WASHINGTON — Trapped for nearly a year in limbo, the Federal Home Loan Bank of Seattle may finally be seeing a way forward.
Under a consent order signed late Monday with the Federal Housing Finance Agency, the bank will be allowed to repurchase member stock and potentially pay dividends in mid-2011 provided it hits certain financial targets and addresses regulatory concerns about its oversight, management, compensation practices and capital adequacy.
Although that sounds like a tall order, observers said it is still a good step for the bank, which has been under a regulatory cloud since November 2009 without any clear indication of when or how it would be lifted.
"Given what they've been through, this is mildly positive," said Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s First Financial Capital Markets Corp. "It puts steps in place that allow them to buy back capital."
Still, it is clear the Seattle bank has plenty of work to do. Karen Shaw Petrou, managing director of Federal Financial Analytics, said that while the consent order is better than nothing, it shows the many challenges facing the bank.
"The best outcome would have been for the bank to be deemed adequately capitalized, not having a new order with a potential date for possible restoration of dividends and capital compliance," she said. The Finance Agency could have removed "the existing order and let them get about their business, but that's not what happened."
The order is part of a continuing struggle between the Seattle bank and its regulator — and has its roots in the bank's ill-fated decision to launch a program a decade ago to purchase mortgages from their members.
As losses from the program mounted in 2004, its regulator, which at that time was the Federal Housing Finance Board, hit it with a written agreement that banned stock redemptions for five years, curtailed dividends and required the development of a capital plan.
Although the Finance Board lifted the written agreement in 2007, it continued to bar the bank from repurchasing any member stock before the five-year waiting period was up. By last year, however, the bank was taking massive losses related to other-than-temporary impairment charges levied against its portfolio of private-label mortgage-backed securities. Although it said it met its capital requirements at the time, the Finance Agency had continued concerns and deemed it "undercapitalized" while prohibiting it from repurchasing stock or paying dividends.
The agency ordered the bank to draft a capital restoration plan, but they had trouble reaching an agreement. The Finance Agency rejected the bank's first plan in August 2009. A second plan was deemed complete, but not approved, in February 2010 as the Finance Agency asked the bank to supplement it with a business strategy plan, including how the Seattle Home Loan Bank could improve its advance business.
According to sources familiar with the situation, the bank's chief executive, Richard Riccobono, had sharp disagreements with the Finance Agency. Riccobono, the former No. 2 official at the Office of Thrift Supervision, argued the Finance Agency was making unrealistic demands. The bank announced late Monday that Riccobono had resigned as CEO, but did not offer a reason for his departure. It appointed Steven R. Horton, the bank's senior vice president and chief operating officer, as acting president and CEO.
The consent order provides some form of resolution to the issue. Under the consent order, the Finance Agency accepts the bank's capital plan but continues to consider it undercapitalized until it meets certain financial metrics.
If it meets and maintains those metrics, it will be able to repurchase capital stock after it files its 2011 second-quarter report. The bank must also deal with regulatory concerns about its oversight, management, asset improvement program, capital adequacy, compensation practices and retained earnings.
"The Seattle Bank regards this agreement with the Finance Agency as a positive step toward achieving our goals of returning to repurchasing and redeeming capital stock and to paying dividends," William V. Humphreys, the bank's chairman, said in the press release.