||||
Private-label
|
1,045,671 | (219,697 | ) | 2,401,023 | (1,761,176 | ) | 3,446,694 | (1,980,873 | ) | |||||||||||||||
Subtotal
|
1,586,057 | (235,096 | ) | 2,830,266 | (1,769,870 | ) | 4,416,323 | (2,004,966 | ) | |||||||||||||||
Total
|
$ | 1,594,164 | $ | (235,164 | ) | $ | 2,830,266 | $ | (1,769,870 | ) | $ | 4,424,430 | $ | (2,005,034 | ) | |||||||||
(1)
|
Primarily
consists of Ginnie Mae or SBA investment pools.
|
(2)
|
Primarily
consists of securities issued by Freddie Mac, Fannie Mae, or
TVA.
|
As
of September 30, 2009, 170 of our HTM investments had gross unrealized losses
totaling $1.1 billion, with the total estimated fair value of these positions
approximating 89.7% of their carrying value. Of these 170 positions, 139 had
gross unrealized losses for at least 12 months. As of December 31, 2008, 186 of
our HTM investments had gross unrealized losses totaling $2.0 billion, with the
total estimated fair value of these positions approximating 68.8% of their
carrying value. Of these 186 positions, 127 had gross unrealized losses for at
least 12 months.
Redemption
Terms
The amortized cost,
carrying value, and estimated fair value, as applicable, of HTM securities by
contractual maturity as of September 30, 2009 and December 31, 2008 are
shown below. Expected maturities of some securities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment fees.
As of September 30, 2009 |
As
of December 31, 2008
|
|||||||||||||||||||
Amortized
|
Carrying
|
Estimated
|
Amortized
|
Estimated
|
||||||||||||||||
Year
of Maturity
|
Cost
Basis
|
Value
|
Fair
Value
|
Cost
Basis
(1)
|
Fair
Value
|
|||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Non-Mortgage-Backed
Securities
|
||||||||||||||||||||
Due in one
year or less
|
$ | 6,812,267 | $ | 6,812,267 | $ | 6,817,041 | $ | 1,524,889 | $ | 1,527,528 | ||||||||||
Due after one
year through five years
|
405,024 | 405,024 | 456,074 | 628,059 | 689,602 | |||||||||||||||
Due after five
years through 10 years
|
7,629 | 7,629 | 7,623 | 4,622 | 4,636 | |||||||||||||||
Due after 10
years
|
30,783 | 30,783 | 30,961 | 37,898 | 38,109 | |||||||||||||||
Subtotal
|
7,255,703 | 7,255,703 | 7,311,699 | 2,195,468 | 2,259,875 | |||||||||||||||
Mortgage-Backed
Securities
|
6,583,829 | 6,175,644 | 5,574,121 | 7,589,423 | 5,597,322 | |||||||||||||||
Total
|
$ | 13,839,532 | $ | 13,431,347 | $ | 12,885,820 | $ | 9,784,891 | $ | 7,857,197 |
(1)
|
As of December
31, 2008, the amortized cost basis of HTM securities equaled their
carrying value.
|
12
Credit
Risk
A
detailed discussion of credit risk on our investments, including those
classified as HTM, and our assessment of OTTI of such securities is included in
Note 4.
NOTE
4. INVESTMENT CREDIT RISK AND ASSESSMENT FOR OTHER-THAN-TEMPORARY
IMPAIRMENT
Credit
Risk
Our MBS investments
consist of agency-guaranteed securities and senior tranches of privately issued
prime, Alt-A, and subprime MBS, collateralized by residential mortgage loans,
including hybrid adjustable-rate mortgages (ARMs), and option ARMs. Our exposure
to the risk of loss on our investments in MBS increases when the loans
underlying the MBS exhibit high rates of delinquency and foreclosure, as well as
losses on the sale of foreclosed properties. In order to reduce our risk of loss
on these investments, all of the MBS owned by the Seattle Bank contain one or
more of the following forms of credit protection:
•
|
Subordination
– where the MBS is structured such that payments to junior classes are
subordinated to senior classes to ensure cash flows to the senior
classes.
|
|
•
|
Excess spread
– where the weighted-average coupon rate of the underlying mortgage loans
in the pool is higher than the weighted-average coupon rate on the MBS.
The spread differential may be used to cover any losses that may
occur.
|
|
•
|
Over-collateralization
– where the total outstanding balance on the underlying mortgage loans in
the pool is greater than the outstanding MBS balance. The excess
collateral is available to cover any losses that may
occur.
|
|
•
|
Insurance
wrap – where a third-party bond insurance company (e.g., a monoline
insurer) guarantees timely payment of principal and interest on the MBS.
The bond insurance company is obligated to cover any losses that occur. As
of September 30, 2009, the Seattle Bank held $3.4 million in investments
with unrealized losses of $1.5 million that had been credit-enhanced by a
monoline insurer, MBIA. We also have additional credit enhancements on
these securities such that we expect to collect all amounts due according
to their contractual terms.
|
Our investments in
PLMBS were rated “AAA” (or its equivalent) by a nationally recognized
statistical rating organization (NRSRO), such as Moody’s Investor Service
(Moody’s) or Standard & Poor’s (S&P), at their respective purchase
dates. The AAA-rated securities achieved their ratings through credit
enhancement, primarily subordination and over-collateralization.
The following table
summarizes the unpaid principal balance, amortized cost, carrying value, and
gross unrealized loss of our PLMBS by credit rating and year of issuance, as
well as the weighted-average credit enhancement on the applicable securities as
of September 30, 2009.
As
of September 30, 2009
|
||||||||||||||||||||||
Private-Label
Mortgage-Backed Securities Ratings
|
Unpaid
|
Amortized Cost |
Carrying
Value
|
Gross Unrealized Loss |
Current Weighted-Average |
|||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||
Prime
|
||||||||||||||||||||||
AAA
|
||||||||||||||||||||||
2004 and
earlier
|
$ | 796,494 | $ | 790,913 | $ | 790,913 | $ | (26,084 | ) | 7.33 | ||||||||||||
A | ||||||||||||||||||||||
2004 and
earlier
|
30,155 | 30,254 | 30,254 | (907 | ) | 5.68 | ||||||||||||||||
Total
prime
|
826,649 | 821,167 | 821,167 | (26,991 | ) | 7.27 | ||||||||||||||||
Alt-A
|
||||||||||||||||||||||
AAA
|
||||||||||||||||||||||
2004 and
earlier
|
448,217 | 446,814 | 446,814 | (30,977 | ) | 6.17 | ||||||||||||||||
2005 | 4,426 | 4,435 | 4,435 | (1,817 | ) | 46.63 | ||||||||||||||||
2008 | 328,115 | 327,739 | 327,739 | (115,448 | ) | 33.16 | ||||||||||||||||
AA
|
||||||||||||||||||||||
2004 and
earlier
|
43,579 | 43,665 | 43,665 | (11,632 | ) | 13.70 | ||||||||||||||||
2005 | 42,025 | 42,041 | 42,041 | (24,555 | ) | 29.85 | ||||||||||||||||
A | ||||||||||||||||||||||
2004
and earlier
|
15,283 | 15,205 | 15,205 | (2,262 | ) | 11.30 | ||||||||||||||||
2005 | 7,220 | 7,012 | 3,406 | (3,606 | ) | 31.40 | ||||||||||||||||
2007 | 77,621 | 77,621 | 77,621 | (40,989 | ) | 44.06 | ||||||||||||||||
BBB
|
||||||||||||||||||||||
2005 | 21,807 | 21,771 | 16,345 | (10,841 | ) | 42.34 | ||||||||||||||||
2006 | 49,168 | 49,168 | 49,168 | (14,812 | ) | 54.03 | ||||||||||||||||
2007 | 67,909 | 67,854 | 67,854 | (33,088 | ) | 44.68 | ||||||||||||||||
2008 | 77,412 | 76,271 | 47,866 | (28,405 | ) | 40.87 | ||||||||||||||||
BB
|
||||||||||||||||||||||
2004 and
earlier
|
3,604 | 3,608 | 3,608 | (985 | ) | 21.03 | ||||||||||||||||
2005 | 49,074 | 48,933 | 41,144 | (19,315 | ) | 22.95 | ||||||||||||||||
2006 | 111,933 | 105,246 | 48,520 | (56,726 | ) | 44.35 | ||||||||||||||||
2007 | 397,151 | 376,293 | 227,558 | (212,913 | ) | 42.04 | ||||||||||||||||
2008 | 127,688 | 127,688 | 127,688 | (42,460 | ) | 20.97 | ||||||||||||||||
B | ||||||||||||||||||||||
2005 | 31,982 | 32,009 | 32,009 | (15,525 | ) | 46.30 | ||||||||||||||||
2006 | 346,473 | 297,874 | 163,306 | (134,567 | ) | 44.46 | ||||||||||||||||
2007 | 118,726 | 101,898 | 46,984 | (54,913 | ) | 40.87 | ||||||||||||||||
2008 | 160,449 | 160,449 | 160,449 | (79,132 | ) | 48.31 | ||||||||||||||||
CCC
|
||||||||||||||||||||||
2005 | 104,703 | 95,613 | 55,185 | (49,602 | ) | 38.24 | ||||||||||||||||
2006 | 453,070 | 394,427 | 249,529 | (174,142 | ) | 44.68 | ||||||||||||||||
2007 | 821,646 | 736,595 | 473,299 | (383,458 | ) | 31.52 | ||||||||||||||||
CC
|
||||||||||||||||||||||
2007 | 227,201 | 203,469 | 103,331 | (100,139 | ) | 45.27 | ||||||||||||||||
C | ||||||||||||||||||||||
2005 | 7,554 | 5,666 | 2,653 | (3,014 | ) | 9.16 | ||||||||||||||||
Total
Alt-A
|
4,144,036 | 3,869,364 | 2,877,422 | (1,645,323 | ) | 34.95 | ||||||||||||||||
Subprime
(2)
|
||||||||||||||||||||||
A | ||||||||||||||||||||||
2004 and
earlier
|
2,353 | 2,341 | 2,341 | (1,250 | ) | 100.00 | ||||||||||||||||
B | ||||||||||||||||||||||
2004 and
earlier
|
1,031 | 1,032 | 1,032 | (292 | ) | 100.00 | ||||||||||||||||
Total
Subprime
|
3,384 | 3,373 | 3,373 | (1,542 | ) | 100.00 | ||||||||||||||||
Total
|
$ | 4,974,069 | $ | 4,693,904 | $ | 3,701,962 | $ | (1,673,856 | ) | 30.39 |
(1)
|
The current
weighted-average credit enhancement is the weighted average percent of par
value of subordinated tranches and over-collateralization currently in
place that will absorb losses before our investments incur a
loss.
|
(2)
|
In the second
quarter of 2009, the Seattle Bank revised the classification at
origination of two securities with a total unpaid principal balance of
$3.4 million from Alt-A to
subprime.
|
Assessment
for Other-than-Temporary Impairment
We
evaluate each of our investments in an unrealized loss position for OTTI on at
least a quarterly basis. As part of this process, we consider our intent to sell
each debt security and whether it is more likely than not that we would be
required to sell such security before its anticipated recovery. If either of
these conditions is met, we recognize an OTTI loss in earnings equal to the
entire difference between the security’s amortized cost basis and its fair value
as of the statement of condition date. If neither condition is met, we perform
analyses to determine if any of these securities are other-than-temporarily
impaired.
Based on current
information, we determined that for GSE residential MBS, the strength of the
issuers’ guarantees through direct obligations or U.S. government support is
currently sufficient to protect us from losses. Further, we determined that it
is not more likely than not that the Seattle Bank will be required to sell
impaired securities prior to their anticipated recovery. We expect to recover
the entire cost basis of these securities and have thus concluded that our gross
unrealized losses on GSE residential MBS are temporary as of September 30,
2009.
Beginning with the
second quarter of 2009, the FHLBanks formed an OTTI Governance Committee (of
which the Seattle Bank is a member) with the responsibility for reviewing and
approving the key modeling assumptions, inputs, and methodologies to be used by
the FHLBanks to generate cash flow projections used in analyzing credit losses
and determining OTTI for PLMBS. Beginning with the second quarter of
2009 and continuing in the third quarter of 2009, to support consistency among
the FHLBanks, we performed our OTTI analysis primarily using the key modeling
assumptions provided by the FHLBanks OTTI Governance Committee for the majority
of our PLMBS. Further, prior to the third quarter of 2009, the FHLBanks had used
indicators, or screens, to determine which individual securities required
additional quantitative evaluation using detailed cash flow analysis. Beginning
with the third quarter of 2009, the process was changed to select 100% of PLMBS
investments in unrealized loss positions, for purposes of OTTI cash flow
analysis to be run using the FHLBanks’ common platform (as discussed further
below) and approved key assumptions. Seven of our PLMBS investments (with a
total unpaid principal balance of $54.9 million) did not have underlying
collateral data available for cash flow testing and were thus outside the scope
of the OTTI Governance Committee’s key modeling assumptions. The Seattle Bank
used alternative procedures to assess these securities for OTTI.
To
assess whether the entire amortized cost basis of our PLMBS will be recovered,
cash flow analyses are performed using two third-party models. The first model
considers borrower characteristics and the particular attributes of the loans
underlying the PLMBS, in conjunction with assumptions about future changes in
home prices and interest rates, to project prepayments, defaults, and loss
severities. A significant input into the first model is the forecast of future
housing price changes for the relevant states and core-based statistical areas
(CBSAs), which are based upon an assessment of the individual housing markets.
CBSA refers collectively to metropolitan and micropolitan statistical areas as
defined by the United States Office of Management and Budget. As currently
defined, a CBSA must contain at least one urban area with a population of 10,000
or more. The housing price forecast assumes current-to-trough home price
declines ranging from 0% to 20% over the next nine-to-15
months Thereafter, home prices are projected to increase 0% in the
first six months, 0.5% in the next six months, 3% in the second year, and 4% in
each subsequent year.
The month-by-month
projections of future loan performance derived from the first model, which
reflect projected prepayments, defaults, and loss severities, are then input
into a second model that allocates the projected loan level cash flows to the
various security classes in the securitization structure in accordance with its
prescribed cash flow and loss allocation rules. In a securitization in which the
credit enhancement for the senior securities is derived from the presence of
subordinate securities, losses are generally allocated first to the subordinate
securities until their principal balance is reduced to zero. The projected cash
flows are based on a number of assumptions and expectations, and the results of
these models can vary significantly with changes in assumptions and
expectations. The scenario of cash flows determined based on the model approach
described above reflects a best estimate scenario and includes a base-case
current-to-trough price forecast and a base-case housing price recovery path as
described in the previous paragraph.
In
accordance with Finance Agency guidance, we engaged the Federal Home Loan Bank
of Indianapolis (Indianapolis Bank) to perform the cash flow analyses for our
applicable PLMBS for the second and third quarters of 2009, utilizing the key
modeling assumptions approved by the OTTI Governance Committee. For the
three-month period ended September 30, 2009, we completed our OTTI evaluation
utilizing the key modeling assumptions approved by the OTTI Governance Committee
and the cash flow analyses provided by the Indianapolis Bank. In addition, we
verified the cash flow analyses as modeled by the Indianapolis Bank, employing
the specified risk modeling software, loan data source information, and key
modeling assumptions approved by the OTTI Governance Committee. As a result of
our OTTI evaluations as of September 30, 2009, we determined that the present
value of the cash flows expected to be collected was less than the amortized
cost basis of certain of our PLMBS, including 29 securities that had been
identified as other-than-temporarily impaired in previous periods and six
additional securities that were newly identified as other-than-temporarily
impaired as of September 30, 2009. We do not intend to sell these securities and
it is not more likely than not that we will be required to sell these securities
prior to their anticipated recovery.
For those
securities for which an OTTI was determined to have occurred during the third
quarter of 2009, the following table presents a summary of the significant
inputs used to measure the amount of the credit loss recognized in earnings for
the three months ended September 30, 2009.
For
the Three Months Ended September 30, 2009
|
||||||||||||||||
Significant
Inputs
|
||||||||||||||||
Cumulative
Voluntary
|
Current
|
|||||||||||||||
Prepayment
Rates
*
|
Cumulative
Default Rates *
|
Loss
Severities
|
Credit
Enhancement
|
|||||||||||||
Year
of Securitization
|
Weighted
Average %
|
Range
%
|
Weighted
Average %
|
Range
%
|
Weighted
Average %
|
Range
%
|
Weighted
Average %
|
Range
%
|
||||||||
Alt-A
|
||||||||||||||||
2008
|
10.1
|
10.1-10.1
|
50.3
|
50.3-50.3
|
43.2
|
43.2-43.2
|
40.9
|
40.9-40.9
|
||||||||
2007
|
7.8
|
5.1-13.8
|
76.0
|
32.0-86.7
|
50.2
|
43.1-55.0
|
34.8
|
11.7-45.4
|
||||||||
2006
|
5.1
|
2.9-6.8
|
86.8
|
77.7-92.3
|
51.1
|
43.2-58.7
|
44.3
|
40.5-48.4
|
||||||||
2005
|
7.5
|
5.0-11.8
|
72.7
|
40.0-81.6
|
48.3
|
32.8-52.5
|
34.1
|
9.2-51.2
|
||||||||
Total
|
6.9
|
2.9-13.8
|
78.9
|
32.0-92.3
|
50.2
|
32.8-58.7
|
38.4
|
9.2-51.2
|
*
|
The cumulative
voluntary prepayment rates and cumulative default rates are on unpaid
principal balances.
|
The following table
summarizes key information as of September 30, 2009 and 2008 for the PLMBS on
which we have recorded OTTI.
As
of September 30, 2009
|
|||||||||||||||||||||||||
Held-to-Maturity
Securities
|
Available-for
Sale Securities
|
||||||||||||||||||||||||
Unpaid
|
Gross
|
Unpaid
|
|||||||||||||||||||||||
Principal
|
Amortized
|
Carrying
|
Unrealized
|
Fair
|
Principal
|
Amortized
|
Fair
|
||||||||||||||||||
Other-than-Temporarily
Impaired Securities
|
Balance
|
Cost
|
Value (2)
|
Losses
|
Value
|
Balance
|
Cost
|
Value
|
|||||||||||||||||
(in
thousands)
|
|||||||||||||||||||||||||
Alt -A
private-label mortgage-backed securities (1)
|
$ | 827,074 | $ | 752,958 | $ | 344,773 | $ | 408,185 | $ | 400,724 | $ | 1,447,256 | $ | 1,248,485 | $ | 664,728 | |||||||||
Total OTTI
|
$ | 827,074 | $ | 752,958 | $ | 344,773 | $ | 408,185 | $ | 400,724 | $ | 1,447,256 | $ | 1,248,485 | $ | 664,728 |
As
of December 31, 2008
|
|||||||||||||||
Held-to-Maturity
Securities
|
|||||||||||||||
Unpaid
|
Gross
|
||||||||||||||
Principal
|
Amortized
|
Carrying
|
Unrealized
|
Fair
|
|||||||||||
Other-than-Temporarily
Impaired Securities
|
Balance
|
Cost
|
Value (2)
|
Losses
|
Value
|
||||||||||
(in
thousands)
|
|||||||||||||||
Alt -A
private-label mortgage-backed securities (1)
|
$ | 546,478 | $ | 546,442 | $ | 546,442 | $ | 304,243 | $ | 242,199 | |||||
Total OTTI
|
$ | 546,478 | $ | 546,442 | $ | 546,442 | $ | 304,243 | $ | 242,199 |
(1)
|
Classification
based on originator’s classification at the time of origination or based
on classification by an NRSRO upon issuance of the MBS.
|
(2)
|
This table
does not include gross unrealized gains; therefore, amortized cost net of
gross unrealized losses will not necessarily equal the fair
value.
|
The fair value of
the majority of our previously identified OTTI securities improved as of
September 30, 2009, compared to June 30, 2009, resulting in minimal additional
total OTTI losses, however; we identified six newly other-than-temporarily
impaired securities as of September 30, 2009. As a result, we recorded total
OTTI losses of $85.0 million and $1.2 billion for the three and nine months
ended September 30, 2009. In addition, because our OTTI analysis indicated
further deterioration in the cash flows expected to be collected on our
previously identified OTTI securities, we recorded additional credit losses into
earnings and reduced our OTTI recorded in other comprehensive income. For the
three and nine months ended September 30, 2009, we recorded OTTI credit losses
totaling $130.1 million and $263.5 million.
On
September 30, 2009, the Seattle Bank transferred certain PLMBS with an
unpaid principal balance of $1.4 billion and a fair value of $664.7 million
from its HTM portfolio to its AFS portfolio. The transferred
PLMBS had OTTI credit losses of $94.1 million and $193.7 million for the
three and nine months ended September 30, 2009, which the Seattle Bank
considers to be evidence of a significant deterioration in the issuers'
creditworthiness. The Seattle Bank transferred the securities to the AFS
portfolio to increase its financial flexibility with respect to these
securities, although management has no current plans to sell these or any other
other-than-temporarily impaired PLMBS. The total OTTI loss previously recognized
for the transferred securities was $782.5 million. Upon transfer, the carrying
value of these securities was increased by $108.2 million (and recorded in other
comprehensive loss) to reflect the securities at fair value.
Subsequent
increases and decreases (if not an additional OTTI) in the fair value of AFS
securities and transfers are included in accumulated other comprehensive income
(loss). The OTTI recognized in accumulated other comprehensive loss related to
HTM securities is accreted to the carrying value of each security on a
prospective basis, based on the amount and timing of future cash flows, over the
remaining life of each security. The accretion increases the carrying value of
each security and does not affect earnings unless the security is subsequently
sold or has an additional OTTI loss that is recognized in earnings. For the
three and nine months ended September 30, 2009, $89.2 million and $169.9 million
were accreted from accumulated other comprehensive loss to the carrying value of
the securities.
The following table
provides the credit and non-credit OTTI losses on our PLMBS securities for the
three and nine months ended September 30, 2009.
For
the Three Months Ended September 30, 2009
|
For
the Nine Months Ended September 30, 2009
|
|||||||||||||||||||||||
OTTI
|
OTTI
|
Total
|
OTTI
|
OTTI
|
Total
|
|||||||||||||||||||
Related
to
|
Related
to All
|
OTTI
|
Related
to
|
Related
to All
|
OTTI
|
|||||||||||||||||||
Other-than-Temporarily
Impaired Securities
|
Credit
Loss
|
Other
Factors
|
Loss
|
Credit
Loss
|
Other
Factors
|
Loss
|
||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Alt -A
private-label mortgage-backed securities
|
$ | 130,100 | $ | (45,121 | ) | $ | 84,979 | $ | 263,519 | $ | 976,654 | $ | 1,240,173 |
Under
the FASB guidance in effect prior to January 1, 2009, we recorded total
OTTI charges of $49.8 million in our Statement of Operations for the three
and nine months ended September 30, 2008, on certain PLMBS in our
held-to-maturity portfolio.
The following table
summarizes the credit loss components of our OTTI losses recognized in earnings
for the three and nine months ended September 30, 2009.
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||
Credit
Loss Component of OTTI
|
September
30, 2009
|
September
30, 2009
|
||||||
(in
thousands)
|
||||||||
Balance,
beginning of period (1)
|
$ | 142,112 | $ | 8,693 | ||||
Additions
|
||||||||
Credit losses
on securities for which OTTI was not previously recognized
|
2,511 | 171,561 | ||||||
Additional
OTTI credit losses on securities for which an OTTI loss
was
|
||||||||
previously
recognized (2)
|
127,589 | 91,958 | ||||||
Total
additions
|
130,100 | 263,519 | ||||||
Balance, end
of period
|
$ | 272,212 | $ | 272,212 |
(1)
|
We adopted new
OTTI guidance from the FASB, effective January 1, 2009, and recognized the
cumulative effect of initially applying this guidance, totaling $293.4
million, as an adjustment to our retained earnings as of January 1, 2009,
with a corresponding adjustment to other comprehensive loss. This amount
represents credit losses remaining in retained earnings related to the
adoption of this guidance.
|
(2)
|
For the three
months ended September 30, 2009, “Additional OTTI credit losses on
securities for which an OTTI loss was previously recognized” relates to
securities that were also previously determined to be OTTI prior to July
1, 2009. For the nine months ended September 30, 2009, “Additional OTTI
credit losses on securities for which an OTTI loss was previously
recognized” relates to securities that were also previously determined to
be OTTI prior to January 1, 2009.
|
The remaining
securities in our HTM and AFS portfolios have experienced unrealized losses and
decreases in fair value primarily due to illiquidity in the marketplace, credit
deterioration, and interest-rate volatility in the U.S. mortgage markets.
However, the declines are considered temporary as we expect to recover the
entire amortized cost basis of the remaining HTM securities in unrealized loss
positions and neither intend to sell these securities nor believe it is more
likely than not that we will be required to sell these securities prior to their
anticipated recovery.
NOTE
5. ADVANCES
For accounting
policies and additional information concerning advances, see Note 6 in our 2008
Audited Financials included in our 2008 annual report on Form 10-K as well as
Note 11 in this report.
Redemption
Terms
We
had advances outstanding at interest rates ranging from 0.20% to 8.62% as of
September 30, 2009 and from 0.13% to 8.62% as of December 31, 2008. The
interest rates on our AHP advances ranged from 2.80% to 5.99% as of September
30, 2009 and December 31, 2008.
The following table
summarizes the amount and weighted-average interest rate of our advances by
contractual maturity as of September 30, 2009 and December 31,
2008.
As
of September 30, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Weighted-
|
Weighted-
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Interest
|
Interest
|
|||||||||||||||
Terms-to-Maturity
and Weighted-Average Interest Rates
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||
(in
thousands, except interest rates)
|
||||||||||||||||
Due in one
year or less
|
$ | 13,365,769 | 1.88 | $ | 24,014,584 | 2.65 | ||||||||||
Due after one
year through two years
|
4,214,305 | 2.44 | 4,540,058 | 3.34 | ||||||||||||
Due after two
years through three years
|
1,788,547 | 2.97 | 1,679,058 | 3.83 | ||||||||||||
Due after
three years through four years
|
1,341,451 | 3.26 | 1,440,120 | 3.89 | ||||||||||||
Due after four
years through five years
|
523,367 | 3.16 | 1,353,482 | 3.32 | ||||||||||||
Thereafter
|
3,200,959 | 4.35 | 3,268,677 | 4.41 | ||||||||||||
Total
par value
|
24,434,398 | 2.48 | 36,295,979 | 3.02 | ||||||||||||
Commitment
fees
|
(677 | ) | (803 | ) | ||||||||||||
Discount on
AHP advances
|
(84 | ) | (126 | ) | ||||||||||||
Discount on
advances
|
(4,600 | ) | (5,030 | ) | ||||||||||||
Hedging
adjustments
|
479,319 | 653,831 | ||||||||||||||
Total
|
$ | 24,908,356 | $ | 36,943,851 |
Generally, advances
prepaid prior to maturity are subject to a prepayment fee. The prepayment fee is
required by regulation and is intended to make us financially indifferent to a
borrower’s decision to prepay an advance. Prepayment fees received in connection
with the restructure of an existing advance are included in “discount on
advances.”
We
offer putable advances, on which we have a right to terminate at par at our
discretion on specific dates, and callable advances, on which our borrower has
the right to terminate at par at its discretion on specific dates. We had
putable advances outstanding of $4.3 billion and $4.4 billion as of September
30, 2009 and December 31, 2008. We had no callable advances outstanding as
of either September 30, 2009 or December 31, 2008. We also offer convertible
advances, or advances that initially are variable interest-rate advances and
then, on a predetermined date, convert to fixed interest-rate advances. We have
the option on specified dates to cancel a convertible advance with the borrower.
We had convertible advances of $370.0 million outstanding as of September 30,
2009 and December 31, 2008.
Interest-Rate
Payment Terms
The following table
summarizes advances by interest-rate payment terms as of September 30, 2009 and
December 31, 2008.
As
of September 30, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Interest-Rate
Payment Terms
|
Amount
|
Percent
of Total Advances
|
Amount
|
Percent
of Total Advances
|
||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||
Fixed interest
rate
|
$ | 21,931,355 | 89.8 | $ | 24,844,273 | 68.5 | ||||||||||
Variable
interest rate
|
2,133,043 | 8.7 | 11,081,706 | 30.5 | ||||||||||||
Floating-to-fixed
convertible rate
|
370,000 | 1.5 | 370,000 | 1.0 | ||||||||||||
Total par
value
|
$ | 24,434,398 | 100.0 | $ | 36,295,979 | 100.0 |
Credit
Risk
We
have never experienced a credit loss on an advance. Given the current economic
environment, some of our members have experienced and we expect that more of our
member institutions will experience financial difficulties, including failure.
For example, by year-end 2008 and continuing through September 30, 2009, the
number of borrowers on our internal credit watch list increased to approximately
one-third of our membership, generally as a result of increases in
non-performing assets and the need for additional capital. Further, in the nine
months ended September 30, 2009, eight of our member institutions failed. All
outstanding advances to these members were collateralized and were prepaid by
the acquiring institution or the FDIC.
We
protect against credit risk on advances by requiring collateral on all advances
we fund and may also request additional or substitute collateral during the life
of an advance to protect our security interest. In addition, the Competitive
Equality Banking Act of 1987 affords priority to any security interest granted
to us by any of our member borrowers over the claims and rights of any party,
including any receiver, conservator, trustee, or similar party having rights as
a lien creditor. Two exceptions to this priority are claims and rights that
would be entitled to priority under otherwise applicable law or that are held by
actual bona fide purchasers for value or by parties that have actual perfected
security interests in the collateral. In addition, our claims are given certain
preferences pursuant to the receivership provisions in the Federal Deposit
Insurance Act. Most member borrowers grant us a blanket lien covering
substantially all of the member borrower’s assets and consent to our filing a
financing statement evidencing the blanket lien, which we do as a standard
practice.
Borrowing capacity
depends upon the type of collateral provided by a borrower, and is calculated as
a percentage of the collateral’s value. We periodically evaluate the percentage
of collateral value to take into account market conditions, etc. See “Part I.
Item 1. Our Business—Advances—Borrowing Capacity” in our 2008 annual report on
Form 10-K for additional information. As of September 30, 2009 and
December 31, 2008, we had rights to pledged collateral, either loans or
securities, on a borrower-by-borrower basis, with an estimated value in excess
of outstanding advances. For the purpose of estimating value, the unpaid balance
is used for loans and vendor pricing services are used for securities. As a
result, we do not currently expect to incur any credit losses on our
advances.
We
believe that we have policies and procedures in place to manage credit risk on
advances, including requirements for physical possession or control of pledged
collateral, restrictions on borrowing, review of each advance request,
verifications of collateral, and continuous monitoring of borrowings and the
member’s financial condition. Should the financial condition of a borrower
decline or become otherwise impaired, we may take possession of a borrower’s
collateral, or require that the borrower provide additional collateral to us. In
the first nine months of 2009 and during the second half of 2008, due to
deteriorating market conditions and pursuant to our advance agreements, we moved
a number of borrowers from blanket collateral arrangements to physical
possession. As of September 30, 2009, approximately 15.4% of our borrowers were
on a physical possession collateral arrangement. This arrangement generally
limits our credit risk and allows us to continue lending to borrowers whose
financial condition has weakened. We continue to monitor collateral and
creditworthiness of our members. Accordingly, we have not currently provided any
allowances for losses on advances.
Concentration
Risk
As
of September 30, 2009, five borrowers held 65.0% of the par value of our
outstanding advances, with two borrowers holding 46.2% (Bank of America Oregon,
N.A. with 33.2% and JPMorgan Chase Bank, N.A., formerly Washington Mutual Bank,
F.S.B., with 13.0%). As of December 31, 2008, five borrowers held 68.4% of the
par value of our outstanding advances, with three borrowers holding 56.7%
(JPMorgan Chase Bank, N.A. with 35.0%, Bank of America Oregon, N.A. with 11.4%,
and Merrill Lynch Bank USA with 10.3%). No other member institutions held
advances in excess of 10% of our total advances outstanding as of September 30,
2009 or December 31, 2008.
We
expect that advance volumes and associated advance interest income which began
to decline in the fourth quarter of 2008, will continue to be negatively
impacted as a result of the acquisition of our former largest member, Washington
Mutual Bank, F.S.B. by JPMorgan Chase Bank, N.A., a non-member institution, in
October 2008. As of September 30, 2009, approximately 75% of advances
outstanding to JPMorgan Chase Bank, N.A. as of December 31, 2008 had matured.
Because a large concentration of our advances is held by only a few members and
a non-member shareholder, changes in this group’s borrowing decisions can
significantly affect the amount of our advances outstanding. We expect that the
concentration of advances with our largest borrowers will remain significant for
the foreseeable future. In addition, the Federal Reserve’s extension to February
2010 of certain of its liquidity programs may also adversely impact demand for
our advances.
NOTE
6. MORTGAGE LOANS HELD FOR PORTFOLIO
For accounting
policies and additional information concerning mortgage loans held for
portfolio, see Note 7 in our 2008 Audited Financials included in our 2008 annual
report on Form 10-K.
As
of September 30, 2009 and December 31, 2008, 87.5% and 87.0% of our
outstanding mortgage loans held for portfolio had been purchased from JPMorgan
Chase Bank, N.A. (formerly Washington Mutual Bank, F.S.B.). This former member
owned more than 10% of our total outstanding capital stock and mandatorily
redeemable capital stock as of September 30, 2009 and December 31, 2008.
The acquisition of Washington Mutual Bank, F.S.B. by JPMorgan Chase has not
impacted and we do not expect such acquisition to impact the credit quality or
otherwise impact our outstanding mortgage loans.
The following table summarizes information on our mortgage loans held
for portfolio as of September 30, 2009 and December 31, 2008.
As
of
|
As
of
|
|||||||
Mortgage
Loans Held for Portfolio
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands)
|
||||||||
Real
Estate
|
||||||||
Fixed
interest-rate, medium-term*,
single-family mortgage loans
|
$ | 595,645 | $ | 732,644 | ||||
Fixed
interest-rate, long-term*,
single-family mortgage loans
|
3,689,961 | 4,345,197 | ||||||
Total loan
principal
|
4,285,606 | 5,077,841 | ||||||
Premiums
|
35,812 | 40,823 | ||||||
Discounts
|
(28,693 | ) | (31,341 | ) | ||||
4,292,725 | 5,087,323 | |||||||
Allowance for
credit losses
|
(271 | ) | ||||||
Total mortgage
loans held for portfolio, net of allowance
|
||||||||
for credit
losses
|
$ | 4,292,454 | $ | 5,087,323 |
*
|
Medium-term is
defined as a term of 15 years or less while long-term is defined as a term
greater than 15 years.
|
Credit
Risk
As
of September 30, 2009, we have never experienced a credit loss on our mortgage
loans held for portfolio and our former supplemental mortgage insurance provider
experienced only two loss claims on our mortgage loans (for which it was
reimbursed from the lender risk accounts) prior to the cancellation of our
supplemental mortgage insurance policies in April 2008.
We
conduct a loss reserve analysis for our mortgage loans held for portfolio on a
quarterly basis. Based on our analysis as of September 30, 2009, we determined
that the credit enhancement provided by our members in the form of the lender
risk account was not sufficient to absorb the expected credit losses inherent in
our mortgage loan portfolio as of September 30, 2009, and we increased our
allowance for credit losses by $14,000 from the $257,000 that had been
established as of June 30, 2009.
We
believe the combination of the lender risk account and our provision for loan
losses is sufficient to absorb expected credit losses inherent in our mortgage
loan portfolio as of September 30, 2009. We believe we have policies and
procedures in place to appropriately manage the credit risk relating to our
mortgage loans held for portfolio.
The following table
presents our mortgage loans past due 90 days or more or in foreclosure, as a
percentage of par, as of September 30, 2009 and December 31, 2008.
As
of
|
As
of
|
|||||||
Mortgage
Loans 90-Days Delinquent or in Foreclosure
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands, except percentages)
|
||||||||
Conventional
mortgage loan delinquencies
|
$ | 19,816 | $ | 8,898 | ||||
Conventional
mortgage loans outstanding
|
4,105,614 | 4,872,474 | ||||||
Conventional
mortgage loan delinquencies
|
0.5 | % | 0.2 | % | ||||
Conventional
mortgage loan foreclosures
|
0.3 | % | 0.1 | % | ||||
Government-insured
mortgage loan delinquencies
|
$ | 33,108 | $ | 27,540 | ||||
Government-insured
mortgage loans outstanding
|
179,992 | 205,367 | ||||||
Government-insured
mortgage loan delinquencies
|
18.4 | % | 13.4 | % | ||||
Government-insured
mortgage loan foreclosures
|
None
|
None
|
As
of September 30, 2009, we held six mortgage loans totaling $882,000 classified
as real-estate owned. As of December 31, 2008, the Seattle Bank held one
mortgage loan totaling $126,000 classified as real-estate owned.
NOTE
7. CONSOLIDATED OBLIGATIONS
For accounting
policies and additional information concerning consolidated obligations, see
Note 11 in our 2008 Audited Financials included in our 2008 annual report on
Form 10-K.
Consolidated
Obligation Discount Notes
Consolidated
obligation discount notes are issued to raise short-term funds. Discount notes
are consolidated obligations with original maturities up to one year. These
notes are issued at less than their face amount and redeemed at par value when
they mature.
The following table
summarizes the book value, net of discounts and concessions, par value, and
weighted-average interest rate for our consolidated obligation discount notes as
of September 30, 2009 and December 31, 2008.
Consolidated
Obligation Discount Notes
|
Book
Value
|
Par
Value
|
Weighted-Average
Interest Rate*
|
|||||||||
(in
thousands, except interest rates)
|
||||||||||||
As of
September 30, 2009
|
$ | 21,678,303 | $ | 21,681,920 | 0.30 | |||||||
As of December
31, 2008
|
$ | 15,878,281 | $ | 15,899,022 | 1.14 |
*
|
The
consolidated obligation discount notes’ weighted-average interest rate
represents an implied rate.
|
Consolidated
Obligation Bonds
Redemption
Terms
The following table
summarizes our participation in consolidated obligation bonds outstanding by
year of contractual maturity as of September 30, 2009 and December 31,
2008.
As
of September 30, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Weighted-
|
Weighted-
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Interest
|
Interest
|
|||||||||||||||
Terms-to-Maturity
and Weighted-Average Interest Rates
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||
(in
thousands, except interest rates)
|
||||||||||||||||
Due in one
year or less
|
$ | 13,463,255 | 1.38 | $ | 22,821,835 | 3.01 | ||||||||||
Due after one
year through two years
|
3,863,245 | 1.88 | 1,904,000 | 3.84 | ||||||||||||
Due after two
years through three years
|
2,809,550 | 3.46 | 2,176,535 | 4.27 | ||||||||||||
Due after
three years through four years
|
2,672,000 | 3.98 | 2,609,000 | 4.96 | ||||||||||||
Due after four
years through five years
|
1,973,500 | 4.47 | 2,598,000 | 4.25 | ||||||||||||
Thereafter
|
4,753,270 | 5.01 | 6,028,195 | 5.40 | ||||||||||||
Total
par value
|
29,534,820 | 2.67 | 38,137,565 | 3.72 | ||||||||||||
Premiums
|
12,271 | 15,800 | ||||||||||||||
Discounts
|
(26,213 | ) | (29,981 | ) | ||||||||||||
Hedging
adjustments
|
233,395 | 467,015 | ||||||||||||||
Total
|
$ | 29,754,273 | $ | 38,590,399 |
The fair values of
bifurcated derivatives relating to $66.0 million and $10.0 million of range
consolidated obligation bonds were net liabilities of $834,000 and $290,000 and
are included in “hedging adjustments” in the table above.
The amounts in the
above table reflect certain consolidated obligation bond transfers from other
FHLBanks as of September 30, 2009 and December 31, 2008. The Seattle Bank
becomes the primary obligor on consolidated obligation bonds transferred to it.
We account for consolidated obligation bonds transferred out as debt
extinguishments, as the receiving FHLBank becomes the primary obligor. The
following table summarizes our consolidated obligation bond transfers from other
FHLBanks as of September 30, 2009 and December 31, 2008.
As of September 30, 2009 |
As
of December 31, 2008
|
||||||||||||||||
Other
FHLBanks' Consolidated Obligations
|
Par
Value
|
Original
Net Discount
|
Par
Value
|
Original
Net Discount
|
|||||||||||||
(in
thousands)
|
|||||||||||||||||
Transfers
In
|
|||||||||||||||||
FHLBank of
Chicago
|
$ | 1,014,000 | $ | 18,462 | $ | 1,074,000 | $ | 19,602 | |||||||||
Total
|
$ | 1,014,000 | $ | 18,462 | $ | 1,074,000 | $ | 19,602 |
We
transferred no consolidated obligation bonds to other FHLBanks during the nine
months ended September 30, 2009.
The following table
summarizes the par value of consolidated obligation bonds outstanding by
callable and putable terms as of September 30, 2009 and December 31,
2008.
Par
Value of Consolidated Obligation Bonds
|
As
of
September
30, 2009
|
As
of
December
31, 2008
|
||||||
(in
thousands)
|
||||||||
Non-callable
and non-putable
|
$ | 21,106,820 | $ | 29,609,310 | ||||
Callable
|
8,428,000 | 8,528,255 | ||||||
Total par
value
|
$ | 29,534,820 | $ | 38,137,565 |
The following table
summarizes the par value of consolidated obligation bonds outstanding by year of
contractual maturity or next call date as of September 30, 2009 and December 31,
2008.
