Seattle FHLB Breaks Into TheBlack

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SEATTLE - (07/26/06) -- The financially ailing Federal HomeLoan Bank of Seattle reported Tuesday that it shed its red ink inthe second quarter, with earnings of $2.5 million for the period,compared to a loss of $15.7 million for the second quarter lastyear. However, the Seattle Bank, which has struggled with hugelosses on its hedging portfolio, said net interest income remainsunder pressure, with net interest income for the second quarterdown 36% to $14 million, compared to the second quarter last year,and by 30% from this year's first quarter. The reduction in netinterest income over the past year was caused by the Bank'sinvestments in low-yielding consolidated obligations of other HomeLoan Banks that were funded with a mix of long-term non-callabledebt. The flattening yield curve caused interest rates on theshort-term bullet debt that funded these investments to re-price ata cost higher than the yield on the investments. Because of itsfinancial difficulties, the Seattle Bank entered into a raresupervisory agreement last year with its regulator, the FederalHousing Finance Board, which entails elimination of its secondarymortgage market program, called Mortgage Purchase Program, and thesuspension of all dividends to its 370 members (including 79 creditunions) for three years.

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