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EX-31.1 - ACTING PRESIDENT AND CHIEF EXECUTIVE OFFICER 302 CERTIFICATION - Federal Home Loan Bank of Seattleex3119301010q.htm
EX-31.2 - CHIEF ACCOUNTING AND ADMINISTRATIVE OFFICER 302 CERTIFICATION - Federal Home Loan Bank of Seattleex3129301010q.htm
EX-32.2 - CHIEF ACCOUNTING AND ADMINISTRATIVE OFFICER 906 CERTIFICATION - Federal Home Loan Bank of Seattleex3229301010q.htm
EX-32.1 - ACTING PRESIDENT AND CHIEF EXECUTIVE OFFICER 906 CERTIFICATION - Federal Home Loan Bank of Seattleex3219301010q.htm


 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, 2010
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
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
 Securities registered pursuant to Section 12(b) of the Act:    None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Name of Each Exchange on Which Registered:
Class B Common Stock, $100 par value per share
(Title of class)
 
N/A
  
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 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
 
Registrant's stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. As of October 31, 2010, the Federal Home Loan Bank of Seattle had outstanding 1,588,642 shares of its Class A capital stock and 26,394,947 shares of its Class B capital stock.



FEDERAL HOME LOAN BANK OF SEATTLE
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
 
 
 
 
 
 
Page
FINANCIAL INFORMATION
 
Item 1.
Financial Statements:
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
FEDERAL HOME LOAN BANK OF SEATTLE
STATEMENTS OF CONDITION
(Unaudited)
 
 
 
As of
 
As of
 
 
September 30, 2010
 
December 31, 2009
(in thousands, except par value)
 
 
 
 
Assets
 
 
 
 
Cash and due from banks
 
$
1,163
 
 
$
731,430
 
Deposits with other Federal Home Loan Banks (FHLBanks)
 
52
 
 
32
 
Securities purchased under agreements to resell
 
8,750,000
 
 
3,500,000
 
Federal funds sold
 
3,212,380
 
 
10,051,000
 
Investment securities:
 
 
 
 
Available-for-sale securities (Note 2)
 
11,778,740
 
 
976,870
 
Held-to-maturity securities (fair values of $6,993,454 and $8,884,890 as of September 30, 2010 and December 31, 2009) (Note 3)
 
7,056,194
 
 
9,288,906
 
Total investment securities
 
18,834,934
 
 
10,265,776
 
Advances (Note 5)
 
15,413,951
 
 
22,257,026
 
Mortgage loans held for portfolio, net (includes $1,794 and $626 of allowance for credit losses as of September 30, 2010 and December 31, 2009) (Note 6)
 
3,543,858
 
 
4,106,195
 
Accrued interest receivable
 
97,481
 
 
123,586
 
Premises, software, and equipment, net
 
14,548
 
 
14,836
 
Derivative assets (Note 7)
 
10,539
 
 
3,649
 
Other assets
 
35,120
 
 
40,953
 
Total Assets
 
$
49,914,026
 
 
$
51,094,483
 
Liabilities
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Interest-bearing
 
$
330,582
 
 
$
339,800
 
Total deposits
 
330,582
 
 
339,800
 
Consolidated obligations, net (Note 8):
 
 
 
 
 
 
Discount notes
 
14,014,461
 
 
18,501,642
 
Bonds
 
32,961,274
 
 
29,762,229
 
Total consolidated obligations, net
 
46,975,735
 
 
48,263,871
 
Mandatorily redeemable capital stock (Note 9)
 
1,004,270
 
 
946,527
 
Accrued interest payable
 
126,354
 
 
207,842
 
Affordable Housing Program (AHP) payable
 
7,370
 
 
8,628
 
Derivative liabilities (Note 7)
 
237,251
 
 
300,030
 
Other liabilities
 
131,857
 
 
34,037
 
Total liabilities
 
48,813,419
 
 
50,100,735
 
Commitments and contingencies (Note 13)
 
 
 
 
 
 
Capital (Note 9)
 
 
 
 
 
 
Capital stock:
 
 
 
 
 
 
Class B capital stock putable ($100 par value) - issued and outstanding shares: 16,676 and 17,171 shares as of September 30, 2010 and December 31, 2009
 
1,667,635
 
 
1,717,149
 
Class A capital stock putable ($100 par value) - issued and outstanding shares: 1,265 and 1,325 shares as of September 30, 2010 and December 31, 2009
 
126,454
 
 
132,518
 
Total capital stock
 
1,794,089
 
 
1,849,667
 
Retained earnings
 
76,835
 
 
52,897
 
Accumulated other comprehensive loss (Note 9)
 
(770,317
)
 
(908,816
)
Total capital
 
1,100,607
 
 
993,748
 
Total Liabilities and Capital
 
$
49,914,026
 
 
$
51,094,483
 
 
The accompanying notes are an integral part of these financial statements.