Term-to-Maturity
or Next Call Date
|
As
of
September
30, 2009
|
As
of
December
31, 2008
|
||||||
(in
thousands)
|
||||||||
Due in one
year or less
|
$ | 20,466,255 | $ | 29,220,090 | ||||
Due after one
year through two years
|
2,905,245 | 2,174,000 | ||||||
Due after two
years through three years
|
1,419,550 | 1,036,535 | ||||||
Due after
three years through four years
|
1,387,000 | 1,234,000 | ||||||
Due after four
years through five years
|
1,062,500 | 1,217,000 | ||||||
Thereafter
|
2,294,270 | 3,255,940 | ||||||
Total par
value
|
$ | 29,534,820 | $ | 38,137,565 |
Interest-Rate Payment
Terms
The following table
summarizes the par value of consolidated obligation bonds outstanding by
interest-rate payment terms as of September 30, 2009 and December 31,
2008.
As
of September 30, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Interest-Rate
Payment Terms
|
Par
Value
|
Percent
of Total
|
Par
Value
|
Percent
of Total
|
||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||
Fixed interest
rate
|
$ | 26,269,820 | 88.9 | $ | 24,856,565 | 65.2 | ||||||||||
Step-up
interest rate
|
980,000 | 3.3 | 50,000 | 0.1 | ||||||||||||
Variable
interest rate
|
2,219,000 | 7.6 | 13,171,000 | 34.5 | ||||||||||||
Range interest
rate
|
66,000 | 0.2 | 60,000 | 0.2 | ||||||||||||
Total par
value
|
$ | 29,534,820 | 100.0 | $ | 38,137,565 | 100.0 |
NOTE
8. CAPITAL
For accounting
policies and additional information concerning capital, including applicable
regulatory capital requirements, see Note 14 in our 2008 Audited Financials
included in our 2008 annual report on Form 10-K.
Capital
Requirements
As
of September 30, 2009, we were in compliance with all of our regulatory capital
requirements. As of December 31, 2008, due to increases in the market-risk
and credit-risk components of our risk-based capital, we were out of compliance
with our risk-based capital requirement. The following table shows our statutory
and regulatory capital requirements compared to our actual
positions.
As
of September 30, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Regulatory
Capital Requirements
|
Required
|
Actual
|
Required
|
Actual
|
||||||||||||
(in
thousands, except for ratios)
|
||||||||||||||||
Risk-based
capital
|
$ | 2,591,371 | $ | 2,706,235 | $ | 2,707,000 | $ | 2,547,811 | ||||||||
Total
capital-to-assets ratio
|
4.00 | % | 5.30 | % | 4.00 | % | 4.60 | % | ||||||||
Total
regulatory capital *
|
$ | 2,163,496 | $ | 2,865,099 | $ | 2,334,468 | $ | 2,687,140 | ||||||||
Leverage
capital-to-assets ratio
|
5.00 | % | 7.80 | % | 5.00 | % | 6.79 | % | ||||||||
Leverage
capital
|
$ | 2,704,370 | $ | 4,218,217 | $ | 2,918,085 | $ | 3,961,046 |
*
|
Total
regulatory capital is defined as the sum of permanent capital, the amounts
paid for Class A capital,any general allowance for losses, and any other
amount from sources available to absorb losses that the Finance Agency has
determined to be appropriate to include in determining total regulatory
capital. Total regulatory capital also includes mandatorily redeemable
capital stock. Regulatory capital excludes other comprehensive loss, which
totaled $995.5 million and $2.9 million as of September 30, 2009 and
December 31, 2008. Permanent capital is defined as retained earnings and
Class B capital stock.
|
On
July 30, 2009, the Finance Agency published a final rule that implemented the
prompt corrective action (PCA) provisions of the Housing and Economic Recovery
Act of 2008 (Housing Act). The rule established four capital classifications
(i.e., adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized) for FHLBanks and implemented the PCA provisions
that apply to FHLBanks that are not deemed to be adequately capitalized. Once an
FHLBank is determined (on not less than a quarterly basis) by the Finance Agency
to be other than adequately capitalized, the FHLBank becomes subject to
additional supervisory authority by the Finance Agency. Before implementing a
reclassification, the Director of the Finance Agency is required to provide the
FHLBank with written notice of the proposed action and an opportunity to submit
a response.
In
August 2009, following applicable notice and response, we received a capital
classification of undercapitalized from the Finance Agency. An FHLBank with a
final capital classification of undercapitalized, such as the Seattle Bank, is
subject to a range of mandatory or discretionary restrictions. For example, an
undercapitalized FHLBank must submit a capital restoration plan to the Finance
Agency, as well as obtain prior approval from the Finance Agency for any new
business activities. In addition, the mandatory restrictions include
restrictions on asset growth. Although the Finance Agency recognized the initial
steps taken by the Seattle Bank in response to the Finance Agency’s preliminary
notification, in addition to the reported risk-based capital deficiencies as of
March 31, 2009 and June 30, 2009, the Finance Agency noted the deterioration in
the value of our PLMBS, our accumulated other comprehensive loss stemming from
that deterioration, the level of our retained earnings in comparison to the
other comprehensive loss, and our market value of equity compared to the par
value of outstanding stock.
In
accordance with the PCA provisions, we submitted a proposed capital restoration
plan to the Finance Agency in August 2009. The Finance Agency determined that it
was unable to approve our proposed plan and required us to submit a new plan by
October 31, 2009. We subsequently requested an extension in order to prepare a
revised proposed capital restoration plan and the Finance Agency approved an
extension to December 6, 2009. It is unknown whether the Finance Agency will
accept our revised capital restoration plan. Failure to obtain approval of our
revised capital restoration plan could result in the appointment of a
conservator or receiver by the Finance Agency. Further, Finance Agency approval
of our proposed capital restoration plan could result in additional restrictions
for the Seattle Bank. In addition, the Finance Agency could take other
regulatory actions (as further described in the PCA provisions), which could
negatively impact demand for our advances, our financial performance, and
business in general.
Although as of
September 30, 2009 the Seattle Bank met all of our regulatory requirements
(including the risk-based capital requirement), on November 6, 2009, the Finance
Agency reaffirmed the Seattle Bank’s capital classification as undercapitalized.
All mandatory actions and restrictions in place as a result of the previous
capital classification determination remain in effect, including not redeeming
or repurchasing capital stock or paying dividends without prior Finance Agency
approval. The Finance Agency also indicated that it would not change our capital
classification to adequately capitalized until the Finance Agency believes that
we have demonstrated sustained performance in line with an approved capital
restoration plan. Our capital classification will remain undercapitalized until
the Finance Agency determines otherwise.
Capital
Stock
Class A
Stock
Class A
capital stock (Class A stock) may be issued, redeemed, repurchased, or
transferred between shareholders only at a par value of $100 per share.
Class A stock may only be issued to satisfy a member’s advance stock
purchase requirement for a new advance and cannot be used to meet its other
requirements relating to shareholdings. Class A stock is generally
redeemable in cash on six months’ written notice to the Seattle Bank and can be
repurchased by the Seattle Bank, pursuant to the terms of the Capital Plan. On
May 12, 2009, as part of the Seattle Bank’s efforts to correct its risk-based
capital deficiency, the Board of Directors (Board) of the Seattle Bank suspended
the issuance of Class A stock to support new advances, effective June 1, 2009.
New advances must be supported by Class B capital stock (Class B stock), which
unlike Class A stock, can be used to reduce the Seattle Bank’s risk-based
capital deficiency.
Class B
Stock
Class B stock
can be issued, redeemed, repurchased, or transferred between shareholders only
at a par value of $100 per share. Class B stock is generally redeemable
five years after: (i) written notice from the member;
(ii) consolidation or merger of a member with a non-member; or
(iii) withdrawal or termination of membership. All stock redemptions are
subject to restrictions set forth in the FHLBank Act, Finance Agency
regulations, our Capital Plan, and applicable resolutions, if any, adopted by
our Board.
The following table
shows purchase, transfer, and redemption request activity for Class A and B
stock (excluding mandatorily redeemable capital stock) for the three and nine
months ended September 30, 2009.
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||||||
September
30, 2009
|
September
30, 2009
|
|||||||||||||||
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||
Capital
Stock Activity
|
Capital
Stock
|
Capital
Stock
|
Capital
Stock
|
Capital
Stock
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Balance,
beginning of period
|
$ | 135,135 | $ | 1,735,280 | $ | 117,853 | $ | 1,730,287 | ||||||||
New
member capital stock purchases
|
1,054 | 5,961 | ||||||||||||||
Existing
member capital stock purchases
|
514 | 19,535 | 4,051 | |||||||||||||
Total
capital stock purchases
|
1,568 | 19,535 | 10,012 | |||||||||||||
Capital
stock subject to mandatory redemption reclassified from
equity:
|
||||||||||||||||
Withdrawals/involuntary
redemptions
|
(18,857 | ) | (2,253 | ) | (22,767 | ) | ||||||||||
Voluntary
redemptions
|
(572 | ) | (572 | ) | ||||||||||||
Total
capital stock reclassified to mandatorily redeemable stock
|
(572 | ) | (18,857 | ) | (2,825 | ) | (22,767 | ) | ||||||||
Cancellation
of membership withdrawal
|
183 | 262 | ||||||||||||||
Transfers
of capital stock between unaffiliated members
|
||||||||||||||||
(previously
classified as mandatorily redeemable capital stock)
|
380 | |||||||||||||||
Balance,
end of period
|
$ | 134,563 | $ | 1,718,174 | $ | 134,563 | $ | 1,718,174 |
During the second
quarter of 2009, the Board approved the following actions to encourage stock
ownership within our cooperative:
•
|
Through
December 31, 2009, redemption cancellation fees are waived for rescinding
notice of intent to withdraw from membership or notice to redeem excess
stock;
|
|
•
|
Redemption
cancellation fees are waived on transfers of excess Class A or Class B
stock from a member or successor to another member; and
|
|
•
|
Issuance of
Class A stock to support new advances is
suspended.
|
Mandatorily Redeemable
Capital Stock
As
of September 30, 2009 and December 31, 2008, 32 and 27 members and former
members had requested redemptions of $917.9 million and $896.4 million in Class
B stock, which is subject to mandatory redemption with a five-year waiting
period from the time of the request and $24.3 million and $21.5 million in
Class A stock subject to mandatory redemption with payment subject to a
six-month waiting period from the time of the request (assuming we would meet
all capital requirements following the redemption). These amounts have been
classified within liabilities in the Statements of Condition as “mandatorily
redeemable capital stock. Of the $24.3 million of mandatorily redeemable Class A
stock, all had passed its statutory six-month redemption date. Because we did
not meet our risk-based capital requirement as of March 31, 2009 and June 30,
2009 and our undercapitalized classification, we were unable to redeem Class A
stock at the end of the statutory six-month redemption period.
The following table
summarizes the statutory redemption dates for stock classified as mandatorily
redeemable capital stock.
As
of September 30, 2009
|
||||||||
Payment
due by period
|
Class
A Stock
|
Class
B Stock
|
||||||
(in
thousands)
|
||||||||
Past
redemption date
|
$ | 24,301 | $ | |||||
Less than one
year
|
122,878 | |||||||
One year
through two years
|
3,914 | |||||||
Two years
through three years
|
13,544 | |||||||
Three years
through four years
|
4,376 | |||||||
Four years
through five years
|
773,143 | |||||||
Total
|
$ | 24,301 | $ | 917,855 |
Capital
Concentration
As
of September 30, 2009, one member, Bank of America Oregon, N.A. and one
non-member, JPMorgan Chase Bank, N.A. (formerly Washington Mutual Bank, F.S.B.)
collectively held 48.5% of our total outstanding capital stock, including
mandatorily redeemable capital stock. As of December 31, 2008, one member and
one non-member, Merrill Lynch Bank USA and JPMorgan Chase Bank, N.A. held 40.7%
of our total outstanding capital stock, including mandatorily redeemable capital
stock. No other member held more than 10% of our outstanding capital stock,
including mandatorily redeemable capital stock, as of these dates. See Note 12
for additional information regarding the July 1, 2009 transfer of stock from
Bank of America, NA (BANA) to Bank of America Oregon, N.A.
Dividends
Generally, under
the Seattle Bank’s Capital Plan (Capital Plan), our Board can declare and pay
dividends, in either cash or stock, from retained earnings or current net
earnings. In addition, to meet the Finance Agency’s conditions for the
acceptance of our business plan following execution of a written agreement with
the Finance Agency in December 2004, our Board adopted a policy on May 18,
2005, suspending indefinitely the declaration or payment of any Class B
dividends and providing that any future dividend declaration or payment
generally may be made only after prior approval of the Finance Agency. In April
2008, the Finance Agency notified the Seattle Bank of its decision to allow
quarterly dividends not to exceed 75% of year-to-date net income calculated in
accordance with GAAP. The dividend limitations will remain in effect until we
receive written approval from the Finance Agency removing such
limitations.
In
June 2009, our Board approved two new thresholds or policy indicators that must
be met before the Seattle Bank will consider the payment of dividends. The
policy indicators include attainment of 85% of the Seattle Bank’s retained
earnings target and attainment of an 85% market value of equity to book value of
equity ratio. As shown in the table below, dividends will be unrestricted,
restricted, or suspended depending on policy indicators, with the weakest
indicator controlling. These policy indicators overlay rather than replace the
Seattle Bank’s existing dividend policy, and will be applied prior to any action
taken pursuant to the dividend policy.
Policy
Indicator
|
||||||
Dividend
Parameters
|
Suspended
|
Restricted
|
Unrestricted
|
|||
Retained
Earnings
|
< 85% of
target
|
85% <=
target <=100%
|
>=
100%
|
|||
Market value
of equity (MVE) to book value of equity (BVE)
|
MVE/BVE <
85%
|
85% <=
MVE/BVE <=95%
|
MVE/BVE >
95%
|
As
of September 30, 2009, our retained earnings target was $641.0 million (retained
earnings as of September 30, 2009 was 11.0% of target) and our market value of
equity-to-book value of equity ratio was 63.9%.
There can be no
assurance of when or if our Board will declare dividends in the
future.
For additional
information on dividends, see “Part II. Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Capital Resources and
Liquidity—Capital Resources” of our 2008 annual report on Form
10-K.
Accumulated Other
Comprehensive Loss
The following
tables provide information regarding the components of other comprehensive loss
for the three and nine months ended September 30, 2009 and the components of
accumulated other comprehensive loss for the nine months ended September 30,
2009.
For
the Three Months Ended
September
30,
|
For
the Nine Months Ended
September
30,
|
||||||||||||||
Other
Comprehensive Income (Loss)
|
2009
|
2008
|
2009
|
2008
|
|||||||||||
(in
thousands)
|
|||||||||||||||
Non-credit
portion of OTTI loss on HTM securities
|
$ | (80,166 | ) | $ | $ | (1,160,512 | ) | $ | |||||||
Reclassification
adjustment into earnings relating to non-credit
|
|||||||||||||||
portion of
OTTI loss on HTM securities
|
125,287 | 183,858 | |||||||||||||
Accretion of
non-credit portion of OTTI loss on HTM securities
|
89,203 | 169,884 | |||||||||||||
HTM
securities, net
|
134,324 | (806,770 | ) | ||||||||||||
Change in
unrealized losses on AFS securities
|
108,243 | 108,243 | |||||||||||||
Pension
benefits
|
40 |
(159)
|
(649 | ) | (159 | ) | |||||||||
Other
comprehensive income (loss)
|
$ | 242,607 |
$
|
(159)
|
$ | (699,176 | ) | $ | (159 | ) |
Held-To-Maturity
|
Available-For-Sale
|
||||||||||||||
Accumulated
Other Comprehensive Loss
|
Benefit
Plans
|
Securities
|
Securities
|
Total
|
|||||||||||
(in
thousands)
|
|||||||||||||||
Balance,
December 31, 2008
|
$ | (2,939 | ) | $ | $ | $ | (2,939 | ) | |||||||
Cumulative
effect of adjustment to opening balance relating to
|
|||||||||||||||
new
OTTI guidance
|
(293,415 | ) | (293,415 | ) | |||||||||||
Reclassification
of non-credit portion of OTTI loss on HTM securities
|
|||||||||||||||
to
AFS securities
|
692,000 | (692,000 | ) | ||||||||||||
Net
change during the period
|
(649 | ) | (806,770 | ) | 108,243 | (699,176 | ) | ||||||||
Accumulated
other comprehensive loss, September 30, 2009
|
$ | (3,588 | ) | $ | (408,185 | ) | $ | (583,757 | ) | $ | (995,530 | ) |
NOTE
9. DERIVATIVES AND HEDGING ACTIVITIES
We
recognize derivatives on the Statement of Condition at their fair values,
including net cash collateral and accrued interest from counterparties. At
inception, we designate each derivative as one of the following:
•
|
a hedge of
the fair value of a recognized asset or liability or an unrecognized firm
commitment (a fair value hedge);
|
|
•
|
a
non-qualifying hedge of an asset or liability for asset/liability
management purposes (an economic hedge); or
|
|
•
|
a
non-qualifying hedge of another derivative that is used to offset other
derivatives with non-member counterparties (an intermediary
hedge).
|
Changes in the fair
value of a derivative that is designated and qualifies as a fair value hedge,
along with changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk (including changes that reflect losses or gains
on firm commitments), are recorded in our Statement of Operations within other
loss as “net gain (loss) on derivatives and hedging activities.” For fair value
hedges, any hedge ineffectiveness (which represents the amount by which the
change in the fair value of the derivative differs from the change in the fair
value of the hedged item attributable to the hedged risk) is recorded in “net
gain (loss) on derivatives and hedging activities.”
An
economic hedge is defined as a derivative hedging specific or non-specific
underlying assets, liabilities, or firm commitments that does not qualify or was
not designated for hedge accounting, but that is an acceptable hedging strategy
under our risk management program. These economic hedging strategies also comply
with Finance Agency regulatory requirements prohibiting speculative hedge
transactions. An economic hedge by definition introduces the potential for
earnings variability caused by the changes in the fair value of the derivatives
that are recorded in our income but that are not offset by corresponding changes
in the fair value of the economically hedged assets, liabilities, or firm
commitments. As a result, we recognize only the net interest and the change in
fair value of these derivatives in other (loss) income as “net gain (loss) on
derivatives and hedging activities” with no offsetting fair value adjustments
for the assets, liabilities, or firm commitments. Cash flows associated with
such freestanding derivatives (derivatives not qualifying for hedge accounting)
are reflected as cash flows from operating activities in the Statement of Cash
Flows.
The derivatives
used in intermediary activities do not qualify for hedge accounting treatment
and are separately marked to market through earnings. These amounts are recorded
in other loss as “net gain (loss) on derivatives and hedging
activities.”
In
addition to the disclosures provided herein, see Note 8 in our 2008 Audited
Financials included in our 2008 annual report on Form 10-K for additional
information concerning our derivatives and hedging activities.
Nature
of Business Activity
We
are exposed to interest-rate risk primarily from the effect of interest-rate
changes on our interest-earning assets and the funding sources that finance
these assets. Consistent with Finance Agency policy, we enter into interest-rate
exchange agreements (derivatives) only to reduce the interest-rate exposures
inherent in otherwise unhedged assets and funding positions, to achieve our
risk-management objectives, and to reduce our cost of funds. Finance Agency
regulation and our risk management policy prohibit trading in or the speculative
use of these derivative instruments and limit credit risk arising from these
instruments.
We
generally use derivatives to:
•
|
reduce the
interest-rate sensitivity and repricing gaps of assets and
liabilities;
|
|
•
|
reduce
funding costs by combining a derivative with a consolidated obligation as
the cost of a combined funding structure can be lower than the cost of a
comparable consolidated obligation bond (structured
funding);
|
|
•
|
preserve an
interest-rate spread between the yield of an asset (e.g., an advance) and
the cost of the related liability (e.g., the consolidated obligation bond
used to fund the advance). Without the use of derivatives, this
interest-rate spread could be reduced or eliminated when a change in the
interest rate on the advance does not match a change in the interest rate
on the bond;
|
|
•
|
mitigate the
adverse earnings effects of the shortening or extension of expected lives
of certain assets (e.g., mortgage assets) and
liabilities;
|
|
•
|
protect the
value of existing asset or liability positions;
|
|
•
|
manage
embedded options in assets and liabilities; and
|
|
•
|
enhance our
overall asset/liability management.
|
Types
of Interest-Rate Exchange Agreements
Our risk management
policy establishes guidelines for the use of derivatives, including the amount
of exposure to interest-rate changes we are willing to accept. The goal of our
interest-rate risk management strategy is not to eliminate interest-rate risk,
but to manage it within appropriate limits. We use derivatives when they are
considered the most cost-effective alternative to achieve our financial- and
risk-management objectives. Accordingly, we may enter into derivatives that do
not necessarily qualify for hedge accounting (i.e., economic hedges or
intermediary hedges). We use the following types of derivatives in our
interest-rate risk management.
Interest-Rate
Swaps
An
interest-rate swap is an agreement between two entities to exchange cash flows
in the future. The agreement sets the dates on which the cash flows will be paid
and the manner in which the cash flows will be calculated. One of the simplest
forms of an interest-rate swap involves the promise by one party to pay cash
flows equivalent to the interest on a notional principal amount at a
predetermined fixed rate for a given period of time. In return for this promise,
this party receives cash flows equivalent to the interest on the same notional
principal amount based on a variable interest-rate index for the same period of
time. The variable interest-rate index in most of our interest-rate exchange
agreements is the London Interbank Offered Rate (LIBOR).
Swaptions
A
swaption is an option on an interest-rate swap that gives the buyer the right to
enter into a specified interest-rate swap at a certain time in the future. When
used as a hedge, a swaption can protect an entity that is planning to lend or
borrow funds in the future against future interest-rate changes. We purchase
both payer swaptions and receiver swaptions. A payer swaption is the option to
make fixed interest payments at a later date and a receiver swaption is the
option to receive fixed interest payments at a later date.
Interest-Rate Caps and
Floors
In
an interest-rate cap agreement, a cash flow is generated if the price or
interest rate of an underlying variable rises above a certain threshold (cap)
price. In an interest-rate floor agreement, a cash flow is generated if the
price or rate of an underlying variable falls below a certain threshold (floor)
price. We use caps in conjunction with liabilities and floors in conjunction
with assets. Caps and floors are designed as protection against the interest
rate on a variable interest-rate asset or liability rising above or falling
below a certain level.
Interest-rate swaps
are generally used to manage interest-rate exposures and swaptions, caps, and
floors are generally used to manage interest-rate and volatility
exposures.
Types of Hedged
Items
We
incur interest-rate risk on advances, mortgage loans held for portfolio,
investments, consolidated obligations, and intermediary positions.
Advances
We
offer a wide variety of advance structures to meet members’ funding needs. These
advances may have maturities up to 30 years with variable or fixed interest
rates and may include early termination features or options. The repricing
characteristics and optionality embedded in certain advances can create
interest-rate risk. We may use derivatives to adjust the repricing and/or option
characteristics of certain advances to more closely match the characteristics of
our funding. In general, fixed interest-rate advances or variable interest-rate
advances with embedded options are hedged with an interest-rate exchange
agreement with terms that offset the advance’s terms and options. For example,
we may hedge a fixed interest-rate advance with an interest-rate swap where we
pay a fixed rate of interest and receive a variable rate of interest,
effectively converting the advance from a fixed to a variable rate of interest.
This type of hedge is treated as a fair value hedge.
When issuing a
convertible advance, we purchase an option from a member that allows us to
convert the advance from a fixed interest rate to a variable interest rate or to
terminate on a specified date(s). The initial interest rate on a convertible
advance is lower than a comparable maturity fixed interest-rate advance that
does not have the conversion feature. When we make a putable advance, we
effectively purchase a put option from the member, allowing us the right to
terminate the advance at our discretion. We generally hedge a convertible or a
putable advance by entering into a cancelable interest-rate exchange agreement
where we pay a fixed interest rate and receive a variable interest rate based on
a market index, typically LIBOR. The swap counterparty can cancel the
interest-rate exchange agreement on the put dates, which would normally occur in
a rising interest-rate environment, at which time we would generally terminate
the advance. This type of hedge is accounted for as a fair value
hedge.
We also offer our members
capped advances, which are variable interest-rate advances with a maximum
interest rate. When we make a capped advance, we typically purchase an
offsetting interest-rate cap from a broker. This type of hedge is accounted for
as a fair value hedge.
We
may hedge a firm commitment for a forward starting advance through the use of an
interest-rate swap. In this case, the interest-rate swap functions as the
hedging instrument for both the firm commitment and the subsequent advance. The
basis movement associated with the firm commitment is rolled into the basis of
the advance at the time the commitment is terminated and the advance is issued.
The basis adjustment is then amortized into interest income over the life of the
advance.
Mortgage Loans Held for
Portfolio
The prepayment
options embedded in mortgage loans can result in extensions or contractions in
the expected repayment of these assets, depending on changes in estimated
prepayment speeds. In addition, to the extent that we purchased mortgage loans
at premiums or discounts, net income is affected by extensions or contractions
in the expected maturities of these assets. We seek to manage the interest-rate
and prepayment risk associated with mortgage loans primarily through debt
issuance. We use both callable and noncallable debt to attempt to achieve cash
flow patterns and liability durations similar to those expected on the mortgage
loans. We may also purchase interest-rate exchange agreements, such as
swaptions, to manage the prepayment risk embedded in the mortgage loans.
Although these derivatives are valid economic hedges against the prepayment risk
of the mortgage loans, they are not specifically linked to individual mortgage
loans, and we account for these instruments as freestanding derivatives. Since
2006, we have purchased no mortgage loans under the MPP.
Investments
We
invest in U.S. agency and GSE MBS, U.S. agency and GSE obligations, TLGP
securities, and the taxable portion of state or local housing finance agency
securities, which are classified as AFS or HTM securities. The interest-rate and
prepayment risks associated with these investment securities are managed through
a combination of callable and non-callable debt issuance and derivatives, such
as swaptions. Derivatives used to manage these risks are considered freestanding
derivatives.
Consolidated
Obligations
We
manage the risk arising from changing market prices of a consolidated obligation
by matching the cash outflows on the consolidated obligation with the cash
inflows on an interest-rate exchange agreement. In a typical transaction, the
Office of Finance issues a fixed interest-rate consolidated obligation for the
Seattle Bank, and we generally concurrently enter into a matching interest-rate
exchange agreement in which the counterparty pays fixed cash flows, designed to
mirror in timing and amount the cash outflows we pay on the consolidated
obligation. The net result of this transaction is that we pay a variable
interest rate that closely matches the interest rates we receive on short-term
or variable interest-rate advances. These transactions are accounted for as fair
value hedges. This intermediation within the financial markets permits us to
raise funds at lower costs than would otherwise be available through the
issuance of simple fixed or variable interest-rate consolidated obligations in
the financial markets.
Intermediation
We
may enter into interest-rate exchange agreements to offset the economic effect
of other derivatives that are no longer designated in a hedge transaction of one
or more advances, investments, or consolidated obligations. In these
intermediary transactions, maturity dates, call dates, and fixed interest rates
match, as do the notional amounts on the de-designated portion of the
interest-rate exchange agreement and the intermediary derivative. The net result
of the accounting for these derivatives does not significantly affect our
operating results.
Derivative
Credit-Risk Exposure and Counterparty Ratings
The Seattle Bank is
subject to credit risk because of the potential nonperformance by a counterparty
to our interest-rate exchange agreement. The degree of counterparty risk on
interest-rate exchange agreements depends on our selection of counterparties and
the extent to which we use netting procedures and other credit enhancements to
mitigate the risk. We manage counterparty credit risk through credit analysis,
collateral management, and other credit enhancements. We require agreements to
be in place for all counterparties. These agreements must include provisions for
netting exposures across all transactions with that counterparty. The agreements
also require a counterparty to deliver collateral to the Seattle Bank if the
total exposure to that counterparty exceeds a specific threshold limit as
denoted in the agreement. Except in connection with Lehman Brothers Special
Financing, Inc. (LBSF) (see below and Note 13), as a result of these risk
mitigation initiatives, we have not incurred and do not currently anticipate any
additional credit losses on our interest-rate exchange agreements.
The contractual
notional amount of derivatives reflects our involvement in the various classes
of financial instruments and serves as a factor in determining periodic interest
payments or cash flows received and paid. The notional amount of derivatives
represents neither the actual amounts exchanged nor the overall exposure of the
Seattle Bank to credit and market risk. The overall amount that could
potentially be subject to credit loss is much smaller. Notional values are not
meaningful measures of the risks associated with derivatives. The risks of
derivatives are more appropriately measured on a hedging relationship or
portfolio basis, taking into account the derivatives, the item(s) being hedged,
and any offsets between the two.
As
of September 30, 2009 and December 31, 2008, our credit risk, taking into
consideration master netting arrangements, was approximately $4.2 million and
$32.0 million, including $19.2 million and $11.0 million of net accrued interest
receivable. We held cash collateral of $16.4 million and no securities from our
counterparties as of September 30, 2009. We held no cash collateral and $9.0
million in securities from our counterparties as of December 31, 2008. We do not
include the fair value of securities from our counterparties in our derivative
asset or liability balances. Additionally, collateral with respect to
derivatives with member institutions includes collateral assigned to us as
evidenced by a written security agreement and held by the member institution for
our benefit. Changes in credit risk and net exposure after considering
collateral on our derivatives are primarily due to changes in market conditions,
including the level and slope of the yield curve.
Certain of our
interest-rate exchange agreements include provisions that require Federal Home
Loan Bank System (FHLBank System) debt to maintain an investment-grade rating
from each of the major credit rating agencies. If the FHLBank System debt were
to fall below investment grade, we would be in violation of these provisions,
and the counterparties to our interest-rate exchange agreements could request
immediate and ongoing collateralization on derivatives in net liability
positions. As of September 30, 2009, the FHLBank System’s consolidated
obligations were rated “Aaa/P-1” by Moody’s and “AAA/A-1+” by S&P. The
aggregate fair value of all derivative instruments with credit-risk contingent
features that were in a liability position as of September 30, 2009 was $259.3
million, for which we have posted collateral of $56.6 million in the normal
course of business. If the Seattle Bank’s individual credit rating had been
lowered by one rating level, we would not have been required to deliver any
additional collateral to our derivative counterparties as of September 30, 2009.
Our credit rating has not changed since 2008, although the Seattle Bank was
briefly placed on credit watch negative by S&P between June 5, 2009 and July
1, 2009.
We
transact our interest-rate exchange agreements with large banks and major
broker-dealers. Some of these banks and broker-dealers or their affiliates buy,
sell, and distribute consolidated obligations. We are not a derivatives dealer
and do not trade derivatives for short-term profit.
In
September 2008, Lehman Brothers Holdings, Inc. (LBHI), the parent company of
LBSF and a guarantor of LBSF’s obligations, filed for bankruptcy protection.
LBSF was our counterparty on multiple derivative transactions under
International Swap Dealers Association, Inc. master agreements with a total
notional amount of $3.5 billion at the time of the LBHI bankruptcy
filing. As a result, we notified LBSF of our intent to early
terminate all outstanding derivative positions with LBSF, unwound such
positions, and established a receivable position, netting the value of the
collateral due to be returned to us with all other amounts due, which resulted
in the establishment of a $10.4 million net receivable from LBSF (before
provision) included in other assets in the Statement of Condition. We
also established an offsetting provision for credit loss on receivable based on
management’s current estimate of the probable amount that will be realized in
settling our derivative transactions with LBSF. In September 2009, we filed
claims of $10.4 million against LBHI and LBSF in bankruptcy court.
Other than LBSF, we
have never experienced a loss on a derivative transaction due to default by a
counterparty. We believe that the credit risk on our interest-rate exchange
agreements is low because we contract with counterparties that are of high
credit quality and also have collateral agreements in place with each
counterparty. As of both September 30, 2009 and December 31, 2008, 14
counterparties represented the total notional amount of our outstanding
interest-rate exchange agreements with five and six counterparties rated “AA-“
or higher from an NRSRO, such as S&P or Moody’s. As of September 30, 2009
and December 31, 2008, 44.2% and 61.0% of the total notional amount of our
outstanding interest-rate exchange agreements were with five and six
counterparties rated “AA-“ or higher from an NRSRO. As of September 30, 2009 and
December 31, 2008, 100.0% of the notional amount of our outstanding
interest-rate exchange agreements were with counterparties with credit ratings
of at least “A” or equivalent. See Note 11 for information concerning
nonperformance risk valuation adjustments.
Financial
Statement Effect and Additional Financial Information
The following table
summarizes the notional amounts and the fair values of our derivative
instruments, including the effect of netting arrangements and collateral as of
September 30, 2009 and December 31, 2008. For purposes of this disclosure, the
derivative values include both the fair value of derivatives and related accrued
interest.
As
of September 30, 2009
|
||||||||||||
Fair
Value of Derivative Instruments
|
Notional
Amount
|
Derivative
Assets
|
Derivative
Liabilities
|
|||||||||
(in
thousands)
|
||||||||||||
Derivatives
designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
$ | 42,199,811 | $ | 291,472 | $ | 580,700 | ||||||
Interest-rate
caps or floors
|
10,000 | 5 | ||||||||||
Total
derivatives designated as hedging instruments
|
42,209,811 | 291,477 | 580,700 | |||||||||
Derivatives
not designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
669,700 | 13,657 | 12,289 | |||||||||
Interest-rate
caps or floors
|
200,000 | 59 | ||||||||||
Total
derivatives not designated as hedging instruments
|
869,700 | 13,716 | 12,289 | |||||||||
Total
derivatives before netting and collateral adjustments
|
$ | 43,079,511 | $ | 305,193 | $ | 592,989 | ||||||
Netting
adjustments(1)
|
(284,594 | ) | (284,593 | ) | ||||||||
Cash
collateral and related accrued interest
|
(16,362 | ) | (49,118 | ) | ||||||||
Subtotal
netting and collateral adjustments
|
(300,956 | ) | (333,711 | ) | ||||||||
Derivative
assets and derivative liabilities as reported on the
|
||||||||||||
Statement
of Condition
|
$ | 4,237 | $ | 259,278 |
As
of December 31, 2008
|
||||||||||||
Fair
Value of Derivative Instruments
|
Notional
Amount
|
Derivative
Assets
|
Derivative
Liabilities
|
|||||||||
(in
thousands)
|
||||||||||||
Derivatives
designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
$ | 29,604,444 | $ | 390,117 | $ | 675,723 | ||||||
Interest-rate
caps or floors
|
65,000 | 19 | ||||||||||
Total
derivatives designated as hedging instruments
|
29,669,444 | 390,136 | 675,723 | |||||||||
Derivatives
not designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
716,000 | 18,992 | 18,469 | |||||||||
Interest-rate
caps or floors
|
260,000 | 206 | ||||||||||
Total
derivatives not designated as hedging instruments
|
976,000 | 19,198 | 18,469 | |||||||||
Total
derivatives before netting and collateral adjustments
|
$ | 30,645,444 | $ | 409,334 | $ | 694,192 | ||||||
Netting
adjustments(1)
|
(377,350 | ) | (377,350 | ) | ||||||||
Cash
collateral and related accrued interest
|
(81,425 | ) | ||||||||||
Subtotal
netting and collateral adjustments
|
(377,350 | ) | (458,775 | ) | ||||||||
Derivative
assets and derivative liabilities as reported on the
|
||||||||||||
Statement
of Condition
|
$ | 31,984 | $ | 235,417 |
(1)
|
Amounts
represent the effect of legally enforceable master netting agreements that
allow the Seattle Bank to settle positive and negative
positions.
|
The fair values of
bifurcated derivatives relating to $66.0 million and $10.0 million of range
consolidated obligation bonds were net liabilities of $834,000 and $290,000 and
are not reflected in the table above.
The following table
presents the components of net gain (loss) on derivatives and hedging activities
as presented in the Statement of Operations for the three and nine months ended
September 30, 2009 and 2008.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
Components
of Net Gain (Loss) on Derivatives and Hedging Activities
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Derivatives
and hedged items in fair value hedging relationships
|
||||||||||||||||
Interest-rate
swaps
|
$ | 1,998 | $ | (789 | ) | $ | (9,278 | ) | $ | 7,942 | ||||||
Total net gain
(loss) related to fair value hedge ineffectiveness
|
1,998 | (789 | ) | (9,278 | ) | 7,942 | ||||||||||
Derivatives
not designated as hedging instruments
|
||||||||||||||||
Economic
hedges
|
||||||||||||||||
Interest-rate
swaps
|
(10 | ) | (6 | ) | (70 | ) | ||||||||||
Interest-rate
swaptions
|
1,630 | |||||||||||||||
Interest-rate
caps or floors
|
(36 | ) | (922 | ) | (147 | ) | (758 | ) | ||||||||
Net interest
settlements
|
604 | 1,161 | 1,039 | 2,623 | ||||||||||||
Other
|
6,108 | 6,109 | ||||||||||||||
Intermediary
transactions
|
||||||||||||||||
Interest-rate
swaps
|
(3 | ) | (1 | ) | (21 | ) | 129 | |||||||||
Total net gain
(loss) related to derivatives not designated as hedging
instruments
|
555 | 6,346 | 865 | 9,663 | ||||||||||||
Net gain
(loss) on derivatives and hedging activities
|
$ | 2,553 | $ | 5,557 | $ | (8,413 | ) | $ | 17,605 |
The following table
presents, by type of hedged item, the gain (loss) on derivatives and the related
hedged items in fair value hedging relationships and the impact of those
derivatives on our net interest income for the three and nine months ended
September 30, 2009 and 2008.
For
the Three Months Ended September 30, 2009
|
||||||||||||||||
Gain
(Loss) on Derivatives and on the Related Hedged Items in Fair Value
Hedging Relationships
|
Gain/(Loss)
on Derivatives
|
(Loss)/Gain
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | (20,488 | ) | $ | 18,792 | $ | (1,696 | ) | $ | (89,708 | ) | |||||
Consolidated
obligation bonds
|
54,897 | (52,526 | ) | 2,371 | 64,836 | |||||||||||
Consolidated
obligation discount notes
|
(3,636 | ) | 4,959 | 1,323 | 10,065 | |||||||||||
Total
|
$ | 30,773 | $ | (28,775 | ) | $ | 1,998 | $ | (14,807 | ) |
For
the Three Months Ended September 30, 2008
|
||||||||||||||||
(Loss)
Gain on Derivatives and on the Related Hedged Items in Fair Value Hedging
Relationships
|
(Loss)/Gain
on Derivatives
|
Gain/(Loss)
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | (359 | ) | $ | (3,037 | ) | $ | (3,396 | ) | $ | (23,166 | ) | ||||
Consolidated
obligation bonds
|
(20,184 | ) | 22,559 | 2,375 | 53,783 | |||||||||||
Consolidated
obligation discount notes
|
(227 | ) | 459 | 232 | 65 | |||||||||||
Total
|
$ | (20,770 | ) | $ | 19,981 | $ | (789 | ) | $ | 30,682 |
For
the Nine Months Ended September 30, 2009
|
||||||||||||||||
(Loss)
Gain on Derivatives and on the Related Hedged Items in Fair Value Hedging
Relationships
|
(Loss)/Gain
on Derivatives
|
Gain/(Loss)
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | (10,560 | ) | $ | 4,847 | $ | (5,713 | ) | $ | (217,953 | ) | |||||
Consolidated
obligation bonds
|
(213,529 | ) | 207,445 | (6,084 | ) | 181,597 | ||||||||||
Consolidated
obligation discount notes
|
(562 | ) | 3,081 | 2,519 | 19,016 | |||||||||||
Total
|
$ | (224,651 | ) | $ | 215,373 | $ | (9,278 | ) | $ | (17,340 | ) |
For
the Nine Months Ended September 30, 2008
|
||||||||||||||||
(Loss)
Gain on Derivatives and on the Related Hedged Items in Fair Value Hedging
Relationships
|
(Loss)/Gain
on Derivatives
|
Gain/(Loss)
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | 3,506 | $ | (5,256 | ) | $ | (1,750 | ) | $ | (50,403 | ) | |||||
Consolidated
obligation bonds
|
(51,750 | ) | 61,210 | 9,460 | 141,815 | |||||||||||
Consolidated
obligation discount notes
|
(227 | ) | 459 | 232 | 65 | |||||||||||
Total
|
$ | (48,471 | ) | $ | 56,413 | $ | 7,942 | $ | 91,477 |
(1)
|
The net
interest on derivatives in fair value hedge relationships is presented in
the interest income/expense line item of the respective hedged
item.
|
NOTE
10. EMPLOYEE RETIREMENT PLANS
For accounting
policies and additional information concerning employee retirement plans, see
Note 15 in our 2008 Audited Financials included in our 2008 annual report on
Form 10-K.
The Seattle Bank
offers to certain highly compensated employees non-qualified supplemental
retirement plans, including the Thrift Plan Benefit Equalization Plan, a
defined-contribution pension plan, and the Retirement Fund Benefit Equalization
Plan (Retirement BEP) and the Executive Supplemental Retirement Plan (SERP),
defined-benefit pension plans.
The net periodic
pension cost for the defined benefit plans was as follows for the three and nine
months ended September 30, 2009 and 2008.
Net
Periodic Pension Cost for the
|
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
||||||||||||||
Retirement
BEP and SERP
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Service
costs
|
$ | 79 | $ | 91 | $ | 239 | $ | 239 | ||||||||
Interest
costs
|
74 | 80 | 221 | 221 | ||||||||||||
Amortization
of prior service cost
|
39 | 159 | 118 | 159 | ||||||||||||
Net periodic
pension cost
|
$ | 192 | $ | 330 | $ | 578 | $ | 619 |
NOTE
11. ESTIMATED FAIR VALUE
The Seattle Bank
records derivative assets and liabilities, AFS securities, and rabbi trust
assets (included in other assets), at fair value on the Statement of Condition.
