WASHINGTON – Reeling from charges related to its mortgage holdings, the Federal Home Loan Bank of Seattle reported deep losses late Monday and became the first bank in the system to exhaust its cushion of retained earnings.

The Seattle Home Loan Bank remains positively capitalized with stock used to satisfy membership requirements and advances but the depletion of the retained earnings fund, which totaled $162.3 million on Sept. 30, leaves the bank with almost $1.8 billion in total capital. That is below the regulatory risk-based capital requirement, which means the Home Loan bank is barred from paying dividends to shareholders or repurchasing capital stock.

Less clear is whether the Seattle Home Loan Bank "broke the buck," which involves lowering the value of its par-value stock. The Home Loan bank's stock is redeemed in five years so the shares could theoretically regain value if they were damaged in the current climate. Such an occurrence would be a first in Home Loan Bank history and could have dire consequences for members of the Seattle bank.

The capital hit resulted from a dismal period for the Seattle Home Loan bank: losses totaled $241.2 million during the fourth quarter and $199.4 million for 2008.

Like other Home Loan banks, the Seattle bank was buried under other-than-temporary impairment charges levied on its holdings of private-label mortgage-backed securities. Such charges totaled $304.2 million in 2008 at the Seattle Home Loan bank, bringing the system's total charges to $1.8 billion for the year.

In a letter to members on Monday, Richard Riccobono, the Seattle bank's chief executive, blamed the losses on mark-to-market accounting and said actual losses on the MBS portfolio would be more in the range of $12 million over the life of the securities.

"The Seattle bank's financial results reflect the effects of mark-to-market accounting treatment," he wrote. "We are more than disappointed by these results, particularly in light of the significant gains we have made over the past several years."

That frustration was echoed by John von Seggern, the president of the Council of Federal Home Loan Banks.

"What you have is a case where the Federal Home Loan Bank of Seattle had strong core earnings but because of the accounting treatment on the mortgage-backed securities, it's forced them into a situation where they've had to write off nearly 30 times the economic loss," he said.

The Seattle Home Loan bank's capital levels have see-sawed in recent months. In January, the Home Loan bank said it expected to fall below its risk-based capital requirement as of Dec. 31. It later said it had a $149.7 million cushion on Jan. 31 but by Monday, it said capital was again below required levels as of Feb. 28.

Still, it remained in compliance with required leverage and capital-to-assets ratios.

The Seattle Home Loan bank also said advances were off for the year, declining nearly 19%, to $36.9 billion on Dec. 31. Net interest income, however, was higher, increasing 4.4%, to $178.6 million.

The Seattle Home Loan bank is the third Home Loan bank to report a loss for 2008, mostly due to OTTI charges. The Chicago Home Loan bank said last month it lost $119 million during the year and losses at the Boston Home Loan bank totaled $73.2 million.

Though final year-end financial results are not due to the Securities and Exchange Commission until March 31, the Atlanta Home Loan bank is now the only one in the system that has yet to announce fourth quarter and 2008 numbers.

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