3


FEDERAL HOME LOAN BANK OF SEATTLE
STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2010
 
2009
 
2010
 
2009
(in thousands)
 
 
 
 
 
 
 
 
Interest Income
 
 
 
 
 
 
 
 
Advances
 
$
43,708
 
 
$
74,354
 
 
$
133,473
 
 
$
358,858
 
Prepayment fees on advances, net
 
725
 
 
1,869
 
 
13,671
 
 
7,502
 
Interest-bearing deposits
 
19
 
 
24
 
 
53
 
 
203
 
Securities purchased under agreements to resell
 
5,179
 
 
1,808
 
 
9,133
 
 
6,564
 
Federal funds sold
 
2,524
 
 
1,965
 
 
10,448
 
 
4,813
 
Available-for-sale securities
 
9,134
 
 
 
 
20,501
 
 
 
Held-to-maturity securities
 
33,797
 
 
50,472
 
 
117,987
 
 
162,693
 
Mortgage loans held for portfolio
 
47,177
 
 
53,382
 
 
143,568
 
 
180,799
 
Loans to other FHLBanks
 
1
 
 
 
 
2
 
 
 
Total interest income
 
142,264
 
 
183,874
 
 
448,836
 
 
721,432
 
Interest Expense
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations - discount notes
 
6,700
 
 
9,826
 
 
16,802
 
 
63,224
 
Consolidated obligations - bonds
 
93,614
 
 
125,992
 
 
298,566
 
 
486,982
 
Deposits
 
78
 
 
158
 
 
183
 
 
885
 
Securities sold under agreements to repurchase
 
1
 
 
 
 
1
 
 
 
Total interest expense
 
100,393
 
 
135,976
 
 
315,552
 
 
551,091
 
Net Interest Income
 
41,871
 
 
47,898
 
 
133,284
 
 
170,341
 
Provision for credit losses
 
 
 
14
 
 
1,168
 
 
271
 
Net Interest Income after Provision for Credit Losses
 
41,871
 
 
47,884
 
 
132,116
 
 
170,070
 
Other (Loss) Income
 
 
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment (OTTI) losses (Note 4)
 
(62,276
)
 
(84,979
)
 
(207,512
)
 
(1,240,173
)
Portion of OTTI losses recognized in other comprehensive loss
 
46,656
 
 
(45,121
)
 
125,446
 
 
976,654
 
Net OTTI credit loss recognized in income
 
(15,620
)
 
(130,100
)
 
(82,066
)
 
(263,519
)
Net gain (loss) on derivatives and hedging activities
 
8,145
 
 
2,553
 
 
35,287
 
 
(8,413
)
Net realized loss on early extinguishment of consolidated obligations
 
(5,879
)
 
(301
)
 
(11,712
)
 
(5,268
)
Service fees
 
708
 
 
845
 
 
2,103
 
 
1,989
 
Other, net
 
5
 
 
(15
)
 
4
 
 
2
 
Total other loss
 
(12,641
)
 
(127,018
)
 
(56,384
)
 
(275,209
)
Other Expense
 
 
 
 
 
 
 
 
 
 
 
Operating:
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
6,212
 
 
8,579
 
 
21,637
 
 
22,173
 
Other operating
 
8,552
 
 
5,026
 
 
21,452
 
 
13,762
 
Federal Housing Finance Agency
 
610
 
 
446
 
 
1,902
 
 
1,389
 
Office of Finance
 
588
 
 
494
 
 
1,746
 
 
1,430
 
Other, net
 
106
 
 
127
 
 
(3,587
)
 
407
 
Total other expense
 
16,068
 
 
14,672
 
 
43,150
 
 
39,161
 
Income (Loss) before Assessments
 
13,162
 
 
(93,806
)
 
32,582
 
 
(144,300
)
Assessments
 
 
 
 
 
 
 
 
 
 
 
AHP
 
1,074
 
 
 
 
2,659
 
 
 
Resolution Funding Corporation (REFCORP)
 
2,418
 
 
 
 
5,985
 
 
33
 
Total assessments
 
3,492
 
 
 
 
8,644
 
 
33
 
Net Income (Loss)
 
$
9,670
 
 
$
(93,806
)
 
$
23,938
 
 
$
(144,333
)
 
The accompanying notes are an integral part of these financial statements.

4


FEDERAL HOME LOAN BANK OF SEATTLE
STATEMENTS OF CAPITAL
(Unaudited) 
 
For the Nine Months Ended
September 30, 2010 and 2009
 
Class A
Capital Stock *
 
Class B
Capital Stock *
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Loss (AOCL)
 
Total Capital
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
(amounts and shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2008
 
1,179
 
 
$
117,853
 
 
17,302
 
 
$
1,730,287
 
 
$
(78,876
)
 
$
(2,939
)
 
$
1,766,325
 
Cumulative-effect adjustment (Note 9)
 
 
 
 
 
 
 
 
 
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 9)
 
 
 
 
 
 
 
 
 
 
 
(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
 
Balance, December 31, 2009
 
1,325
 
 
$
132,518
 
 
17,171
 
 
$
1,717,149
 
 
$
52,897
 
 
$
(908,816
)
 
$
993,748
 
Proceeds from sale of capital stock
 
 
 
 
 
22
 
 
2,165
 
 
 
 
 
 
2,165
 
Net shares reclassified to mandatorily redeemable capital stock
 
(60
)
 
(6,064
)
 
(517
)
 
(51,679
)
 
 
 
 
 
(57,743
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
23,938
 
 
 
 
23,938
 
Other comprehensive income (Note 9)
 
 
 
 
 
 
 
 
 
 
 
138,499
 
 
138,499
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
162,437
 
Balance, September 30, 2010
 
1,265
 
 
$
126,454
 
 
16,676
 
 
$
1,667,635
 
 
$
76,835
 
 
$
(770,317
)
 
$
1,100,607
 
*
Putable
 
The accompanying notes are an integral part of these financial statements.