In addition, certain other assets, such as HTM securities, are measured at fair
value on a nonrecurring basis, as detailed below. For accounting policies and
additional information concerning estimated fair values, see Note 16 in our 2008
Audited Financials included in our 2008 annual report on Form 10-K.
Financial
Asset and Financial Liability Valuation Methodologies
Outlined below are
the valuation methodologies for our financial assets and financial
liabilities.
Cash and Due From
Banks
The estimated fair
value approximates the recorded carrying value.
Federal Funds
Sold
The estimated fair
value of overnight Federal funds sold approximates the recorded carrying value.
The estimated fair value of term Federal funds sold is determined by calculating
the present value of the expected future cash flows. The discount rates used in
these calculations are the rates for federal funds with similar
terms.
Held-to-Maturity and
Available-for-Sale Securities
We
use prices from independent pricing services (such as Reuters) and, to a lesser
extent, non-binding dealer quotes, to determine the fair values of substantially
all of our HTM and AFS securities, for disclosure and non-recurring fair value
measurements. During the quarter ended September 30, 2009, the Seattle Bank
expanded the number of outside pricing sources it employs in its processes to
estimate the market value of its MBS in order to conform to the FHLBank System
common pricing methodology. The Seattle Bank now employs four, rather than two,
independent pricing sources. The Seattle Bank incorporated the new pricing
sources into its ongoing practice of comparing and analyzing prices among
pricing sources and among comparable securities to ensure that the estimated
market values for these securities are reasonable and internally consistent. The
Seattle Bank typically employs a centered price from the available pricing
sources as the best estimate of market value of each mortgage backed security if
there are no inconsistencies or anomalies observed in the pricing inputs. Market
values are analyzed daily and any inconsistencies between pricing services or
between instruments are reviewed with the pricing services to ensure the
estimated market values are reasonable.
Pricing reviews are
performed by Seattle Bank personnel with knowledge of liquidity and other
current conditions in the market. We have gained an understanding of the
information used by these third party pricing sources to develop these estimated
values.
Generally, pricing
services’ values and broker quotes obtained on level 3 instruments are
indications of value based on price indications, market intelligence, and
proprietary cash flow modeling techniques. These values were evaluated in
relation to other securities and their related characteristics (e.g. underlying
product, vintage, FICO, geographical information, etc.), other broker
indications, pricing trends, as well as our independent knowledge of the
security’s collateral characteristics (e.g. geographical information,
delinquencies, foreclosures and real-estate owned).
Securities Sold Under
Agreements to Repurchase and Securities Purchased Under Agreements to
Resell
The fair value of
overnight agreements approximates the recorded carrying value. The estimated
fair value for agreements with terms to maturity in excess of one day is
determined by calculating the present value of the expected future cash flows.
The discount rates used in these calculations are the rates for agreements with
similar terms.
Advances
The estimated fair
value of advances is determined by calculating the present value of expected
future cash flows from the advances excluding the amount of the accrued interest
receivable. For advances with embedded options, additional market-based inputs
are obtained from derivatives dealers. The discount rates used in these
calculations are the consolidated obligation rates for instruments with similar
terms as of the last business day of the period, adjusted for a target
spread.
In
accordance with Finance Agency regulation, advances with a maturity and
repricing period greater than six months require a prepayment fee sufficient to
make us financially indifferent to the borrower’s decision to prepay the
advances. Therefore, the estimated fair value of advances does not incorporate
prepayment risk.
Mortgage Loans Held for
Portfolio
The estimated fair
values for mortgage loans are determined based on quoted market prices for
similar mortgage loans. These prices, however, can change rapidly based upon
market conditions and are highly dependent upon the underlying prepayment
assumptions priced in the secondary market. Changes in prepayment rates often
have a material effect on the fair value estimates. Since these underlying
prepayment assumptions are made at a specific point in time, they are
susceptible to material changes in the near term.
Accrued Interest Receivable
and Payable
The estimated fair
value approximates the recorded carrying value.
Derivative Assets and
Liabilities
We
base the estimated fair values of interest-rate exchange agreements on
instruments with similar terms or available market prices excluding accrued
interest receivable and payable. However, active markets do not exist for
certain types of financial instruments. Consequently, fair values for these
instruments must be estimated using techniques such as discounted cash flow
analysis and comparisons to similar instruments. Estimates developed using these
methods are highly subjective and require judgment regarding significant matters
such as the amount and timing of future cash flows, volatility of interest
rates, and the selection of discount rates that appropriately reflect market and
credit risks. Changes in judgment often have a material effect on the fair value
estimates. Because these estimates are made at a specific point in time, they
are susceptible to material near-term changes.
We
are subject to credit risk on derivatives due to nonperformance by the
counterparties. To mitigate this risk, we enter into master netting agreements
for interest-rate-exchange agreements with highly rated institutions. In
addition, we enter into bilateral security exchange agreements with all our
derivatives dealer counterparties that provide for delivery of collateral at
specified levels tied to long-term counterparty credit ratings to limit our net
unsecured credit exposure to these counterparties. The fair values are netted by
counterparty where such legal right exists and offset against amounts recognized
for collateral arrangements related to that counterparty. If these netted
amounts are positive, they are classified as an asset and if negative, a
liability. The estimated fair values of our derivatives are adjusted for
counterparty nonperformance risk, particularly credit risk, as appropriate. Our
nonperformance risk adjustment is computed using observable credit default swap
spreads and estimated probability default rates applied to our exposure after
taking into consideration collateral held or placed. The
nonperformance risk adjustment is not currently material to our derivative
valuations or financial statements.
Deposits
We
determine the estimated fair values of member institution deposits by
calculating the present value of expected future cash flows from the deposits
and reducing this amount for accrued interest payable. The discount rates used
in these calculations are the cost of deposits with similar terms.
Consolidated
Obligations
We
estimate the fair values of our consolidated obligations using internal
valuation models with market observable inputs. We calculate the fair value of
consolidated obligations without embedded options using market-based yield curve
inputs obtained from the Office of Finance. For consolidated obligations with
embedded options, market-based inputs are obtained from the Office of Finance
and derivatives dealers. We then calculate the fair value of the consolidated
obligations using the present value of expected cash flows using discount rates
that are based on replacement funding rates for liabilities with similar
terms.
Mandatorily Redeemable
Capital Stock
The fair value of
capital stock subject to mandatory redemption generally approximates par value
as indicated by contemporaneous member purchases and transfers at par value.
Fair value also includes estimated dividends earned at the time of
reclassification from equity to liabilities, until such amount is paid, and any
subsequently declared stock dividend. Capital stock can only be acquired by
members at par value and redeemed at par value (plus any declared but unpaid
dividends). Our capital stock is not traded and no market mechanism exists for
the exchange of capital stock outside our cooperative.
Commitments
The estimated fair
value of our commitments to extend credit is determined using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
The estimated fair value of these fixed interest-rate commitments also takes
into account the difference between current and committed interest rates. The
estimated fair value of standby letters of credit is based on the present value
of fees currently charged for similar agreements or on the estimated cost to
terminate or otherwise settle the obligations with the
counterparties.
Fair
Value Hierarchy
Under GAAP, a fair
value hierarchy is used to prioritize the inputs of valuation techniques used to
measure fair value. The inputs are evaluated and an overall level for the
measurement is determined. This overall level is an indication of the market
observability of the inputs to the fair value measurement. Fair value is price
in an orderly transaction between market participants for selling an asset or
transferring a liability in the principal (or most advantageous) market for the
asset or liability. In order to determine the fair value, or exit price,
entities must determine the unit of account, highest and best use, principal
market, and market participants. These determinations allow the reporting entity
to define the inputs for fair value and level of hierarchy.
The fair value
hierarchy prioritizes the inputs used in valuation techniques to measure fair
value into three broad levels:
•
|
Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. An active market for
the asset or liability is a market in which the transactions for the asset
or liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. We have classified certain money market
funds that are held in a rabbi trust as level 1 assets.
|
|
•
|
Level 2 –
inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets and model-based techniques for
which all significant inputs are observable, either directly or
indirectly, for substantially the full term of the asset or liability. We
have classified our derivatives as level 2 assets and
liabilities.
|
|
•
|
Level 3 –
inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Unobservable inputs are typically supported by
little or no market activity and reflect the entity’s own assumptions. We
have classified certain AFS and HTM securities, for which we have recorded
other-than-temporary impairment charges on a non-recurring basis, as level
3 assets.
|
We
use valuation techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs. Fair value is first based on quoted market
prices or market-based prices, where available. If quoted market prices or
market-based prices are not available, fair value is determined based on
valuation models that use market-based information available to us as inputs to
our models.
Fair Value on a Recurring
Basis
The following
tables present for each hierarchy level, our financial assets and liabilities
that are measured at fair value on a recurring basis on our Statements of
Condition as of September 30, 2009 and December 31, 2008.
As
of September 30, 2009
|
||||||||||||||||
Netting
|
||||||||||||||||
Recurring
Fair Value Measurement
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Adjustment
*
|
|||||||||||
(in
thousands)
|
||||||||||||||||
Available-for-sale
securities
|
$ | 664,728 | $ | $ | $ | 664,728 | $ | |||||||||
Derivative
assets
|
4,237 | 305,193 | (300,956 | ) | ||||||||||||
Other assets
(rabbi trust)
|
3,711 | 3,711 | ||||||||||||||
Total assets
at fair value
|
$ | 672,676 | $ | 3,711 | $ | 305,193 | $ | 664,728 | $ | (300,956 | ) | |||||
Derivative
liabilities
|
$ | (259,278 | ) | $ | $ | (592,989 | ) | $ | $ | 333,711 | ||||||
Total
liabilities at fair value
|
$ | (259,278 | ) | $ | $ | (592,989 | ) | $ | $ | 333,711 |
As
of December 31, 2008
|
|||||||||||||||
Netting
|
|||||||||||||||
Recurring
Fair Value Measurement
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Adjustment
*
|
||||||||||
(in
thousands)
|
|||||||||||||||
Derivative
assets
|
$ | 31,984 | $ | $ | 409,536 | $ | $ | (377,552 | ) | ||||||
Other assets
(rabbi trust)
|
3,247 | 3,247 | |||||||||||||
Total assets
at fair value
|
$ | 35,231 | $ | 3,247 | $ | 409,536 | $ | $ | (377,552 | ) | |||||
Derivative
liabilities
|
$ | (235,417 | ) | $ | $ | (694,192 | ) | $ | $ | 458,775 | |||||
Total
liabilities at fair value
|
$ | (235,417 | ) | $ | $ | (694,192 | ) | $ | $ | 458,775 |
*
|
Amounts
represent the effect of legally enforceable master netting agreements that
allow the Seattle Bank to settle positive and negative positions with cash
collateral held or placed with the same counterparties. The total cash
collateral was $32.8 million as of September 30, 2009 and $81.4 million as
of December 31, 2008.
|
For instruments
carried at fair value, we review the fair value hierarchy classification on a
quarterly basis. Changes in the observability of the valuation attributes may
result in a reclassification of certain financial assets or
liabilities.
Fair Value on a Nonrecurring
Basis
We
measure certain HTM securities and real estate owned at fair value on a
nonrecurring basis. These assets are subject to fair value adjustments only in
certain circumstances (e.g., when there is evidence of OTTI).
The following table
presents, by hierarchy level, HTM securities and real estate owned for which a
nonrecurring change in fair value has been recorded as of September 30,
2009.
As
of September 30, 2009
|
||||||||||
Non-Recurring
Fair Value Measurement
|
Total
|
Level
2
|
Level
3
|
|||||||
(in
thousands)
|
||||||||||
Held-to-maturity
securities
|
$ | 104,627 | $ | $ | 104,627 | |||||
Real estate
owned
|
840 | 840 | ||||||||
Total assets
at fair value
|
$ | 105,467 | $ | 840 | $ | 104,627 |
The fair values of
the PLMBS in our HTM portfolio have been determined on the basis of market-based
information provided by third-party pricing services. Prior to September 30,
2008, these assets were classified as level 2, as evidenced by observable trades
in the market and similar prices obtained from multiple sources. Beginning in
late 2007 and continuing into 2008, the divergence among prices obtained from
these sources increased, and became significant in the third quarter of 2008.
The significant reduction in transaction volumes and widening credit spreads led
us to conclude that the prices received from pricing services, which are derived
from third party proprietary models, are reflective of significant unobservable
inputs. Because of the significant unobservable inputs used by the pricing
services, effective September 30, 2008, we consider these to be level 3
inputs. See “—Financial Asset and Financial Liability Valuation
Methodologies—Held-to-Maturity Securities” above for additional
information.
Fair
Value Summary Tables
The following table
summarizes the carrying value and estimated fair values of our financial
instruments as of September 30, 2009 and December 31, 2008.
As
of September 30, 2009
|
As
of December 31, 2008
|
||||||||||||
Estimated
|
Estimated
|
||||||||||||
Estimated
Fair Values
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||
(in
thousands)
|
|||||||||||||
Financial
Assets
|
|||||||||||||
Cash and due
from banks
|
$ | 8,873 | $ | 8,873 | $ | 1,395 | $ | 1,395 | |||||
Deposit with
other FHLBanks
|
72 | 72 | |||||||||||
Securities
purchased under agreements to resell
|
4,750,000 | 4,750,000 | 3,900,000 | 3,900,096 | |||||||||
Federal funds
sold
|
5,862,300 | 5,862,435 | 2,320,300 | 2,320,300 | |||||||||
Held-to-maturity
securities
|
13,431,347 | 12,885,820 | 9,784,891 | 7,857,197 | |||||||||
Available-for-sale
securities
|
664,728 | 664,728 | |||||||||||
Advances
|
24,908,356 | 25,041,924 | 36,943,851 | 37,110,844 | |||||||||
Mortgage loans
held for portfolio, net
|
4,292,454 | 4,466,241 | 5,087,323 | 5,207,494 | |||||||||
Accrued
interest receivable
|
110,054 | 110,054 | 241,124 | 241,124 | |||||||||
Derivative
assets
|
4,237 | 4,237 | 31,984 | 31,984 | |||||||||
Financial
Liabilities
|
|||||||||||||
Deposits
|
(284,507 | ) | (284,521 | ) | (582,258 | ) | (582,804 | ) | |||||
Securities
sold under agreements to repurchase
|
|||||||||||||
Consolidated
obligations, net:
|
|||||||||||||
Discount
notes
|
(21,678,303 | ) | (21,676,836 | ) | (15,878,281 | ) | (15,859,873 | ) | |||||
Bonds
|
(29,754,273 | ) | (30,194,002 | ) | (38,590,399 | ) | (39,073,154 | ) | |||||
Mandatorily
redeemable capital stock
|
(942,156 | ) | (942,156 | ) | (917,876 | ) | (917,876 | ) | |||||
Accrued
interest payable
|
(196,722 | ) | (196,722 | ) | (337,303 | ) | (337,303 | ) | |||||
Derivative
liabilities
|
(259,278 | ) | (259,278 | ) | (235,417 | ) | (235,417 | ) | |||||
Other
|
|||||||||||||
Commitments to
extend credit for advances
|
(677 | ) | (677 | ) | (803 | ) | (803 | ) | |||||
Commitments to
issue consolidated obligations
|
1,262 | 35,190 |
NOTE
12. TRANSACTIONS WITH RELATED PARTIES AND OTHER FHLBANKS
Transactions
with Members
We
are a cooperative whose members own our stock and may receive dividends on their
investments in our stock. Virtually all our advances are initially issued to
members, and all mortgage loans held for portfolio were purchased from members
or former members. We also maintain demand deposit accounts for members,
primarily to facilitate settlement activities that are directly related to
advances and mortgage loans purchased. Such transactions with members are
entered into during the normal course of business.
In
addition, we have investments in federal funds sold, interest-bearing deposits,
and MBS with members or their affiliates. All investments are transacted at
market prices and MBS are purchased through securities brokers or
dealers.
For member
transactions related to concentration of investments in AFS securities purchased
from members or affiliates of certain members, see Note 2; HTM securities
purchased from members or affiliates of certain members, see Note 3;
concentration associated with advances, see Note 5; concentration associated
with mortgage loans held for portfolio, see Note 6; and concentration associated
with capital stock, see Note 8.
The following
tables set forth information with respect to the Seattle Bank’s outstanding
transactions with members and their affiliates as of September 30, 2009 and
December 31, 2008 and for the nine months ended September 30, 2009 and
2008. Certain disclosures concerning the December 31, 2008 HTM securities
purchased from members and their affiliates have been revised from amounts
previously disclosed. Specifically, we have increased HTM securities
purchased from members and their affiliates by $88.9 million to $3.3 billion as
of December 31, 2008.
As
of
|
As
of
|
||||||
Assets
and Liabilities with Members and Affiliates
|
September
30, 2009
|
December
31, 2008
|
|||||
(in
thousands)
|
|||||||
Assets
|
|||||||
Cash and due
from banks
|
$ | 338 | $ | 386 | |||
Securities
purchased under agreements to resell
|
1,250,000 | ||||||
Federal funds
sold
|
480,000 | 195,300 | |||||
Available-for-sale
securities
|
224,634 | ||||||
Held-to-maturity
securities
|
2,410,510 | 3,260,810 | |||||
Advances*
|
21,637,313 | 24,152,434 | |||||
Mortgage loans
held for portfolio
|
521,770 | 653,712 | |||||
Accrued
interest receivable
|
70,303 | 112,372 | |||||
Total
assets
|
$ | 26,594,868 | $ | 28,375,014 | |||
Liabilities
|
|||||||
Deposits
|
$ | 278,817 | $ | 569,088 | |||
Mandatorily
redeemable capital stock
|
145,308 | 126,874 | |||||
Derivative
liabilities
|
134,189 | 95,066 | |||||
Other
liabilities
|
2,112 | 2,096 | |||||
Total
liabilities
|
$ | 560,426 | $ | 793,124 | |||
Capital
|
|||||||
Capital
Stock
|
|||||||
Class B
stock
|
$ | 1,713,684 | $ | 2,148,968 | |||
Class A
stock
|
134,564 | 317,378 | |||||
Accumulated
other comprehensive loss:
|
|||||||
Non-credit
portion of OTTI loss on available-sale securities
|
(180,688 | ) | |||||
Non-credit
portion of OTTI loss on held-to-maturity securities
|
(370,206 | ) | |||||
Total
Capital
|
$ | 1,297,354 | $ | 2,466,346 | |||
Other
|
|||||||
Notional
amount of derivatives
|
$ | 19,686,649 | $ | 12,431,629 | |||
Letters of
credit
|
$ | 879,140 | $ | 913,858 |
For
the Nine Months Ended September 30,
|
|||||||
Income
and Expense with Members and Affiliates
|
2009
|
2008
|
|||||
(in
thousands)
|
|||||||
Interest
Income
|
|||||||
Advances*
|
$ | 502,611 | $ | 1,008,570 | |||
Prepayment
fees on advances, net
|
7,025 | 21,958 | |||||
Securities
purchased under agreements to resell
|
1,511 | 5,889 | |||||
Federal funds
sold
|
662 | 10,404 | |||||
Available-for-sale
securities
|
2,067 | ||||||
Held-to-maturity
securities
|
46,815 | 81,512 | |||||
Mortgage loans
held for portfolio
|
22,985 | 205,167 | |||||
Other
income
|
37 | ||||||
Total
interest income
|
583,676 | 1,333,537 | |||||
Interest
Expense
|
|||||||
Deposits
|
876 | 19,041 | |||||
Consolidated
obligations*
|
80,930 | 40,140 | |||||
Mandatorily
redeemable capital stock
|
448 | ||||||
Total
interest expense
|
81,806 | 59,629 | |||||
Net
Interest Income
|
$ | 501,870 | $ | 1,273,908 | |||
Other
Income (Loss)
|
|||||||
Service
fees
|
$ | 1,927 | $ | 1,344 | |||
Net OTTI
credit loss
|
(138,357 | ) | (49,830 | ) | |||
Net (loss)
gain on derivatives and hedging activities
|
(7,878 | ) | 4,766 | ||||
Total other
income (loss)
|
$ | (144,308 | ) | $ | (43,720 | ) |
*
|
Includes the
effect of associated derivatives with members or their
affiliates.
|
Transactions
with Related Parties
For purposes of
these financial statements, we define related parties as those members and
former members with capital stock outstanding in excess of 10% of our total
outstanding capital stock and mandatorily redeemable capital stock. We also
consider instances where a member or an affiliate of a member has an officer or
director who is a director of the Seattle Bank to meet the definition of a
related party. Transactions with such members are subject to the same
eligibility and credit criteria, as well as the same terms and conditions, as
other similar transactions, although the Board has imposed certain restrictions
on the repurchase of capital stock held by members who have officers or
directors on our Board.
The following
tables set forth information as of September 30, 2009 and December 31, 2008, and
for the nine months ended September 30, 2009 and 2008 with respect to
transactions with related parties. Certain disclosures concerning the
December 31, 2008 HTM securities purchased from related parties and their
affiliates have been revised from amounts previously
disclosed. Specifically, we have increased HTM securities purchased
from related parties and their affiliates by $701.7 million to $938.8 million as
of December 31, 2008.
As
of
|
As
of
|
||||||
Assets
and Liabilities with Related Parties
|
September
30, 2009
|
December
31, 2008
|
|||||
(in
thousands)
|
|||||||
Assets
|
|||||||
Cash and due
from banks
|
$ | 338 | $ | ||||
Securities
purchased under agreements to resell
|
3,750,000 | ||||||
Federal funds
sold
|
515,000 | ||||||
Available-for-sale
securities
|
411,956 | ||||||
Held-to-maturity
securities
|
948,075 | 938,784 | |||||
Advances*
|
13,527,200 | 18,923,217 | |||||
Mortgage loans
held for portfolio
|
3,761,848 | 4,421,078 | |||||
Accrued
interest receivable
|
61,576 | 142,242 | |||||
Total
assets
|
$ | 22,975,993 | $ | 24,425,321 | |||
Liabilities
|
|||||||
Deposits
|
$ | 9,759 | $ | 8,676 | |||
Mandatorily
redeemable capital stock
|
790,764 | 772,259 | |||||
Derivative
liabilities
|
111,348 | 24,119 | |||||
Other
liabilities
|
13,901 | 16,978 | |||||
Total
liabilities
|
$ | 925,772 | $ | 822,032 | |||
Capital
|
|||||||
Capital
Stock
|
|||||||
Class B
capital stock putable
|
$ | 829,594 | $ | 830,894 | |||
Class A
capital stock putable
|
7,174 | 174,392 | |||||
Accumulated
other comprehensive loss:
|
|||||||
Non-credit
portion of OTTI loss on available-sale securities
|
(355,030 | ) | |||||
Non-credit
portion of OTTI loss on held-to-maturity securities
|
(37,080 | ) | |||||
Total
Capital
|
$ | 444,658 | $ | 1,005,286 | |||
Other
|
|||||||
Notional
amount of derivatives
|
$ | 14,610,725 | $ | 6,977,797 | |||
Letters of
credit
|
$ | 464,835 | $ | 699,176 |
*
|
Includes the
effect of associated derivatives with members or their
affiliates.
|
For
the Nine Months Ended September 30,
|
|||||||
Income
and Expense with Related Parties
|
2009
|
2008
|
|||||
(in
thousands)
|
|||||||
Interest
Income
|
|||||||
Advances*
|
$ | 353,288 | $ | 457,057 | |||
Prepayment
fees on advances, net
|
3,813 | 21,127 | |||||
Securities
purchased under agreements to resell
|
3,874 | 2,152 | |||||
Federal funds
sold
|
272 | 900 | |||||
Available-for-sale
securities
|
4,853 | ||||||
Held-to-maturity
securities
|
20,909 | 5,271 | |||||
Mortgage loans
held for portfolio
|
157,505 | 177,618 | |||||
Total
interest income
|
544,514 | 664,125 | |||||
Interest
Expense
|
|||||||
Deposits
|
22 | 1,605 | |||||
Consolidated
obligations*
|
84,169 | 11,021 | |||||
Total
interest expense
|
84,191 | 12,626 | |||||
Net
Interest Income
|
$ | 460,323 | $ | 651,499 | |||
Other
Income (Loss)
|
|||||||
Service
fees
|
$ | 128 | $ | ||||
Net OTTI
credit loss
|
(118,438 | ) | (49,830 | ) | |||
Net (loss)
gain on derivatives and hedging activities
|
(5,892 | ) | 232 | ||||
Total other
income (loss)
|
$ | (124,202 | ) | $ | (49,598 | ) |
*
|
Includes the
effect of associated derivatives with members or their
affiliates.
|
Transactions
Affecting Related Parties
In
January 2009, BANA completed the acquisition of Merrill Lynch & Co. (Merrill
Lynch). On July 1, 2009, the assets of Merrill Lynch Bank USA, previously a
member of the Seattle Bank, were transferred to BANA, a non-member, as part of
its purchase of Merrill Lynch. As part of this restructuring, outstanding
advances of $411.2 million and Class B stock of $146.3 million held by Merrill
Lynch Bank USA were transferred to BANA. Immediately subsequent to the asset
transfer, BANA transferred substantially all of the Class B stock to its
subsidiary, Bank of America Oregon, N.A., a Seattle Bank member. Since that
date, Bank of America Oregon, N.A. has begun utilizing the transferred Class B
stock for new advances with the Seattle Bank.
In
September 2008, in a transaction facilitated by the FDIC, Washington Mutual
Bank, F.S.B. was acquired by JPMorgan Chase, a non-member. In October 2008,
JPMorgan Chase notified the Seattle Bank that it had merged Washington Mutual
Bank, F.S.B. into a non-member entity, JPMorgan Chase Bank, N.A., that assumed
the fully collateralized, related advances and capital stock of the Seattle
Bank. Effective October 7, 2008, we reclassified the membership to that of a
non-member shareholder that is no longer able to enter into new borrowing
arrangements with the Seattle Bank and transferred its Class A stock and Class B
stock to “mandatorily redeemable capital stock” on the Statement of Condition.
Per our Capital Plan, Class A stock is redeemable six months after notification
and Class B stock is redeemable five years after notification, subject to
certain requirements. As a non-member, JPMorgan Chase Bank, N.A. is not eligible
to initiate new advances or renew maturing advances. As of September 30, 2009,
approximately 75% of advances outstanding to JPMorgan Chase Bank, N.A., as of
December 31, 2008 had matured.
Transactions
with Other FHLBanks
Our transactions
with other FHLBanks are identified on the face of our financial statements. For
additional information on debt transfers to or from other FHLBanks, see Note
7.
NOTE
13. COMMITMENTS AND CONTINGENCIES
For accounting
policies and additional information concerning commitments and contingencies,
see Note 17 in our 2008 Audited Financials included in our 2008 annual report on
Form 10-K.
We
have not recognized a liability for our joint and several obligation related to
other FHLBanks’ consolidated obligations as of September 30, 2009 and
December 31, 2008. The par amounts of all the FHLBanks’ outstanding
consolidated obligations for which we are jointly and severally liable, net of
interbank holdings, were $1.0 trillion and $1.3 trillion as of September 30,
2009 and December 31, 2008.
During the third
quarter of 2008, the Seattle Bank and each of the other 11 FHLBanks entered into
lending agreements with the U.S. Treasury in connection with the U.S. Treasury’s
establishment of a Government-Sponsored Enterprise Credit Facility (GSECF), as
authorized by the Housing Act (each, a Lending Agreement). The GSECF is designed
to serve as a contingent source of liquidity for the housing GSEs, including
each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the
GSECF are considered consolidated obligations with the same joint and several
liability as all other consolidated obligations. The terms of any borrowing are
agreed to at the time of issuance. Loans under a Lending Agreement are to be
secured by collateral acceptable to the U.S. Treasury, which consists of FHLBank
advances to members and MBS issued by Fannie Mae or Freddie Mac. Each FHLBank is
required to submit to the Federal Reserve Bank of New York, acting as fiscal
agent of the U.S. Treasury, a list of eligible collateral, updated on a weekly
basis. As of September 30, 2009, the Seattle Bank had provided the U.S. Treasury
with a listing of collateral, consisting entirely of advances, totaling $24.4
billion, which provides for maximum borrowings of $21.1 billion. The amount of
collateral can be increased or decreased (subject to the approval of the U.S.
Treasury) at any time through the delivery of an updated listing of collateral.
As of September 30, 2009, no FHLBank had drawn on this available source of
liquidity. The Lending Agreement is scheduled to expire on December 31, 2009.
For additional information regarding the Lending Agreements, see “Part II. Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations––Capital Resources and Liquidity––Liquidity” in our 2008 annual
report on Form 10-K.
Commitments that
legally bind and unconditionally obligate us for additional advances totaled
$6.5 million and $20.8 million as of September 30, 2009 and December 31,
2008. Commitments generally are for periods of up to 12 months. Standby letters
of credit were approximately $879.1 million and $913.9 million as of September
30, 2009 and December 31, 2008. Standby letters of credit as of September
30, 2009 had original terms of 19 days to 7.5 years, with final expiration as
late as February 2012. Based on our credit analyses and collateral requirements,
we do not consider it necessary to have any provision for credit losses on these
commitments.
We
have entered into a standby bond purchase agreement with a state housing
authority, whereby we agree to purchase and hold the authority’s bonds until the
designated marketing agent can find a suitable investor or the housing authority
repurchases the bond according to a schedule established by the standby
agreement. The bond purchase agreement expires in May 2011. Total commitments
for standby bond purchases were $48.7 million and $52.7 million as of September
30, 2009 and December 31, 2008.
As
of September 30, 2009 and December 31, 2008, we had no investments that had
been traded but not settled. As of September 30,
2009 and December 31, 2008, we had $1.5 billion and $1.1 billion par value in
outstanding agreements to issue consolidated obligation bonds.
As
of September 30, 2009, we have a fully reserved receivable of $10.4 million from
LBSF recorded on our Statement of Condition. In September 2008, Lehman Brothers
Holdings, Inc. (LBHI), the parent company of LBSF and a guarantor of LBSF’s
obligations, filed for bankruptcy protection. LBSF was our counterparty on
multiple derivative transactions under International Swap Dealers Association,
Inc. master agreements with a total notional amount of $3.5 billion at the time
of the LBHI bankruptcy filing. As a result, we notified LBSF of our intent to
early terminate all outstanding derivative positions with LBSF, unwound such
positions, and established a receivable position, netting the value of the
collateral due to be returned to us with all other amounts due, which resulted
in the establishment of a $10.4 million net receivable from LBSF (before
provision) included in other assets in the Statement of Condition. We also
established an offsetting provision for credit loss on the receivable based on
management’s current estimate of the probable amount that will be realized in
settling our derivative transactions with LBSF. In September 2009, we filed
claims of $10.4 million against LBHI and LBSF in bankruptcy court.
From time to time,
the Seattle Bank is subject to legal proceedings arising in the normal course of
business. After consultations with legal counsel, we do not anticipate that the
ultimate liability, if any, arising out of any current matters will have a
material impact on our financial condition, results of operations, or cash
flows.
NOTE
14. SUBSEQUENT EVENTS
In
connection with preparation of these unaudited financial statements and
condensed notes, we evaluated subsequent events after the statement of condition
date of September 30, 2009 through November 12, 2009, which is the date the
financial statements were issued.
Regulatory
Actions and Developments
As
described in Note 8, although as of September 30, 2009 the Seattle Bank met all
of our regulatory requirements (including the risk-based capital requirement),
on November 6, 2009, the Finance Agency reaffirmed the Seattle Bank’s capital
classification as undercapitalized. All mandatory actions and restrictions in
place as a result of the previous capital classification determination remain in
effect, including redeeming or repurchasing capital stock or paying dividends
without prior Finance Agency approval. The Finance Agency also indicated that it
would not change our capital classification to adequately capitalized until the
Finance Agency believes that we have demonstrated sustained performance in line
with an approved capital restoration plan. Our capital classification will
remain undercapitalized until the Finance Agency determines
otherwise. For additional
information on our capital classification, see Note 8.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements that are subject to risk and
uncertainty. These statements describe the expectations of the Federal Home Loan
Bank of Seattle (Seattle Bank) regarding future events and developments,
including future operating results, changes in asset levels, and use of our
products. These statements include, without limitation, statements as to future
expectations, beliefs, plans, strategies, objectives, events, conditions, and
financial performance. The words “will,” “believe,” “expect,” “intend,” “may,”
“could,” “should,” “anticipate,” and words of similar nature are intended in
part to help identify forward-looking statements.
Future results,
events, and developments are difficult to predict, and the expectations
described in this report, including any forward-looking statements, are subject
to risk and uncertainty which may cause actual results, events, and developments
to differ materially from those we currently anticipate. Consequently, there is
no assurance that the expected results, events and developments will occur. See
“Part II. Item 1A. Risk Factors” of this report for additional information
on risks and uncertainties. Factors that may cause actual results, events, and
developments to differ materially from those discussed in this report include,
among others, the following:
•
|
adverse
changes in the credit quality, market prices, or other factors that could
affect our financial instruments, particularly our private-label
mortgage-backed securities (PLMBS), that could result in, among other
things, additional other-than-temporary impairment (OTTI) charges or
capital deficiencies;
|
|
•
|
regulatory
requirements and restrictions, including growth restrictions, resulting
from our continuing capital classification of “undercapitalized” by the
Federal Housing Finance Agency (Finance Agency), a further adverse change
in our capital classification, or other actions by the Finance Agency,
other governmental bodies, or regulatory agencies;
|
|
•
|
our ability
to attract new members and our existing members’ willingness to purchase
new or additional capital stock or transact business with us due to, among
other things, concerns about our capital classification or our ability to
redeem or repurchase capital stock or pay dividends;
|
|
•
|
loss of
members and repayment of advances of those members due to institutional
failures, consolidations, or withdrawals from
membership;
|
|
•
|
adverse
changes in the market prices or credit quality of our members’ assets used
as collateral for our advances;
|
|
•
|
instability
or sustained deterioration in our results of operations or financial
condition or adverse regulatory actions that could result in member or
non-member shareholders deciding to record impairment charges on their
Seattle Bank capital stock;
|
|
•
|
our ability
to obtain applicable regulatory approval to introduce new products and
services and successfully manage the risks associated with those products
and services;
|
|
•
|
increased
operating costs resulting from regulatory actions, economic conditions,
credit rating agency actions affecting the Seattle Bank, or legislative
changes that could cause us to modify our current structure, policies, or
business operations;
|
|
•
|
our ability
to identify, manage, mitigate, and/or remedy internal control weaknesses
and other operational risks;
|
|
•
|
adverse
changes in investor demand for consolidated obligations or increased
competition from the other government-sponsored enterprises (GSEs),
including other Federal Home Loan Banks (FHLBanks), as well as corporate,
sovereign, and supranational entities;
|
|
•
|
significant
or rapid changes in market conditions, including fluctuations in interest
rates, shifts in yield curves, and spreads on mortgage-related assets
relative to other financial instruments, or our failure to effectively
hedge these instruments;
|
|
•
|
negative
changes in credit agency ratings applicable to the FHLBanks (including the
Seattle Bank) or the Federal Home Loan Bank System (FHLBank
System);
|
|
•
|
actions taken
by the U.S. Department of the Treasury (U.S. Treasury), the Federal
Reserve System (Federal Reserve), or the Federal Deposit Insurance
Corporation (FDIC) to stabilize the capital and credit
markets;
|
|
•
|
significant
increases or decreases in business from or changes in business of our
members;
|
|
•
|
changes in
laws or regulations that could result in modification of the terms or
principal balances of mortgage loans that we own or relating to the
collateral underlying our mortgage-backed securities
(MBS);
|
|
•
|
changing
accounting guidance, including changes relating to financial instruments
that are marked to market or hedge accounting criteria, that could
adversely affect our financial statements;
|
|
•
|
the need to
make principal or interest payments on behalf of another FHLBank as a
result of the joint and several liability of all FHLBanks for consolidated
obligations;
|
|
•
|
changes in
global, national, and local economic conditions, including unemployment,
inflation, or deflation; and
|
|
•
|
events such
as terrorism, natural disasters, or other catastrophic events that could
disrupt the financial markets where we obtain funding, our borrowers’
ability to repay advances, the value of the collateral that we hold, or
our ability to conduct business in
general.
|
These cautionary
statements apply to all related forward-looking statements, wherever they appear
in this report. We do not undertake to update any forward-looking statements
that we make in this report or that we may make from time to time.
OVERVIEW
This discussion and
analysis reviews our financial condition as of September 30, 2009 and
December 31, 2008 and our results of operations for the three and nine
months ended September 30, 2009 and 2008. This discussion should be read in
conjunction with our unaudited financial statements and related condensed notes
for the three and nine months ended September 30, 2009 in “Part I. Item 1.
Financial Statements” in this report and with our audited financial statements
and related notes for the year ended December 31, 2008 (2008 Audited Financials)
included in our 2008 annual report on Form 10-K.
Our financial
condition as of September 30, 2009 and our results of operations for the three
and nine months ended September 30, 2009 are not necessarily indicative of the
financial condition and the operating results that may be expected as of or for
the year ending December 31, 2009 or for any other future dates or
periods.
GENERAL
The Seattle Bank is
a federally chartered corporation and one of 12 FHLBanks, which along with the
Office of Finance, comprise the FHLBank System. The Seattle Bank is a
cooperative that is owned by member financial institutions located within our
district, which includes Alaska, Hawaii, Idaho, Montana, Oregon, Utah,
Washington, and Wyoming, as well as the U.S. territories of American Samoa and
Guam and the Commonwealth of the Northern Mariana Islands. Any building and loan
association, savings and loan association, homestead association, insurance
company, savings bank, community development financial institution (CDFI), or
federally insured depository institution engaged in residential housing finance
located in the Seattle Bank’s district is eligible to apply for membership. Our
primary business activity is providing loans (advances) to our members and
eligible housing associates. We also work with our members and a variety of
other entities, including nonprofit organizations, to provide affordable housing
and community economic development funds through direct subsidy grants and low-
or no-interest loans, to benefit individuals and communities in need. We fund
these grants and loans through the Affordable Housing Program (AHP) and the
Community Investment Program (CIP).
Our capital stock
is not publicly traded and can be held only by our members, by non-member
institutions that acquire capital stock by virtue of acquiring member
institutions, or by former members that retain capital stock to support advances
or other activity that remains outstanding. All of our members must purchase
capital stock in the Seattle Bank. Our capital stock has a par value of $100 per
share and is purchased, redeemed, repurchased, and transferred within our
cooperative (with our prior approval) only at its par value. Members may redeem
excess capital stock, or withdraw from membership and redeem all outstanding
capital stock, with five years’ written notice in the case of Class B capital
stock (Class B stock) and six months’ written notice in the case of Class A
capital stock (Class A stock), assuming the Seattle Bank is in compliance with
its capital requirements or other requirements and is not otherwise restricted
from redeeming stock by the Finance Agency. All references in this document
relating to the Finance Agency include both the Finance Agency and its
predecessor FHLBank regulator, the Federal Housing Finance Board, which was
abolished as a result of the enactment of the Housing and Economic Recovery Act
of 2008.
Our revenues derive
primarily from interest income from advances, investments, and mortgage loans
held for portfolio. Our principal funding source is consolidated obligations
issued by the Office of Finance on our behalf. We are primarily liable for
repayment of consolidated obligations issued on our behalf and jointly and
severally liable for the consolidated obligations issued on behalf of the other
FHLBanks. We believe many variables influence our financial performance,
including market interest-rate changes, yield-curve shifts, availability of
credit, and general economic conditions.
MARKET
CONDITIONS
The turmoil in the
global financial markets that began in mid-2007 and intensified during 2008
continued to impact borrowing and lending activities during the first nine
months of 2009. Although interbank lending continued to improve during the
second and third quarters of 2009, indicating modest improvement in global
market liquidity, concerns regarding the creditworthiness and nonperformance
risks of trade counterparties continued to adversely affect the market value and
capitalization of many financial institutions and, in turn, resulted in
additional institutional failures, mergers, and consolidations.
During the third
quarter of 2009, the U.S. mortgage market continued to experience volatility,
including increases in delinquency and foreclosure rates on mortgage loans. As
foreclosure moratorium programs instituted in response to rising delinquencies
expired and default rates on modified as well as non-modified loans increased,
the inventory of foreclosed properties grew during the third quarter of 2009.
Although pricing of PLMBS in the secondary PLMBS market improved during the
third quarter of 2009, continued deterioration in the overall credit quality of
the mortgage collateral underlying PLMBS resulted in the recognition of
additional OTTI losses by a number of FHLBanks, including the Seattle Bank,
during the third quarter of 2009. Further, in the third quarter of 2009, the
credit-rating agencies continued to downgrade a significant number of PLMBS,
including many owned by the Seattle Bank (including subordinate tranches of
securities where the Seattle Bank owns a senior tranche), which further
adversely impacted the market values of these securities.
During the first
three quarters of 2009, Seattle Bank advances continued to be an important
source of liquidity to many of our members as they worked through the changing
and difficult financial climate. Our advances balance continued to decline,
however, as many of our members reduced their asset balances, experienced
increases in customer deposits, and participated in one or more of the
regulatory initiatives described above. Member demand continued to be primarily
for short-term, fixed interest-rate advances, and we generally funded these
advances with short-term funding at favorable interest rates. In addition,
advance demand was affected by the failure of eight of our members through
November 12, 2009. We believe that the continued deterioration of the U.S.
mortgage and commercial real estate markets and increasing delinquencies in
consumer credit card debt may result in additional member institution failures
during the remainder of 2009 and 2010, which could further negatively impact
advance demand.
The difficulties in
the housing, credit, and other financial markets, as well as other factors,
prompted significant actions by governments, regulatory agencies, and other
credit market participants around the world, including in the United States, in
2008 and so far in 2009. For example, during this period, the U.S. Treasury, the
Federal Reserve, the FDIC, and the Finance Agency announced a number of major
initiatives, including new measures impacting the FHLBank System, its members,
and the financial markets, to address liquidity pressures and increase
confidence among credit market participants. These initiatives included, for
example, passing the American Recovery and Reinvestment Act of 2009 and
extending the effective periods of a number of Federal Reserve liquidity
programs through February 2010. It is unclear how long it will take for recent
legislative and regulatory initiatives to be fully implemented and, when and if
implemented, what effects they will ultimately have on the U.S. economy. See
“—Recent Regulatory Actions and Developments” below for more
information.
FINANCIAL
RESULTS AND CONDITION
The Seattle Bank
recorded net losses of $93.8 million and $144.3 million for the three and nine
months ended September 30, 2009, compared to a net loss of $18.8 million for the
three months ended September 30, 2008 and net income of $41.8 million for the
nine months ended September 30, 2008. The declines in net income for the three
and nine months ended September 30, 2009 were primarily due to significant
increases in OTTI credit losses on certain of our PLMBS (further discussed
below).
Net interest income
increased by $4.7 million and $12.0 million for the three and nine months ended
September 30, 2009, compared to the same periods in 2008. The increases in net
interest income were primarily driven by more favorable debt funding costs and
by increased investment interest income.
Our net loss on
early extinguishment of consolidated obligations and operating expenses declined
for the three and nine months ended September 30, 2009, compared to the same
periods in 2008, and AHP/REFCORP assessments declined for the nine months ended
September 30, 2009 compared to the same period in 2008. While these factors
improved net income, they were offset by: the OTTI credit losses; decreases in
net gain (loss) on derivatives and hedging activities for the three and nine
months ended September 30, 2009, compared to the same periods in 2008;
and the negative impact of the reversal of 2008 year-to-date AHP/REFCORP
assessments for the three months ended September 30, 2008.
As
of September 30, 2009, we had total assets of $54.1 billion, total outstanding
stock (including mandatorily redeemable capital stock) of $2.8 billion, and
retained earnings of $70.2 million, compared to total assets of $58.4 billion,
total outstanding stock (including mandatorily redeemable stock) of $2.8
billion, and an accumulated deficit of $78.9 million as of December 31, 2008.
The decrease in assets was primarily due to a lower advances balance. Advances,
which peaked at $46.3 billion in September 2008, declined to $24.9 billion as of
September 30, 2009. The change from our accumulated deficit as of December 31,
2008 to retained earnings as of September 30, 2009 primarily resulted from our
adoption of new OTTI accounting guidance (as described below), under which we
recognized a cumulative-effect adjustment of $293.4 million as an increase to
our retained earnings as of January 1, 2009 (with a corresponding adjustment to
accumulated other comprehensive loss), partially offset by our 2009 year-to-date
loss of $144.3 million.
In
April 2009, the Financial Accounting Standards Board (FASB) issued new
accounting guidance for other-than-temporary impairment of securities. This
guidance requires, among other things, the separation of an OTTI loss into (a)
the amount of the total impairment related to credit loss and (b) the amount of
the total impairment related to all other factors (i.e., the “non-credit”
component). The amount of the total OTTI loss related to credit loss is
recognized in earnings in the statement of income. The amount of the total OTTI
loss related to all other factors is recognized in other comprehensive income in
the statement of condition. The Seattle Bank adopted this new OTTI accounting
guidance effective January 1, 2009.
As
a result of our OTTI evaluations as of September 30, 2009, we determined that
the present value of the cash flows expected to be collected was less than the
amortized cost basis of certain of our PLMBS, including 29 securities that had
been identified as other-than-temporarily impaired in previous periods and six
additional securities that were newly identified as other-than-temporarily
impaired as of September 30, 2009. We do not intend to sell these securities and
it is not more likely than not that we will be required to sell these securities
prior to their anticipated recovery.
The fair value of
the majority of our previously identified securities improved as of September
30, 2009, compared to that of June 30, 2009, resulting in minimal additional
total OTTI losses, however, we identified six newly other-than-temporarily
impaired securities as of September 30, 2009. In addition, because our OTTI
analysis indicated further deterioration in the cash flows expected to be
collected on our previously identified securities, we recorded additional credit
losses into earnings and reduced our OTTI recorded in other comprehensive loss.
As a result, we recorded total OTTI losses of $85.0 million and $1.2 billion for
the three and nine months ended September 30, 2009. For the three and nine
months ended September 30, 2009, we recorded OTTI credit losses of $130.1
million and $263.5 million.
Due to the
continued deterioration of the U.S. housing market, we could continue to
recognize additional OTTI losses on our PLMBS if, among other things,
delinquency or loss rates on mortgages continue to increase beyond those already
expected, residential real estate values continue to decline beyond our
forecasted levels as of September 30, 2009, or the collateral supporting our
securities becomes part of a loan modification program. If additional OTTI
losses are taken, they could further negatively impact our earnings, other
comprehensive loss, and total regulatory and GAAP capital, as well as our
compliance with regulatory requirements. The majority of our OTTI losses have
been related to non-credit factors, which we currently expect to recover over
the terms of the investments. See “––Financial Condition—Investments,” Note 4 in
“Part I. Item 1. Financial Statements—Condensed Notes to Financial Statements,”
and “Part II. Item 1A. Risk Factors,” for more information.
Changes in market
interest rates and the considerable decline in activity in the PLMBS market
since mid-2007 have had a significant net unfavorable impact on the fair value
of our assets and liabilities, particularly our PLMBS collateralized by Alt-A
mortgage loans. As of September 30, 2009 and December 31, 2008, our net
unrealized market value losses were $675.1 million and $2.1 billion, which, in
accordance with GAAP, are not reflected in our financial position and operating
results. The decrease in our unrealized market value loss is primarily the
result of the recognition of the $1.2 billion in total OTTI losses for the nine
months ended September 30, 2009 and improvements in the market values of some of
our PLMBS. Because of our net unrealized market value losses, the ratio of the
market value to the book value of our equity was estimated at 63.9% and 22.9% as
of September 30, 2009 and December 31, 2008. Our market value of equity may
continue to fluctuate significantly until conditions more consistent with past
experience return to the financial markets. See Note 11 in “Part I. Item 1.
Financial Statements—Condensed Notes to Financial Statements,” for additional
information on the estimation of fair values.
We
have elected not to hedge the basis risk of our mortgage-related assets (i.e.,
the spread at which our MBS and mortgage loans held for portfolio may be
purchased relative to other financial instruments) due to the cost and lack of
available derivatives that we believe can effectively hedge this risk. For
additional information, see “—Financial Condition,” “Part I. Item 3.
Quantitative and Qualitative Disclosures about Market Risk,” and “Part II. Item
1A. Risk Factors,” in this report.
We
believe the condition of the U.S. economy will continue to affect and be
affected by deterioration in the U.S. housing, commercial real estate, and
consumer credit card debt markets, at least through 2009 and early 2010. Going
forward, we expect to continue to manage our business in order to meet members’
needs, particularly for liquidity, in varying market conditions, and we have
continued to demonstrate our creditworthiness, the ability to access the capital
markets, and a strong liquidity position. However, the actions that we have
taken and continue to take to manage our members’ needs, as well as our
undercapitalized status (as discussed below), have and may continue to
negatively impact our financial condition and results of operations. For
example, between September 2008 and August 2009, in order to reduce our
counterparty credit risk, we limited the number of counterparties and
transaction amounts for unsecured investments, resulting in significantly lower
2009 year-to-date interest income from investments and significantly higher
capital-to-asset and leverage ratios – although beginning in August 2009, in
response to a more stable liquidity environment and in order to maintain
capacity for advance demand, we re-established activity with certain
counterparties for unsecured investing. In addition, while we continue to assess
the impact of legislative, regulatory, and membership changes, we believe that
some of these changes may negatively affect our advance volumes, our cost of
funds, and our flexibility in managing our business, further affecting our
financial condition and results of operations.
RECENT
REGULATORY ACTIONS AND DEVELOPMENTS
On
July 30, 2009, the Finance Agency published a proposed rule related to the
reconstitution and strengthening of the Office of Finance Board of Directors.
The proposed regulation would increase the size of the Office of Finance Board
of Directors, create a fully independent audit committee, provide for the
creation of other committees and set a method for electing independent
directors, along with setting qualifications for these directors. Finance Agency
regulation defines the Office of Finance board of directors. Under existing
Finance Agency regulation, the Office of Finance Board of Directors is made up
of two FHLBank presidents and one independent director. The Finance Agency
has proposed that all 12 FHLBank presidents be members of the Office of Finance
Board of Directors, along with three to five independent directors. The
independent directors would comprise the audit committee of the Office of
Finance Board of Directors with oversight responsibility for the combined
financial reports. Under the proposed rule, the audit committee of the Office of
Finance would be responsible for ensuring that the FHLBanks adopt consistent
accounting policies and procedures so that the combined financial reports will
continue to be accurate and meaningful.
Also, on July 30,
2009, the Finance Agency published a final rule that implemented the prompt
corrective action (PCA) provisions of the Housing and Economic Recovery Act of
2008 (Housing Act). The rule established four capital classifications (i.e.,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized) for FHLBanks and implemented the PCA provisions
that apply to FHLBanks that are not deemed to be adequately capitalized. Once an
FHLBank is determined (on not less than a quarterly basis) by the Finance Agency
to be other than adequately capitalized, the FHLBank becomes subject to
additional supervisory authority by the Finance Agency. Before implementing a
reclassification, the Director of the Finance Agency is required to provide the
FHLBank with written notice of the proposed action and an opportunity to submit
a response.
In
August 2009, following applicable notice and response, we received a capital
classification of undercapitalized from the Finance Agency. An FHLBank with a
final capital classification of undercapitalized, such as the Seattle Bank, is
subject to a range of mandatory or discretionary restrictions. For example, an
undercapitalized FHLBank must submit a capital restoration plan to the Finance
Agency, as well as obtain prior approval from the Finance Agency for any new
business activities. In addition, the mandatory restrictions include
restrictions on asset growth.
In
accordance with the PCA provisions, we submitted a proposed capital restoration
plan to the Finance Agency in August 2009. The Finance Agency determined that it
was unable to approve our proposed plan and required us to submit a new plan by
October 31, 2009. We subsequently requested an extension in order to prepare a
revised proposed capital restoration plan and the Finance Agency approved an
extension to December 6, 2009. It is unknown whether the Finance Agency will
accept our revised capital restoration plan. Failure to obtain approval of our
revised capital restoration plan could result in the appointment of a
conservator or receiver by the Finance Agency. Further, Finance Agency approval
of our proposed capital restoration plan could result in additional restrictions
for the Seattle Bank. In addition, the Finance Agency could take other
regulatory actions (as further described in the PCA provisions), which could
negatively impact demand for our advances, our financial performance, and
business in general.
Although as of
September 30, 2009 the Seattle Bank met all of our regulatory requirements
(including the risk-based capital requirement), on November 6, 2009, the Finance
Agency reaffirmed the Seattle Bank’s capital classification as undercapitalized.
All mandatory actions and restrictions in place as a result of the previous
capital classification determination remain in effect, including not redeeming
or repurchasing capital stock or paying dividends without prior Finance Agency
approval. The Finance Agency also indicated that it would not change our capital
classification to adequately capitalized until the Finance Agency believes that
we have demonstrated sustained performance in line with an approved capital
restoration plan. Our capital classification will remain undercapitalized until
the Finance Agency determines otherwise.
See “Part I. Item
1. Business—Statutory Capital Requirements” in our 2008 annual report on Form
10-K for additional information on consequences for FHLBanks that are determined
not to be adequately capitalized.
In
October 2009, the SEC extended the date for non-accelerated filers to
comply with the auditor attestation requirement under section 404(b) of the
Sarbanes-Oxley Act of 2002. Under the extension, non-accelerated filers
must comply with this requirement in annual reports for fiscal years
ending on or after June 15, 2010 (December 31, 2010 for the Seattle
Bank). We do not expect to take advantage of the extension and plan to
include the section 404(b) auditor attestation report in our annual
report for the year ending December 31, 2009.
In addition, federal legislation has been proposed that would
regulate the U.S. market for financial derivatives by providing for, in
certain circumstances, centralized clearing of derivatives, trading of
standardized products on regulated exchanges, and regulation of swap dealers and
major swap participants. The proposed legislation may also require higher margin
and capital requirements for non-standardized derivatives. The proposed
legislation, if enacted, could materially affect the FHLBanks’, including the
Seattle Bank's, ability to: 1) hedge interest-rate risk exposure, 2) achieve
risk management objectives, and 3) act as an intermediary between the FHLBanks’
members and counterparties. We are unsure if,
when, or in what form this legislation will ultimately be approved and how it
may affect Seattle Bank.
The Seattle Bank is
continuing to evaluate the implications of new regulatory and legislative
developments, including Finance Agency proposals and actions and other
regulations, orders, and reports on our members’ and the Seattle Bank’s
business. See “Part II. Item 1A. Risk Factors” in this report.
FINANCIAL
HIGHLIGHTS
The following table
presents a summary of selected financial information for the Seattle Bank as of
and for the periods indicated.
September
30,
|
June
30,
|
March
31,
|
December
31,
|
September
30,
|
||||||||||||||||
Selected
Financial Data
|
2009
|
2009
|
2009
|
2008
|
2008
|
|||||||||||||||
(in
millions, except ratios)
|
||||||||||||||||||||
Statements
of Condition (at period end)
|
||||||||||||||||||||
Total
assets
|
$ | 54,087 | $ | 49,384 | $ | 56,947 | $ | 58,362 | $ | 76,195 | ||||||||||
Cash and
investments (1)
|
24,717 | 16,358 | 19,965 | 16,006 | 24,369 | |||||||||||||||
Advances
|
24,908 | 28,257 | 31,848 | 36,944 | 46,331 | |||||||||||||||
Mortgage loans
held for portfolio
|
4,293 | 4,571 | 4,899 | 5,087 | 5,211 | |||||||||||||||
Deposits and
other borrowings
|
285 | 778 | 671 | 582 | 1,434 | |||||||||||||||
Consolidated
obligations
|
51,432 | 46,061 | 53,481 | 54,469 | 70,875 | |||||||||||||||
Affordable
Housing Program (AHP)
|
10 | 13 | 15 | 16 | 23 | |||||||||||||||
Payable to
Resolution Funding Corporation (REFCORP)
|
||||||||||||||||||||
Class A stock
- putable
|
135 | 135 | 134 | 118 | 396 | |||||||||||||||
Class B
stock - putable
|
1,718 | 1,735 | 1,733 | 1,730 | 2,480 | |||||||||||||||
Retained
earnings (accumulated deficit) (2)
|
70 | 164 | 198 | (79 | ) | 162 | ||||||||||||||
Accumulated
other comprehensive loss (2)
|
(996 | ) | (1,238 | ) | (1,105 | ) | (3 | ) | (1 | ) | ||||||||||
Total GAAP
capital
|
927 | 796 | 961 | 1,766 | 3,037 | |||||||||||||||
Statements
of Income (for the three month period ended)
|
||||||||||||||||||||
Interest
income
|
$ | 183 | $ | 223 | $ | 315 | $ | 485 | $ | 523 | ||||||||||
Net interest
income
|
48 | 48 | 74 | 21 | 43 | |||||||||||||||
Other
loss
|
(127 | ) | (69 | ) | (79 | ) | (264 | ) | (47 | ) | ||||||||||
Other
expense
|
14 | 13 | 12 | 13 | 22 | |||||||||||||||
Loss before
assessments
|
(93 | ) | (35 | ) | (16 | ) | (256 | ) | (26 | ) | ||||||||||
AHP and
REFCORP assessments
|
(15 | ) | (7 | ) | ||||||||||||||||
Net loss
|
(93 | ) | (35 | ) | (16 | ) | (241 | ) | (19 | ) | ||||||||||
Dividends
(for the three month period ended)
|
||||||||||||||||||||
Dividends paid
in cash and stock
|
$ | $ | $ | $ | $ | 9 | ||||||||||||||
Annualized
dividend rate
|
||||||||||||||||||||
Class
A stock - putable
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 2.09 | % | ||||||||||
Class
B stock - putable
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 1.40 | % | ||||||||||
Dividend
payout ratio
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | -49.38 | % | ||||||||||
Financial
Statistics (for the three month period ended)
|
||||||||||||||||||||
Return on
average equity
|
-43.94 | % | -13.58 | % | -3.64 | % | -45.58 | % | -2.75 | % | ||||||||||
Return on
average assets
|
-0.72 | % | -0.26 | % | -0.11 | % | -1.41 | % | -0.11 | % | ||||||||||
Total average
equity to average assets (3)
|
1.64 | % | 1.92 | % | 3.00 | % | 3.10 | % | 3.96 | % | ||||||||||
Total
regulatory capital-to-assets ratio (4)
|
5.30 | % | 5.99 | % | 5.24 | % | 4.60 | % | 4.18 | % | ||||||||||
Net interest
margin
(5)
|
0.34 | % | 0.33 | % | 0.49 | % | 0.12 | % | 0.25 | % |
(1) |
Investments
may include, among other things, securities purchased under agreements to
resell, federal funds sold, and AFS and HTM securities.
|
(2)
|
As a result of
our adoption of new FASB OTTI guidance, effective January 1, 2009, we
recognized a cumulative effect adjustment of $293.4 million as an increase
to our retained earnings as of January 1, 2009, with a corresponding
adjustment to accumulated other comprehensive loss.
|
(3)
|
Total average
equity to average assets ratio is monthly average stock, retained
earnings/(accumulated deficit), and accumulated other comprehensive loss,
divided by monthly total average assets.
|
(4) |
Total
regulatory capital-to-assets ratio is regulatory stock plus retained
earnings, divided by the total assets at the end of the
period.
|
(5) |
Net interest
margin is net interest income divided by average earning
assets.
|
FINANCIAL
CONDITION
Our assets
principally consist of advances, investments, and mortgage loans held for
portfolio. Our advance balance and our advances as a percentage of total assets
as of September 30, 2009 declined from December 31, 2008, to $24.9 billion from
$36.9 billion and to 46.1% from 63.3%. These declines primarily resulted from
$9.5 billion in maturities of JPMorgan Chase Bank, N.A. advances, prepayments of
$2.9 billion in advances by Merrill Lynch Bank USA, generally lower advance
activity across our membership, and an increase in our short-term investments
portfolio, which includes federal funds sold, certificates of deposit, and
securities purchased under agreements to resell. The increase in our short-term
investments is primarily intended to provide sufficient liquidity to meet
members’ demand for advances, as well as to provide additional investment
income.
The following table summarizes our
major categories of assets as a percentage of total assets as of September 30,
2009 and December 31, 2008.
As
of
|
As
of
|
||||
Major
Categories of Assets as a Percentage of Total Assets
|
September
30, 2009
|
December
31, 2008
|
|||
(in
percentages)
|
|||||
Advances
|
46.1
|
63.3
|
|||
Investments
|
45.7
|
27.4
|
|||
Mortgage loans
held for portfolio
|
7.9
|
8.7
|
|||
Other
assets
|
0.3
|
0.6
|
|||
Total
|
100.0
|
100.0
|
We
obtain funding to support our business primarily through the issuance, by the
Office of Finance on our behalf, of debt securities in the form of consolidated
obligations. To a significantly lesser extent, we also rely on member deposits
and on the issuance of our equity securities to our members in connection with
their membership and their utilization of our products. In addition, during the
third quarter of 2008, the Seattle Bank entered into a lending agreement with
the U.S. Treasury (Lending Agreement) to serve as a contingent source of
liquidity. As of November 12, 2009, we had not drawn on this available liquidity
source. The Lending Agreement is scheduled to expire on December 31, 2009. For
additional information regarding the Lending Agreement, see “––Capital Resources
and Liquidity––Liquidity.”
The following table
summarizes our major categories of liabilities and total GAAP capital as a
percentage of total liabilities and GAAP capital as of September 30, 2009 and
December 31, 2008.
Major
Categories of Liabilities and GAAP Capital
|
As
of
|
As
of
|
|||
as
a Percentage of Total Liabilities and GAAP Capital
|
September
30, 2009
|
December
31, 2008
|
|||
(in
percentages)
|
|||||
Consolidated
obligations
|
95.1
|
93.3
|
|||
Deposits
|
0.5
|
1.0
|
|||
Other
liabilities*
|
2.7
|
2.7
|
|||
Total GAAP
capital
|
1.7
|
3.0
|
|||
Total
|
100.0
|
100.0
|
*
|
Mandatorily
redeemable capital stock, representing 1.7% and 1.6% as of total
liabilities and GAAP capital as of September 30, 2009 and December 31,
2008, is recorded in other
liabilities.
|
We
report our assets, liabilities, and commitments in accordance with GAAP,
including the market value of our assets, liabilities, and commitments, which we
also review for purposes of risk management. The differences between the
carrying value and market value of our assets, liabilities, and commitments are
unrealized market-value gains or losses. As of September 30, 2009 and
December 31, 2008, we had net unrealized market value losses of $675.1
million and $2.1 billion. The decrease in our unrealized market value loss is
primarily the result of the recognition of $1.2 billion in OTTI losses for the
nine months ended September 30, 2009 and improvements in the market values of
some of our PLMBS. Because of these net unrealized market value losses, the
ratio of the market value of equity-to-book value of equity was 63.9% and 22.9%
as of September 30, 2009 and December 31, 2008. We have elected not to
hedge our mortgage-related asset basis risk due to the cost and lack of
effective means we believe can effectively hedge this risk.
We
discuss the material changes in each of our principal categories of assets,
liabilities, and equity in more detail below.
ADVANCES
Advances decreased
by 32.6%, or $12.0 billion, to $24.9 billion, as of September 30, 2009, compared
to December 31, 2008. This decline primarily resulted from $9.5 billion in
maturities of JPMorgan Chase Bank, N.A. (formerly Washington Mutual Bank,
F.S.B.) advances, advance prepayments of $2.9 billion by Merrill Lynch Bank USA,
and generally lower advance activity across our membership.
As
of September 30, 2009, five borrowers held 65.0% of the par value of our
outstanding advances, with two borrowers holding 46.2% (Bank of America Oregon,
N.A. with 33.2% and JPMorgan Chase Bank, N.A. with 13.0%). As of December 31,
2008, five borrowers held 68.4% of the par value of our outstanding advances,
with three borrowers holding 56.7% (JPMorgan Chase Bank, N.A. with 35.0%, Bank
of America Oregon, N.A. with 11.4%, and Merrill Lynch Bank USA with 10.3%). No
other borrower held over 10% of our outstanding advances as of September 30,
2009 or December 31, 2008.
On
July 1, 2009, the assets of Merrill Lynch Bank USA, previously a member of the
Seattle Bank, were transferred to Bank of America, National Association (BANA),
a non-member, as part of its purchase of Merrill Lynch, the parent of Merrill
Lynch Bank USA. As part of this restructuring, outstanding advances of $411.2
million and Seattle Bank Class B stock of $146.3 million held by Merrill Lynch
Bank USA were transferred to BANA. Immediately subsequent to the asset transfer,
BANA transferred substantially all of the Seattle Bank Class B stock to its
subsidiary, Bank of America Oregon, N.A., a Seattle Bank member.
We
expect that advance volumes and associated advance interest income which began
to decline in the fourth quarter of 2008, will be further negatively impacted as
a result of the acquisition of our former largest member, Washington Mutual
Bank, F.S.B. by JPMorgan Chase Bank, N.A., a non-member institution, in October
2008. As of September 30, 2009, approximately 75% of advances outstanding to
JPMorgan Chase Bank, N.A. as of December 31, 2008 had matured. Because a large
percentage of our advances is held by only a few members and a non-member
shareholder, continued changes in this group’s borrowing decisions can
significantly affect the amount of our advances outstanding. We expect that the
concentration of advances with our largest borrowers will remain significant for
the foreseeable future. In addition, the extension to February 2010 of certain
of the Federal Reserve’s liquidity programs may also adversely impact demand for
our advances.
The percentage of
advances maturing in one year or less decreased to 54.7% as of September 30,
2009, from 66.2% as of December 31, 2008, and the percentage of variable
interest-rate advances (including floating-to-fixed convertible advances) as a
portion of our total advance portfolio decreased to 10.2% as of September 30,
2009, compared to 31.6% as of December 31, 2008. These changes generally reflect
our members’ preference for short-term, fixed interest-rate funding given the
current very low, short-term interest rates available in the current
environment.
The total
weighted-average interest rate on our advance portfolio declined to 2.48% as of
September 30, 2009 from 3.02% as of December 31, 2008. The weighted-average
interest rate on our portfolio depends upon the term-to-maturity and type of
advances within the portfolio at the time of measurement, as well as on our cost
of funds (which is the basis for our advance pricing). The lower prevailing
market interest rates, as well as our overall lower cost of funds, contributed
to significantly lower yields on our advances across all
terms-to-maturity.
The following table summarizes our advance portfolio by remaining
terms-to-maturity and weighted-average interest rates as of September 30, 2009
and December 31, 2008.
As
of September 30, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Weighted-
|
Weighted-
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Terms-to-Maturity
and Weighted-Average Interest Rates
|
Amount
|
Interest
Rate
|
Amount
|
Interest
Rate
|
||||||||||||
(in
thousands, except interest rates)
|
||||||||||||||||
Due in one
year or less
|
$ | 13,365,769 | 1.88 | $ | 24,014,584 | 2.65 | ||||||||||
Due after one
year through two years
|
4,214,305 | 2.44 | 4,540,058 | 3.34 | ||||||||||||
Due after two
years through three years
|
1,788,547 | 2.97 | 1,679,058 | 3.83 | ||||||||||||
Due after
three years through four years
|
1,341,451 | 3.26 | 1,440,120 | 3.89 | ||||||||||||
Due after four
years through five years
|
523,367 | 3.16 | 1,353,482 | 3.32 | ||||||||||||
Thereafter
|
3,200,959 | 4.35 | 3,268,677 | 4.41 | ||||||||||||
Total
par value
|
24,434,398 | 2.48 | 36,295,979 | 3.02 | ||||||||||||
Commitment
fees
|
(677 | ) | (803 | ) | ||||||||||||
Discount on
AHP advances
|
(84 | ) | (126 | ) | ||||||||||||
Discount on
advances
|
(4,600 | ) | (5,030 | ) | ||||||||||||
Hedging
adjustments
|
479,319 | 653,831 | ||||||||||||||
Total
|
$ | 24,908,356 | $ | 36,943,851 |
For additional
information on advances, see Note 5 in “Part I. Item 1. Financial
Statements––Condensed Notes to Financial Statements” in this
report.
Member
Demand for Advances
Many factors affect
the demand for advances, including changes in credit markets, interest rates,
collateral availability, member liquidity, and member funding needs. Our members
regularly evaluate financing options relative to our advance products and
pricing. Although many sources of wholesale funding, such as repurchase
agreements, commercial paper, and certain other commercial lending arrangements,
were either constrained or more expensive than FHLBank advances during the first
nine months of 2009, our members generally had less need for our advances as
they, among other things, continued their efforts to reduce their asset balances
and experienced increases in customer deposits, providing them with additional
liquidity. Advances, which peaked at $46.3 billion in September 2008, declined
to $36.9 billion as of December 31, 2008 and $24.9 billion as of September 30,
2009.
The Seattle Bank’s
advance pricing alternatives include differential pricing, daily market-based
pricing, and auction pricing (generally offered two times per week for limited
terms, but not offered by us during the third quarter of 2009). We may also
offer featured advances from time to time, where advances of specific maturities
are offered at lower rates than our daily market-based pricing. The following
table summarizes our advance pricing as a percentage of new advance activity,
excluding cash management advances.
For
the Nine Months Ended September 30,
|
||||
Advance
Pricing
|
2009
|
2008
|
||
(in
percentages)
|
||||
Differential
pricing
|
73.0
|
65.0
|
||
Daily
market-based pricing
|
26.3
|
31.4
|
||
Auction
pricing
|
0.7
|
3.6
|
||
Total
|
100.0
|
100.0
|
We
believe that the use of differential pricing gives us greater flexibility to
compete for advance business. The use of differential pricing means that
interest rates on our advances may be lower for some members requesting advances
within specified criteria than for others, so that we can compete with lower
interest rates available to those members that have alternative wholesale or
other funding sources. In general, our larger members have more alternative
wholesale funding sources and are able to access funding at lower interest rates
than our smaller members. Overall, we believe that the use of differential
pricing has helped to increase our advances balance and our lending capacity and
improve our ability to generate net income for the benefit of all our
members.
The demand for
advances also may be affected by the manner in which members support their
advances with stock, the dividends we pay on our stock, and our members’ ability
to have stock repurchased or redeemed by us. In December 2006, we implemented
amendments to our Capital Plan, including the ability to issue Class A
stock. Overall, we believe that the availability of the Class A stock,
which has a six-month redemption period, as well as our resumption of quarterly
dividend payments in December 2006, contributed to our members’ use of our
advances in 2008 and early 2009, particularly advances that required new stock
purchases. However, as a result of OTTI losses recorded in the third and fourth
quarters of 2008 and a risk-based capital deficiency as of December 31, 2008, we
suspended dividend payments and Class A stock repurchases in late 2008. In May
2009, to increase our permanent capital, our Board suspended the issuance of
Class A stock to support new advances, effective June 1, 2009. After that date,
new advances requiring stock purchases have had to be supported by Class B
stock, which increases the Seattle Bank’s permanent capital (against which our
risk-based capital requirement is measured). In August 2009, we received a
capital classification of undercapitalized from the Finance Agency based
primarily on risk-based capital deficiencies resulting from unrealized
market-value losses on our PLMBS. An FHLBank whose final capital classification
is determined to be undercapitalized, such as the Seattle Bank, is subject to a
range of mandatory and discretionary restrictions, including restrictions on
asset growth and the need to obtain prior approval from the Finance Agency of
any new business activity. In addition, an undercapitalized FHLBank needs to
submit a capital restoration plan to the Finance Agency for approval. Although
we do not believe that these suspensions have thus far significantly adversely
affected our advance volumes, we cannot predict when we will be able to resume
dividend payments and stock repurchases or how the continuance of these
suspensions or the institution of any other restrictions will affect future
advance demand.
In
March 2009, the FDIC issued a final rule revising its risk-based assessment
system, effective April 1, 2009. The changes to the assessment system include
higher rates for institutions that rely significantly on secured liabilities.
Because our advances are considered secured liabilities by our members, the rule
has the effect of increasing our members’ all-in cost of borrowing from the
Seattle Bank and may lead to reduced member demand for our advances. It is not
clear whether this change has affected advance demand during the third quarter
of 2009 or if it will impact advance demand going forward.
See “Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Capital Resources and Liquidity—Capital Resources—Capital
Plan Amendments and Board Policies Regarding Seattle Bank Stock” in our 2008
annual report on Form 10-K for additional information.
Credit
Risk
Our credit risk
from advances is concentrated in commercial banks and savings institutions. As
of September 30, 2009, we had advances of $11.3 billion outstanding to two
borrowers, which represented 46.2% (33.2% and 13.0%) of our total par value of
advances outstanding. As of December 31, 2008, we had advances of $20.6 billion
outstanding to three borrowers, which represented 56.7% (35.0%, 11.4%, and
10.3%) of our total par value of advances outstanding.
Borrowing capacity
depends upon the type of collateral provided by a borrower, and is calculated as
a percentage of the collateral’s value. We periodically evaluate the percentage
of collateral value to take into account market conditions, etc. As of September
30, 2009 and December 31, 2008, we had rights to collateral (loans, and/or
securities), on a borrower-by-borrower basis, with an estimated value in excess
of outstanding advances. To estimate the value of the collateral, we use the
unpaid balance for loans and vendor pricing services for securities. In
addition, the Competitive Equality Banking Act of 1987 affords priority to any
security interest granted to us by any of our member borrowers over the claims
and rights of any party, including any receiver, conservator, trustee, or
similar party having rights as a lien creditor. Two exceptions to this priority
are claims and rights that would be entitled to priority under otherwise
applicable law or that are held by actual bona fide purchasers for value or by
parties that have actual perfected security interests in the collateral. In
addition, our claims are given certain preferences pursuant to the receivership
provisions in the Federal Deposit Insurance Act. Most member borrowers grant us
a blanket lien covering substantially all of the member borrower’s assets and
consent to our filing a financing statement evidencing the blanket lien, which
we do as a standard practice.
Through November
12, 2009, we have never experienced a credit loss on an advance. Given the
current economic environment, we expect that some of our member institutions
will experience financial difficulties, including failure. As of December 31,
2008 and continuing through October 31, 2009, the number of borrowers on our
internal credit watch list increased to approximately one-third of our
membership, generally as a result of increases in their non-performing assets
and their need for additional capital. Further, in the nine months ended
September 30, 2009, eight of our member institutions failed (with no additional
member failures through November 12, 2009). All outstanding advances to these
members were fully collateralized and were prepaid or assumed by the acquiring
institution or the FDIC.
We
monitor the financial condition of our borrowers. Should the financial condition
of a borrower decline or become otherwise impaired, we may take possession of a
borrower’s collateral, or require that the borrower provide additional
collateral to us. In the first nine months of 2009 and during the second half of
2008, due to deteriorating market conditions and pursuant to our advance
agreements, we moved a number of borrowers from blanket collateral arrangements
to physical possession. As of September 30, 2009, approximately 15.4% of our
borrowers were on the physical possession collateral arrangement. This
arrangement generally limits our credit risk and allows us to continue lending
to borrowers whose financial condition has weakened. See “Part I. Item 1.
Business—Our Business—Products and Services—Advances,” in our 2008 annual report
on Form 10-K for additional information on advances and credit risk
management.
Investments
We
maintain portfolios of short- and long-term investments for liquidity purposes
and to generate returns on our capital. Short-term investments generally include
federal funds sold, certificates of deposit, securities purchased under
agreements to resell, and Temporary Loan Guarantee Program (TLGP) securities,
while long-term investments generally include MBS and agency obligations.
Investment levels generally depend upon our liquidity and leverage needs,
including demand for our advances.
The following table
summarizes the carrying values of our investments as of September 30, 2009 and
December 31, 2008.
As
of
|
As
of
|
|||||||
Short-
and Long-Term Investments
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands)
|
||||||||
Short-Term
Investments
|
||||||||
Federal funds
sold
|
$ | 5,862,300 | $ | 2,320,300 | ||||
Certificates
of deposit
|
6,603,000 | |||||||
Securities
purchased under agreements to resell
|
4,750,000 | 3,900,000 | ||||||
Other (TLGP
securities)
|
1,250,000 | |||||||
Total
short-term investments
|
$ | 17,215,300 | $ | 7,470,300 | ||||
Long-Term
Investments
|
||||||||
Mortgage-backed
securities
|
6,840,372 | 7,589,423 | ||||||
Other U.S.
agency obligations
|
53,010 | 64,164 | ||||||
Government-sponsored
enterprise obligations
|
595,233 | 875,604 | ||||||
State or local
housing agency obligations
|
4,460 | 5,700 | ||||||
Total
long-term investments
|
$ | 7,493,075 | $ | 8,534,891 |
Between
December 31, 2008 and September 30, 2009, we increased our short-term
investment portfolio to provide for sufficient liquidity to meet members’
potential demand for advances by leveraging our members’ stock purchases and
reinvesting funds from maturing advances and investments. In September 2008, in
order to reduce our unsecured counterparty exposure, we modified our investment
strategy and began replacing our unsecured short-term investments with secured
short-term investments and overnight federal funds sold, which because of the
generally lower yields than on unsecured short-term investments and PLMBS,
depressed our investment interest income. However, beginning in August 2009, in
response to a more stable liquidity environment and in order to maintain
capacity for advance demand, we re-established short-term investing
activity with certain counterparties (after having slightly increased our
unsecured short-term investment activity in March 2009). As of September 30,
2009, our short-term investments increased by 130.4%, to $17.2 billion, from
$7.5 billion as of December 31, 2008. We expect that our short-term
investment portfolio will continue to fluctuate based on the Seattle Bank’s
liquidity, investment strategy, and leverage needs, as well as advance balances
and market conditions.
For our long-term
investment portfolio, we are currently purchasing only GSE or U.S. agency MBS.
Our long-term investment portfolio declined by 12.2%, to $7.5 billion, primarily
due to principal payments.
Mortgage-Backed
Securities
Previously, each
FHLBank’s MBS investments were limited at the time a security was purchased, to
300% of the FHLBank’s regulatory capital, which in our case is comprised of
capital stock, retained earnings, and mandatorily redeemable capital stock. In
March 2008, the Finance Agency adopted a resolution authorizing the FHLBanks to
increase their purchases of agency MBS, effective immediately, from 300% to 600%
of an FHLBank’s regulatory capital, subject to certain requirements. This
resolution remains in effect for two years. To date, we have not utilized this
increased authority.
Our MBS investments
represented 239.0% and 282.4% of our regulatory capital as of September 30, 2009
and December 31, 2008. As of September 30, 2009 and December 31, 2008, our
MBS investments included $1.2 billion (both periods) in Fannie Mae MBS and $1.9
billion and $728.0 million in Freddie Mac MBS. As of September 30, 2009, the
carrying value of our investments in MBS rated “AAA” (or its equivalent) by a
nationally recognized statistical rating organization (NRSRO), such as Moody’s
Investor Service (Moody’s) and Standard & Poor’s (S&P), totaled
$4.7 billion. See “—Credit Risk” below for credit ratings relating to
our MBS investments.
On
September 30, 2009, we transferred certain of our PLMBS with an amortized
cost of $1.2 billion and a fair value of $664.7 million from our HTM
portfolio to AFS portfolio. Upon transfer, the carrying value of these
securities was increased by $108.2 million (and recorded in other comprehensive
income) to reflect the securities at fair value. These transferred
PLMBS had OTTI losses recognized during the quarter
ended September 30, 2009, which we believe evidences a significant
decline in the issuers’ creditworthiness. We transferred the securities to the
AFS portfolio to increase our financial flexibility with respect to
these securities.
Other
U.S. Agency Obligations
Our investments in
other U.S. agency obligations consist primarily of debt securities of government
agencies whose debt is guaranteed, directly or indirectly, by the U.S.
government. Our investments in other U.S. agency obligations declined slightly
as of September 30, 2009 from December 31, 2008, primarily due to principal
repayments.
Government-Sponsored
Enterprise Obligations
Our investments in
GSEs consist primarily of unsecured debt securities of Fannie Mae and Freddie
Mac. Fannie Mae securities totaled $102.9 million and $300.9 million and
Freddie Mac securities totaled $193.0 million and $275.6 million as of September
30, 2009 and December 31, 2008. Finance Agency regulations limit any
investments in the debt of any one GSE to the lower of 100% of our regulatory
capital or the capital of the GSE.
Credit
Risk
We are subject to credit risk on our investments. We limit our
unsecured credit exposure to any counterparty, other than the U.S. government or
GSEs, based on the credit quality and capital level of the counterparty and the
GAAP capital level of the Seattle Bank. As of September 30, 2009, our unsecured
credit exposure was $13.1 billion, primarily consisting of $5.9 billion of
federal funds sold and $6.6 billion in certificates of deposit. As of
December 31, 2008, our unsecured credit exposure was $4.5 billion,
primarily consisting of $2.3 billion in federal funds sold and $1.3 billion in
TLGP securities. The increase in unsecured credit exposure primarily resulted
from our investments in certificates of deposit and federal funds sold.Our MBS investments
consist of agency guaranteed securities and senior tranches of privately issued
prime, Alt-A, and subprime MBS, collateralized by residential mortgage loans,
including hybrid adjustable-rate mortgages (ARMs) and option-ARMs. Our exposure
to the risk of loss on our investments in MBS increases when the loans
underlying the MBS exhibit high rates of delinquency and foreclosure, as well as
losses on the sale of foreclosed properties. In order to reduce our risk of loss
on these investments, all of the MBS owned by the Seattle Bank contain one or
more of the following forms of credit protection:
•
|
Subordination
– where the MBS is structured such that payments to junior classes are
subordinated to senior classes to ensure cash flows to the senior
classes.
|
|
•
|
Excess spread
– where the weighted-average coupon rate of the underlying mortgage loans
in the pool is higher than the weighted-average coupon rate on the MBS.
The spread differential may be used to cover any losses that may
occur.
|
|
•
|
Over-collateralization
– where the total outstanding balance on the underlying mortgage loans in
the pool is greater than the outstanding MBS balance. The excess
collateral is available to cover any losses that may
occur.
|
|
•
|
Insurance
wrap – where a third-party bond insurance company (e.g., a monoline
insurer) guarantees timely payment of principal and interest on the MBS.
The bond insurance company is obligated to cover any losses that occur. As
of September 30, 2009, the Seattle Bank held $3.4 million in investments
with unrealized losses of $1.5 million that had been credit-enhanced by a
monoline insurer, MBIA. We also have additional credit enhancements on
these securities such that we expect to collect all amounts due according
to their contractual terms.
|
The following table
summarizes the carrying value of our long-term investments and their credit
ratings as of September 30, 2009 and December 31, 2008.