5


FEDERAL HOME LOAN BANK OF SEATTLE
STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2010
 
2009
(in thousands)
 
 
 
 
Operating Activities
 
 
 
 
Net income (loss)
 
$
23,938
 
 
$
(144,333
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
(68,999
)
 
(121,399
)
Net OTTI credit loss recognized in income
 
82,066
 
 
263,519
 
Change in net fair value adjustment on derivatives and hedging activities
 
37,841
 
 
(24,385
)
Loss on early extinguishment of consolidated obligations
 
11,712
 
 
5,269
 
Provision for credit losses
 
1,168
 
 
271
 
Other
 
2
 
 
14
 
Net change in:
 
 
 
 
 
 
Accrued interest receivable
 
26,100
 
 
131,067
 
Other assets
 
(555
)
 
(941
)
Accrued interest payable
 
(81,486
)
 
(140,580
)
Other liabilities
 
9,254
 
 
(9,263
)
Total adjustments
 
17,103
 
 
103,572
 
Net cash provided by (used in) operating activities
 
41,041
 
 
(40,761
)
Investing Activities
 
 
 
 
 
 
Net change in:
 
 
 
 
 
 
Interest-bearing deposits
 
(230
)
 
32,311
 
Deposits with other FHLBanks
 
(20
)
 
(72
)
Securities purchased under agreements to resell
 
(5,250,000
)
 
(850,000
)
Federal funds sold
 
6,838,620
 
 
(3,542,000
)
Premises, software and equipment
 
(1,739
)
 
(3,723
)
Available-for-sale securities:
 
 
 
 
 
 
Proceeds from long-term
 
390,405
 
 
 
Purchases of long-term
 
(10,536,813
)
 
 
Held-to-maturity securities:
 
 
 
 
 
Net increase (decrease) in short-term
 
1,233,019
 
 
(5,353,000
)
Proceeds from maturities of long-term
 
1,520,247
 
 
1,748,028
 
Purchases of long-term
 
(1,002,231
)
 
(1,670,845
)
Advances:
 
 
 
 
 
Proceeds
 
25,477,453
 
 
49,869,976
 
Made
 
(18,517,631
)
 
(38,009,029
)
Mortgage loans held for portfolio:
 
 
 
 
 
Principal collected
 
554,245
 
 
790,806
 
Net cash provided by investing activities
 
705,325
 
 
3,012,452
 
 

6


FEDERAL HOME LOAN BANK OF SEATTLE
STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
 
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2010
 
2009
(in thousands)
 
 
 
 
Financing Activities
 
 
 
 
Net change in:
 
 
 
 
Deposits
 
6,072
 
 
(281,392
)
Net proceeds on derivative contracts with financing elements
 
82,873
 
 
 
Net proceeds from issuance of consolidated obligations:
 
 
 
 
 
Discount notes
 
730,432,336
 
 
780,550,600
 
Bonds
 
36,654,783
 
 
18,875,945
 
Payments for maturing and retiring consolidated obligations:
 
 
 
 
 
Discount notes
 
(734,871,062
)
 
(774,645,157
)
Bonds
 
(33,783,800
)
 
(27,493,087
)
Proceeds from issuance of capital stock
 
2,165
 
 
29,547
 
Payments for redemption of mandatorily redeemable capital stock
 
 
 
(669
)
Net cash used in financing activities
 
(1,476,633
)
 
(2,964,213
)
Net (decrease) increase in cash and cash equivalents
 
(730,267
)
 
7,478
 
Cash and cash equivalents at beginning of the period
 
731,430
 
 
1,395
 
Cash and cash equivalents at end of the period
 
$
1,163
 
 
$
8,873
 
 
 
 
 
 
 
 
Supplemental Disclosures
 
 
 
 
 
 
Interest paid
 
$
397,040
 
 
$
691,673
 
AHP payments, net
 
$
3,918
 
 
$
6,113
 
Transfers from mortgage loans to real estate owned
 
$
1,868
 
 
$
1,438
 
Non-cash transfers of held-to-maturity securities to available-for-sale securities
 
$
319,978
 
 
$
664,728
 
 
The accompanying notes are an integral part of these financial statements.

7


FEDERAL HOME LOAN BANK OF SEATTLE
CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1—Basis of Presentation, Use of Estimates, and Recently Adopted and Issued Accounting Guidance
 
Basis of Presentation
 
These unaudited financial statements and condensed notes should be read in conjunction with the 2009 audited financial statements and related notes (2009 Audited Financial Statements) included in the 2009 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 of America (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 of only normal recurring accruals) necessary for a fair statement of the financial condition, operating results, and cash flows for the interim periods have been included. Our financial condition as of September 30, 2010 and our results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the financial condition and operating results that may be expected as of or for the year ending December 31, 2010 or for any other future dates or periods.
 
We have evaluated subsequent events for potential recognition or disclosure through the filing date of this report on Form 10-Q. 
 
Use of Estimates
 
The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates that may affect the amounts reported or disclosed in the financial statements and accompanying notes. For the Seattle Bank, the most significant of these assumptions and estimates relate to the determination of OTTI of securities, fair valuation of financial instruments, application of accounting for derivatives and hedging activities, amortization of premiums and accretion of discounts, and determination of the allowance for credit losses. Actual results could differ significantly from these assumptions and estimates.
 
Recently Adopted Accounting Standards
 
Fair Value Measurements and Disclosures—Improving Disclosures about Fair
Value Measurements
 
In January 2010, the Financial Accounting Standards Board (FASB) issued amended guidance related to the disclosure of fair value measurements. The amended guidance requires a reporting entity to disclose separately the amounts of significant transfers into and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, this guidance requires new disclosures, on a gross basis, relating to purchases, sales, issuances, and settlements for fair value measurements using significant unobservable inputs (Level 3), and clarifies existing disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The guidance became effective for interim and annual reporting periods beginning after December 15, 2009 (January 1, 2010 for the Seattle Bank), except for the new Level 3 fair value measurement disclosure requirements, which are effective for fiscal years beginning after December 15, 2010 (January 1, 2011 for the Seattle Bank), and for interim periods within those fiscal years. We adopted this guidance as of January 1, 2010, except for the new Level 3 disclosure requirements, which we expect to adopt as of January 1, 2011. Adoption of the 2010 guidance resulted in (and the 2011 guidance is expected to result in) increased financial statement disclosures (see Note 11) but did not (and is not expected to) affect our financial condition, results of operations, or cash flows.
  