As
of September 30, 2009
|
||||||||||||||||||||||||
AAA
or
|
Below
|
|||||||||||||||||||||||
Government
|
Investment
|
|||||||||||||||||||||||
Long-Term
Investments by Credit Rating
|
Agency
|
AA
|
A |
BBB
|
Grade
|
Unrated
|
Total
|
|||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
U.S. agency
obligations
|
$ | 634,979 | $ | $ | $ | $ | $ | 13,264 | $ | 648,243 | ||||||||||||||
State or local
housing investments
|
4,460 | 4,460 | ||||||||||||||||||||||
Residential
mortgage-backed securities
|
||||||||||||||||||||||||
Government-sponsored
enterprise
|
3,138,410 | 3,138,410 | ||||||||||||||||||||||
Private-label
|
1,569,901 | 85,705 | 128,827 |
181,233
|
1,736,296
|
3,701,962 | ||||||||||||||||||
Total
long-term investment securities
|
$ | 5,343,290 | $ | 90,165 | $ | 128,827 | $ |
$181,233
|
$ |
1,736,296
|
$ | 13,264 | $ | 7,493,075 |
As
of September 30, 2009
|
|||||||||||||||||||||
Long-Term
Investments below Investment Grade
|
BB
|
B |
CCC
|
CC
|
C |
Total
|
|||||||||||||||
(in
thousands)
|
|||||||||||||||||||||
Private-label
residential mortgage-backed securities
|
$ | 448,518 | $ | 403,781 | $ | 778,014 | $ | 103,330 | $ | 2,653 | $ | 1,736,296 | |||||||||
Total
securities below investment grade
|
$ | 448,518 | $ | 403,781 | $ | 778,014 | $ | 103,330 | $ | 2,653 | $ | 1,736,296 |
As
of December 31, 2008
|
||||||||||||||||||||||||
AAA
or
|
||||||||||||||||||||||||
Government
|
||||||||||||||||||||||||
Long-Term
Investments by Credit Rating
|
Agency
|
AA
|
A |
BBB
|
CCC
|
Unrated
|
Total
|
|||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
U.S. agency
obligations
|
$ | 925,771 | $ | $ | $ | $ | $ | 13,997 | $ | 939,768 | ||||||||||||||
State or local
housing investments
|
380 | 5,320 | 5,700 | |||||||||||||||||||||
Residential
mortgage-backed securities
|
||||||||||||||||||||||||
Government-sponsored
enterprise
|
2,002,701 | 2,002,701 | ||||||||||||||||||||||
Private-label
|
5,470,426 | 56,779 | 38,905 |
17,694
|
2,918
|
5,586,722 | ||||||||||||||||||
Total
long-term investment securities
|
$ | 8,399,278 | $ | 62,099 | $ | 38,905 | $ |
17,694
|
$ |
$2,918
|
$ | 13,997 | $ | 8,534,891 |
Between September
30, 2009 and November 12, 2009, one of our PLMBS with an unpaid principal
balance of $77.6 million was downgraded to “B” from “A.”
The following table
summarizes the unpaid principal balance, amortized cost, carrying value, and
gross unrealized loss of our PLMBS by credit rating and year of issuance, as
well as the weighted-average credit enhancement on the applicable securities as
of September 30, 2009.
As
of September 30, 2009
|
||||||||||||||||||||||
Private-Label
Mortgage-Backed Securities Ratings
|
Unpaid Principal
Balance |
Amortized Cost |
Carrying
Value
|
Gross Unrealized
Loss |
Current Weighted-Average |
|||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||
Prime
|
||||||||||||||||||||||
AAA
|
||||||||||||||||||||||
2004 and
earlier
|
$ | 796,494 | $ | 790,913 | $ | 790,913 | $ | (26,084 | ) | 7.33 | ||||||||||||
A | ||||||||||||||||||||||
2004 and
earlier
|
30,155 | 30,254 | 30,254 | (907 | ) | 5.68 | ||||||||||||||||
Total
prime
|
826,649 | 821,167 | 821,167 | (26,991 | ) | 7.27 | ||||||||||||||||
Alt-A
|
||||||||||||||||||||||
AAA
|
||||||||||||||||||||||
2004 and
earlier
|
448,217 | 446,814 | 446,814 | (30,977 | ) | 6.17 | ||||||||||||||||
2005 | 4,426 | 4,435 | 4,435 | (1,817 | ) | 46.63 | ||||||||||||||||
2008 | 328,115 | 327,739 | 327,739 | (115,448 | ) | 33.16 | ||||||||||||||||
AA
|
||||||||||||||||||||||
2004 and
earlier
|
43,579 | 43,665 | 43,665 | (11,632 | ) | 13.70 | ||||||||||||||||
2005 | 42,025 | 42,041 | 42,041 | (24,555 | ) | 29.85 | ||||||||||||||||
A | ||||||||||||||||||||||
2004
and earlier
|
15,283 | 15,205 | 15,205 | (2,262 | ) | 11.30 | ||||||||||||||||
2005 | 7,220 | 7,012 | 3,406 | (3,606 | ) | 31.40 | ||||||||||||||||
2007 | 77,621 | 77,621 | 77,621 | (40,989 | ) | 44.06 | ||||||||||||||||
BBB
|
||||||||||||||||||||||
2005 | 21,807 | 21,771 | 16,345 | (10,841 | ) | 42.34 | ||||||||||||||||
2006 | 49,168 | 49,168 | 49,168 | (14,812 | ) | 54.03 | ||||||||||||||||
2007 | 67,909 | 67,854 | 67,854 | (33,088 | ) | 44.68 | ||||||||||||||||
2008 | 77,412 | 76,271 | 47,866 | (28,405 | ) | 40.87 | ||||||||||||||||
BB
|
||||||||||||||||||||||
2004 and
earlier
|
3,604 | 3,608 | 3,608 | (985 | ) | 21.03 | ||||||||||||||||
2005 | 49,074 | 48,933 | 41,144 | (19,315 | ) | 22.95 | ||||||||||||||||
2006 | 111,933 | 105,246 | 48,520 | (56,726 | ) | 44.35 | ||||||||||||||||
2007 | 397,151 | 376,293 | 227,558 | (212,913 | ) | 42.04 | ||||||||||||||||
2008 | 127,688 | 127,688 | 127,688 | (42,460 | ) | 20.97 | ||||||||||||||||
B | ||||||||||||||||||||||
2005 | 31,982 | 32,009 | 32,009 | (15,525 | ) | 46.30 | ||||||||||||||||
2006 | 346,473 | 297,874 | 163,306 | (134,567 | ) | 44.46 | ||||||||||||||||
2007 | 118,726 | 101,898 | 46,984 | (54,913 | ) | 40.87 | ||||||||||||||||
2008 | 160,449 | 160,449 | 160,449 | (79,132 | ) | 48.31 | ||||||||||||||||
CCC
|
||||||||||||||||||||||
2005 | 104,703 | 95,613 | 55,185 | (49,602 | ) | 38.24 | ||||||||||||||||
2006 | 453,070 | 394,427 | 249,529 | (174,142 | ) | 44.68 | ||||||||||||||||
2007 | 821,646 | 736,595 | 473,299 | (383,458 | ) | 31.52 | ||||||||||||||||
CC
|
||||||||||||||||||||||
2007 | 227,201 | 203,469 | 103,331 | (100,139 | ) | 45.27 | ||||||||||||||||
C | ||||||||||||||||||||||
2005 | 7,554 | 5,666 | 2,653 | (3,014 | ) | 9.16 | ||||||||||||||||
Total
Alt-A
|
4,144,036 | 3,869,364 | 2,877,422 | (1,645,323 | ) | 34.95 | ||||||||||||||||
Subprime
(2)
|
||||||||||||||||||||||
A | ||||||||||||||||||||||
2004 and
earlier
|
2,353 | 2,341 | 2,341 | (1,250 | ) | 100.00 | ||||||||||||||||
B | ||||||||||||||||||||||
2004 and
earlier
|
1,031 | 1,032 | 1,032 | (292 | ) | 100.00 | ||||||||||||||||
Total
Subprime
|
3,384 | 3,373 | 3,373 | (1,542 | ) | 100.00 | ||||||||||||||||
Total
|
$ | 4,974,069 | $ | 4,693,904 | $ | 3,701,962 | $ | (1,673,856 | ) | 30.39 |
(1)
|
The current
weighted-average credit enhancement is the weighted average percent of par
value of subordinated tranches and over-collateralization currently in
place that will absorb losses before our investments incur a
loss.
|
(2)
|
In the second
quarter of 2009, the Seattle Bank revised the classification at
origination of two securities with a total unpaid principal balance of
$3.4 million from Alt-A to
subprime.
|
The following table
summarizes the unpaid principal balance, amortized cost, gross unrealized loss,
and weighted average collateral delinquency rate of our PLMBS by type of
underlying collateral as of September 30, 2009.
As
of September 30, 2009
|
||||||||||||||||||||
Private-Label
Mortgage-Backed Securities
|
Unpaid
Principal Balance
|
Amortized
Cost
|
Gross
Unrealized Loss
|
Percent
of Delinquent Collateral
(60+
Days)
|
Percent
of Unpaid Principal Balance
Rated
AAA
|
|||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||
Prime
|
||||||||||||||||||||
First
lien
|
$ | 826,649 | $ | 821,167 | $ | (26,991 | ) | 1.79 | 96.35 | |||||||||||
Total
prime
|
826,649 | 821,167 | (26,991 | ) | 1.79 | 96.35 | ||||||||||||||
Alt-A
|
||||||||||||||||||||
Option
ARM
|
2,582,752 | 2,381,267 | (1,194,220 | ) | 42.03 | 0.17 | ||||||||||||||
Other
|
1,561,284 | 1,488,097 | (451,103 | ) | 21.87 | 49.72 | ||||||||||||||
Total
Alt-A
|
4,144,036 | 3,869,364 | (1,645,323 | ) | 34.44 | 18.84 | ||||||||||||||
Subprime
|
||||||||||||||||||||
First
lien
|
3,384 | 3,373 | (1,542 | ) | 12.12 | |||||||||||||||
Total
subprime
|
3,384 | 3,373 | (1,542 | ) | 12.12 | |||||||||||||||
Total
|
$ | 4,974,069 | $ | 4,693,904 | $ | (1,673,856 | ) | 29.00 | 31.71 |
The following table
summarizes the weighted average fair value of our PLMBS as a percentage of
unpaid balance by year of issuance and type of underlying collateral as of
September 30, 2009 and at each other quarter-end since December 31,
2008.
As
of
|
||||||||
Private-Label
Mortgage-Backed Securities
|
September
30, 2009
|
June
30, 2009
|
March
31, 2009
|
December
31, 2008
|
||||
Prime
- Year of Issuance
|
||||||||
2004 and
earlier
|
96%
|
95%
|
93%
|
91%
|
||||
Alt-A
- Year of Issuance
|
||||||||
2004 and
earlier
|
91%
|
87%
|
81%
|
84%
|
||||
2005
|
50%
|
44%
|
42%
|
47%
|
||||
2006
|
49%
|
41%
|
36%
|
40%
|
||||
2007
|
46%
|
38%
|
33%
|
37%
|
||||
2008
|
62%
|
53%
|
54%
|
81%
|
||||
Total Alt-A
weighted-average
|
||||||||
percentage of
unpaid balance
|
55%
|
48%
|
45%
|
53%
|
||||
Subprime
- Year of Issuance
|
||||||||
2004 and
earlier
|
54%
|
35%
|
35%
|
98%
|
||||
Total
private-label mortgage-backed securities weighted-average percentage of
unpaid balance
|
62%
|
56%
|
55%
|
61%
|
The following table
summarizes the unpaid principal balance, gross unrealized losses, and fair
values of our PLMBS by interest-rate type and underlying collateral as of
September 30, 2009.
As
of September 30, 2009
|
||||||||||||
Unpaid
|
Gross
|
|||||||||||
Private-Label
Mortgage-Backed Securities
|
Principal
Balance
|
Unrealized
Losses
|
Fair
Value
|
|||||||||
(in
thousands)
|
||||||||||||
Prime
|
||||||||||||
Fixed
|
$ | 686,050 | $ | (15,106 | ) | $ | 666,394 | |||||
Variable
|
140,599 | (11,885 | ) | 128,685 | ||||||||
Total
prime
|
826,649 | (26,991 | ) | 795,079 | ||||||||
Alt-A
|
||||||||||||
Fixed
|
135,399 | (3,202 | ) | 131,712 | ||||||||
Variable
|
4,008,637 | (1,642,121 | ) | 2,148,280 | ||||||||
Total
Alt-A
|
4,144,036 | (1,645,323 | ) | 2,279,992 | ||||||||
Subprime
|
||||||||||||
Variable
|
3,384 | (1,542 | ) | 1,831 | ||||||||
Total
subprime
|
3,384 | (1,542 | ) | 1,831 | ||||||||
Total
private-label mortgage-backed securities
|
$ | 4,974,069 | $ | (1,673,856 | ) | $ | 3,076,902 |
Other-Than-Temporary
Impairment Assessment
We
evaluate each of our investments in an unrealized loss position for OTTI on at
least a quarterly basis. As part of this process, we consider our intent to sell
each debt security and whether it is more likely than not that we would be
required to sell such security before its anticipated recovery. If either of
these conditions is met, we recognize an OTTI loss in earnings equal to the
entire difference between the security’s amortized cost basis and its fair value
as of the statement of condition date. If neither condition is met, we perform
analyses to determine if any of these securities are other-than-temporarily
impaired.
Based on current
information, we determined that for GSE residential MBS, the strength of the
issuers’ guarantees through direct obligations or U.S. government support is
currently sufficient to protect us from losses. Further, we determined that it
is more likely than not that the Seattle Bank will not be required to sell
impaired securities prior to their anticipated recovery. We expect to recover
the entire cost basis of these securities and have thus concluded that our gross
unrealized losses on GSE residential MBS are temporary as of September 30,
2009.
Beginning with the
second quarter of 2009, the FHLBanks formed an OTTI Governance Committee (of
which the Seattle Bank is a member) with the responsibility for reviewing and
approving the key modeling assumptions, inputs, and methodologies to be used by
the FHLBanks to generate cash flow projections used in analyzing credit losses
and determining OTTI for PLMBS. Beginning with the second quarter of
2009 and continuing in the third quarter of 2009, to support consistency among
the FHLBanks, we performed our OTTI analysis primarily using the key modeling
assumptions provided by the FHLBanks OTTI Governance Committee for the majority
of our PLMBS. Further, prior to the third quarter of 2009, the FHLBanks had used
indicators, or screens, to determine which individual securities required
additional quantitative evaluation using detailed cash flow analysis. Beginning
with the third quarter of 2009, the process was changed to select 100% of PLMBS
investments in unrealized loss positions, for purposes of OTTI cash flow
analysis to be run using the FHLBanks’ common platform (as discussed further
below) and approved key assumptions. Seven of our PLMBS investments (with a
total unpaid principal balance of $54.9 million) did not have underlying
collateral data available for cash flow testing and were thus outside the scope
of the OTTI Governance Committee’s key modeling assumptions. The Seattle Bank
used alternative procedures to assess these securities for OTTI.
To
assess whether the entire amortized basis of our PLMBS will be recovered, cash
flow analyses are performed using two third-party models. The first model
considers borrower characteristics and the particular attributes of the loans
underlying the PLMBS, in conjunction with assumptions about future changes in
home prices and interest rates, to project prepayments, defaults, and loss
severities. A significant input into the first model is the forecast of future
housing price changes for the relevant states and core-based statistical areas
(CBSAs), which are based upon an assessment of the individual housing markets.
CBSA refers collectively to metropolitan and micropolitan statistical areas as
defined by the United States Office of Management and Budget. As currently
defined, a CBSA must contain at least one urban area with a population of 10,000
or more. The housing price forecast assumes current-to-trough home price
declines ranging from 0% to 20% over the next nine-to-15 months Thereafter, home
prices are projected to increase 0% in the first six months, 0.5% in the next
six months, 3% in the second year, and 4% in each subsequent year.
The month-by-month
projections of future loan performance derived from the first model, which
reflect projected prepayments, defaults, and loss severities, are then input
into a second model that allocates the projected loan level cash flows to the
various security classes in the securitization structure in accordance with its
prescribed cash flow and loss allocation rules. In a securitization in which the
credit enhancement for the senior securities is derived from the presence of
subordinate securities, losses are generally allocated first to the subordinate
securities until their principal balance is reduced to zero. The projected cash
flows are based on a number of assumptions and expectations, and the results of
these models can vary significantly with changes in assumptions and
expectations. The scenario of cash flows determined based on the model approach
described above reflects a best estimate scenario and includes a base-case
current-to-trough price forecast and a base-case housing price recovery path
described in the previous paragraph.
In
accordance with Finance Agency guidance, we engaged the Federal Home Loan Bank
of Indianapolis (Indianapolis Bank) to perform the cash flow analyses for our
applicable PLMBS for the second and third quarters of 2009, utilizing the key
modeling assumptions approved by the OTTI Governance Committee. For the
three-month period ended September 30, 2009, we completed our OTTI evaluation
utilizing the key modeling assumptions approved by the OTTI Governance Committee
and the cash flow analyses provided by the Indianapolis Bank. In addition, we
verified the cash flow analyses as modeled by the Indianapolis Bank, employing
the specified risk modeling software, loan data source information, and key
modeling assumptions approved by the OTTI Governance Committee. As a result of
our OTTI evaluations as of September 30, 2009, we determined that the present
value of the cash flows expected to be collected was less than the amortized
cost basis of certain of our PLMBS, including 29 securities that had been
identified as other-than-temporarily impaired in previous periods and six
additional securities that were newly identified as other-than-temporarily
impaired as of September 30, 2009. We do not intend to sell these securities and
it is more likely than not that we will not be required to sell these securities
prior to their anticipated recovery.
For those
securities for which an OTTI was determined to have occurred during the third
quarter of 2009, the following table presents a summary of the significant
inputs used to measure the amount of the credit loss recognized in earnings for
the three months ended September 30, 2009.
For
the Three Months Ended September 30, 2009
|
||||||||||||||||
Significant
Inputs
|
||||||||||||||||
Cumulative
Voluntary
|
Current
|
|||||||||||||||
Prepayment
Rates
*
|
Cumulative
Default Rates *
|
Loss
Severities
|
Credit
Enhancement
|
|||||||||||||
Year
of Securitization
|
Weighted
Average %
|
Range
%
|
Weighted
Average %
|
Range
%
|
Weighted
Average %
|
Range
%
|
Weighted
Average %
|
Range
%
|
||||||||
Alt-A
|
||||||||||||||||
2008
|
10.1
|
10.1-10.1
|
50.3
|
50.3-50.3
|
43.2
|
43.2-43.2
|
40.9
|
40.9-40.9
|
||||||||
2007
|
7.8
|
5.1-13.8
|
76.0
|
32.0-86.7
|
50.2
|
43.1-55.0
|
34.8
|
11.7-45.4
|
||||||||
2006
|
5.1
|
2.9-6.8
|
86.8
|
77.7-92.3
|
51.1
|
43.2-58.7
|
44.3
|
40.5-48.4
|
||||||||
2005
|
7.5
|
5.0-11.8
|
72.7
|
40.0-81.6
|
48.3
|
32.8-52.5
|
34.1
|
9.2-51.2
|
||||||||
Total
|
6.9
|
2.9-13.8
|
78.9
|
32.0-92.3
|
50.2
|
32.8-58.7
|
38.4
|
9.2-51.2
|
*
|
The cumulative
voluntary prepayment rates and cumulative default rates are on unpaid
principal balances.
|
The following table
summarizes key information as of September 30, 2009 and 2008 for the PLMBS on
which we have recorded OTTI.
As
of September 30, 2009
|
|||||||||||||||||||||||||
Held-to-Maturity
Securities
|
Available-for
Sale Securities
|
||||||||||||||||||||||||
Unpaid
|
Gross
|
Unpaid
|
|||||||||||||||||||||||
Principal
|
Amortized
|
Carrying
|
Unrealized
|
Fair
|
Principal
|
Amortized
|
Fair
|
||||||||||||||||||
Other-than-Temporarily
Impaired Securities
|
Balance
|
Cost
|
Value (2)
|
Losses
|
Value
|
Balance
|
Cost
|
Value
|
|||||||||||||||||
(in
thousands)
|
|||||||||||||||||||||||||
Alt -A
private-label mortgage-backed securities (1)
|
$ | 827,074 | $ | 752,958 | $ | 344,773 | $ | 408,185 | $ | 400,724 | $ | 1,447,256 | $ | 1,248,485 | $ | 664,728 | |||||||||
Total OTTI
|
$ | 827,074 | $ | 752,958 | $ | 344,773 | $ | 408,185 | $ | 400,724 | $ | 1,447,256 | $ | 1,248,485 | $ | 664,728 |
As
of December 31, 2008
|
|||||||||||||||
Held-to-Maturity
Securities
|
|||||||||||||||
Unpaid
|
Gross
|
||||||||||||||
Principal
|
Amortized
|
Carrying
|
Unrealized
|
Fair
|
|||||||||||
Other-than-Temporarily
Impaired Securities
|
Balance
|
Cost
|
Value (2)
|
Losses
|
Value
|
||||||||||
(in
thousands)
|
|||||||||||||||
Alt -A
private-label mortgage-backed securities (1)
|
$ | 546,478 | $ | 546,442 | $ | 546,442 | $ | 304,243 | $ | 242,199 | |||||
Total OTTI
|
$ | 546,478 | $ | 546,442 | $ | 546,442 | $ | 304,243 | $ | 242,199 |
(1)
|
Classification
based on originator’s classification at the time of origination or based
on classification by an NRSRO upon issuance of the MBS.
|
(2)
|
This table
does not include gross unrealized gains; therefore, amortized cost net of
gross unrealized losses will not necessarily equal the fair
value.
|
The fair value of
the majority of our previously identified securities improved as of September
30, 2009, compared to June 30, 2009, resulting in minimal additional total OTTI
losses; however, we identified six newly other-than-temporarily impaired
securities as of September 30, 2009. In addition, because our OTTI analysis
indicated further deterioration in the cash flows expected to be collected on
our previously identified securities, we recorded additional credit losses into
earnings and reduced our OTTI recorded in other comprehensive loss. As a result,
we recorded total OTTI losses of $85.0 million and $1.2 billion for the three
and nine months ended September 30, 2009. For the three and nine months ended
September 30, 2009, we recorded OTTI credit losses of $130.1 million and $263.5
million.
On
September 30, 2009, the Seattle Bank transferred certain PLMBS with an
unpaid principal balance of $1.4 billion and a fair value of $664.7 million
from its HTM portfolio to its AFS portfolio. The transferred
PLMBS had OTTI credit losses of $94.1 million and $193.7 million for the
three months ended September 30, 2009, which the Seattle Bank considers to
be evidence of a significant deterioration in the issuer’s creditworthiness.
The Seattle Bank transferred the securities to the AFS portfolio to
increase its financial flexibility with respect to these securities,
although management has no current plans to sell these or any other
other-than-temporarily impaired PLMBS. The total OTTI loss previously recognized
for the transferred securities was $782.5 million. Upon transfer, the carrying
value of these securities was increased by $108.2 million (and recorded in other
comprehensive loss) to reflect the securities at fair value.
Subsequent
increases and decreases (if not an additional OTTI) in the fair value of AFS
securities and transfers are included in accumulated other comprehensive income.
The OTTI recognized in accumulated other comprehensive loss related to HTM
securities will be accreted to the carrying value of each security on a
prospective basis, based on the amount and timing of future cash flows, over the
remaining life of each security. The accretion increases the carrying value of
each security and does not affect earnings unless the security is subsequently
sold or has an additional OTTI loss that is recognized in earnings. For the
three and nine months ended September 30, 2009, $89.2 million and $169.9 million
were accreted from other comprehensive loss to the carrying value of the
securities.
The following table
provides the credit and non-credit OTTI losses on our PLMBS securities for the
three and nine months ended September 30, 2009.
For
the Three Months Ended September 30, 2009
|
For
the Nine Months Ended September 30, 2009
|
|||||||||||||||||||||||
OTTI
|
OTTI
|
Total
|
OTTI
|
OTTI
|
Total
|
|||||||||||||||||||
Related
to
|
Related
to All
|
OTTI
|
Related
to
|
Related
to All
|
OTTI
|
|||||||||||||||||||
Other-than-Temporarily
Impaired Securities
|
Credit
Loss
|
Other
Factors
|
Loss
|
Credit
Loss
|
Other
Factors
|
Loss
|
||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Alt -A
private-label mortgage-backed securities
|
$ | 130,100 | $ | (45,121 | ) | $ | 84,979 | $ | 263,519 | $ | 976,654 | $ | 1,240,173 |
Under the FASB
guidance in effect prior to January 1, 2009, we recorded total OTTI
charges of $49.8 million in our Statement of Operations for the three and
nine months ended September 30, 2008, on certain PLMBS in our
held-to-maturity portfolio.
The following table
summarizes the credit loss components of our OTTI losses recognized in earnings
for the three and nine months ended September 30, 2009.
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||
Credit
Loss Component of OTTI
|
September
30, 2009
|
September
30, 2009
|
||||||
(in
thousands)
|
||||||||
Balance,
beginning of period (1)
|
$ | 142,112 | $ | 8,693 | ||||
Additions
|
||||||||
Credit losses
on securities for which OTTI was not previously recognized
|
2,511 | 171,561 | ||||||
Additional
OTTI credit losses on securities for which an OTTI loss
was
|
||||||||
previously
recognized (2)
|
127,589 | 91,958 | ||||||
Total
additions
|
130,100 | 263,519 | ||||||
Balance, end
of period
|
$ | 272,212 | $ | 272,212 |
(1)
|
We adopted new
OTTI guidance from the FASB, effective January 1, 2009, and recognized the
cumulative effect of initially applying this guidance, totaling $293.4
million, as an adjustment to our retained earnings as of January 1, 2009,
with a corresponding adjustment to other comprehensive loss. This amount
represents credit losses remaining in retained earnings related to the
adoption of this guidance.
|
(2)
|
For the three
months ended September 30, 2009, “Additional OTTI credit losses on
securities for which an OTTI loss was previously recognized” relates to
securities that were also previously determined to be OTTI prior to July
1, 2009. For the nine months ended September 30, 2009, “Additional OTTI
credit losses on securities for which an OTTI loss was previously
recognized” relates to securities that were also previously determined to
be OTTI prior to January 1, 2009.
|
The remaining
securities in our HTM and AFS portfolios have experienced unrealized losses and
decreases in fair value primarily due to illiquidity in the marketplace, credit
deterioration, and interest-rate volatility in the U.S. mortgage markets.
However, the declines are considered temporary as we expect to recover the
entire amortized cost basis of the remaining HTM securities in unrealized loss
positions and neither intend to sell these securities nor believe it is more
likely than not that we will be required to sell these securities prior to their
anticipated recovery.
In
addition to evaluating our non-agency residential MBS under a base-case (or best
estimate) scenario, a cash flow analysis is also performed for these securities
under a more stressful housing price scenario. The more stressful scenario is
based on a housing price forecast that was five percentage points lower at the
trough than the base-case scenario followed by a flatter recovery path. Under
the more stressful scenario, current-to-trough home price declines are projected
to range from 5% to 25% over the next nine to 15 months. Thereafter, home prices
are projected to increase 0% in the first year, 1% in the second year, 2% in the
third and fourth years, and 3% in each subsequent year. The following table
represents the impact to credit-related OTTI for the three months ended
September 30, 2009 in a housing price scenario that delays recovery of the
housing price index, compared to actual credit-related OTTI recorded, using our
base-case housing price assumptions. The results of this scenario are not
recorded in our financial statements.
For
the Three Months Ended September 30, 2009
|
Unpaid
Principal Balance
|
Credit-Related
OTTI in Net Income
|
Credit-Related
OTTI Using Adverse Housing Price Scenario
|
|||||||||
(in
thousands)
|
||||||||||||
Alt-A (1)
|
$ | 2,989,749 | $ | 130,100 | $ | 262,010 | ||||||
Total
Private-label MBS
|
$ | 2,989,749 | $ | 130,100 | $ | 262,010 |
(1)
|
Represents
classification at time of purchase, which may differ from the current
performance characteristics of the
instrument.
|
MORTGAGE
LOANS HELD FOR PORTFOLIO
The par value of
our mortgage loans held for portfolio consisted of $4.1 billion and $4.9 billion
in conventional mortgage loans and $180.0 million and $205.4 million in
government-insured mortgage loans as of September 30, 2009 and December 31,
2008. The decrease for the nine months ended September 30, 2009 was due to our
receipt of $790.8 million in principal payments. As a result of our decision to
exit the Mortgage Purchase Program (MPP) in 2005, we ceased entering into new
master commitment contracts and terminated all open contracts.
As
of September 30, 2009 and December 31, 2008, 87.5% and 87.0% of our
outstanding mortgage loan portfolio consisted of mortgage loans originally
purchased from our formerly largest participating member, Washington Mutual
Bank, F.S.B. The acquisition of Washington Mutual Bank, F.S.B. by JPMorgan Chase
has not impacted and we do not expect such acquisition to impact the credit
quality or otherwise impact our outstanding mortgage loans.
The following table
summarizes the activity and other information related to our mortgage loan
portfolio as of September 30, 2009 and December 31, 2008.
As
of
|
As
of
|
|||||||
Mortgage
Loan Portfolio Activity
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands, except percentages and FICO scores)
|
||||||||
Mortgage loan
par balance at beginning of the year
|
$ | 5,077,841 | $ | 5,642,177 | ||||
Mortgage loans
transferred to real-estate owned
|
(1,476 | ) | (365 | ) | ||||
Maturities and
principal amount recovered
|
(790,759 | ) | (563,971 | ) | ||||
Mortgage
loan par balance at period end
|
4,285,606 | 5,077,841 | ||||||
Mortgage loan
net premium balance at beginning of the year
|
9,482 | 23,393 | ||||||
Net premium on
loans transferred to real estate owned
|
(8 | ) | (2 | ) | ||||
Net premium
recovery from repurchases
|
(7 | ) | (21 | ) | ||||
Net premium
amortization
|
(2,348 | ) | (13,888 | ) | ||||
Mortgage
loan net premium balance at period end
|
7,119 | 9,482 | ||||||
Mortgage loans
held for portfolio
|
4,292,725 | $ | 5,087,323 | |||||
Allowance for
credit losses
|
(271 | ) | ||||||
Mortgage loans
held for portfolio, net of allowance for credit losses
|
$ | 4,292,454 | $ | 5,087,323 | ||||
Premium
balance as a percent of mortgage loan par amounts
|
0.17 | % | 0.19 | % | ||||
Average FICO
score*
at origination
|
746 | 746 | ||||||
Average
loan-to-value ratio at origination
|
64.33 | % | 64.26 | % |
*
|
FICO score is
a standardized, statistical credit score used as an indicator of borrower
credit risk.
|
Credit
Risk
As
of September 30, 2009, we have not experienced a credit loss on our mortgage
loans held for portfolio, and our former supplemental mortgage insurance
provider experienced only two loss claims on our mortgage loans (for which it
was reimbursed from the lender risk accounts) prior to the cancellation of our
supplemental mortgage insurance policies in April 2008.
As
part of our business plan, we have been exiting the MPP since early 2005.
However, this decision has not impacted and we do not expect that this decision
will impact the credit risk of our mortgage loans held for portfolio. We conduct
a loss reserve analysis on a quarterly basis. Based on our analysis of our
mortgage loan portfolio as of September 30, 2009, we determined that the credit
enhancement provided by our members in the form of the lender risk account was
not sufficient to absorb the expected credit losses inherent in our mortgage
loan portfolio as of September 30, 2009, and we increased our allowance for
credit losses by $14,000 from the $257,000 that had been established as of June
30, 2009. We believe the combination of the lender risk account and our
provision for loan losses is sufficient to absorb expected credit losses in our
mortgage loan portfolio. We believe we have policies and procedures in place to
appropriately manage the credit risk relating to our mortgage loans held for
portfolio.
The following table
presents our mortgage loans past due 90 days or more or in foreclosure, as a
percentage of par, as of September 30, 2009 and December 31, 2008.
As
of
|
As
of
|
|||||||
Mortgage
Loans 90-Days Delinquent or in Foreclosure
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands, except percentages)
|
||||||||
Conventional
mortgage loan delinquencies (at par)
|
$ | 19,816 | $ | 8,898 | ||||
Conventional
mortgage loans outstanding (at par)
|
$ | 4,105,614 | $ | 4,872,474 | ||||
Conventional
mortgage loan delinquencies
|
0.5 | % | 0.2 | % | ||||
Conventional
mortgage loan foreclosures
|
0.3 | % | 0.1 | % | ||||
Government-insured
mortgage loan delinquencies (at par)
|
$ | 33,108 | $ | 27,540 | ||||
Government-insured
mortgage loans outstanding (at par)
|
$ | 179,992 | $ | 205,367 | ||||
Government-insured
mortgage loan delinquencies
|
18.4 | % | 13.4 | % | ||||
Government-insured
mortgage loan foreclosures
|
None
|
None
|
As
of September 30, 2009, we held six mortgage loans totaling $882,000 classified
as real estate owned. As of December 31, 2008, we held one mortgage loan
totaling $126,000 classified as real estate owned.
DERIVATIVE
ASSETS AND LIABILITIES
We
have traditionally used derivatives to hedge advances, consolidated obligations,
and mortgage loans under our MPP, and as intermediary swaps for members. The
principal derivative instruments we use are interest-rate exchange agreements,
such as interest-rate swaps, caps, floors, and swaptions. We classify these
types of interest-rate exchange agreements as derivative assets or liabilities
according to the net fair value of the derivatives and associated accrued
interest receivable, interest payable, and collateral by counterparty, under
individual master netting agreements. Subject to a master netting agreement, if
the net fair value of our interest-rate exchange agreements by counterparty is
positive, the net fair value is reported as an asset, and if negative, the net
fair value is reported as a liability. Changes in the fair value of
interest-rate exchange agreements are recorded directly through
earnings.
We
transact our interest-rate exchange agreements with large banks and major
broker-dealers. Some of these banks and broker-dealers or their affiliates buy,
sell, and distribute consolidated obligations. We are not a derivatives dealer
and do not trade derivatives for short-term profit.
As
of September 30, 2009 and December 31, 2008, we held derivative assets,
including associated accrued interest receivable and payable and cash collateral
from counterparties, of $4.2 million and $32.0 million and derivative
liabilities of $259.3 million and $235.4 million. The changes in these balances
reflect the effect of interest-rate changes on the fair value of our
derivatives, as well as expirations and terminations of outstanding
interest-rate exchange agreements and entry into new interest-rate exchange
agreements occurring during the first half of 2009. The differentials between
interest receivable and interest payable on some derivatives are recognized as
adjustments to the income or expense of the designated underlying advances,
consolidated obligations, or other financial instruments. We record all
derivative financial instruments in the Statements of Condition at fair value,
with changes in the fair value reported in earnings. See Notes 9 and 11 in “Part
I. Item 1. Financial Statements—Condensed Notes to Financial Statements” and
“—Results of Operations—Other Loss,” for additional information.
The following table
summarizes the notional amounts and the fair values of our derivative
instruments, including the effect of netting arrangements and collateral as of
September 30, 2009 and December 31, 2008. For purposes of this disclosure, the
derivative values include both the fair value of derivatives and related accrued
interest. Changes in the notional amount of interest-rate exchange agreements
generally reflect changes in our use of such agreements to reduce our
interest-rate risk and lower our cost of funds.
As
of September 30, 2009
|
||||||||||||
Fair
Value of Derivative Instruments
|
Notional
Amount
|
Derivative
Assets
|
Derivative
Liabilities
|
|||||||||
(in
thousands)
|
||||||||||||
Derivatives
designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
$ | 42,199,811 | $ | 291,472 | $ | 580,700 | ||||||
Interest-rate
caps or floors
|
10,000 | 5 | ||||||||||
Total
derivatives designated as hedging instruments
|
42,209,811 | 291,477 | 580,700 | |||||||||
Derivatives
not designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
669,700 | 13,657 | 12,289 | |||||||||
Interest-rate
caps or floors
|
200,000 | 59 | ||||||||||
Total
derivatives not designated as hedging instruments
|
869,700 | 13,716 | 12,289 | |||||||||
Total
derivatives before netting and collateral adjustments
|
$ | 43,079,511 | $ | 305,193 | $ | 592,989 | ||||||
Netting
adjustments(1)
|
(284,594 | ) | (284,593 | ) | ||||||||
Cash
collateral and related accrued interest
|
(16,362 | ) | (49,118 | ) | ||||||||
Subtotal
netting and collateral adjustments
|
(300,956 | ) | (333,711 | ) | ||||||||
Derivative
assets and derivative liabilities as reported on the
|
||||||||||||
Statement
of Condition
|
$ | 4,237 | $ | 259,278 |
As
of December 31, 2008
|
||||||||||||
Fair
Value of Derivative Instruments
|
Notional
Amount
|
Derivative
Assets
|
Derivative
Liabilities
|
|||||||||
(in
thousands)
|
||||||||||||
Derivatives
designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
$ | 29,604,444 | $ | 390,117 | $ | 675,723 | ||||||
Interest-rate
caps or floors
|
65,000 | 19 | ||||||||||
Total
derivatives designated as hedging instruments
|
29,669,444 | 390,136 | 675,723 | |||||||||
Derivatives
not designated as hedging instruments
|
||||||||||||
Interest-rate
swaps
|
716,000 | 18,992 | 18,469 | |||||||||
Interest-rate
caps or floors
|
260,000 | 206 | ||||||||||
Total
derivatives not designated as hedging instruments
|
976,000 | 19,198 | 18,469 | |||||||||
Total
derivatives before netting and collateral adjustments
|
$ | 30,645,444 | $ | 409,334 | $ | 694,192 | ||||||
Netting
adjustments(1)
|
(377,350 | ) | (377,350 | ) | ||||||||
Cash
collateral and related accrued interest
|
(81,425 | ) | ||||||||||
Subtotal
netting and collateral adjustments
|
(377,350 | ) | (458,775 | ) | ||||||||
Derivative
assets and derivative liabilities as reported on the
|
||||||||||||
Statement
of Condition
|
$ | 31,984 | $ | 235,417 |
(1)
|
Amounts
represent the effect of legally enforceable master netting agreements that
allow the Seattle Bank to settle positive and negative
positions.
|
Credit
Risk
We
are subject to credit risk on our interest-rate exchange agreements, primarily
because of the potential nonperformance by a counterparty to an agreement. The
degree of counterparty risk on interest-rate exchange agreements and other
derivatives depends on our selection of counterparties and the extent to which
we use netting procedures and other credit enhancements to mitigate the risk. We
manage counterparty credit risk through credit analysis, collateral management,
and other credit enhancements. We require netting agreements to be in place for
all counterparties. These agreements include provisions for netting exposures
across all transactions with that counterparty. These agreements also require a
counterparty to deliver collateral to the Seattle Bank if the total exposure to
that counterparty exceeds a specific threshold limit as denoted in the
agreement. Except in connection with Lehman Brothers Special Financing (LBSF),
as discussed below, as a result of our risk mitigation initiatives, we do not
currently anticipate any additional credit losses on our interest-rate exchange
agreements.
Our credit risk on
our derivatives equals the estimated cost of replacing favorable interest-rate
swaps, forward agreements, and purchased caps and floors, if the counterparty
defaults, net of the value of related collateral. Our maximum counterparty
credit risk on our derivatives equals the estimated cost of replacing favorable
interest-rate swaps, forward agreements, and purchased caps and floors, if the
counterparty defaults and the related collateral, if any, is of no value to us.
In determining the maximum credit risk on our derivatives, we consider accrued
interest receivables and payables and the legal right to offset derivative
assets and liabilities by counterparty. As of September 30, 2009 and December
31, 2008, our maximum credit risk, taking into consideration master netting
arrangements, was approximately $4.2 million and $32.0 million, including $19.2
million and $11.0 million of net accrued interest receivable. We held cash
collateral of $16.4 million and no securities from our counterparties as of
September 30, 2009. We held no cash collateral and $9.0 million in securities
from our counterparties as of December 31, 2008. We do not include the fair
value of securities from our counterparties in our derivative asset or liability
balances. Additionally, collateral with respect to derivatives with member
institutions includes collateral assigned to us, as evidenced by a written
security agreement and held by the member institution for our benefit. Changes
in credit risk and net exposure after considering collateral on our derivatives
are primarily due to changes in market conditions, including the level and slope
of the yield curve.
Certain of our
interest-rate exchange agreements include provisions that FHLBank System debt to
maintain an investment-grade rating from each of the major credit rating
agencies. If the FHLBank System debt were to fall below investment grade, we
would be in violation of these provisions, and the counterparties to our
interest-rate exchange agreements could request immediate and ongoing
collateralization on derivatives in net liability positions. As of September 30,
2009, the FHLBank System’s consolidated obligations were rated “Aaa/P-1” by
Moody’s and “AAA/A-1+” by S&P, the highest ratings available by an NRSRO.
The aggregate fair value of all derivative instruments with credit-risk
contingent features that were in a liability position as of September 30, 2009
was $259.3 million, for which we have posted collateral of $56.6 million in the
normal course of business. If the Seattle Bank’s individual credit rating had
been lowered by one rating level, we would not have been required to deliver any
additional collateral to our derivative counterparties as of September 30, 2009.
Our credit rating has not changed since 2008, although the Seattle Bank was
briefly placed on credit watch negative by S&P between June 5, 2009 and July
1, 2009.
Our counterparty
credit exposure, by credit rating, was as follows as of September 30, 2009 and
December 31, 2008.