8


Accounting for the Consolidation of Variable Interest Entities
 
In June 2009, the FASB issued guidance which is intended to improve financial reporting by enterprises involved with variable interest entities (VIEs) by providing more relevant and reliable information to users of financial statements. Under the new guidance, an entity must consolidate a VIE if it determines it is the primary beneficiary of that VIE. An entity qualitatively assesses whether it is the primary beneficiary of a VIE based on whether it (1) has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (2) has the obligation to absorb losses or receive benefits from the VIE that could be significant to the VIE. The guidance also requires enhanced disclosures about how an entity's involvement with a VIE affects its financial statements and its exposure to risks. Our involvement with VIEs may include, but is not limited to, investments in senior interests in private-label mortgage-backed securities (PLMBS). This new accounting guidance became effective for the Seattle Bank on January 1, 2010. We evaluated our investments in VIEs and determined that consolidation was not required since we were not the primary beneficiary of any VIE. Our evaluation as of January 1, 2010 included reconsideration of our previous consolidation conclusions with respect to VIEs, particularly our investments in PLMBS where subordinate tranches have been adversely affected by credit losses. Although adoption of this guidance had no impact on our financial condition, results of operations, or cash flows, we are required under the guidance to continually evaluate whether we have become the primary beneficiary of a VIE.
 
Accounting for Transfers of Financial Assets
 
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, introduces the concept of a participating interest in circumstances in which a portion of a financial asset has been transferred, changes the requirements for de-recognizing 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 became effective January 1, 2010 for the Seattle Bank. Our adoption of this guidance did not impact our financial condition, results of operations, or cash flows.
 
Recently Issued Accounting Guidance Not Yet Effective
    
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
 
In June 2010, the FASB issued amended guidance for receivables that requires enhanced, disaggregated disclosures about the credit quality of financing receivables and the allowance for credit losses. In addition, the amended guidance requires an entity to disclose credit quality indicators, past due information, and modifications of its financing receivables. The new disclosures are effective for interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010 for the Seattle Bank). The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 (January 1, 2011 for the Seattle Bank). We are currently evaluating the increased annual and interim financial statement disclosure requirements of the amended guidance but do not expect its adoption to affect our financial condition, results of operations, or cash flows.
 

9


Note 2—Available-for-Sale Securities
 
Major Security Types
 
The following tables summarize our available-for-sale (AFS) securities as of September 30, 2010 and December 31, 2009.
 
 
 
As of September 30, 2010
AFS Securities
 
Amortized
Cost Basis (1)
 
OTTI Charges Recognized 
in AOCL
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(in thousands)
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprise (GSE) obligations (2)
 
$
4,120,836
 
 
$
 
 
$
7,014
 
 
$
(446
)
 
$
4,127,404
 
Temporary Liquidity Guarantee Program (TLGP) securities (3)
 
6,268,104
 
 
 
 
17,486
 
 
(440
)
 
6,285,150
 
Residential Mortgage-Backed Securities (MBS):
 
 
 
 
 
 
 
 
 
 
 
 
 
PLMBS
 
1,996,310
 
 
(1,087,879
)
 
457,755
 
 
 
 
1,366,186
 
Total
 
$
12,385,250
 
 
$
(1,087,879
)
 
$
482,255
 
 
$
(886
)
 
$
11,778,740
 
 
 
As of December 31, 2009
AFS Securities
 
Amortized
Cost Basis (1)
 
OTTI Charges Recognized 
in AOCL
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(in thousands)
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
PLMBS
 
$
1,673,296
 
 
$
(928,895
)
 
$
232,469
 
 
$
 
 
$
976,870
 
Total
 
$
1,673,296
 
 
$
(928,895
)
 
$
232,469
 
 
$
 
 
$
976,870
 
 
(1)
Includes unpaid principal balance, accretable discounts and premiums, and OTTI charges recognized in earnings.
(2)
Consists of obligations issued by Federal Farm Credit Bank (FFCB), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage Association, (Fannie Mae), and Tennessee Valley Authority (TVA).
(3)
Consists of notes guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the TLGP.
 
The amortized cost basis of our PLMBS classified as AFS includes net accretable discounts of $399.1 million and $314.6 million as of September 30, 2010 and December 31, 2009. See Note 9 for a tabular presentation of AOCL on AFS securities for the nine months ended September 30, 2010 and 2009.
 
During 2009 and the first nine months of 2010, we transferred certain of our PLMBS from our held-to-maturity (HTM) portfolio to our AFS portfolio. The transferred PLMBS had significant OTTI credit losses in the periods of transfer, which the Seattle Bank considers to be evidence of a significant deterioration in the securities' creditworthiness. These transfers allow us the option to divest these securities prior to maturity in response to changes in interest rates, changes in prepayment risk, or other factors, while acknowledging our intent to hold these securities for an indefinite period of time. Certain securities with current-period credit-related losses remained in our HTM portfolio primarily due to their moderate level of credit-related OTTI losses.
 
On October 25, 2010, the Seattle Bank entered into a Stipulation and Consent to the Issuance of a Consent Order (Stipulation and Consent) with the Finance Agency, relating to the Consent Order dated October 25, 2010 issued by the Finance Agency to the Seattle Bank. (The Stipulation and Consent, Consent Order, and related understandings with the Finance Agency are collectively referred to as the Consent Arrangement.) As required by the Consent Arrangement, we will be developing and implementing a plan acceptable to the Finance Agency for increasing advances as a percentage of the Seattle Bank's assets. In the event that our advance balance does not materially increase, we expect that our investments balance will decrease over time.
 

10


The following table summarizes the amortized cost basis, OTTI charges recognized in AOCL, gross unrecognized holding gains, and fair value of PLMBS transfered from our HTM to AFS portfolios. The amounts below represent the values as of the referenced transfer dates.
 
 
 
2010
 
2009
HTM Securities Transferred to
AFS Securities
 
Amortized Cost Basis
 
OTTI Charges Recognized In AOCL
 
Gross Unrecognized Holding Gains
 
Fair Value
 
Amortized Cost Basis
 
OTTI Charges Recognized in AOCL
 
Gross Unrecognized Holding Gains
 
Fair Value
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transferred on:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31
 
$
136,506
 
 
$
(59,179
)
 
$
 
 
$
77,327
 
 
$
 
 
$
 
 
$
 
 
$
 
June 30
 
212,042
 
 
(96,099
)
 
4,742
 
 
120,685
 
 
 
 
 
 
 
 
 
September 30
 
199,208
 
 
(72,500
)
 
9,405
 
 
136,113
 
 
1,248,485
 
 
(692,000
)
 
108,243
 
 
664,728
 
Total
 
$
547,756
 
 
$
(227,778
)
 
$
14,147
 
 
$
334,125
 
 
$
1,248,485
 
 
$
(692,000
)
 
$
108,243
 
 
$
664,728
 
 
As of September 30, 2010, the amortized cost basis of our GSE obligations and TLGP securities reflects favorable basis adjustments of $20.0 million related to fair value hedges. We did not hedge any AFS securities as of December 31, 2009. The portion of the change in fair value of the AFS securities related to the risk being hedged is recorded in other income (loss) as "net realized and unrealized gain (loss) on derivatives and hedging activities" together with the related change in the fair value of the derivative. The remainder of the change in fair value of the hedged AFS securities as well as the change in fair value of the non-hedged AFS securities is recorded in AOCL as "net unrealized gain (loss) on available-for-sale securities." 
 
As of September 30, 2010 and December 31, 2009, we held $2.9 billion and $454.5 million of AFS securities originally purchased from members or affiliates of members that own more than 10% of our total outstanding capital stock, including mandatorily redeemable capital stock, or members with representatives serving on our Board of Directors (Board). See Note 12 for additional information concerning these related parties.
 
Unrealized Losses on Available-for-Sale Securities
 
The following tables summarize our AFS securities with 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, 2010 and December 31, 2009. The total unrealized losses in the tables below will not agree to the total gross unrealized losses included in the Major Security Types table above. The total unrealized losses include noncredit-related OTTI losses recorded in AOCL and subsequent unrealized changes in fair value related to other-than-temporarily impaired securities.
 
 
 
As of September 30, 2010
 
 
Less than 12 months
 
12 months or more
 
Total
AFS Securities in
Unrealized Loss Positions
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
GSE obligations
 
$
820,325
 
 
$
(446
)
 
$
 
 
$
 
 
$
820,325
 
 
$
(446
)
TLGP securities
 
792,962
 
 
(440
)
 
 
 
 
 
792,962
 
 
(440
)
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PLMBS
 
 
 
 
 
1,366,186
 
 
(630,124
)
 
1,366,186
 
 
(630,124
)
Total
 
$
1,613,287
 
 
$
(886
)
 
$
1,366,186
 
 
$
(630,124
)
 
$
2,979,473
 
 
$
(631,010
)
 
 
As of December 31, 2009
 
 
Less than 12 months
 
12 months or more
 
Total
AFS Securities in
Unrealized Loss Positions
 
 
Fair Value
 
Unrealized
Losses
 
 
Fair Value
 
Unrealized
Losses
 
 
Fair Value
 
Unrealized
Losses
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
PLMBS
 
$
 
 
$
 
 
$
976,870
 
 
$
(696,426
)
 
$
976,870
 
 
$
(696,426
)
Total
 
$
 
 
$
 
 
$
976,870
 
 
$
(696,426
)
 
$
976,870
 
 
$
(696,426
)

11


     
As of September 30, 2010, 51 of our AFS investment positions had gross unrealized losses totaling $631.0 million, including 38 positions with gross unrealized losses for at least 12 months. As of December 31, 2009, 28 of our investment positions had gross unrealized losses totaling $696.4 million, all of which had gross unrealized losses for at least 12 months.
 
Redemption Terms
 
The amortized cost basis and fair value, as applicable, of AFS securities by contractual maturity as of September 30, 2010 and December 31, 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, 2010
 
As of December 31, 2009
Year of Maturity
 
Amortized
Cost Basis
 
Fair Value
 
Amortized
Cost Basis
 
Fair Value
(in thousands)
 
 
 
 
 
 
 
 
Non-MBS:
 
 
 
 
 
 
 
 
Due in less than one year
 
$
840,822
 
 
$
840,819
 
 
$
 
 
$
 
Due after one year through five years
 
9,511,056
 
 
9,531,109
 
 
 
 
 
Due after 10 years
 
37,062
 
 
40,626
 
 
 
 
 
Subtotal
 
10,388,940
 
 
10,412,554
 
 
 
 
 
MBS
 
1,996,310
 
 
1,366,186
 
 
1,673,296
 
 
976,870
 
Total
 
$
12,385,250
 
 
$
11,778,740
 
 
$
1,673,296
 
 
$
976,870
 
 
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
 
Major Security Types
 
The following tables summarize our HTM securities as of September 30, 2010 and December 31, 2009.
 