As
of September 30, 2009
|
|||||||||||||||||||
Derivative
|
Total
Net
|
Net
Exposure
|
|||||||||||||||||
Notional
|
Exposure
at
|
Collateral
|
After
|
||||||||||||||||
Counterparty
Credit Exposure by Credit Rating
|
Amount
|
Fair
Value
|
Held
|
Collateral
|
|||||||||||||||
(in
thousands)
|
|||||||||||||||||||
AA
|
$ | 10,920,287 | $ | $ | $ | ||||||||||||||
AA–
|
8,134,333 | ||||||||||||||||||
A+ | 17,776,542 | 16,352 | 16,360 | (1 | ) | ||||||||||||||
A | 6,248,349 | 4,237 | 4,237 | ||||||||||||||||
Total
|
$ | 43,079,511 | $ | 20,589 | $ | 16,360 | $ | 4,237 |
As
of December 31, 2008
|
|||||||||||||||||||
Derivative
|
Total
Net
|
Net
Exposure
|
|||||||||||||||||
Notional
|
Exposure
at
|
Collateral
|
After
|
||||||||||||||||
Counterparty
Credit Exposure by Credit Rating
|
Amount
|
Fair
Value
|
Held
|
Collateral
|
|||||||||||||||
(in
thousands)
|
|||||||||||||||||||
AA+
|
$ | 6,524,654 | $ | $ | $ | ||||||||||||||
AA
|
1,307,816 | ||||||||||||||||||
AA–
|
10,853,390 | ||||||||||||||||||
A+ | 7,424,101 | 31,418 | 8,961 | 22,457 | |||||||||||||||
A | 4,535,483 | 566 | 566 | ||||||||||||||||
Total
|
$ | 30,645,444 | $ | 31,984 | $ | 8,961 | $ | 23,023 |
(1)
|
We hold excess
collateral for one counterparty as of Septermber 30,
2009
|
In
September 2008, Lehman Brothers Holdings, Inc. (LBHI), the parent company of
LBSF and a guarantor of LBSF’s obligations, filed for bankruptcy protection.
LBSF was our counterparty on multiple derivative transactions under
International Swap Dealers Association, Inc. master agreements with a total
notional amount of $3.5 billion at the time of the LBHI bankruptcy filing. As a
result, we notified LBSF of our intent to early terminate all outstanding
derivative positions with LBSF, unwound such positions, and established a
receivable position, netting the value of the collateral due to be returned to
us with all other amounts due, which resulted in the establishment of a $10.4
million net receivable from LBSF (before provision) included in other assets in
the Statement of Condition. We also established an offsetting provision for
credit loss on receivable based on management’s current estimate of the probable
amount that will be realized in settling our derivative transactions with LBSF.
In September 2009, we filed claims of $10.4 million against LBHI and LBSF in
bankruptcy court.
Other
than LBSF, we have never experienced a loss on a derivative transaction due to
default by a counterparty. We believe that the credit risk on our interest-rate
exchange agreements is low because we contract with counterparties that are of
high credit quality and also have collateral agreements in place with each
counterparty. As of both September 30, 2009 and December 31, 2008, 14
counterparties represented the total notional amount of our outstanding
interest-rate exchange agreements with five and six counterparties rated “AA-“
or higher from an NRSRO, such as S&P or Moody’s. As of September 30, 2009
and December 31, 2008, 44.2% and 61.0% of the total notional amount of our
outstanding interest-rate exchange agreements were with five and six
counterparties rated “AA-“ or higher from and NRSRO. As of September 30, 2009
and December 31, 2008, 100.0% of the notional amount of our outstanding
interest-rate exchange agreements were with counterparties with credit ratings
of at least “A” or equivalent. See Note 11 in “Part1. Item 1. Financial
Statements – Condensed Notes to Financial Statements or information concerning
nonperformance risk valuation adjustments.
CONSOLIDATED
OBLIGATIONS AND OTHER FUNDING SOURCES
Our principal
liabilities are the consolidated obligation discount notes and bonds issued on
our behalf by the Office of Finance and, to a significantly lesser degree, a
variety of other funding sources such as our member deposits. Although we are
jointly and severally liable for all consolidated obligations issued by the
Office of Finance on behalf of all of the FHLBanks, we report only the portion
of consolidated obligations issued on our behalf on which we are the primary
obligor. On July 1, 2009, S&P affirmed the Seattle Bank’s long-term
counterparty credit rating of “AA+” and improved our ratings outlook from credit
watch negative to stable. As of September 30, 2009, our Moody’s rating was “Aaa”
with a ratings outlook of stable. On May 7, 2009, Moody’s reaffirmed our
long-term rating and outlook. For additional information on the FHLBanks’
consolidated obligations, see “Part I. Item 1. Business—Debt
Financing—Consolidated Obligations” in our 2008 annual report on Form
10-K.
Consolidated
Obligation Discount Notes
Our allocated
portion of the FHLBank System’s combined consolidated obligation discount notes
outstanding increased by 36.4%, to a par amount of $21.7 billion as of September
30, 2009, from $15.9 billion as of December 31, 2008. During the first six
months of 2009, due to the continued volatility and uncertainty in the global
capital markets, market demand was primarily for short-term, high-quality
financial instruments. As a result, we generally used consolidated obligation
discount notes to fund short-term advances and investments. During the third
quarter of 2009, the cost to issue consolidated obligation discount notes became
less attractive, compared to that of issuing negotiated callable and
consolidated obligation bonds (particularly range and step-up consolidated
obligation bonds) hedged with interest-rate swaps (i.e., structured funding). As
a result, we reduced our use of consolidated obligation discount notes as a
proportion of total funding during the third quarter of 2009. When appropriate,
we use structured funding to reduce funding costs and manage liquidity and
interest-rate risk.
Consolidated
Obligation Bonds
Our allocated
portion of the par amount of FHLBank System consolidated obligation bonds
outstanding decreased 22.6% to a par amount of $29.5 billion as of September 30,
2009, from $38.1 billion as of December 31, 2008. As discussed above,
during the third quarter of 2009, we increased our use of structured funding as
a percentage of total funding as pricing relating to the issuance of
consolidated obligation discount notes became less attrative.
The par amount of
variable interest-rate consolidated obligation bonds decreased by $10.0 billion,
or 75.4%, to $3.3 billion as of September 30, 2009 from December 31, 2008.
The decrease in variable interest-rate consolidated obligation bonds generally
corresponded to the decrease in variable interest-rate investments and fixed
interest-rate advances swapped to variable interest rates made during the nine
months ended September 30, 2009. The interest rates on these consolidated
obligation bonds and advances are generally based on the London Interbank
Offered Rate (LIBOR).
We
seek to match, to the extent possible, the anticipated cash flows of our debt to
the anticipated cash flows of our assets. The cash flows of mortgage-related
assets are largely dependent on the prepayment behavior of borrowers. When
interest rates rise and all other factors remain unchanged, borrowers (and
issuers of callable investments) tend to refinance their debts more slowly than
originally anticipated; when interest rates fall, borrowers tend to refinance
their debts more rapidly than originally anticipated. We use a combination of
bullet and callable debt in seeking to match the anticipated cash flows of our
fixed interest-rate mortgage-related assets and callable investments, using a
variety of prepayment scenarios.
With callable debt,
we have the option to repay the obligation without penalty prior to the
contractual maturity date of the debt obligation, while with bullet debt, we
generally repay the obligation at maturity. Our callable debt is predominantly
fixed interest-rate debt that may be used to fund our fixed interest-rate
mortgage-related assets or that may be swapped to LIBOR and used to fund
variable interest-rate advances and investments. The call feature embedded in
our debt is generally matched with a call feature in the interest-rate swap,
giving the swap counterparty the right to cancel the swap under certain
circumstances. In a falling interest-rate environment, the swap counterparty
typically exercises its call option on the swap and we, in turn, generally call
the debt. To the extent we continue to have variable interest-rate advances or
investments, or other short-term assets, we attempt to replace the called debt
with new callable debt that is generally swapped to LIBOR. This strategy is
often less expensive than borrowing through the issuance of discount notes. In
the third quarter of 2009, as a result of increased demand for structured
funding, we replaced certain of our maturing consolidated obligation bonds and
discount notes with structured funding.
Although the
balance of our callable consolidated obligation bonds, at $8.4 billion as of
September 30, 2009, was essentially unchanged compared to December 31,
2008, the proportion of callable bonds to total funding increased during the
third quarter of 2009. The relative changes in our use of callable debt reflects
changes in the pricing of unswapped consolidated obligation discount notes
relative to callable consolidated obligation bonds with associated interest-rate
exchange agreements. As discussed above, during the third quarter of 2009, we
increased the use of callable consolidated obligation bonds as part of our
increased used of structured funding.
During the three
and nine months ended September 30, 2009 and 2008, we called and extinguished
certain high-cost debt primarily to lower our relative cost of funds in future
years, as the future yield of the replacement debt is expected to be lower than
the yield for the called and extinguished debt. We continue to review our
consolidated obligation portfolio for opportunities to call or extinguish debt,
lower our interest expense, and better match the duration of our liabilities to
that of our assets.
The following table
summarizes the par value and weighted-average interest rate of the consolidated
obligation bonds called and extinguished for the three and nine months ended
September 30, 2009 and 2008.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
Consolidated
Obligations Called and Extinguished
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
(in
thousands, except interest rates)
|
||||||||||||||||
Consolidated
Obligations Called
|
||||||||||||||||
Par
value
|
$ | 895,000 | $ | 1,946,015 | $ | 7,132,255 | $ | 14,971,500 | ||||||||
Weighted-average
interest rate
|
4.19 | % | 4.81 | % | 4.45 | % | 4.74 | % | ||||||||
Consolidated
Obligations Extinguished
|
||||||||||||||||
Par
value
|
17,095 | 10,000 | 34,170 | 962,535 | ||||||||||||
Weighted-average
interest rate
|
5.38 | % | 7.38 | % | 5.37 | % | 3.98 | % | ||||||||
Total par
value
|
$ | 912,095 | $ | 1,956,015 | $ | 7,166,425 | $ | 15,934,035 |
OTHER
FUNDING SOURCES
Deposits are a
source of funds that give members a liquid, low-risk investment. We offer demand
and term deposit programs to our members and to other eligible depositors. There
is no requirement for members or other eligible depositors to maintain balances
with us, and as a result, these balances fluctuate. Deposits decreased by $297.8
million, to $284.5 million, as of September 30, 2009, compared to
December 31, 2008, primarily due to a decrease in demand, overnight, and
term deposits. As of September 30, 2009 and December 31, 2008, demand deposits
comprised the largest percentage of deposits, representing 88.5% and 66.9% of
total deposits. Deposit levels generally vary based on the interest rates paid
to our members, our members’ liquidity levels, and market conditions. In
addition, to provide short-term, low-cost liquidity, we sell securities under
agreements to repurchase those securities. We had no transactions outstanding
under such agreements as of September 30, 2009 or December 31,
2008.
Other
Liabilities
Other liabilities,
primarily consisting of accounts and miscellaneous payable balances, was
essentially unchanged as of September 30, 2009, compared to December 31,
2008.
CAPITAL
RESOURCES AND LIQUIDITY
Our capital
resources consist of stock held by our members and nonmember shareholders,
retained earnings, and other comprehensive loss. The amount of our capital
resources does not take into account our joint and several liability for the
consolidated obligations of other FHLBanks. See Note 8 in “Part I. Item 1.
Financial Statements—Condensed Notes to Financial Statements” in this report for
additional information. Our principal sources of liquidity are the proceeds from
the issuance of consolidated obligations and our short-term
investments.
Capital
Resources
Our GAAP capital
resources decreased by $838.9 million, to $927.4 million, as of September 30,
2009 from the amount as of December 31, 2008. This decrease was primarily driven
by OTTI losses on our PLMBS.
Seattle Bank
Stock
The Seattle Bank
has two classes of stock, Class A stock and Class B, stock as further described
below. We reclassify stock subject to redemption from equity to liability once a
member gives notice of intent to withdraw from membership or attains non-member
status by merger or acquisition, charter termination, or involuntary termination
from membership. Written redemption requests of excess stock generally remain
classified as equity because the penalty of rescission is not substantive as it
is based on the forfeiture of future dividends. If circumstances change, such
that the rescission of an excess stock redemption request is subject to a
substantive penalty, we would reclassify such stock as mandatorily redeemable
stock. All stock redemptions are subject to restrictions set forth in the
FHLBank Act, Finance Agency regulations, our Capital Plan, and applicable
resolutions, if any, adopted by our Board. See Notes 1 and 14 in “Part II—Item
8. Financial Statements and Supplementary Data—Audited Financial
Statements—Notes to Financial Statements” of our 2008 annual report on Form 10-K
for additional information.
Class A
Stock
Class A stock
may be issued, redeemed, repurchased, or transferred between shareholders only
at a par value of $100 per share. Class A stock may only be issued to
satisfy a member’s advance stock purchase requirement for a new advance and
cannot be used to meet its other requirements relating to shareholdings.
Class A stock is generally redeemable six months after: (i) written
notice from the member; (ii) consolidation or merger of a member with a
non-member; or (iii) withdrawal or termination of membership and can be
repurchased by the Seattle Bank, pursuant to the terms of the Capital Plan. The
Board adopted a resolution limiting dividends on Class A stock, if any, to
cash payments, subject to any applicable restrictions, and dividends on
Class A stock will not necessarily be paid at the same rate as dividends,
if any, on Class B stock. As of September 30, 2009 and December 31, 2008,
our outstanding Class A stock totaled $158.9 million (of which $24.3
million was classified as mandatorily redeemable stock) and $139.3 million (of
which $21.5 million was classified as mandatorily redeemable stock). Of the
$24.3 million of mandatorily redeemable Class A stock, all had passed its
statutory six-month redemption date. Because we did not meet our risk-based
capital requirement as of March 31, 2009 and June 30, 2009 and our
undercapitalized classification, we were unable to redeem Class A stock at the
end of the statutory six-month redemption period.
On
May 12, 2009, as part of the Seattle Bank’s efforts to correct our risk-based
capital deficiency, the Board suspended the issuance of Class A stock to support
new advances, effective June 1, 2009. New advances must be supported by Class B
stock, which unlike Class A stock, can be used to increase the Seattle Bank’s
permanent capital (against which our risk-based capital requirement is
measured).
Class
B Stock
Class B stock
can be issued, redeemed, repurchased, or transferred between shareholders only
at a par value of $100 per share. Class B stock is generally redeemable
five years after: (i) written notice from the member;
(ii) consolidation or merger of a member with a non-member; or
(iii) withdrawal or termination of membership. As of September 30, 2009 and
December 31, 2008, our outstanding Class B stock totaled $2.6 billion
(including $917.9 million classified as mandatorily redeemable stock) and $2.6
billion (including $896.4 million classified as mandatorily redeemable stock).
In addition, as of September 30, 2009 and December 31, 2008, outstanding excess
Class B stock redemption requests that were not classified as mandatorily
redeemable stock totaled $201.1 million and $195.2 million. All of the
Class B stock related to member withdrawals (arising from the acquisition
of 18 members by out-of-district institutions, 12 voluntary withdrawal requests,
and two redemption requests) has been classified as a liability
in “mandatorily redeemable capital stock” on our Statements of
Condition.
The following table
shows purchase, transfer, and redemption request activity for Class A and Class
B stock classified as shareholder’s equity on the Statement of Condition for the
three and nine months ended September 30, 2009.
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||||||
September
30, 2009
|
September
30, 2009
|
|||||||||||||||
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||
Capital
Stock Activity
|
Capital
Stock
|
Capital
Stock
|
Capital
Stock
|
Capital
Stock
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Balance,
beginning of period
|
$ | 135,135 | $ | 1,735,280 | $ | 117,853 | $ | 1,730,287 | ||||||||
New
member capital stock purchases
|
1,054 | 5,961 | ||||||||||||||
Existing
member capital stock purchases
|
514 | 19,535 | 4,051 | |||||||||||||
Total
capital stock purchases
|
1,568 | 19,535 | 10,012 | |||||||||||||
Capital
stock subject to mandatory redemption reclassified from
equity:
|
||||||||||||||||
Withdrawals/involuntary
redemptions
|
(18,857 | ) | (2,253 | ) | (22,767 | ) | ||||||||||
Voluntary
redemptions
|
(572 | ) | (572 | ) | ||||||||||||
Total
capital stock reclassified to mandatorily redeemable stock
|
(572 | ) | (18,857 | ) | (2,825 | ) | (22,767 | ) | ||||||||
Cancellation
of membership withdrawal
|
183 | 262 | ||||||||||||||
Transfers
of capital stock between unaffiliated members
|
||||||||||||||||
(previously
classified as mandatorily redeemable capital stock)
|
380 | |||||||||||||||
Balance,
end of period
|
$ | 134,563 | $ | 1,718,174 | $ | 134,563 | $ | 1,718,174 |
Effective October
7, 2008, we reclassified Washington Mutual Bank, F.S.B.’s membership to that of
a non-Seattle Bank member shareholder that is no longer able to enter into new
borrowing arrangements with us and transferred its Class A and Class B stock to
mandatorily redeemable capital stock on the Statement of Condition. As of
September 30, 2009, this former member held $21.5 million in Class A stock and
$750.8 million in Class B stock.
Effective July 1,
2009, in conjunction with its asset and stock transfer to BANA, we reclassified
$18.5 million of Merrill Lynch Bank USA’s Class B stock to “mandatorily
redeemable capital stock” on our Statement of Condition.
Capital
Plan Amendments and Board Policies Regarding Seattle Bank Stock
The Board approved
the December 2006 amendments to our Capital Plan with the expectation that they
would encourage new borrowing by Seattle Bank members and simplify the terms and
provisions of the Capital Plan. Key amendments made to the Capital Plan included
provisions for Class A stock and members’ access to an excess stock pool,
which before it expired in October 2008, could be used to support certain
additional advances without requiring a member to purchase additional
stock.
In
December 2007, we requested approval from the Finance Agency to remove the 50%
limitation it had previously imposed on Seattle Bank dividends and allow us to
introduce a modest excess Class B stock repurchase program in 2008. In April
2008, the Finance Agency notified the Seattle Bank of its decision to raise the
ceiling on our permissible dividend payments from 50% to 75% of year-to-date net
income calculated in accordance with U.S. GAAP, but not to allow the bank to
repurchase excess Class B stock at that time. We retained the ability to redeem
Class B stock following the expiration of the statutory five-year redemption
period.
In
February 2008, we amended our Capital Plan to: (i) allow for transfers of
excess stock, at par value, between unaffiliated members, pursuant to the
requirements of the Capital Plan; and (ii) increase the range of the member
advance stock purchase requirement to between 2.5% and 6.0% of a member’s
outstanding principal balance of advances. Allowing the transfer of excess stock
between unaffiliated members was designed to provide some flexibility to members
with excess stock, given the existing restrictions on repurchases of Class B
stock. Although we are not presently considering an increase in the member
advance stock purchase requirement, the increased range of the member advance
stock purchase requirement offers us greater flexibility in our capital
management practices, which is critical to effectively managing growth, changes
in our advance business, or increasing capital. Any changes to our advance stock
purchase requirement would only be applied prospectively to new or renewing
advances.
During the first
nine months of 2009 and in 2008, the significant reduction in the market value
and demand for MBS adversely impacted the unrealized market value loss of the
PLMBS held by a number of banks in the FHLBank System, including the Seattle
Bank. As a result, a number of FHLBanks voluntarily suspended dividend payments
and stock repurchases in order to conserve regulatory and GAAP capital. As a
result of these market value declines, we reported unrealized market value
losses of $675.1 million and $2.1 billion as of September 30, 2009 and December
31, 2008 and risk-based capital deficiencies as of June 30, 2009, March 31,
2009, and December 31, 2008. During the second quarter of 2009, the Board
approved the following actions to encourage stock ownership within our
cooperative:
•
|
Through
December 31, 2009, redemption cancellation fees are waived for rescinding
notice of intent to withdraw from membership or notice to redeem excess
stock;
|
|
•
|
Redemption
cancellation fees are waived on transfers of excess Class A or Class B
stock from a member or successor to another member; and
|
|
•
|
Issuance of
Class A stock to support new advances is
suspended.
|
Dividends
and Retained Earnings
In
general, our retained earnings represent our accumulated net income after the
payment of any dividends to our members. Our net loss was $93.8 million and
$144.3 million for the three and nine months ended September 30, 2009, compared
to a net loss of $18.8 million for the three months ended September 30, 2008 and
net income of $41.8 million for the nine months ended September 30,
2008.
Dividends
Under our Capital
Plan, our Board can declare and pay dividends either in cash or stock (although
pursuant to Board resolution, Class A stock dividends must be paid in cash)
from retained earnings or current net earnings. In December 2006, the Finance
Agency issued a final rule that prohibits an FHLBank from declaring and paying
stock dividends if its excess stock balance is greater than 1% of its total
assets. As of September 30, 2009, the Seattle Bank had excess stock of $1.4
billion, or 2.5% of total assets.
In
May 2005, the Finance Agency accepted our business plan which was initially
implemented under the terms of a written agreement with the Finance Agency in
December 2004 and subject to our adoption of certain dividend and stock
repurchase restrictions. To meet the regulator’s conditions, our Board adopted
these policies:
•
|
suspending
indefinitely the declaration or payment of any dividend and providing that
any future dividend declaration or payment may be made only after prior
approval of the Finance Agency, and
|
|
•
|
suspending
indefinitely the repurchase of any Class B stock, except for a limited
amount of excess Class B stock repurchases that may be made after prior
approval of the Finance Agency.
|
The termination of
the written agreement in January 2007 did not affect the above-described
restrictions on Class B stock repurchases. However, in December 2006, we were
granted a waiver of certain restrictions on the bank’s authority to pay
quarterly cash dividends, within certain parameters, which generally limited
dividends to 50% of the current year’s net income. Under our Board’s policy
adopted in December 2006, we were limited to paying dividends no greater than
50% of our year-to-date earnings until, among other things, our retained
earnings target had been met and the Finance Agency had removed our dividend
restrictions. In April 2008, the Finance Agency notified the Seattle Bank of its
decision to raise the ceiling on our permissible dividend payments from 50% to
75% of year-to-date net income calculated in accordance with GAAP. Prior to
the receipt of the waiver described above, from May 2005 to December 2006, our
Board had indefinitely suspended the declaration and payment of dividends on
stock without prior approval by the Finance Agency.
In
June 2009, the Board approved two new thresholds or policy indicators that must
be met before the Seattle Bank will consider the payment of dividends. The
policy indicators include attainment of 85% of the Seattle Bank’s retained
earnings target and attainment of an 85% market value of equity to book value of
equity ratio. As shown in the table below, dividends will be unrestricted,
restricted, or suspended depending on policy indicators, with the weakest
indicator controlling the threshold of dividend payments. These policy
indicators overlay rather than replace the Seattle Bank’s existing dividend
policy, but will be applied prior to any action taken pursuant to the dividend
policy.
Policy
Indicator
|
||||||
Dividend
Parameters
|
Suspended
|
Restricted
|
Unrestricted
|
|||
Retained
Earnings
|
< 85% of
target
|
85% <=
target <=100%
|
>=
100%
|
|||
Market value
of equity (MVE) to book value of equity (BVE)
|
MVE/BVE <
85%
|
85% <=
MVE/BVE <=95%
|
MVE/BVE >
95%
|
As
of September 30, 2009, retained earnings was 11.0% of target and our MVE/BVE was
63.9% of target.
Retained
Earnings/Accumulated Deficit
In
September 2004, our Board adopted a revised retained earnings policy in
accordance with Finance Agency guidance. Under this policy, we establish
retained earnings targets each quarter based on criteria including, among other
things, our market risk, credit risk, and operations risk. In April 2007, the
Board approved a revised policy, which added, among other things, a component
based on our annual operating expenses, for determining the target level of
retained earnings. As of September 30, 2009, our retained earnings target was
$641.0 million. We continue to work on enhancing our methodology for determining
our retained earnings target. Further, as discussed above, in June 2009, the
Board approved two new thresholds or policy indicators that must be met before
the Seattle Bank will consider the payment of dividends.
We
reported retained earnings of $70.2 million as of September 30, 2009, an
increase of $149.1 million from the accumulated deficit of $78.9 million as of
December 31, 2008, primarily resulting from our adoption of the new OTTI
accounting guidance, under which we recognized a cumulative effect adjustment of
$293.4 million as an increase to our retained earnings as of January 1, 2009
with a related adjustment to accumulated other comprehensive loss, partially
offset by our 2009 year-to-date loss of $144.3 million.
Accumulated
Other Comprehensive Loss
Accumulated other
comprehensive loss was $995.5 million as of September 30, 2009, compared to $2.9
million as of December 31, 2008. As a result of our adoption of the FASB’s new
OTTI accounting guidance as of January 1, 2009, we recognized a $293.4 million
cumulative-effect adjustment as an increase to our retained earnings as of
January 1, 2009, with a corresponding increase to accumulated other
comprehensive loss. The following tables provide information regarding the
components of other comprehensive loss for the three and nine months ended
September 30, 2009 and the components of accumulated other comprehensive loss
for the nine months ended September 30, 2009.
For
the Three Months Ended
September
30,
|
For
the Nine Months Ended
September
30,
|
||||||||||||||
Other
Comprehensive Income (Loss)
|
2009
|
2008
|
2009
|
2008
|
|||||||||||
(in
thousands)
|
|||||||||||||||
Non-credit
portion of OTTI loss on HTM securities
|
$ | (80,166 | ) | $ | $ | (1,160,512 | ) | $ | |||||||
Reclassification
adjustment into earnings relating to non-credit
|
|||||||||||||||
portion of
OTTI loss on HTM securities
|
125,287 | 183,858 | |||||||||||||
Accretion of
non-credit portion of OTTI loss on HTM securities
|
89,203 | 169,884 | |||||||||||||
HTM
securities, net
|
134,324 | (806,770 | ) | ||||||||||||
Change in
unrealized losses on AFS securities
|
108,243 | 108,243 | |||||||||||||
Pension
benefits
|
40 |
(159)
|
(649 | ) | (159 | ) | |||||||||
Other
comprehensive income (loss)
|
$ | 242,607 |
$
|
(159)
|
$ | (699,176 | ) | $ | (159 | ) |
Held-To-Maturity
|
Available-For-Sale
|
||||||||||||||
Accumulated
Other Comprehensive Loss
|
Benefit
Plans
|
Securities
|
Securities
|
Total
|
|||||||||||
(in
thousands)
|
|||||||||||||||
Balance,
December 31, 2008
|
$ | (2,939 | ) | $ | $ | $ | (2,939 | ) | |||||||
Cumulative
effect of adjustment to opening balance relating to
|
|||||||||||||||
new
OTTI guidance
|
(293,415 | ) | (293,415 | ) | |||||||||||
Reclassification
of non-credit portion of OTTI loss on HTM securities
|
|||||||||||||||
to
AFS securities
|
692,000 | (692,000 | ) | ||||||||||||
Net
change during the period
|
(649 | ) | (806,770 | ) | 108,243 | (699,176 | ) | ||||||||
Accumulated
other comprehensive loss, September 30, 2009
|
$ | (3,588 | ) | $ | (408,185 | ) | $ | (583,757 | ) | $ | (995,530 | ) |
Statutory
Capital Requirements
We
are subject to three capital requirements under statutory and regulatory rules
and regulations: (1) risk-based capital, (2) regulatory
capital-to-assets ratio, and (3) leverage capital ratio. With the exception
of risk-based capital, we were in compliance with all of these statutory capital
requirements, which are described below, as of September 30, 2009 and December
31, 2008. We reported risk-based capital deficiencies as of December 31, 2008,
March 31, 2009, and June 30, 2009.
Risk-Based
Capital
We
are required to hold at all times risk-based capital at least equal to the sum
of our credit-risk capital requirement, market-risk capital requirement, and
operations-risk capital requirement, calculated in accordance with federal laws
and regulations.
•
|
Credit risk
is the potential for financial loss because of the failure of a borrower
or counterparty to perform on an obligation. The credit-risk requirement
is determined by adding the credit-risk capital charges for assets,
off-balance sheet items, and derivative contracts based on, among other
things, the credit percentages assigned to each item as required by
Finance Agency regulations.
|
|
•
|
Market risk
is the potential for financial losses due to the increase or decrease in
the value or price of an asset or liability resulting from broad movements
in prices, such as interest rates. The market-risk requirement is
determined by adding the market value of the portfolio at risk from
movements in interest-rate fluctuations and the amount, if any, by which
the current market value of our total capital is less than 85% of the book
value of our total capital. We calculate the market value of our portfolio
at risk and the current market value of our total capital by using an
internal model. Our modeling approach and underlying assumptions are
subject to Finance Agency review and approval.
|
|
•
|
Operations
risk is the potential for unexpected financial losses due to inadequate
information systems, operational problems, breaches in internal controls,
or fraud. The operations risk requirement is determined as a percentage of
the market risk and credit risk requirements. The Finance Agency has
determined this risk requirement to be 30% of the sum of the credit-risk
and market-risk requirements described
above.
|
Only permanent
capital, defined as retained earnings and Class B stock (including mandatorily
redeemable Class B stock), can satisfy the risk-based capital requirement.
Class A stock (including mandatorily redeemable Class A stock) and
accumulated other comprehensive losses are not considered permanent capital and,
thus, are excluded when determining compliance with risk-based capital
requirements. The Finance Agency has the authority to require us to maintain a
greater amount of permanent capital than is required by the risk-based capital
requirement, but has not exercised such authority.
The following table
presents our permanent capital and risk-based capital requirements as of
September 30, 2009 and December 31, 2008.
As
of
|
As
of
|
|||||||
Permanent
Capital and Risk-Based Capital Requirements
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands)
|
||||||||
Permanent
Capital
|
||||||||
Class B
stock
|
$ | 1,718,174 | $ | 1,730,287 | ||||
Mandatorily
redeemable Class B stock
|
917,855 | 896,400 | ||||||
Retained
earnings (accumulated deficit)
|
70,206 | (78,876 | ) | |||||
Permanent
capital
|
$ | 2,706,235 | $ | 2,547,811 | ||||
Risk-Based
Capital Requirement
|
||||||||
Credit
risk
|
541,605 | 154,760 | ||||||
Market
risk
|
1,451,757 | 1,927,548 | ||||||
Operations
risk
|
598,009 | 624,692 | ||||||
Risk-based
capital requirement
|
$ | 2,591,371 | $ | 2,707,000 | ||||
Risk-based
capital surplus (deficiency)
|
$ | 114,864 | $ | (159,189 | ) |
The decrease in our
risk-based capital requirement as of September 30, 2009, compared to
December 31, 2008, primarily reflected the decreased market-risk component
of our risk-based capital requirement resulting from the improved market values
of some of our PLMBS, partially offset by an increased credit-risk component
requirement resulting from credit rating downgrades on some of our PLMBS. The
operations-risk requirement decreased slightly because it is calculated as a
percentage of the sum of the market- and credit-risk components. We expect that
our risk-based capital requirement will fluctuate with market
conditions.
Regulatory Capital-to-Assets
Ratio
We
are required to maintain at all times a total regulatory capital-to-assets ratio
of at least 4.00%. Total regulatory capital is the sum of permanent capital,
Class A stock (including mandatorily redeemable Class A stock), any
general loss allowance, if consistent with GAAP and not established for specific
assets, and other amounts from sources determined by the Finance Agency as
available to absorb losses. Pursuant to action taken by our Board in January
2007, our minimum regulatory capital-to-assets ratio has been set at 4.05%, with
a current Board-set operating target of 4.10%. As of September 30, 2009, our
regulatory capital to assets ratio was 5.30%. Until the capital markets operate
more normally, we expect to continue to manage our business to a regulatory
capital-to-assets ratio target higher than our operating target.
The following table
presents our regulatory capital-to-assets ratios as of September 30, 2009 and
December 31, 2008.
As
of
|
As
of
|
|||||||
Regulatory
Capital-to-Assets Ratios
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands, except percentages)
|
||||||||
Minimum
Board-approved capital (4.05% of total assets)
|
$ | 2,190,540 | $ | 2,363,648 | ||||
Total
regulatory capital
|
2,865,099 | 2,687,140 | ||||||
Regulatory
capital-to-assets ratio
|
5.30 | % | 4.60 | % |
Leverage Capital
Ratio
We
are required to maintain a 5.00% minimum leverage ratio based on leverage
capital, which is the sum of permanent capital weighted by a 1.5 multiplier plus
non-permanent capital. A minimum leverage ratio, which is defined as leverage
capital divided by total assets, is intended to ensure that we maintain
sufficient permanent capital. Primarily for the same reasons that resulted in
the significant increase in our regulatory capital-to-assets ratio, our leverage
ratio also significantly increased as of September 30, 2009 from
December 31, 2008.
The following table
presents our leverage ratios as of September 30, 2009 and December 31,
2008.
As
of
|
As
of
|
|||||||
Leverage
Ratios
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands, except percentages)
|
||||||||
Minimum
leverage capital (5.00% of total assets)
|
$ | 2,704,370 | $ | 2,918,085 | ||||
Leverage
capital (includes
|
||||||||
1.5
weighting factor applicable to permanent capital)
|
4,218,217 | 3,961,046 | ||||||
Leverage ratio
(leverage capital as a percentage of total assets)
|
7.80 | % | 6.79 | % |
Capital
Classification
On
January 30, 2009, the Finance Agency published an interim final rule and on
July 30, 2009 published a final rule implementing the PCA provisions of the
Housing Act. The rule established four capital classifications for FHLBanks and
implemented the PCA provisions that apply to FHLBanks that are not deemed to be
adequately capitalized. Once an FHLBank is determined by the Finance Agency to
be other than adequately capitalized, the FHLBank becomes subject to additional
supervisory authority of the Finance Agency and a range of mandatory
restrictions (and discretionary restrictions may be imposed), including
institution of a capital restoration plan.
The PCA provisions
include four capital classifications for the FHLBanks:
•
|
Adequately
capitalized (meets or exceeds all of its risk-based and leverage capital
requirements)
|
|
•
|
Undercapitalized
(does not meet one or more of its capital requirements, but it is not
significantly or critically undercapitalized)
|
|
•
|
Significantly
undercapitalized (permanent or total capital is less than 75% of its
capital requirements, but it is not critically
undercapitalized)
|
|
•
|
Critically
undercapitalized (total capital is less than or equal to 2% of total
assets)
|
The Director of the
Finance Agency may at any time downgrade an FHLBank by one capital category
based on specified conduct, decreases in the value of collateral pledged to it,
or a determination by the Director of the Finance Agency that the FHLBank is
engaging in unsafe and unsound practices or is in an unsafe and unsound
condition. Before implementing a reclassification, the Director of the Finance
Agency is required to provide the FHLBank with written notice of the proposed
action and an opportunity to submit a response. See “Part I. Item 1.
Business—Regulations—Capital Status Requirements,” in our 2008 annual report on
Form 10-K for additional information on consequences for FHLBanks that are not
determined to be adequately capitalized.
In
August 2009, we received notification from the Finance Agency that, based on the
Seattle Bank’s risk-based capital deficiency as of March 31, 2009, the Seattle
Bank’s final capital classification was “undercapitalized.” A similar
determination was made by the Finance Agency based on the Seattle Bank’s
risk-based capital deficiency as of June 30, 2009. Although the Finance Agency
recognized the initial steps taken by the Seattle Bank in response to the
Finance Agency’s preliminary notification, in addition to the reported
risk-based capital deficiencies as of March 31, 2009 and June 30, 2009, the
Finance Agency noted the deterioration in the value of our PLMBS, our
accumulated other comprehensive loss stemming from that deterioration, the level
of our retained earnings in comparison to the other comprehensive loss, and our
market value of equity compared to the par value of outstanding
stock.
Restrictions
applicable to an FHLBank whose final capital classification is determined to be
undercapitalized, such as the Seattle Bank, include a range of mandatory or
discretionary restrictions. For example, an undercapitalized FHLBank must submit
a capital restoration plan to the Finance Agency for approval. In addition, the
mandatory restrictions include: an asset growth restriction such that current
quarter average total assets of the FHLBank may not exceed average total assets
of the previous quarter (unless the Director of the Finance Agency determines
the increase is consistent with an approved capital restoration plan and meets
other requirements); and prior approval by the Finance Agency of any new
business activity.
In
accordance with the PCA provisions, we submitted a proposed capital restoration
plan to the Finance Agency in August 2009. The Finance Agency determined that it
was unable to approve our proposed plan and required us to submit a new plan by
October 31, 2009. We subsequently requested an extension in order to prepare a
revised proposed capital restoration plan and the Finance Agency approved an
extension to December 6, 2009. It is unknown whether the Finance Agency will
accept our revised capital restoration plan. Failure to obtain approval of our
rivsed capital restoration plan could result in the appointment of a conservator
or receiver by the Finance Agency. Further, Finance Agency approval of our
proposed capital restoration plan could result in additional restrictions for
the Seattle Bank. In addition, the Finance Agency could take other regulatory
actions (as further described in the PCA provisions), which could negatively
impact demand for our advances, our financial performance, and business in
general.
Although as of
September 30, 2009 the Seattle Bank met all of our regulatory requirements
(including the risk-based capital requirement), on November 6, 2009, the Finance
Agency reaffirmed the Seattle Bank’s capital classification as undercapitalized.
All mandatory actions and restrictions in place as a result of the previous
capital classification determination remain in effect, including not redeeming
or repurchasing capital stock or paying dividends without prior Finance Agency
approval. The Finance Agency also indicated that it would not change our capital
classification to adequately capitalized until the Finance Agency believes that
we have demonstrated sustained performance in line with an approved capital
restoration plan. Our capital classification will remain undercapitalized until
the Finance Agency determines otherwise.
See “Part I. Item
1. Business—Statutory Capital Requirements” in our 2008 annual report on Form
10-K for additional information on consequences for FHLBanks that are determined
not to be adequately capitalized.
Liquidity
We
are required to maintain liquidity in accordance with federal laws and
regulations and policies established by our Board. In addition, in their asset
and liability management planning, many members look to the Seattle Bank as a
source of standby liquidity. We seek to meet our members’ credit and liquidity
needs, while complying with regulatory requirements and Board-established
policies, without maintaining excessive holdings of low-yielding liquid
investments or incurring unnecessarily high borrowing costs. We actively manage
our liquidity to preserve stable, reliable, and cost-effective sources of funds
to meet all current and future normal operating financial
commitments.
Our primary sources
of liquidity are the proceeds of new consolidated obligation issuances and
maturities of short-term investments. Secondary sources of liquidity are other
short-term borrowings, including federal funds purchased, and securities sold
under agreements to repurchase. Member deposits and capital are also liquidity
sources. To ensure that adequate liquidity is available to meet our
requirements, we monitor and forecast our future cash flows and anticipated
member liquidity needs, and we adjust our funding and investment strategies as
needed. Our access to liquidity may be negatively affected by, among other
things, rating agency actions, changes in demand for FHLBank System debt, or
regulatory action that would limit debt issuances.
Federal regulations
require the FHLBanks to maintain, in the aggregate, unpledged qualifying assets
equal to the consolidated obligations outstanding. Qualifying assets are cash,
secured advances, assets with an assessment or rating at least equivalent to the
current assessment or rating of the consolidated obligations, mortgage loans or
other securities of or issued by the U.S. government or its agencies, and
securities that fiduciary and trust funds may invest in under the laws of the
state in which the FHLBank is located. The following table presents our
compliance with this requirement as of September 30, 2009 and December 31,
2008.
As
of
|
As
of
|
|||||||
Unpledged
Qualifying Assets
|
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands)
|
||||||||
Outstanding
debt
|
$ | 51,432,576 | $ | 54,468,680 | ||||
Aggregate
qualifying assets
|
54,028,184 | 58,278,884 |
We
maintain contingency liquidity plans designed to enable us to meet our
obligations and the liquidity needs of our members in the event of operational
disruptions at the Seattle Bank or the Office of Finance or disruptions in
financial markets. In addition to the liquidity measures discussed above, in
March 2009, the Finance Agency issued final guidance formalizing its request in
the fourth quarter 2008 for increases in liquidity of FHLBanks. This final
guidance requires the FHLBanks to maintain sufficient liquidity, through
short-term investments, such as federal funds and securities purchased under
agreements to resell, in an amount at least equal to an FHLBank’s anticipated
cash outflows under two different scenarios. One scenario assumes that an
FHLBank cannot access the capital markets for 15 days and that, during that
time, members do not renew any maturing, prepaid, or called advances. The
second scenario assumes that an FHLBank cannot access the capital markets for
five days and that, during that period, an FHLBank will automatically renew
maturing or called advances for all members except very large, highly rated
members. The guidance is designed to enhance an FHLBank’s protection against
temporary disruptions in access to the FHLBank System debt markets in response
to a rise in capital market volatility. As of September 30, 2009, we held
larger-than-normal balances of overnight federal funds and have lengthened the
maturity of consolidated obligation discount notes used to fund many of these
investments in order to comply with the Finance Agency’s liquidity guidance and
ensure adequate liquidity availability for member advances.
As
of September 30, 2009 and December 31, 2008, we were in compliance with all
other federal laws and regulations and policies established by our Board
relating to liquidity.
During the third
quarter of 2008, the Seattle Bank and each of the other 11 FHLBanks entered into
lending agreements (Lending Agreements) with the U.S. Treasury in connection
with the U.S. Treasury’s establishment of a GSECF, as authorized by the Housing
Act. The GSECF is designed to serve as a contingent source of liquidity for the
housing GSEs, including the FHLBanks. Any borrowings by one or more of the
FHLBanks under the GSECF are considered consolidated obligations with the same
joint-and-several liability as all other consolidated obligations. The terms of
any borrowing are agreed to at the time of issuance. Loans under a Lending
Agreement are to be secured by collateral acceptable to the U.S. Treasury, which
consists of FHLBank advances to members and MBS issued by Fannie Mae or Freddie
Mac. Each FHLBank is required to submit to the Federal Reserve Bank of New York,
acting as fiscal agent of the U.S. Treasury, a list of eligible collateral,
updated on a weekly basis. As of September 30, 2009, the Seattle Bank had
provided the U.S. Treasury with a listing of advance collateral totaling $24.4
billion. The amount of collateral can be increased or decreased (subject to the
approval of the U.S. Treasury) at any time through the delivery of an updated
listing of collateral. As of November 12, 2009, no FHLBank had drawn on this
available source of liquidity. The Lending Agreements are scheduled to expire on
December 31, 2009.