 
 
As of September 30, 2010
HTM Securities
 
Amortized
Cost Basis (1)
 
OTTI Charges
Recognized in
AOCL (2)
 
Carrying
Value
 
Gross
Unrecognized Holding
Gains (3)
 
Gross
Unrecognized Holding
Losses (3)
 
Fair Value
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (4)
 
$
1,670,000
 
 
$
 
 
$
1,670,000
 
 
$
83
 
 
$
 
 
$
1,670,083
 
Other U.S. agency obligations (5)
 
39,515
 
 
 
 
39,515
 
 
544
 
 
(12
)
 
40,047
 
GSE obligations (6)
 
389,141
 
 
 
 
389,141
 
 
45,103
 
 
 
 
434,244
 
State or local housing agency obligations
 
3,735
 
 
 
 
3,735
 
 
 
 
 
 
3,735
 
Subtotal
 
2,102,391
 
 
 
 
2,102,391
 
 
45,730
 
 
(12
)
 
2,148,109
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. agency (5)
 
185,013
 
 
 
 
185,013
 
 
173
 
 
 
 
185,186
 
GSEs (6)
 
3,229,306
 
 
 
 
3,229,306
 
 
47,199
 
 
(1,849
)
 
3,274,656
 
PLMBS
 
1,680,353
 
 
(140,869
)
 
1,539,484
 
 
11,044
 
 
(165,025
)
 
1,385,503
 
Subtotal
 
5,094,672
 
 
(140,869
)
 
4,953,803
 
 
58,416
 
 
(166,874
)
 
4,845,345
 
Total
 
$
7,197,063
 
 
$
(140,869
)
 
$
7,056,194
 
 
$
104,146
 
 
$
(166,886
)
 
$
6,993,454
 

12


 
 
As of December 31, 2009
HTM Securities
 
Amortized
Cost Basis (1)
 
OTTI Charges
Recognized in
AOCL (2)
 
Carrying
Value
 
Gross
Unrecognized Holding
Gains (3)
 
Gross
Unrecognized Holding
Losses (3)
 
Fair Value
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (4)
 
$
2,903,000
 
 
$
 
 
$
2,903,000
 
 
$
73
 
 
$
 
 
$
2,903,073
 
Other U.S. agency obligations (5)
 
51,684
 
 
 
 
51,684
 
 
835
 
 
(2
)
 
52,517
 
GSE obligations (6)
 
593,380
 
 
 
 
593,380
 
 
48,096
 
 
 
 
641,476
 
State or local housing agency obligations
 
4,130
 
 
 
 
4,130
 
 
 
 
 
 
4,130
 
Subtotal
 
3,552,194
 
 
 
 
3,552,194
 
 
49,004
 
 
(2
)
 
3,601,196
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. agency (5)
 
4,229
 
 
 
 
4,229
 
 
91
 
 
 
 
4,320
 
GSEs (6)
 
3,198,679
 
 
 
 
3,198,679
 
 
35,587
 
 
(3,981
)
 
3,230,285
 
PLMBS
 
2,743,096
 
 
(209,292
)
 
2,533,804
 
 
7,083
 
 
(491,798
)
 
2,049,089
 
Subtotal
 
5,946,004
 
 
(209,292
)
 
5,736,712
 
 
42,761
 
 
(495,779
)
 
5,283,694
 
Total
 
$
9,498,198
 
 
$
(209,292
)
 
$
9,288,906
 
 
$
91,765
 
 
$
(495,781
)
 
$
8,884,890
 
   
(1)
Includes unpaid principal balance, accretable discounts and premiums, and OTTI charges recognized in earnings.
(2)
See Note 9 for a reconciliation of the AOCL related to HTM securities as of September 30, 2010 and 2009.
(3)
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) and Small Business Association (SBA) investments.
(6)
Primarily consists of securities issued by Freddie Mac, Fannie Mae, and TVA.
 
The amortized cost basis of our MBS investments classified as HTM with no OTTI losses included purchase discounts of $19.7 million and purchase premiums of $1.5 million as of September 30, 2010 and purchase discounts of $34.9 million and purchase premiums of $2.2 million as of December 31, 2009. The amortized cost of our MBS classified as HTM with OTTI losses included net accretable discounts of $1.9 million and $7.1 million as of September 30, 2010 and December 31, 2009.
 
During 2009 and the first nine months of 2010, we transferred certain of our PLMBS from our HTM portfolio to our AFS portfolio (see Note 2).
 
As of September 30, 2010 and December 31, 2009, we held $515.6 million and $846.0 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, 2010 and December 31, 2009. The gross unrealized losses include OTTI charges recognized in AOCL and gross unrecognized holding losses.
 

13


 
 
As of September 30, 2010
 
 
Less than 12 months
 
12 months or more
 
Total
HTM Securities in
Unrealized Loss Positions
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. agency obligations
 
$
2,225
 
 
$
(11
)
 
$
342
 
 
$
(1
)
 
$
2,567
 
 
$
(12
)
Subtotal
 
2,225
 
 
(11
)
 
342
 
 
(1
)
 
2,567
 
 
(12
)
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. agency
 
2
 
 
 
 
 
 
 
 
2
 
 
 
GSEs
 
413,128
 
 
(1,849
)
 
 
 
 
 
413,128
 
 
(1,849
)
Temporarily impaired PLMBS
 
31,660
 
 
(45
)
 
679,678
 
 
(164,800
)
 
711,338
 
 
(164,845
)
OTTI PLMBS
 
 
 
 
 
182,370
 
 
(141,049
)
 
182,370
 
 
(141,049
)
Subtotal
 
444,790
 
 
(1,894
)
 
862,048
 
 
(305,849
)
 
1,306,838
 
 
(307,743
)
Total
 
$
447,015
 
 
$
(1,905
)
 
$
862,390
 
 
$
(305,850
)
 
$
1,309,405
 
 
$
(307,755
)
 
 
 
As of December 31, 2009
 
 
Less than 12 months
 
12 months or more
 
Total
HTM Securities in
Unrealized Loss Positions
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. agency obligations 
 
$
219
 
 
$
 
 
$
370
 
 
$
(2
)
 
$
589
 
 
$
(2
)
Subtotal
 
219
 
 
 
 
370
 
 
(2
)
 
589
 
 
(2
)
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. agency
 
5
 
 
 
 
 
 
 
 
5
 
 
 
GSEs
 
1,053,968
 
 
(2,436
)
 
161,728
 
 
(1,545
)
 
1,215,696
 
 
(3,981
)
Temporarily impaired PLMBS
 
48,550
 
 
(779
)
 
1,574,190
 
 
(490,788
)
 
1,622,740
 
 
(491,567
)
OTTI PLMBS
 
 
 
 
 
289,781
 
 
(209,523
)
 
289,781
 
 
(209,523
)
Subtotal
 
1,102,523
 
 
(3,215
)
 
2,025,699
 
 
(701,856
)
 
3,128,222
 
 
(705,071
)
Total
 
$
1,102,742
 
 
$
(3,215
)
 
$
2,026,069
 
 
$
(701,858
)
 
$
3,128,811
 
 
$
(705,073
)
 
As of September 30, 2010, 86 of our HTM investment positions had gross unrealized losses totaling $307.8 million, with the total estimated fair value of these positions approximating 89.0% of their carrying value. Of these 86 positions, 68 positions had gross unrealized losses for at least 12 months. As of December 31, 2009, 134 of our investment positions had gross unrealized losses totaling $705.1 million, with the total estimated fair value of these positions approximating 86.5% of their carrying value. Of these 134 positions, 118 positions had gross unrealized losses for at least 12 months.
 
Redemption Terms
 
The amortized cost basis, carrying value, and fair value, as applicable, of HTM securities by contractual maturity as of September 30, 2010 and December 31, 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, 2010
 
As of December 31, 2009
Year of Maturity
 
Amortized
Cost Basis
 
Carrying
Value
 
Fair Value
 
Amortized
Cost Basis
 
Carrying
Value
 
Fair Value
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
1,679,122
 
 
$
1,679,122
 
 
$
1,679,403
 
 
$
3,110,275
 
 
$
3,110,275
 
 
$
3,113,427
 
Due after one year through five years
 
389,141
 
 
389,141
 
 
434,244
 
 
405,104
 
 
405,104
 
 
450,565
 
Due after five years through 10 years
 
12,357
 
 
12,357
 
 
12,459
 
 
13,221
 
 
13,221
 
 
13,364
 
Due after 10 years
 
21,771
 
 
21,771
 
 
22,003
 
 
23,594
 
 
23,594
 
 
23,840
 
Subtotal
 
2,102,391
 
 
2,102,391
 
 
2,148,109
 
 
3,552,194
 
 
3,552,194
 
 
3,601,196
 
MBS
 
5,094,672
 
 
4,953,803
 
 
4,845,345
 
 
5,946,004
 
 
5,736,712
 
 
5,283,694
 
Total
 
$
7,197,063
 
 
$
7,056,194
 
 
$
6,993,454
 
 
$
9,498,198
 
 
$
9,288,906
 
 
$
8,884,890
 

14


 
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, foreclosure, or 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 forms of credit protection, including subordination, excess spread, over-collateralization, and, to an immaterial extent, insurance wraps.
 
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.
 
Assessment for Other-than-Temporary Impairment
 
We evaluate each of our investments in an unrealized loss position for OTTI on a quarterly basis. As part of this process, we consider our intent to sell each such investment 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 believe that for agency residential MBS, the strength of the issuers' guarantees through direct obligations or U.S. government support is sufficient to protect us from credit 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 amortized cost basis of these securities and have thus concluded that our gross unrealized losses on agency residential MBS are temporary as of September 30, 2010.
 
The FHLBanks' OTTI Governance Committee, of which all 12 FHLBanks are members, is responsible 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 of PLMBS. As part of the Seattle Bank's quarterly OTTI evaluation, we review and approve the key modeling assumptions provided by the FHLBanks' OTTI Governance Committee.
 
Beginning with the second quarter of 2009, we have performed OTTI cash flow analyses on our entire PLMBS portfolio using the FHLBanks' common platform and approved assumptions, rather than screening for at-risk securities. Five of our PLMBS could not be analyzed using the standard process. Three of these securities (with a total unpaid principal balance of $17.7 million as of September 30, 2010) lacked the loan-level collateral data necessary to apply the FHLBanks' common platform and were assessed using alternative procedures, including cash flow modeling for similar loan pools or using a proxy for the missing loan-level data results, and the two additional securities (with a total unpaid principal balance of $3.1 million as of September 30, 2010) were evaluated qualitatively because available information was not sufficient for detailed cash flow testing.
 