For additional
information on our statutory liquidity requirements and ending Agreement, see
“Part I. Item 1. Business—Regulation—Liquidity Requirements”, in our 2008
annual report on Form 10-K.
Contractual
Obligations and Other Commitments
The following table
presents our contractual obligations and commitments as of September 30,
2009.
As
of September 30, 2009
|
||||||||||||||||
Payment
Due by Period
|
||||||||||||||||
Contractual
Obligations and Commitments
|
Less
than 1 Year
|
1
to 3 Years
|
3
to 5 Years
|
Thereafter
|
Total
|
|||||||||||
(in
thousands)
|
||||||||||||||||
Member term
deposits
|
$ | 32,752 | $ | 32,752 | ||||||||||||
Consolidated
obligation bonds (at par) (1)
|
20,466,255 | $ | 4,324,795 | $ | 2,449,500 | $ | 2,294,270 | 29,534,820 | ||||||||
Derivative
liabilities
|
259,278 | 259,278 | ||||||||||||||
Mandatorily
redeemable capital stock
|
147,179 | 17,458 | 777,519 | 942,156 | ||||||||||||
Operating
leases
|
3,174 | 6,602 | 1,989 | 11,765 | ||||||||||||
Total
contractual obligations
|
$ | 20,908,638 | $ | 4,348,855 | $ | 3,229,008 | $ | 2,294,270 | $ | 30,780,771 | ||||||
Other
Commitments
|
||||||||||||||||
Commitments
for additional advances
|
$ | 2,140 | $ | 4,400 | $ | $ | $ | 6,540 | ||||||||
Standby
letters of credit
|
761,127 | 118,013 | 879,140 | |||||||||||||
Standby bond
purchase agreements
|
48,715 | 48,715 | ||||||||||||||
Unused lines
of credit and other commitments
|
50,000 | 50,000 | ||||||||||||||
Total other
commitments
|
$ | 813,267 | $ | 171,128 | $ | $ | $ | 984,395 |
(1)
|
Does not
include discount notes and is based on contractual maturities; the actual
timing of payments could be affected by
redemptions.
|
In
June 2006, the FHLBanks and the Office of Finance entered into the Federal Home
Loan Banks P&I Funding and Contingency Plan Agreement (Contingency
Agreement) effective in July 2006. The FHLBanks and the Office of Finance
entered into the Contingency Agreement in response to the Board of Governors of
the Federal Reserve System revising its Policy Statement on Payments System Risk
concerning the disbursement by the Federal Reserve Banks of interest and
principal payments on securities issued by GSEs, such as the FHLBanks. Under the
Contingency Agreement, in the event that one or more FHLBanks does not fund its
principal and interest payments under a consolidated obligation by deadlines
agreed upon by the FHLBanks, the other FHLBanks will be responsible for those
payments in the manner described in the Contingency Agreement. We have not
funded any consolidated obligation principal and interest payments under the
Contingency Agreement.
RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008
The Seattle Bank
recorded net losses of $93.8 million and $144.3 million for the three and nine
months ended September 30, 2009, compared to a net loss of $18.8 million for the
three months ended September 30, 2008 and net income of $41.8 million for the
nine months ended September 30, 2008. The declines in net income from operations
for the three and nine months ended September 30, 2009 were primarily due to
significant increases in OTTI credit losses on certain of our PLMBS (further
discussed in “—Other Income” below).
Net interest income
increased by $4.7 million and $12.0 million for the three and nine months ended
September 30, 2009, compared to the same periods in 2008. The increases in net
interest income were primarily driven by more favorable debt funding costs and
by increased investment interest income.
Our net loss
on early extinguishment of consolidated obligations and other expenses declined
for the three and nine months ended September 30, 2009, compared to the same
periods in 2008, and AHP/REFCORP assessments declined for the nine months ended
September 30, 2009 compared to the same period in 2008. While these factors
improved net income, they were offset by: the OTTI credit losses; decreases in
net gain (loss) on derivatives and hedging activities for the three and nine
months ended September 30, 2009, compared to the same periods in 2008; and the
negative impact of the reversal of 2008 year-to-date AHP/REFCORP
assessments for the three months ended September 30, 2008.
Net
Interest Income
Net interest income
is the primary performance measure for our ongoing operations. Our net interest
income consists of interest earned on advances, investments, and mortgage loans
held for portfolio, less interest accrued or paid on consolidated obligations,
deposits, and other borrowings. Our net interest income is affected by changes
in the average balance (volume) of our interest-earning assets and
interest-bearing liabilities and changes in the average yield (rate) for both
the interest-earning assets and interest-bearing liabilities. These changes are
influenced by economic factors and by changes in our products or services.
Interest-rates, yield-curve shifts, and changes in market conditions are the
primary economic factors affecting net interest income. Between September 30,
2009 and September 30, 2008, the Federal Reserve Open Market Committee reduced
its target for the federal funds rate from 2.00% to between 0% and 0.25%, in an
effort to stimulate the U.S. economy. As a result of our significant holdings of
short-term advances and investments, we expect net interest income to continue
to be unfavorably impacted by the lower federal funds rates.
The following
tables present average balances, interest income and expense, and average yields
of our major categories of interest-earning assets and interest-bearing
liabilities, for the three and nine months ended September 30, 2009 and 2008.
The tables also present interest-rate spread between the average yield on total
interest-earning assets and the average cost of total interest-bearing
liabilities, as well as net interest margin (i.e., net interest income divided
by the average balance of total interest-earning assets), for the three and nine
months ended September 30, 2009 and 2008.
For
the Three Months Ended September 30,
|
||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Interest
|
Interest
|
|||||||||||||||||||||||
Average
Balances, Interest Income and
|
Average
|
Income/
|
Average
|
Average
|
Income/
|
Average
|
||||||||||||||||||
Expense,
and Average Yields
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
||||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||||
Interest-Earning
Assets:
|
||||||||||||||||||||||||
Advances
|
$ | 26,666,215 | $ | 76,223 | 1.13 | $ | 37,357,847 | $ | 271,872 | 2.90 | ||||||||||||||
Mortgage loans
held for portfolio
|
4,424,916 | 53,382 | 4.79 | 5,284,140 | 66,070 | 4.97 | ||||||||||||||||||
Investments
(1)
|
20,298,586 | 54,245 | 1.00 | 25,761,279 | 184,967 | 2.86 | ||||||||||||||||||
Other
interest-earning assets
|
60,993 | 24 | 0.16 | 4,080 | 21 | 2.04 | ||||||||||||||||||
Total
interest-earning assets
|
51,450,710 | 183,874 | 1.39 | 68,407,346 | 522,930 | 3.04 | ||||||||||||||||||
Other
assets
|
194,110 | 295,334 | ||||||||||||||||||||||
Total
assets
|
$ | 51,644,820 | $ | 68,702,680 | ||||||||||||||||||||
Interest-Bearing
Liabilities:
|
||||||||||||||||||||||||
Consolidated
obligations
|
$ | 48,645,742 | $ | 135,818 | 1.11 | $ | 63,883,881 | $ | 471,162 | 2.93 | ||||||||||||||
Deposits
|
522,659 | 158 | 0.12 | 1,080,071 | 5,264 | 1.94 | ||||||||||||||||||
Mandatorily
redeemable capital stock
|
941,972 | 112,328 | 390 | 1.38 | ||||||||||||||||||||
Other
borrowings
|
1,436 | 479,564 | 2,920 | 2.42 | ||||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 50,111,809 | $ | 135,976 | 1.08 | $ | 65,555,844 | $ | 479,736 | 2.91 | ||||||||||||||
Other
liabilities
|
685,948 | 425,532 | ||||||||||||||||||||||
Capital
|
847,063 | 2,721,304 | ||||||||||||||||||||||
Total
liabilities and capital
|
$ | 51,644,820 | $ | 68,702,680 | ||||||||||||||||||||
Net interest
income before provision for credit losses
|
$ | 47,898 | $ | 43,194 | ||||||||||||||||||||
Interest-rate
spread
|
0.31 | 0.13 | ||||||||||||||||||||||
Net interest
margin
|
0.34 | 0.25 |
For
the Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Interest
|
Interest
|
|||||||||||||||||||||||
Average
Balances, Interest Income and
|
Average
|
Income/
|
Average
|
Average
|
Income/
|
Average
|
||||||||||||||||||
Expense,
and Average Yields
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
||||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||||
Interest-Earning
Assets:
|
||||||||||||||||||||||||
Advances
|
$ | 31,078,337 | $ | 366,360 | 1.58 | $ | 38,544,491 | $ | 1,004,342 | 3.48 | ||||||||||||||
Mortgage loans
held for portfolio
|
4,727,960 | 180,799 | 5.11 | 5,440,575 | 205,341 | 5.04 | ||||||||||||||||||
Investments
(1)
|
18,677,607 | 174,070 | 1.19 | 23,361,088 | 552,099 | 3.16 | ||||||||||||||||||
Other
interest-earning assets
|
123,271 | 203 | 0.22 | 2,092 | 37 | 2.35 | ||||||||||||||||||
Total
interest-earning assets
|
54,607,175 | 721,432 | 1.74 | 67,348,246 | 1,761,819 | 3.49 | ||||||||||||||||||
Other
assets
|
218,468 | 362,568 | ||||||||||||||||||||||
Total
assets
|
$ | 54,825,643 | $ | 67,710,814 | ||||||||||||||||||||
Interest-Bearing
Liabilities:
|
||||||||||||||||||||||||
Consolidated
obligations
|
$ | 51,413,428 | $ | 550,206 | 1.43 | $ | 63,107,683 | $ | 1,580,248 | 3.34 | ||||||||||||||
Deposits
|
605,390 | 885 | 0.20 | 1,083,629 | 19,598 | 2.42 | ||||||||||||||||||
Mandatorily
redeemable capital stock
|
928,003 | 92,412 | 1,008 | 1.46 | ||||||||||||||||||||
Other
borrowings
|
1,665 | 161,455 | 2,929 | 2.42 | ||||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 52,948,486 | $ | 551,091 | 1.39 | $ | 64,445,179 | $ | 1,603,783 | 3.32 | ||||||||||||||
Other
liabilities
|
658,531 | 573,887 | ||||||||||||||||||||||
Capital
|
1,218,626 | 2,691,748 | ||||||||||||||||||||||
Total
liabilities and capital
|
$ | 54,825,643 | $ | 67,710,814 | ||||||||||||||||||||
Net interest
income before provision for credit losses
|
$ | 170,341 | $ | 158,036 | ||||||||||||||||||||
Interest-rate
spread
|
0.35 | 0.17 | ||||||||||||||||||||||
Net interest
margin
|
0.39 | 0.31 |
(1)
|
Investment securities include HTM
and AFS securities. The average balances of HTM securities and AFS
securities are reflected at amortized cost; therefore, the resulting
yields do not give effect to changes in fair value or the noncredit
component of a previously recognized OTTI reflected in accumulated other
comprehensive loss.
|
For the three and
nine months ended September 30, 2009, the average composition of our
interest-earning assets changed significantly from the same periods in 2008,
with decreases in all major asset portfolios. The average balances of our
advances and investments decreased, reflecting decreased demand for advances as
our borrowers experienced increased customer deposits and reduced their asset
balances and our earlier deicsion to limit short-term unsecured investing. The
further reduction in mortgage loans held for portfolio reflected our decision in
early 2005 to exit the MPP, which led to our discontinuing the purchase of new
mortgage loans. Significantly lower prevailing interest rates impacted most of
our interest-earning assets and interest-bearing liabilities, but had the most
impact on our advance, investment, and consolidated obligation portfolios, where
yields declined significantly for the three and nine months ended September 30,
2009, compared to the same periods in 2008.
The following table
separates the two principal components of the changes in our net interest
income—interest income and interest expense—identifying the amounts due to
changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in the average interest rate for the three and nine
months ended September 30, 2009 and 2008.
For the Three Months Ended September 30, |
For
the Nine Months Ended September 30,
|
|||||||||||||||||||||||
2009 v. 2008 | 2009 v. 2008 | |||||||||||||||||||||||
Increase
(Decrease)
|
Increase
(Decrease)
|
|||||||||||||||||||||||
Changes
in Volume and Rate
|
Volume*
|
Rate*
|
Total
|
Volume*
|
Rate*
|
Total
|
||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Interest
Income
|
||||||||||||||||||||||||
Advances
|
$ | (62,573 | ) | $ | (133,076 | ) | $ | (195,649 | ) | $ | (166,866 | ) | $ | (471,116 | ) | $ | (637,982 | ) | ||||||
Investments
|
(26,611 | ) | (104,111 | ) | (130,722 | ) | (78,787 | ) | (299,242 | ) | (378,029 | ) | ||||||||||||
Mortgage
loans held for portfolio
|
(10,250 | ) | (2,438 | ) | (12,688 | ) | (27,219 | ) | 2,677 | (24,542 | ) | |||||||||||||
Other
loans
|
112 | (109 | ) | 3 | 230 | (64 | ) | 166 | ||||||||||||||||
Total
interest income
|
(99,322 | ) | (239,734 | ) | (339,056 | ) | (272,642 | ) | (767,745 | ) | (1,040,387 | ) | ||||||||||||
Interest
Expense
|
||||||||||||||||||||||||
Consolidated
obligations
|
(92,865 | ) | (242,479 | ) | (335,344 | ) | (251,833 | ) | (778,209 | ) | (1,030,042 | ) | ||||||||||||
Mandatorily
redeemable capital stock
|
1,703 | (2,093 | ) | (390 | ) | 908 | (1,916 | ) | (1,008 | ) | ||||||||||||||
Deposits
|
(1,812 | ) | (3,294 | ) | (5,106 | ) | (6,070 | ) | (12,643 | ) | (18,713 | ) | ||||||||||||
Other
borrowings
|
(1,458 | ) | (1,462 | ) | (2,920 | ) | (1,457 | ) | (1,472 | ) | (2,929 | ) | ||||||||||||
Total
interest expense
|
(94,432 | ) | (249,328 | ) | (343,760 | ) | (258,452 | ) | (794,240 | ) | (1,052,692 | ) | ||||||||||||
Change
in net interest income before
|
||||||||||||||||||||||||
provision
for credit losses
|
$ | (4,890 | ) | $ | 9,594 | $ | 4,704 | $ | (14,190 | ) | $ | 26,495 | $ | 12,305 |
*
|
Changes in
interest income and interest expense not identifiable as either
volume-related or rate-related, but rather equally attributable to both
volume and rate changes, are allocated to the volume and rate categories
based on the proportion of the absolute value of the volume and rate
changes.
|
Both total interest
income and total interest expense decreased significantly for the three and nine
months ended September 30, 2009, compared to the same periods in 2008. For the
three and nine months ended September 30, 2009, the decreases were primarily due
to significantly lower short-term interest rates.
During the three
and nine months ended September 30, 2009, compared to the same periods in 2008,
we experienced a larger decrease in the average cost on our interest-bearing
liabilities than in the average yield on our interest-earning assets, increasing
our interest-rate spread by 18 basis points to 31 and 35 basis points. The
improvement of our interest-rate spread primarily resulted from a reduction in
the average cost of our consolidated obligations.
Interest
Income
The following table
presents the components of our interest income by category of interest-earning
asset and the percentage change in each category for the three and nine months
ended September 30, 2009 and 2008.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||||||||||
|
Percent
Increase/
|
|
Percent
Increase/
|
|||||||||||||||||||||
Interest
Income
|
2009
|
2008
|
(Decrease)
|
2009
|
2008
|
(Decrease)
|
||||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||||
Advances
|
$ | 74,354 | $ | 271,851 | (72.6 | ) | $ | 358,858 | $ | 982,384 | (63.5 | ) | ||||||||||||
Prepayment
fees on advances, net
|
1,869 | 21 | 8,800.0 | 7,502 | 21,958 | (65.8 | ) | |||||||||||||||||
Subtotal
|
76,223 | 271,872 | (72.0 | ) | 366,360 | 1,004,342 | (63.5 | ) | ||||||||||||||||
Short-term and
held-to-maturity investments
|
54,245 | 184,966 | (70.7 | ) | 174,070 | 552,098 | (68.5 | ) | ||||||||||||||||
Interest-bearing
deposits
|
24 | N/A | 203 | N/A | ||||||||||||||||||||
Available-for-sale
securities
|
1 | (100.0 | ) | 1 | (100.0 | ) | ||||||||||||||||||
Mortgage loans
held for portfolio
|
53,382 | 66,070 | (19.2 | ) | 180,799 | 205,341 | (12.0 | ) | ||||||||||||||||
Loans to other
FHLBanks
|
21 | (100.0 | ) | 37 | (100.0 | ) | ||||||||||||||||||
Total interest
income
|
$ | 183,874 | $ | 522,930 | (64.8 | ) | $ | 721,432 | $ | 1,761,819 | (59.1 | ) |
Total interest income
decreased for the three and nine months ended September 30, 2009, compared to
the same periods in 2008, due to significant decreases in both yields and
volumes on advances and investments.
Advances
Interest income
from advances, excluding prepayment fees on advances, decreased 72.6% and 63.5%
for the three and nine months ended September 30, 2009, compared to the same
periods in 2008. These declines were due to declines in both yield and average
advance volume. The average yield on advances (including prepayment fees)
decreased by 177 and 190 basis points to 1.13% and 1.58% for the three and nine
months ended September 30, 2009, compared to the same periods in 2008, primarily
due to significant declines in prevailing short-term interest rates. This
decline was magnified because our advance portfolio during the first half of
2009 was heavily weighted toward short-term advances. Further, average advance
volume declined $10.7 billion and $7.5 billion for the three and nine months
ended September 30, 2009, compared to the same periods in 2008, primarily due to
decreased advance activity with our largest borrowers, although we had generally
decreased advance demand across the membership in the first half of
2009.
For the three and
nine months ended September 30, 2009, new advances totaled $5.0 billion and
$38.0 billion and maturing advances totaled $8.4 billion and $49.9 billion.
Advance activity for the three and nine months ended September 30, 2009 was
significantly below the advance activity for the same periods in 2008, when new
advances totaled $39.3 billion and $101.5 billion and maturing advances totaled
$29.6 billion and $100.7 billion.
We
expect that advance volumes and associated advance interest income will continue
the decline that began in the fourth quarter of 2008 as a result of the
acquisition of our then largest member, Washington Mutual Bank, F.S.B. by
JPMorgan Chase, a non-member institution. As of September 30, 2009,
approximately 75% of advances outstanding to JPMorgan Chase Bank, N.A. as of
December 31, 2008 had matured. Because a large concentration of our advances is
held by only a few members and a non-member shareholder, changes in this group’s
borrowing decisions have and still can significantly affect the amount of our
total advances outstanding. We expect that the concentration of advances with
our largest borrowers will remain significant for the foreseeable
future.
Prepayment
Fees on Advances
For the three and
nine months ended September 30, 2009, we recorded net prepayment fee income on
advances of $1.9 million and $7.5 million, primarily resulting from fees charged
to borrowers that prepaid $81.0 million and $3.7 billion in advances. Prepayment
fees on hedged advances are partially offset by termination fees charged on the
cancellation of interest-rate exchange agreements hedging those advances.
Borrowers prepaid $33.2 million and $8.8 billion in advances during the three
and nine months ended September 30, 2008, resulting in net prepayment fee income
of $21,000 and $22.0 million.
Short-Term
and Held-to-Maturity Investments
Interest
income from investments, which includes short-term investments and long-term HTM
and AFS investments, decreased by 70.7% and 68.5% for the three and nine months
ended September 30, 2009, compared to the same periods in 2008. These decreases
primarily resulted from significantly lower average yields on investments, a
higher proportion of lower-yielding short-term investments to our total
investment portfolio, and a lower average balance of total investments during
the three and nine months ended September 30, 2009, compared to the same periods
in 2008.
Mortgage
Loans Held for Portfolio
Interest income
from mortgage loans held for portfolio decreased by 19.2% and 12.0% for the
three and nine months ended September 30, 2009, compared to the same periods in
2008. These decreases were primarily due to a continued decline in the average
balance of mortgage loans held for portfolio resulting from our decision in
early 2005 to exit the MPP. The average balance of our mortgage loans held for
portfolio decreased by $859.2 million and $712.6 million, to $4.4 billion and
$4.7 billion, for the three and nine months ended September 30, 2009, compared
to the same periods in 2008, primarily due to receipt of principal payments. The
balance of our remaining mortgage loans held for portfolio will continue to
decrease as the remaining mortgage loans are paid off.
Interest
Expense
The following table
presents the components of our interest expense by category of interest-bearing
liability and the percentage change in each category for the three and nine
months ended September 30, 2009 and 2008.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||||||||||
Percent
Increase/
|
Percent
Increase/
|
|||||||||||||||||||||||
Interest
Expense
|
2009
|
2008
|
(Decrease)
|
2009
|
2008
|
(Decrease)
|
||||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||||
Consolidated
obligations - discount notes
|
$ | 9,826 | $ | 150,617 | (93.5 | ) | $ | 63,224 | $ | 414,881 | (84.8 | ) | ||||||||||||
Consolidated
obligations - bonds
|
125,992 | 320,545 | (60.7 | ) | 486,982 | 1,165,367 | (58.2 | ) | ||||||||||||||||
Deposits
|
158 | 5,264 | (97.0 | ) | 885 | 19,598 | (95.5 | ) | ||||||||||||||||
Securities
sold under agreements to repurchase
|
2,919 | (100.0 | ) | 2,924 | (100.0 | ) | ||||||||||||||||||
Mandatorily
redeemable capital stock
|
390 | (100.0 | ) | 1,008 | (100.0 | ) | ||||||||||||||||||
Other
borrowings
|
1 | (100.0 | ) | 5 | (100.0 | ) | ||||||||||||||||||
Total interest
expense
|
$ | 135,976 | $ | 479,736 | (71.7 | ) | $ | 551,091 | $ | 1,603,783 | (65.6 | ) |
Consolidated
Obligation Discount Notes
Interest expense on
consolidated obligation discount notes decreased by 93.5% and 84.8% for the
three and nine months ended September 30, 2009, compared to the same periods in
2008, primarily due to lower prevailing interest rates. Investor demand for
high-quality, short-term debt instruments continued to be relatively strong
during the third quarter of 2009. The average yield on our consolidated
obligation discount notes declined by 208 and 219 basis points for the three and
nine months ended September 30, 2009, compared to the same periods in 2008. The
average balance of our consolidated obligation discount notes decreased by
29.4%, to $18.5 billion for the three months ended September 30, 2009, compared
to the same period in 2008, and decreased by 5.7%, to $20.1 billion, for the
nine months ended September 30, 2009, compared to the same period in
2008.
Consolidated
Obligation Bonds
Interest expense on
consolidated obligation bonds decreased by 60.7% and 58.2% for the three and
nine months ended September 30, 2009, compared to the same periods in 2008,
primarily due to the decreased issuances of longer-term consolidated obligation
bonds and lower prevailing interest rates. During the third quarter of 2009,
demand for longer-term debt generally remained low, which negatively impacted
the interest rates on these types of instruments. The average balance of our
consolidated obligation bonds decreased by 20.0% and 25.1%, to $30.2 billion and
$31.4 billion, for the three and nine months ended September 30, 2009, compared
to the same periods in 2008. Average yields on such bonds declined by
172 and 164 basis points, to 1.66% and 2.08%, for the three and nine months
ended September 30, 2009, compared to the same periods in 2008.
Deposits
Interest expense on
deposits decreased by 97.0% and 95.5% for the three and nine months ended
September 30, 2009, compared to the same periods in 2008, due to decreases of
182 and 222 basis points in the average interest rate paid on deposits and
$557.4 million and $478.2 million decreases in the average balance of deposits.
Deposit levels generally vary based on the interest rates paid to our members,
as well as our members’ liquidity levels and market conditions.
Mandatorily
Redeemable Stock
Although the
average balance of mandatorily redeemable stock increased by $829.6 million and
$835.6 million to $942.0 million and $928.0 million, interest expense was zero
for the three and nine months ended September 30, 2009, due to our suspension of
dividends.
The following table
presents the effect of derivatives and hedging on the components of our interest
income and interest expense for the three and nine months ended September 30,
2009 and 2008.
For
the Three Months Ended September 30, 2009
|
||||||||||||||||
Gain/(Loss)
on Derivatives and on the Related Hedged Items in Fair Value Hedging
Relationships
|
Gain/(Loss)
on Derivatives
|
(Loss)/Gain
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | (20,488 | ) | $ | 18,792 | $ | (1,696 | ) | $ | (89,708 | ) | |||||
Consolidated
obligation bonds
|
54,897 | (52,526 | ) | 2,371 | 64,836 | |||||||||||
Consolidated
obligation discount notes
|
(3,636 | ) | 4,959 | 1,323 | 10,065 | |||||||||||
Total
|
$ | 30,773 | $ | (28,775 | ) | $ | 1,998 | $ | (14,807 | ) |
For
the Three Months Ended September 30, 2008
|
||||||||||||||||
(Loss)/Gain
on Derivatives and on the Related Hedged Items in Fair Value Hedging
Relationships
|
(Loss)/Gain
on Derivatives
|
Gain/(Loss)
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | (359 | ) | $ | (3,037 | ) | $ | (3,396 | ) | $ | (23,166 | ) | ||||
Consolidated
obligation bonds
|
(20,184 | ) | 22,559 | 2,375 | 53,783 | |||||||||||
Consolidated
obligation discount notes
|
(227 | ) | 459 | 232 | 65 | |||||||||||
Total
|
$ | (20,770 | ) | $ | 19,981 | $ | (789 | ) | $ | 30,682 |
For
the Nine Months Ended September 30, 2009
|
||||||||||||||||
(Loss)/Gain
on Derivatives and on the Related Hedged Items in Fair Value Hedging
Relationships
|
(Loss)/Gain
on Derivatives
|
Gain/(Loss)
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | (10,560 | ) | $ | 4,847 | $ | (5,713 | ) | $ | (217,953 | ) | |||||
Consolidated
obligation bonds
|
(213,529 | ) | 207,445 | (6,084 | ) | 181,597 | ||||||||||
Consolidated
obligation discount notes
|
(562 | ) | 3,081 | 2,519 | 19,016 | |||||||||||
Total
|
$ | (224,651 | ) | $ | 215,373 | $ | (9,278 | ) | $ | (17,340 | ) |
For
the Nine Months Ended September 30, 2008
|
||||||||||||||||
(Loss)/Gain
on Derivatives and on the Related Hedged Items in Fair Value Hedging
Relationships
|
(Loss)/Gain
on Derivatives
|
Gain/(Loss)
on Hedged Items
|
Net
Fair Value Hedge Ineffectiveness
|
Effect
of Derivatives on Net Interest Income (1)
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Advances
|
$ | 3,506 | $ | (5,256 | ) | $ | (1,750 | ) | $ | (50,403 | ) | |||||
Consolidated
obligation bonds
|
(51,750 | ) | 61,210 | 9,460 | 141,815 | |||||||||||
Consolidated
obligation discount notes
|
(227 | ) | 459 | 232 | 65 | |||||||||||
Total
|
$ | (48,471 | ) | $ | 56,413 | $ | 7,942 | $ | 91,477 |
(1)
|
The net
interest on derivatives in fair value hedge relationships is presented in
the interest income/expense line item of the respective hedged
item.
|
Our use of
interest-rate exchange agreements had net unfavorable effects on our net
interest income for the three and nine months ended September 30, 2009, compared
to net favorable effects on our net interest income for the three and nine
months ended September 30, 2008. During the three months and nine months ended
September 30, 2009 and 2008, we held higher notional balances in interest-rate
exchange agreements hedging consolidated obligation bonds and discount notes
than those hedging advances. The effective conversion of our advances and
consolidated obligations to short-term variable interest rates, combined with
changes in short-term interest rates, resulted in decreases in net interest
income for the three and nine months ended September 30, 2009 and increases in
net interest income for the three and nine months ended September 30,
2008.
Other
Loss
Other loss includes
member service fees, net OTTI credit-related losses, net realized gain on HTM
securities, net gain (loss) on derivatives and hedging activities, net realized
loss on the early extinguishment of consolidated obligations, and other
miscellaneous (loss) income not included in net interest income. Because of the
type of financial activity reported in this category, other (loss) income can be
volatile from one period to another. For instance, net gain (loss) on
derivatives and hedging activities is highly dependent on changes in interest
rates and spreads between various interest-rate yield curves.
The following table
presents the components of our other loss for the three and nine months ended
September 30, 2009 and 2008.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||||||||||
Percent
Increase/
|
Percent
Increase/
|
|||||||||||||||||||||||
Other
Loss
|
2009
|
2008
|
(Decrease)
|
2009
|
2008
|
(Decrease)
|
||||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||||
Service
fees
|
$ | 845 | $ | 453 | 86.5 | $ | 1,989 | $ | 1,344 | 48.0 | ||||||||||||||
Net realized
(loss) gain from sale of HTM securities
|
N/A | 1,374 | (100.0 | ) | ||||||||||||||||||||
Net OTTI
credit loss
|
(130,100 | ) | (49,830 | ) | (161.1 | ) | (263,519 | ) | (49,830 | ) | (428.8 | ) | ||||||||||||
Net gain
(loss) on derivatives and hedging activities
|
2,553 | 5,557 | (54.1 | ) | (8,413 | ) | 17,605 | (147.8 | ) | |||||||||||||||
Net realized
(loss) gain on early extinguishment of
|
||||||||||||||||||||||||
consolidated
obligations
|
(301 | ) | (2,541 | ) | 88.2 | (5,268 | ) | (25,213 | ) | 79.1 | ||||||||||||||
Other income
(loss), net
|
(15 | ) | 19 | (178.9 | ) | 2 | (89 | ) | 102.2 | |||||||||||||||
Total other
loss
|
$ | (127,018 | ) | $ | (46,342 | ) | (174.1 | ) | $ | (275,209 | ) | $ | (54,809 | ) | (402.1 | ) |
Total other loss
increased by $80.7 million and $220.4 million for the three and nine months
ended September 30, 2009, compared to the same periods in 2008, primarily due to
$80.3 million and $213.7 million increases in the credit-related portion of OTTI
losses on HTM securities and $3.0 million and $26.0 million increases in net
gain (loss) on derivatives and hedging activities. These increases were offset
by $2.2 million and $19.9 million decreases in net realized loss on early
extinguishment of consolidated obligations. The significant changes in other
(loss) income are discussed in more detail below.
Net Other-Than-Temporary
Impairment Credit Losses
For the three and
nine months ended September 30, 2009, we recognized OTTI credit losses related
to our PLMBS of $130.1 million and $263.5 million, compared to $49.8 million for
the three and nine months ended September 30, 2008.
The following
tables summarize key information as of September 30, 2009 and 2008 and for the
three and nine months ended September 30, 2009 on the PLMBS on which we recorded
OTTI losses in 2009.
As
of September 30, 2009
|
|||||||||||||||||||||||||
Held-to-Maturity
Securities
|
Available-for
Sale Securities
|
||||||||||||||||||||||||
Unpaid
|
Gross
|
Unpaid
|
|||||||||||||||||||||||
Principal
|
Amortized
|
Carrying
|
Unrealized
|
Fair
|
Principal
|
Amortized
|
Fair
|
||||||||||||||||||
Other-than-Temporarily
Impaired Securities
|
Balance
|
Cost
|
Value (2)
|
Losses
|
Value
|
Balance
|
Cost
|
Value
|
|||||||||||||||||
(in
thousands)
|
|||||||||||||||||||||||||
Alt -A
private-label mortgage-backed securities (1)
|
$ | 827,074 | $ | 752,958 | $ | 344,773 | $ | 408,185 | $ | 400,724 | $ | 1,447,256 | $ | 1,248,485 | $ | 664,728 | |||||||||
Total OTTI
|
$ | 827,074 | $ | 752,958 | $ | 344,773 | $ | 408,185 | $ | 400,724 | $ | 1,447,256 | $ | 1,248,485 | $ | 664,728 |
As
of December 31, 2008
|
|||||||||||||||
Held-to-Maturity
Securities
|
|||||||||||||||
Unpaid
|
Gross
|
||||||||||||||
Principal
|
Amortized
|
Carrying
|
Unrealized
|
Fair
|
|||||||||||
Other-than-Temporarily
Impaired Securities
|
Balance
|
Cost
|
Value (2)
|
Losses
|
Value
|
||||||||||
(in
thousands)
|
|||||||||||||||
Alt -A
private-label mortgage-backed securities (1)
|
$ | 546,478 | $ | 546,442 | $ | 546,442 | $ | 304,243 | $ | 242,199 | |||||
Total OTTI
|
$ | 546,478 | $ | 546,442 | $ | 546,442 | $ | 304,243 | $ | 242,199 |
(1)
|
Classification
based on originator’s classification at the time of origination or based
on classification by an NRSRO upon issuance of the MBS.
|
(2)
|
This table
does not include gross unrealized gains; therefore, amortized cost net of
gross unrealized losses will not necessarily equal the fair
value.
|
For
the Three Months Ended September 30, 2009
|
For
the Nine Months Ended September 30, 2009
|
|||||||||||||||||||||||
OTTI
|
OTTI
|
Total
|
OTTI
|
OTTI
|
Total
|
|||||||||||||||||||
Related
to
|
Related
to All
|
OTTI
|
Related
to
|
Related
to All
|
OTTI
|
|||||||||||||||||||
Other-than-Temporarily
Impaired Securities
|
Credit
Loss
|
Other
Factors
|
Loss
|
Credit
Loss
|
Other
Factors
|
Loss
|
||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Alt -A
private-label mortgage-backed securities
|
$ | 130,100 | $ | (45,121 | ) | $ | 84,979 | $ | 263,519 | $ | 976,654 | $ | 1,240,173 |
Under the FASB
guidance in effect prior to January 1, 2009, we recorded total OTTI
charges of $49.8 million in our Statement of Operations for the three and
nine months ended September 30, 2008, on PLMBS in our held-to-maturity
portfolio.
Key inputs and
assumptions used to measure the amount of credit loss related to PLMBS include
prepayments, default rates and loss severity. To discount expected cash flows
expected to be collected, we use the interest rate in effect prior to
impairment. See “—Financial Condition—Investments—Other-Than-Temporary
Impairment Assessment” for additional information.
Net Realized Gain on
Held-to-Maturity Securities
In
June 2008, we sold $500.0 million of investments in other FHLBanks’ consolidated
obligations, resulting in a net gain of $1.4 million for the nine months ended
September 30, 2008. There was no comparable activity for the three or nine
months ended September 30, 2009.
Net Gain (Loss) on
Derivatives and Hedging Activities
For the three and
nine months ended September 30, 2009, we recorded a net gain of $2.6 million and
a net loss of $8.4 million on derivatives and hedging activities, compared to
net gains of $5.6 million and $17.6 million for the same periods in 2008. These
changes are discussed below.
Advances
For the three and
nine months ended September 30, 2009, we recognized a net loss of $1.7
million and net loss of $5.7 million, compared to net losses of $3.4
million and $1.7 million for the same periods in 2008.
Consolidated
Obligation Bonds
For the three and
nine months ended September 30, 2009, we recognized a net gain of $2.4 million
and a net loss of $6.1 million, compared to net gains of $2.4 million and $9.5
million for the same periods in 2008.
Consolidated
Obligation Discount Notes
For the three and
nine months ended September 30, 2009, we recognized net gains of $1.3 million
and $2.5 million compared to net gains of $232,000 for the same periods in
2008.
Net gains and
losses above on derivative and hedging activities represent ineffectiveness in
fair value hedge relationships.
Economic
Hedges
For the three and
nine months ended September 30, 2009, we recorded net gains of $555,000 and
$865,000 compared to net gains of $6.3 million and $9.6 million for the same
periods in 2008. These net gains are discussed by derivative type
below.
Caps and
Floors
As
of September 30, 2009, we held $200.0 million notional amount of interest-rate
caps that were used to economically hedge changes in the fair value of our
assets and liabilities, compared to $260.0 million notional amount of
interest-rate caps and $150.0 million notional amount of interest-rate floors as
of September 30, 2008. We held no interest-rate floors as of September 30, 2009.
Our recorded net losses related to interest-rate caps and floors were $36,000
and $147,000 for the three and nine months ended September 30, 2009, compared to
a net loss of $922,000 and $758,000 for the same periods in 2008.
Swaptions
For the nine months
ended September 30, 2008, we recorded a net gain of $1.6 million on $850 million
notional of swaptions purchased at a cost of $14.4 million to economically hedge
the fair value of our mortgage loan portfolio and to reduce our negative
convexity of equity. There was no comparable activity during the three months
ended September 30, 2008 or for the three and nine months ended September 30,
2009.
Interest-Rate
Swaps
For the three and
nine months ended September 30, 2009, we recorded net gains of $591,000 and $1.0
million on interest-rate swaps economically hedging our consolidated obligations
and advances, compared to net gains of $7.3 million and $8.8 million relating to
such interest-rate swaps for the same periods in 2008.
Net Realized Loss on Early
Extinguishment of Consolidated Obligations
During the three
and nine months ended on September 30, 2009, we recorded net losses of $150,000
and $4.1 million related to calls of consolidated obligations and $152,000 and
$1.2 million in net losses on extinguishments of consolidated obligations, net
of interest rate exchange agreement cancellations. During the same periods of
2008, we recorded net losses of $114,000 and $8.4 million on consolidated
obligation calls and net losses of $2.4 million and $16.9 million on
extinguishment of consolidated obligations, net of interest rate exchange
agreement cancellations.
The following table
summarizes the par value and weighted-average interest rates of the consolidated
obligations called and extinguished for the nine months ended September 30, 2009
and 2008.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
Consolidated
Obligations Called and Extinguished
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
(in
thousands, except interest rates)
|
||||||||||||||||
Consolidated
Obligations Called
|
||||||||||||||||
Par
value
|
$ | 895,000 | $ | 1,946,015 | $ | 7,132,255 | $ | 14,971,500 | ||||||||
Weighted-average
interest rate
|
4.19 | % | 4.81 | % | 4.45 | % | 4.74 | % | ||||||||
Consolidated
Obligations Extinguished
|
||||||||||||||||
Par
value
|
17,095 | 10,000 | 34,170 | 962,535 | ||||||||||||
Weighted-average
interest rate
|
5.38 | % | 7.38 | % | 5.37 | % | 3.98 | % | ||||||||
Total par
value
|
$ | 912,095 | $ | 1,956,015 | $ | 7,166,425 | $ | 15,934,035 |
We
call and extinguish debt primarily to lower the relative cost of our debt in
future years, as the future yield of the replacement debt is expected to be
lower than the yield for the called and extinguished debt. We continue to review
our consolidated obligation portfolio for opportunities to call or extinguish
debt, lower our interest expense, and better match the duration of our
liabilities to that of our assets.
Other
Expense
Other expense
includes operating expenses, Finance Agency and Office of Finance assessments,
provision for credit loss on receivable, and other items, which consist
primarily of mortgage loan administrative fees paid to vendors related to our
mortgage loans held for portfolio. The following table presents the components
of our other expense for the three and nine months ended September 30, 2009 and
2008.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||||||||||
Percent
Increase/
|
Percent
Increase/
|
|||||||||||||||||||||||
Other
Expense
|
2009
|
2008
|
(Decrease)
|
2009
|
2008
|
(Decrease)
|
||||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||||
Operating:
|
||||||||||||||||||||||||
Compensation
and benefits
|
$ | 8,579 | $ | 6,240 | 37.5 | $ | 22,173 | $ | 18,832 | 17.7 | ||||||||||||||
Occupancy
cost
|
1,316 | 1,279 | 2.9 | 3,595 | 3,556 | 1.1 | ||||||||||||||||||
Other
operating
|
3,710 | 3,199 | 16.0 | 10,167 | 10,008 | 1.6 | ||||||||||||||||||
Finance
Agency
|
446 | 502 | (11.2 | ) | 1,389 | 1,507 | (7.8 | ) | ||||||||||||||||
Office of
Finance
|
494 | 575 | (14.1 | ) | 1,430 | 1,462 | (2.2 | ) | ||||||||||||||||
Provision for
credit loss on receivable
|
10,430 | (100.0 | ) | 10,430 | (100.0 | ) | ||||||||||||||||||
Other
|
127 | 155 | (18.1 | ) | 407 | 393 | 3.6 | |||||||||||||||||
Total other
expense
|
$ | 14,672 | $ | 22,380 | (34.4 | ) | $ | 39,161 | $ | 46,188 | (15.2 | ) |
Total other expense
decreased by $7.7 million and $7.0 million for the three and nine months ended
September 30, 2009, compared to the same periods in 2008, primarily due to the
$10.4 million charge-off of our outstanding account receivable with LBSF, which
filed for bankruptcy protection in October 2008. See “—Financial
Condition—Derivative Assets and Liabilities” for more information related to
LBSF.
Increased
compensation and benefit expense of $2.3 million and $3.3 million for the three
and nine months ended September 30, 2009, compared to the same periods in 2008,
partially offset the overall decrease in other expense. These
increases resulted from increased compensation and benefits expense due to
contractor conversions to employees during 2008 and a supplemental employee
retirement fund contribution of $1.8 million recorded in September
2009.