15


Our evaluation includes estimating cash flows that we are likely to collect, taking into account loan-level characteristics and structure of each security and certain modeling assumptions determined by the FHLBanks' OTTI Governance Committee. In performing a detailed cash flow analysis, we identify our best estimate of the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security's effective yield) that is less than the amortized cost basis of a security (i.e., a credit loss exists), an OTTI is considered to have occurred. For our variable interest-rate PLMBS, we use a spread-adjusted forward interest-rate curve to project the future estimated cash flows. We then use the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. We update our estimate of future estimated cash flows on a quarterly basis.
 
We perform our OTTI cash flow analyses using third-party models that consider individual 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 modeling input is the forecast of future housing price changes for the relevant states and certain core-based statistical areas, which are based upon an assessment of the relevant housing markets. The housing price forecast assumes current-to-trough home price declines ranging from 0% to 10% over the next three-to-nine months beginning July 1, 2010; thereafter, home prices are projected to remain flat for one year. Annual increases in years two through six are as follows: 1%, 3%, 4%, 5%, and 6%, with 4% increases in each subsequent year.
 
We also use a third-party model to allocate our month-by-month projected loan-level cash flows to the various security classes in each securitization structure in accordance with its prescribed cash flow and loss allocation rules. 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.
 
In accordance with Federal Housing Finance Agency (Finance Agency) guidance, since the second quarter of 2009, we have engaged the Federal Home Loan Bank of Indianapolis (Indianapolis Bank) to perform the cash flow analyses for our applicable PLMBS, utilizing the key modeling assumptions approved by the FHLBanks' OTTI Governance Committee. In addition, the FHLBank of San Francisco (San Francisco Bank) has provided the expected cash flows for all PLMBS that are owned by two or more FHLBanks and with fair values below amortized cost. We based our OTTI evaluations for the third quarter of 2010 on these approved assumptions and the cash flow analyses provided by the Indianapolis and San Francisco Banks. In addition, we independently verified the cash flows modeled by the Indianapolis and San Francisco Banks, employing the specified risk-modeling software, loan data source information, and key modeling assumptions approved by the FHLBanks' OTTI Governance Committee.
 
Because of increased actual and forecasted credit deterioration as of September 30, 2010, additional OTTI credit losses were recorded in the third quarter of 2010 on 18 securities identified as OTTI in prior reporting periods. We also recognized an OTTI charge on one additional PLMBS security in the third quarter of 2010. We do not intend to sell these securities, and it is not more likely than not that we will be required to sell them before the anticipated recovery of their respective amortized cost bases. The following tables summarize the OTTI charges recorded on our PLMBS, by period of initial OTTI, for the three and nine months ended September 30, 2010 and 2009.
 
 
 
For the Three Months Ended
For the Nine Months Ended
 
 
September 30, 2010
 
September 30, 2010
OTTI PLMBS
 
Credit Losses
 
Net Non-Credit Losses
 
Total OTTI Losses
 
Credit Losses
 
Net Non-Credit Losses
 
Total OTTI Losses
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
PLMBS newly identified as OTTI in the period noted
 
$
92
 
 
$
62,184
 
 
$
62,276
 
 
$
5,643
 
 
$
191,895
 
 
$
197,538
 
PLMBS identified as OTTI in prior periods
 
15,528
 
 
(15,528
)
 
 
 
76,423
 
 
(66,449
)
 
9,974
 
Total
 
$
15,620
 
 
$
46,656
 
 
$
62,276
 
 
$
82,066
 
 
$
125,446
 
 
$
207,512
 

16


 
 
For the Three Months Ended
For the Nine Months Ended
 
 
September 30, 2009
 
September 30, 2009
OTTI PLMBS
 
Credit Losses
 
Net Non-Credit Losses
 
Total OTTI Losses
 
Credit Losses
 
Net Non-Credit Losses
 
Total OTTI Losses
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
PLMBS newly identified as OTTI in the period noted
 
$
2,511
 
 
$
79,920
 
 
$
82,431
 
 
$
171,561
 
 
$
989,954
 
 
$
1,161,515
 
PLMBS identified as OTTI in prior periods
 
127,589
 
 
(125,041
)
 
2,548
 
 
91,958
 
 
(13,300
)
 
78,658
 
Total
 
$
130,100
 
 
$
(45,121
)
 
$
84,979
 
 
$
263,519
 
 
$
976,654
 
 
$
1,240,173
 
 
Credit-related OTTI charges are recorded in current-period earnings on the statement of operations, and non-credit losses are recorded on the statement of condition within AOCL. Certain of our current-period credit losses were related to previously other-than-temporarily impaired securities where the carrying value was less than fair value. In these instances, such losses were reclassified out of AOCL and charged to earnings. AOCL was also impacted by non-credit losses on newly other-than-temporarily impaired securities, transfers of certain OTTI HTM securities to AFS, changes in the fair value of AFS securities, and non-credit OTTI accretion on HTM securities. AOCL decreased by $138.5 million for the nine months ended September 30, 2010 and increased by $992.6 million for the same period in 2009. See Note 9 for a tabular presentation of AOCL for the nine months ended September 30, 2010 and 2009.
 
For those securities for which an OTTI was determined to have occurred during the three months ended September 30, 2010, the following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings during this period, as well as the related current credit enhancement. The calculated averages represent the dollar-weighted averages for all PLMBS in each category shown.
 
 
 
Significant Inputs Used to Measure Credit Loss
for the Three Months Ended September 30, 2010
 
 
 
 
 
 
Cumulative Voluntary
Prepayment Rates *
 
Cumulative Default Rates *