Assessments
AHP and REFCORP
assessments are calculated based on earnings before assessments. Due to our net
losses during the first three quarters of 2009, we had no AHP and REFCORP
assessments for the three and nine months ended September 30, 2009, compared to
a reversal of previously paid assessments of $6.7 million for the three months
ended September 20, 2008 and $15.2 million based on our earnings for the nine
months ended September 30, 2008. The table below presents our AHP and REFCORP
assessments for the three and nine months ended September 30, 2009 and 2008. The
amount shown in REFCORP expense for the nine months ended September 30, 2009
represents an adjustment of 2007 charges recorded in early 2009.
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||||||||
Percent
Increase/
|
Percent
Increase/
|
|||||||||||||||||||||
AHP
and REFCORP Assessments
|
2009
|
2008
|
(Decrease)
|
2009
|
2008
|
(Decrease)
|
||||||||||||||||
(in
thousands, except percentages)
|
||||||||||||||||||||||
AHP
|
$ | $ | (2,044 | ) | 100.0 | $ | $ | 4,759 | (100.0 | ) | ||||||||||||
REFCORP
|
(4,697 | ) | 100.0 | 33 | 10,456 | (99.7 | ) | |||||||||||||||
Total
assessments
|
$ | $ | (6,741 | ) | 100.0 | $ | 33 | $ | 15,215 | (99.8 | ) |
Due to our payment
of quarterly REFCORP assessments during 2008, we are currently entitled to a
refund of $19.7 million, which we have recorded in “other assets” on our
Statement of Condition.
See “Part I.
Item 1. Business—Regulation” in our 2008 annual report on Form 10-K for
additional information on our assessments.
RECENTLY
ISSUED ACCOUNTING STANDARDS
For information
concerning accounting standards issued but not yet adopted, see Note 1 in “Part
I. Item 1. Financial Statements––Condensed Notes to Financial Statements” in
this report.
SUMMARY
OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Estimation
of Other-than-Temporary Impairments of Securities
The continued
deterioration of credit performance related to residential mortgage loans and
the accompanying decline in U.S. residential real estate values have
increased the level of credit risk exposure on our PLMBS. Our investments in
PLMBS are directly or indirectly supported by underlying mortgage loans. Due to
the decline in values of residential U.S. real estate and volatile
conditions in the credit markets, we monitor the performance of our investment
securities classified as HTM or AFS on at least a quarterly basis to evaluate
our exposure to the risk of loss on these investments in order to determine
whether a loss is other-than-temporary, consistent with GAAP.
For impaired debt
securities, the FASB’s new OTTI accounting guidance which we adopted effective
January 1, 2009, requires an entity to assess whether (a) it has the intent to
sell the debt security or (b) it is more likely than not that it will be
required to sell the debt security before its anticipated recovery. If either of
these conditions is met, an OTTI on the security must be recognized for the
entire difference between the impaired security’s amortized cost basis and its
fair value. If the present value of cash flows expected to be collected is less
than the amortized cost basis of the security, the entire amortized cost basis
of the security will not be recovered, and an OTTI is considered to have
occurred.
We
consider whether or not we will recover the entire amortized cost of the
security by comparing our best estimate of the present value of the cash flows
expected to be collected from the security with the amortized cost basis of the
security. Beginning with the second quarter of 2009, the FHLBanks formed an OTTI
Governance Committee (of which the Seattle Bank is a member) with the
responsibility for reviewing and approving the key modeling assumptions, inputs,
and methodologies to be used by the FHLBanks to generate cash flow projections
used in analyzing credit losses and determining OTTI for
PLMBS. Beginning with the second quarter of 2009 and continuing in
the third quarter of 2009, to support consistency among the FHLBanks, we
performed our OTTI analysis primarily using key modeling assumptions provided by
the FHLBanks OTTI Governance Committee for the majority of our PLMBS. Further,
prior to the third quarter of 2009, the FHLBanks had used indicators, or
screens, to determine which individual securities required additional
quantitative evaluation using detailed cash flow analysis. Beginning with the
third quarter of 2009, the process was changed to select 100% of PLMBS
investments, for purposes of OTTI cash flow analysis to be run using the
FHLBanks’ common platform and approved assumptions. A minimal number of our
PLMBS where underlying collateral data was not available were not able to be
cash flow tested and were outside the scope of the OTTI Governance Committee.
Alternative procedures were used by the Seattle Bank to assess these securities
for OTTI.
To
assess whether the entire amortized cost basis of our PLMBS will be recovered,
cash flow analyses were performed using two third-party models. The first model
considers borrower characteristics and the particular attributes of the loans
underlying the PLMBS, in conjunction with assumptions about future changes in
home prices and interest rates, to project prepayments, defaults, and loss
severities. A significant input into the first model is the forecast of future
housing price changes for the relevant states and core-based statistical areas,
which are based upon an assessment of the individual housing
markets.
The month-by-month
projections of future loan performance derived from the first model, which
reflect projected prepayments, defaults, and loss severities, are then input
into a second model that allocates the projected loan level cash flows to the
various security classes in the securitization structure in accordance with its
prescribed cash flow and loss allocation rules. In a securitization in which the
credit enhancement for the senior securities is derived from the presence of
subordinate securities, losses are generally allocated first to the subordinate
securities until their principal balance is reduced to zero. The projected cash
flows are based on a number of assumptions and expectations, and the results of
these models can vary significantly with changes in assumptions and
expectations.
In
instances in which a determination is made that a credit loss (defined as the
difference between the present value of the cash flows expected to be collected
and the amortized cost basis) exists, but the entity does not intend to sell the
debt security and it is not more likely than not that the entity will be
required to sell the debt security before the anticipated recovery of its
remaining amortized cost basis (i.e., the amortized cost basis less any
current-period credit loss), the new OTTI accounting guidance changes the
presentation and amount of the OTTI recognized in the statement of income. In
these instances, the impairment is separated into (a) the amount of the total
impairment related to the credit loss and (b) the amount of the total impairment
related to all other factors. If a security’s cash flow analysis results in a
present value of expected cash flows that is less than the amortized cost basis
of the security (that is, a credit loss exists), an OTTI is considered to have
occurred. If there is no credit loss, any impairment is considered temporary. If
we determine that an OTTI exists, we account for the investment security as if
it had been purchased on the measurement date of the OTTI at an amortized cost
basis equal to the previous amortized cost basis less the OTTI recognized in
non-interest income. The difference between the new amortized cost basis and the
cash flows expected to be collected is accreted into interest income
prospectively over the remaining life of the security. For debt securities
classified as HTM, the OTTI recognized in accumulated comprehensive loss is
accreted to the carrying value of each security on a prospective basis, based on
the amount and timing of future estimated cash flows (with no effect on earnings
unless the security is subsequently sold or there are additional decreases in
cash flows expected to be collected). We do not accrete the OTTI recognized in
accumulated other comprehensive loss for AFS debt securities, because the
subsequent measurement basis for these securities is fair value. We update our
estimated cash flows for previously OTTI HTM and AFS securities on a regular
basis and if significant, favorable changes were to occur, we would adjust
yields prospectively, as a change in estimate. See additional discussion
regarding the recognition and presentation of OTTI in Note 2 in “Part I.
Item 1. Financial Statements – Condensed Notes to Financial Statements” and
“––Financial Condition and Results of Operations––Investments–– Credit
Risk.”
For accounting
policies and additional information regarding, among other things, estimated
fair values, see Notes 1, and 11 in “Part I. Item 1. Financial
Statements––Condensed Notes to Financial Statements” of this report, and Note 16
in “Part II. Item 8. Financial Statements and Supplementary Data” and “Part
II. Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations––Summary of Critical Accounting Policies and Estimates”
included in our 2008 annual report on Form 10-K.
MARKET
RISK
The Seattle Bank is
exposed to market risk, typically interest-rate risk, because our business model
results in our holding large amounts of interest-earning assets and
interest-bearing liabilities, at various interest rates and for varying
periods.
Interest-rate risk
is the risk that the market value of our assets, liabilities, and derivatives
will decline as a result of changes in interest rates or that net interest
margin will be significantly affected by interest-rate changes. Interest-rate
risk can result from a variety of factors, including repricing risk, yield-curve
risk, basis risk, and option risk.
•
|
Repricing
risk occurs when assets and liabilities reprice at different times, which
can produce changes in our net interest margin and market
values.
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•
|
Yield-curve
risk is the risk that changes in the shape or level of the yield curve
will affect our net interest margin and the market value of our assets and
liabilities differently because a liability used to fund an asset may be
short-term while the asset is long-term, or vice versa.
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•
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Basis risk
results from assets we purchase and liabilities we incur having interest
rates based on different interest rate markets. For example, the LIBOR
interbank swap market influences many asset and derivative interest rates,
while the agency debt market influences the interest rates on our
consolidated obligations.
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•
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Option risk
results from the fact that we have purchased and sold options either
directly through derivative contracts or indirectly by having options
embedded within financial assets and liabilities. Option risk arises from
the differences which the options can be exercised and the incentives to
exercise those options. The mismatch in the option terms, exercise
incentives, and market conditions that influence the value of the options
can affect our net interest margin and our market
value.
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Through our
market-risk management practices, we attempt to manage our net interest margin
and market value over a wide variety of interest-rate environments. Our general
approach to managing market risk is to maintain a portfolio of assets,
liabilities, and derivatives that limits our exposure to adverse changes in our
net interest margin. We use derivatives to hedge market risk exposures and to
lower our cost of funds. The derivatives that we employ comply with Finance
Agency regulations and are not used for purposes of speculating on interest
rates.
MEASUREMENT
OF MARKET RISK
We
monitor and manage our market risk daily through a variety of measures. Our
Board oversees our risk management policy through four primary risk measures
that assist us in monitoring and managing our market risk exposures: effective
duration of equity, effective key-rate-duration-of-equity mismatch, effective
convexity of equity, and market-value-of-equity sensitivity. These policy
measures are described below. We manage our market risk using the policy limits
set for each of these measures.
Effective
Duration of Equity
Effective duration
is a measure of the market value sensitivity of a financial instrument to
changes in interest rates. Larger duration numbers, whether positive or
negative, indicate greater market value sensitivity to parallel changes in
interest rates. For example, if a financial instrument has an effective duration
of two, then the financial instrument’s value would be expected to decline about
2% for a 1% instantaneous increase in interest rates across the entire yield
curve or rise about 2% for a 1% instantaneous decrease in interest rates across
the entire yield curve, absent any other effects.
Effective duration
of equity is the market value weighted-average of the effective durations of
each asset, liability, and derivative position we hold that has market value. It
is calculated by multiplying the market value of our assets by their respective
effective durations minus the market value of our liabilities multiplied by
their respective durations plus or minus (depending upon the sign of the market
value of derivative positions) the market value of our derivatives multiplied by
their respective durations. The net result of the calculation is divided by the
market value of equity to obtain the effective duration of equity. All else
being equal, higher effective duration numbers, whether positive or negative,
indicate greater market value sensitivity to changes in interest
rates.
Effective
Key-Rate-Duration-of-Equity Mismatch
Effective key-rate
duration of equity disaggregates effective duration of equity into various
points on the yield curve to allow us to measure and manage our exposure to
changes in the shape of the yield curve. Effective key-rate-duration-of-equity
mismatch is the difference between the maximum and minimum effective key-rate
duration of equity measures.
Effective
Convexity of Equity
Effective convexity
measures the estimated effect of non-proportional changes in instrument prices
that is not incorporated in the proportional effects measured by effective
duration. Financial instruments can have positive or negative effective
convexity.
Effective convexity
of equity is the market value of assets multiplied by the effective convexity of
assets minus the market value of liabilities multiplied by the effective
convexity of liabilities, plus or minus the market value of derivatives
(depending upon the sign of the market value of derivative positions) multiplied
by the effective convexity of derivatives, with the net result divided by the
market value of equity.
Market
Value of Equity/Market Value-of-Equity Sensitivity
Market value of
equity is the sum of the present values of the expected future cash flows,
whether positive or negative, of each of our assets, liabilities, and
derivatives. Market value-of-equity sensitivity is the change in the estimated
market value of equity that would result from an instantaneous parallel increase
or decrease in the yield curve.
MARKET-RISK
MANAGEMENT
Our market-risk
measures reflect the sensitivity of our assets, liabilities, and derivatives to
changes in interest rates, which is primarily due to mismatches in the
maturities, basis, and embedded options associated with our mortgage-related
assets and the consolidated obligations we use to fund these assets. The
exercise opportunities and incentives for exercising the prepayment options
embedded in mortgage-related instruments (which generally may be exercised at
any time) generally do not match those of the consolidated obligations that fund
such assets, which causes the market value of the mortgage-related assets and
the consolidated obligations to behave differently to changes in interest rates
and market conditions.
Our advances result
in minimal interest-rate risk because we price, value, and risk manage our
advances based upon our consolidated obligation funding curve, which is used to
value the debt that funds our advances. In addition, when we make an advance we
generally enter contemporaneously into interest-rate swaps that hedge any
optionality that may be embedded in each advance. Our short-term investments
have short terms to maturity and low durations, which causes their market values
to have low sensitivity to changes in market conditions.
We
evaluate our market-risk measures daily, under a variety of parallel and
non-parallel shock scenarios. These primary risk measures are used for
regulatory reporting purposes, however, as discussed in detail below, for
interest-rate risk management and policy compliance purposes, we have enhanced
our market-risk measurement process to better isolate the effects of
credit/liquidity associated with our MBS backed by Alt-A collateral. The
following table summarizes our primary risk measures as of September 30, 2009
and December 31, 2008.
As
of
|
As
of
|
|||
Primary
Risk Measures
|
September
30, 2009
|
December
31, 2008
|
||
Effective
duration of equity
|
7.40
|
23.59
|
||
Effective
convexity of equity
|
(0.26)
|
(6.18)
|
||
Effective
key-rate-duration-of-equity mismatch
|
6.86
|
16.09
|
||
Market
value-of-equity sensitivity
|
||||
(+
100 basis point shock scenario) (in percentages)
|
(7.18%)
|
(27.24)%
|
||
Market
value-of-equity sensitivity
|
||||
(-100
basis point shock scenario) (in percentages)
|
8.01%
|
20.92%
|
The duration and
the market value of each of our asset and liability portfolios have contributing
effects on our overall effective duration of equity. As of September 30, 2009,
the reduction in the effective duration of equity from that of December 31,
2008, primarily resulted from a decrease in duration contributions of our
mortgage-related assets and advances (net of derivatives hedging our advances).
Decreases in duration contributions of our consolidated obligation bonds (net of
derivatives hedging consolidated obligations) acted to increase our effective
duration because consolidated obligations are liabilities and hence their
effective durations are reversed. The increase in the effective convexity of
equity was primarily caused by reduced negative convexity contribution of our
mortgage-related assets, offset by less positive convexity from our advances
(including the derivatives hedging the advances) and consolidated obligations
(including derivatives hedging consolidated obligations). Effective
key-rate-duration-of-equity mismatch decreased as of September 30, 2009 from
December 31, 2008, primarily due to the changes described above for our
duration-related measures, which were exacerbated by our high market value
leverage ratio (i.e., total assets divided by the market value of
equity).
Our estimates of
our market-value-of-equity sensitivity changes resulting from up 100-basis point
changes in interest rates improved as a result of the reduced duration, but the
shock values remain elevated due to the very depressed market value of our
equity and the resulting high market value leverage ratio as of September 30,
2009 and December 31, 2008.
In
the first quarter of 2009, we completed our replacement of the adjusted risk
measures used in the third and fourth quarters of 2008 with a more sophisticated
disaggregation of our operations to better isolate the effects of
credit/liquidity associated with MBS collateralized by Alt-A mortgage loans.
Commencing in mid-January 2009, for market-risk management purposes, we began
reporting on a market value basis (i) a credit/liquidity portfolio and (ii) a
basis and mortgage portfolio. The sum of the market values of these two
portfolios equal the market value of the Seattle Bank. The credit/liquidity
portfolio contains our mortgage-backed investments that are collateralized by
Alt-A mortgage loans along with the liabilities that fund these assets, as well
as any associated hedging instruments. The basis and mortgage portfolio contains
the Seattle Bank’s remaining operations, primarily consisting of our advances,
short-term investments, mortgage loans held for portfolio, and mortgage
investments that are not collateralized by Alt-A mortgage loans, along with the
funding and hedges associated with these assets. This process allows us to more
accurately measure and manage interest-rate risk in the basis and mortgage
portfolio. Similarly, the credit/liquidity portfolio allows more accurate
identification of the credit/liquidity effects of this portfolio on our market
risk measures and our market value leverage ratio. We believe that this
improvement in our risk management process provides greater transparency, a more
granular assessment of market risk, and a means to more effectively manage our
risks.
Our risk management
policy limits apply only to the basis and mortgage book risk measures, just as
they previously applied to our adjusted risk measures in the third and fourth
quarters of 2008. We were in compliance with these risk management policy limits
as of and during the three months ended September 30, 2009. The
following tables summarize our basis and mortgage book risk measures and their
respective limits as of September 30, 2009 and our adjusted risk measures as of
December 31, 2008.
As
of
|
Risk
Measure
|
|||
Basis
and Mortgage Book Risk Measures and Limits
|
September
30, 2009
|
Limit
|
||
Effective
duration of equity
|
(0.34)
|
+/-5.00
|
||
Effective
convexity of equity
|
(2.17)
|
+/-5.00
|
||
Effective
key-rate-duration-of-equity mismatch
|
1.83
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+/-3.50
|
||
Market-value-of-equity
sensitivity
|
||||
(+100
basis point shock scenario) (in percentages)
|
(0.53%)
|
+/-4.50%
|
||
Market-value-of-equity
sensitivity
|
||||
(-100
basis point shock scenario) (in percentages)
|
(0.93%)
|
+/-4.50%
|
As
of
|
Risk
Measure
|
|||
Adjusted
Risk Measures and Limits
|
December
31, 2008
|
Limit
|
||
Effective
duration of equity
|
10.56
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+/-5.00
|
||
Effective
convexity of equity
|
(9.34)
|
+/-4.00
|
||
Effective
key-rate-duration-of-equity mismatch
|
4.75
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+/-3.50
|
||
Market-value-of-equity
sensitivity
|
||||
(+100
basis point shock scenario) (in percentages)
|
(15.75)%
|
+/-4.50%
|
||
Market-value-of-equity
sensitivity
|
||||
(-100
basis point shock scenario) (in percentages)
|
6.41%
|
+/-4.50%
|
For
additional information on the adjusted risk measures and limits as of December
31, 2008, see “Part II. Item 7A. Quantative and Qualitative Disclosures about
Market Risk––Market Risk Management” In our annual report on Form
10-K.
Instruments
that Address Market Risk
Consistent with
Finance Agency regulation, we enter into interest-rate exchange agreements, such
as interest-rate swaps, interest-rate caps and floors, forward purchase and sale
agreements, and swaptions only to reduce the interest-rate exposures inherent in
otherwise unhedged assets and funding positions, to achieve our risk-management
objectives, and to reduce our cost of funds. This enables us to adjust the
effective maturity, repricing frequency, or option characteristics of our assets
and liabilities in response to changing market conditions.
The total notional
amount of interest-rate exchange agreements outstanding was $43.1 billion and
$30.6 billion as of September 30, 2009 and December 31, 2008. We report our
derivatives in the Statements of Condition at their estimated fair value. As of
September 30, 2009 and December 31, 2008, we held derivative assets of $4.2
million and $32.0 million, as well as derivative liabilities of $259.3 million
and $235.4 million. See “—Financial Condition – Derivative Assets and
Liabilities,” for additional information.
DISCLOSURE
CONTROLS AND PROCEDURES
The Seattle Bank’s
management is responsible for establishing and maintaining a system of
disclosure controls and procedures designed to ensure that information required
to be disclosed by the Seattle Bank in the reports it files or submits under the
Securities Exchange Act of 1934, as amended (Exchange Act), is recorded,
processed, summarized, and reported within the time periods specified in the
rules and forms of the SEC. The Seattle Bank’s disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Seattle Bank in the
reports it files or submits under the Exchange Act is accumulated and
communicated to management, including the principal executive officer and
principal financial officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required disclosure. Because of
inherent limitations, disclosure controls and procedures, as well as internal
control over financial reporting, may not prevent or detect all inaccurate
statements or omissions. The design of any system of controls and procedures is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving stated
goals under all potential conditions.
As
discussed in “Part II. Item 9A(T) – Controls and Procedures” of our 2008 annual
report on Form 10-K, our management concluded that the Seattle Bank’s disclosure
controls and procedures were not effective as of December 31, 2008 due to a
material weakness in our control environment, which also contributed to the
existence of additional material weaknesses related to the financial reporting
and accounting for PLMBS and amortization of premiums and discounts on HTM
securities. A material weakness is a control deficiency, or combination of
control deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Seattle
Bank’s annual or interim financial statements will not be prevented or detected
on a timely basis.
Under the
supervision and with the participation of the Seattle Bank’s management,
including the president and chief executive officer and the chief accounting and
administrative officer (who for purposes of the Seattle Bank’s disclosure
controls and procedures performs similar functions as a principal financial
officer), the Seattle Bank evaluated the effectiveness of the Seattle Bank’s
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange
Act) as of September 30, 2009, the end of the period covered by this report.
Based on this evaluation, our management has concluded that the Seattle Bank’s
disclosure controls and procedures were not effective as of September 30, 2009,
because one of the previously identified material weaknesses as of December 31,
2008 had not been fully remediated.
The Seattle Bank’s
management performed additional analysis and other procedures to ensure that the
financial statements contained within this quarterly report on Form 10-Q were
prepared in accordance with GAAP. Accordingly, notwithstanding the one remaining
material weakness described below, we believe our financial statements included
in this quarterly report on Form 10-Q fairly present in all material respects
our financial position, results of operations, and cash flows, for the periods
presented.
As
of September 30, 2009, we believe, based on our evaluation that the controls we
implemented during the first and second quarters of 2009 have been effective for
a reasonable period of time, that we have remediated two of our three previously
identified material weaknesses. We are in the process of remediating our one
remaining material weakness, including the testing of recently implemented
controls, by the end of the fourth quarter of 2009. See “—Remediation Activities
Related to Previously Identified Material Weaknesses,” for additional
information.
MATERIAL
WEAKNESSES
Control
Environment
As
of December 31, 2008, we had not maintained an effective control environment
based on the criteria established in the Committee of Sponsoring Organizations
(COSO) Framework, and as of September 30, 2009, we had not fully remediated such
control environment, specifically:
•
|
We did not
ensure adequate oversight over significant accounting estimates and
assumptions given the current risks in our credit and investment
portfolios and the rapidly changing market conditions. Our oversight over
significant estimates and assumptions was not sufficiently independent and
did not include input from key managers across the organization nor did we
conduct timely benchmarking of assumptions to ensure they were still
applicable during rapidly changing market conditions. In addition,
ineffective flows of information and lines of communication among key
functional areas, such as treasury and risk management, contributed to our
failure to detect or prevent risks to the financial reporting process from
being appropriately addressed.
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•
|
We did not
establish and maintain an adequate assignment of authority and segregation
of duties among members of management. Specifically, a member of senior
management and an analyst that participated in OTTI evaluation for PLMBS
were members of the department which was also responsible for the purchase
of such securities.
|
The material
weakness in our control environment contributed to the existence of the two
additional material weaknesses described below, as of December 31, 2008, each of
which resulted in adjustments to our preliminary financial statements for the
year ended December 31, 2008.
Financial
Reporting and Accounting for PLMBS
As
of December 31, 2008, we had not designed and maintained effective controls to
ensure that financial reporting and accounting for OTTI of PLMBS were in
conformity with GAAP. Specifically, we did not utilize an appropriate
methodology that included financial models and related assumptions, in
determining whether these securities were other than temporarily
impaired. In addition, as of September 30, 2008, we concluded that we
did not maintain effective controls over the methodology for evaluating OTTI of
PLMBS given the change in risk profile for these securities.
Amortization
of Premiums and Accretion of Discounts on Held-to-Maturity
Securities
As
of December 31, 2008, we had not maintained effective controls to ensure that
our amortization of premiums and accretion of discounts on HTM securities were
in conformity with GAAP. Specifically, we did not have adequate controls to
ensure a sufficient, timely review and approval of significant inputs to our
amortization methodology, including controls to ensure that unusual results were
appropriately identified, reviewed, and evaluated.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The president and
chief executive officer and the chief accounting and administrative officer (who
for the purposes of the Seattle Bank’s internal control of financial reporting
performs similar functions as the principal financial officer) conducted an
evaluation of our internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) to determine whether any changes in our internal
control over financial reporting occurred during the fiscal quarter ended
September 30, 2009 that have materially affected or which are reasonably likely
to materially affect our internal control over financial reporting. Changes in
our internal control over financial reporting since December 31, 2008, including
the three months ended September 30, 2009, that management believes have
materially affected, or are reasonably likely to materially effect, our internal
control over financial reporting are described below.
Remediation
Activities Relating to Previously Identified Material Weaknesses
During the third
quarter of 2009, we completed the remediation and testing of the two material
weaknesses described below under Financial Reporting and Accounting for PLMBS
and Amortization of Premiums and Accretion of Discounts on Held-to-Maturity
Securities. We continued to make progress on our remediation plan for the third
material weakness, related to our general control environment.
Control
Environment
We
have finalized the implementation of new controls for this material weakness in
the third quarter of 2009. During the third quarter, we continued to evaluate
and make changes to, our management committee structure to help ensure
appropriate oversight and segregation of duties through the participation of key
managers from different departments across the organization responsible for
developing, benchmarking, and documenting assumptions and processes used for
significant accounting estimates and valuations, including identification of key
control points. Our analysis and results enhanced our controls and information
flow as well as facilitated communication and actions requiring
inter-departmental cooperation. Individual elements of the enhancements made to
date to our management committee structure are discussed below:
•
|
During the
first quarter of 2009, we established specialized management committees to
oversee our processes and policies with respect to (1) the amortization of
premiums and the accretion of discounts on mortgage-related assets, and
(2) derivative strategies and documentation, effectiveness testing, and
accounting and disclosure requirements for derivatives and
hedging.
|
|
•
|
In April
2009, we made certain changes to our senior management team, including the
hiring of a new chief risk officer and the appointment of a new chief
operating officer, which were intended in part to strengthen our risk
management.
|
|
•
|
In May 2009,
we established a new Board-level committee, the Risk Committee, to provide
enhanced oversight of risk management activities. This
committee held its first meeting in July 2009.
|
|
•
|
We
implemented changes to our OTTI evaluation process for PLMBS, including
the establishment of a new related management committee, as described
below.
|
|
•
|
In September
2009, to ensure appropriate oversight, we evaluated the entire committee
structure and made enhancements to our documentation of committee
responsibilities.
|
While these changes
have all been implemented, management desires to observe the enhancements for a
period of time to ensure the changes are effective.
Financial Reporting and
Accounting for PLMBS
We
implemented the following new controls during the periods indicated. We tested
these controls during the first three quarters of 2009 and concluded that this
material weakness has been remediated as of September 30, 2009.
•
|
We formally
established an OTTI steering committee (OTTI committee) composed of senior
Seattle Bank managers, including accounting and credit risk personnel. The
OTTI committee is the principal forum for management to evaluate whether
an impaired debt security is other-than-temporarily impaired and acts as
the Seattle Bank’s focal point for developing and approving new
methodologies, controls, policies, and frameworks for the OTTI evaluation
process. We completed this remediation activity for the first quarter of
2009.
|
|
•
|
We developed
an improved process for identifying and evaluating securities for possible
OTTI. Under the direction of our OTTI committee, we perform an initial,
security-by-security assessment to identify investments at risk for OTTI
at the end of each quarter, based on various quantitative and qualitative
criteria. We implemented procedures to regularly validate our data and
assumptions for this initial assessment. For securities identified as
being at risk, we implemented an improved cash flow modeling approach, as
discussed below, in the fourth quarter of 2008. Finally, the OTTI
committee reviews the model results and formally documents its conclusions
for this inherently complex and subjective evaluation. While we believe
the key elements of this new control process were successfully implemented
for the fourth quarter of 2008, we put additional controls in place for
the first quarter of 2009 to help ensure, for example, that proper
segregation exists between those responsible for trading securities and
those responsible for running models and analyzing the securities for
OTTI. In addition, for the first quarter of 2009, we updated our
documentation and procedures to comply with new OTTI accounting guidance
issued by the FASB in April 2009.
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•
|
We acquired
new software and implemented a more granular cash-flow modeling system in
order to improve the reliability and transparency of the data used to
evaluate possible other-than-temporary impairment of our at-risk
securities. In particular, we are now able to consider loan-level
information, including estimated loan-to-value ratios, FICO credit scores,
geographic information, and other characteristics. These models estimate
future cash flows, including defaults and losses, to help us assess
whether the Seattle Bank will collect all contractual cash flows related
to a potentially at-risk security. The advanced cash-flow modeling
software was successfully implemented for the fourth quarter of 2008 and
used as part of our OTTI evaluations for the first, second, and third
quarters of 2009, including validation of cash flow analyses performed on
our behalf by other FHLBanks in accordance with the Finance Agency
guidance described below.
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•
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During the
first quarter of 2009, in addition to implementing new software, we
implemented new guidance from our regulator, the Finance Agency, intended
to ensure consistency among the FHLBanks relating to OTTI. As discussed
below, the Seattle Bank, like other FHLBanks, used and validated key
modeling assumptions provided by the FHLBank of San Francisco in
performing our OTTI assessment for the first quarter of 2009. During the
second quarter of 2009, the FHLBanks formed an FHLBank System OTTI
Governance Committee, which was established to create a common set of
assumptions and methodologies for OTTI cash flow analysis. The Seattle
Bank participated in the FHLBank System OTTI Governance Committee (FHLBank
OTTI Governance Committee), which has the responsibility for reviewing and
approving the key modeling assumptions, inputs, and methodologies to be
used by the FHLBanks to generate cash flow projections for use in OTTI
assessments of PLMBS. We reviewed the assumptions approved by the FHLBank
OTTI Governance Committee and determined that they were reasonable before
using them for our OTTI assessment for the second and third quarters of
2009. In accordance with the Finance Agency guidance, we engaged the
FHLBank of Indianapolis to perform the cash flow analyses for the majority
of our PLMBS for the second and third quarters of 2009, utilizing the key
modeling assumptions approved by the FHLBank OTTI Governance Committee. We
internally validated these analyses employing the specific risk modeling
software and loan data source information approved by the FHLBank OTTI
Governance Committee.
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Amortization of Premiums and
Accretion of Discounts on Held-to-Maturity Securities
We
have established a specialized management committee to provide oversight over
our processes and policies with respect to the amortization of premiums and the
accretion of discounts on mortgage-related assets, including HTM debt
securities. The charter of this committee, which held its first formal meetings
in April 2009, includes approvals of key estimates and modeling assumptions.
Membership includes both accounting and treasury, to help improve information
and communication flows. We tested these newly implemented controls during the
first three quarters of 2009 and concluded that this material weakness has been
remediated as of September 30, 2009.
Other
Changes in Internal Control Over Financial Reporting
As
described in Note 4 in “Part I. Item 1. Financial Statements––Condensed Notes to
Financial Statements,” in accordance with the Finance Agency’s OTTI consistency
guidance, we are required to use the key modeling assumptions provided by the
FHLBank OTTI Governance Committee for the cash flow analysis of our PLMBS, for
the purposes of evaluating OTTI. Such assumptions are material to the
determination of OTTI and, in turn, material to the Seattle Bank’s internal
control over financial reporting. Accordingly, management has established
procedures to review the assumptions approved by the FHLBank OTTI Governance
Committee in order to determine whether such assumptions are reasonable. Based
on its review, management determined that the assumptions were reasonable and we
have utilized the assumptions in connection with our risk model to produce the
cash flow analyses used in analyzing credit losses and assessing OTTI. There
were no other changes in the Seattle Bank’s internal control over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Seattle Bank’s
internal control over financial reporting.
PART
II – OTHER INFORMATION
From time to time,
the Seattle Bank is subject to legal proceedings arising in the normal course of
business. After consultations with legal counsel, we do not anticipate that the
ultimate liability, if any, arising out of any current matters will have a
material impact on our financial condition, results of operations, or cash
flows.
Our
2008 annual report on Form 10-K includes a detailed discussion of our risk
factors. The information below includes material updates to, and should be read
in conjunction with, the risk factors included in our 2008 annual report on Form
10-K as updated in our quarterly reports on Form 10-Q for the periods ended
March 31, 2009 and June 30, 2009.
The
continued deterioration and uncertainty in the general economy, particularly the
U.S. housing and credit markets, has and could continue to adversely impact the
market value of our assets and liabilities, particularly our PLMBS, as well as
result in additional asset impairment charges that could significantly impact
our future financial condition and operating results and restrict the manner in
which we run our business.
During the third
quarter of 2009, the U.S. mortgage market continued to experience volatility,
including increases in delinquency and foreclosure rates on mortgage loans. As
foreclosure moratorium programs instituted in response to rising delinquencies
expired and default rates on modified as well as non-modified loans increased,
the inventory of foreclosed properties grew during the third quarter of 2009.
Although pricing of PLMBS in the secondary PLMBS market improved during the
third quarter of 2009, continued deterioration in the overall credit quality of
the mortgage collateral underlying PLMBS resulted in the recognition of
additional OTTI losses by a number of FHLBanks, including the Seattle Bank,
during the third quarter of 2009. Further, in the third quarter of 2009, the
credit-rating agencies continued to downgrade a significant number of PLMBS,
including many owned by the Seattle Bank (including subordinate tranches of
securities where the Seattle Bank owns a senior tranche), which further
adversely impacted the market values of these securities.
We
recorded $85.0 million and $1.2 billion of total OTTI losses for the three and
nine months ended September 30, 2009 (of which $130.1 million and $263.5 million
were related to credit losses), after recording $304.2 million in OTTI losses
for the year ended December 31, 2008, related to certain of our PLMBS. In
addition to the continued deterioration of the U.S. housing market, we believe
that the recent NRSRO ratings downgrades and the changes in accounting rules
related to the recognition of other-than-temporary impairments could lead to
additional total OTTI or OTTI credit losses on our PLMBS in the future, which,
among other things, would negatively affect our financial condition and
operating results as well as negatively impact the manner in which we run our
business. For additional information, see Note 2 in “Part I. Item 1.
Financial Statements—Condensed Notes to Financial Statements,” and “Part I. Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Financial Condition—Investments,” in this report.
The
Finance Agency has determined that the Seattle Bank’s capital classification is
“undercapitalized.” An FHLBank that is classified as undercapitalized, such as
the Seattle Bank, is subject to a range of mandatory or discretionary
restrictions, including limits on asset growth, prior approval by the Finance
Agency of any new business activity, and submission of a capital restoration
plan. We cannot predict whether or when the Finance Agency will change our
capital classification, or if an approved capital restoration plan would include
any additional restrictions.
In
August 2009, we received a capital classification of undercapitalized from the
Finance Agency based primarily on unrealized market-value losses on our PLMBS.
An FHLBank whose final capital classification is determined to be
undercapitalized, such as the Seattle Bank, is subject to a range of mandatory
or discretionary restrictions. For example, an undercapitalized FHLBank needs to
submit a capital restoration plan to the Finance Agency. In addition, the
mandatory restrictions include on asset growth and prior approval by the Finance
Agency of any new business activity. Although we do not believe that the
undercapitalized classification determination has affected our ability to meet
our members’ liquidity and funding needs, the capital classification could
decrease member confidence, which in turn could reduce advance demand and net
income should our members elect to use alternative sources of wholesale funding.
Further, as a result of the capital classification, the credit rating agencies
could perceive an increased level of risk or deterioration in the performance at
the Seattle Bank, which could result in a downgrade in our outlook or short- or
long-term credit ratings. Should our ratings decline, our business
counterparties could perceive that the Seattle Bank has increased credit risk,
which could increase our cost of entering into interest-rate exchange
agreements, secured borrowings, and collateral arrangements, negatively
impacting our net income.
In
accordance with the PCA provisions, we submitted a proposed capital restoration
plan to the Finance Agency in August 2009. The Finance Agency determined that it
was unable to approve our proposed plan and required us to submit a new plan by
October 31, 2009. We subsequently requested an extension in order to prepare a
revised proposed capital restoration plan and the Finance Agency approved an
extension to December 6, 2009. It is unknown whether the Finance Agency will
accept our revised capital restoration plan. Failure to obtain approval of our
rivsed capital restoration plan could result in the appointment of a conservator
or receiver by the Finance Agency. Further, Finance Agency approval of our
proposed capital restoration plan could result in additional restrictions for
the Seattle Bank. In addition, the Finance Agency could take other regulatory
actions (as further described in the PCA provisions), which could negatively
impact demand for our advances, our financial performance, and business in
general.
Although as of
September 30, 2009 the Seattle Bank met all of our regulatory requirements
(including the risk-based capital requirement), on November 6, 2009, the Finance
Agency reaffirmed the Seattle Bank’s capital classification as undercapitalized.
All mandatory actions and restrictions in place as a result of the previous
capital classification determination remain in effect, including not redeeming
or repurchasing capital stock or paying dividends without prior Finance Agency
approval. The Finance Agency also indicated that it would not change our capital
classification to adequately capitalized until the Finance Agency believes that
we have demonstrated sustained performance in line with an approved capital
restoration plan. Our capital classification will remain undercapitalized until
the Finance Agency determines otherwise.
See “Part I.
Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Overview,” for additional information.
Not
applicable.
None.
None.
On
September 28, 2009, the Seattle Bank announced that the following three
individuals ran unopposed and were elected to the Seattle Bank’s Board as a
member director for four-year terms commencing January 1, 2010:
•
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Craig A.
Dahl, president, chief executive officer and director, Alaska Pacific
Bank, Juneau, Alaska. Mr. Dahl currently serves on the Board, and his
current term expires on December 31, 2009.
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•
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Russell J.
Lau, vice chairman and chief executive officer, Finance Factors, Ltd.,
Honolulu, Hawaii. Mr. Lau currently serves on the Board, and his current
term expires on December 31, 2009.
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•
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James G.
Livingston, PhD, vice president, Investments Division, Zions First
National Bank, West Valley City, Utah. Dr. Livingston currently serves on
the Board, and his current term expires on December 31,
2009.
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The above
directors’ election took place in accordance with the rules governing the
election of Federal Home Loan Bank directors specified in the Federal Home Loan
Bank Act of 1932, as amended (“Bank Act”) and the related regulations of the
Finance Agency. Pursuant to the Bank Act and Finance Agency regulations, the
Seattle Bank’s directors are elected by and from the Seattle Bank’s
membership.
In
addition, as a result of the Finance Agency’s annual designation of
directorships for the Federal Home Loan Banks, the Seattle Bank’s Board will be
reduced from 17 to 16 directors, effective January 1, 2010. The reduction will
eliminate one member director seat in the state of Washington.
On
October 19, 2009, Harold B. Gilkey notified the Seattle Bank of his resignation
from the Board effective immediately. The Seattle Bank had previously announced
that, as a result of the previously noted reduction in the number of director
positions at the Seattle Bank, Mr. Gilkey would be leaving the Seattle Bank’s
Board of Directors on December 31, 2009.
Exhibit No.
|
Exhibits
|
3.1
|
Bylaws of the
Federal Home Loan Bank of Seattle, as adopted March 31, 2006, as amended
July 30, 2009 (incorporated by reference to Exhibit 3.1 to the Form 8-K
filed with the SEC on August 4, 2009).
|
10.1 *
|
Separation
and Release Agreement between the Federal Home Loan Bank of Seattle and
John W. Blizzard (incorporated by reference to Exhibit 10.1 to the Form
8-K filed with the SEC on July 15, 2009).
|
10.2 *
|
Form of
Indemnification Agreement (incorporated by reference to Exhibit 10.1 to
the Form 8-K filed with the SEC on August 4, 2009).
|
31.1
|
Certification
of the President and Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of the Chief Accounting and Administrative Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of the President and Chief Executive Officer pursuant to 18.U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
Certification
of the Chief Accounting and Administrative Officer pursuant to 18.U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
*
|
Director or
employee compensation benefit-related
exhibit.
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Federal Home Loan
Bank of Seattle
By:
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/s/ Richard
M. Riccobono
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Dated:
|
November 12,
2009
|
||
Richard
M. Riccobono
|
|||||
President
and Chief Executive Officer
|
|||||
By:
|
/s/ Christina
J. Gehrke
|
Dated:
|
November 12,
2009
|
||
Christina
J. Gehrke
|
|||||
Senior
Vice President, Chief Accounting and Administrative Officer
*
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|||||
*
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The Chief
Accounting and Administrative Officer for purposes of the Seattle Bank's
disclosure controls and procedures and internal control of financial
reporting performs similar functions as a principal financial
officer.
|
||||
EXHIBITS
Exhibit No.
|
Exhibits
|
3.1
|
Bylaws of the
Federal Home Loan Bank of Seattle, as adopted March 31, 2006, as amended
July 30, 2009 (incorporated by reference to Exhibit 3.1 to the Form 8-K
filed with the SEC on August 4, 2009).
|
10.1 *
|
Separation
and Release Agreement between the Federal Home Loan Bank of Seattle and
John W. Blizzard (incorporated by reference to Exhibit 10.1 to the Form
8-K filed with the SEC on July 15, 2009).
|
10.2 *
|
Form of
Indemnification Agreement (incorporated by reference to Exhibit 10.1 to
the Form 8-K filed with the SEC on August 4, 2009).
|
31.1
|
Certification
of the President and Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of the Chief Accounting and Administrative Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of the President and Chief Executive Officer pursuant to 18.U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
Certification
of the Chief Accounting and Administrative Officer pursuant to 18.U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
*
|
Director or
employee compensation benefit-related
exhibit.
|
82