COLLATERAL VERIFICATION PROCESS

The Seattle Bank is required by its regulator to establish procedures for verifying the existence of collateral securing advances and to regularly verify the collateral. The Seattle Bank's collateral verification procedures and standards are structured to address the wide variety of credit and collateral arrangements that our membership requires. We also recognize that our membership consists of a broad range of institutions, which can be supported best with programs that consider the specific credit profile of the individual member.

Selection of Members for Collateral Verification:
In determining if a member will be asked to complete a collateral verification, the Seattle Bank considers a number of factors, including: the amount of credit that it has extended to the member, the extent of reliance on pledged loans, the member's financial condition, the amount of credit exposure relative to the member's total assets, and other factors that are specific to each member.

When identifying candidates for a collateral verification, the Seattle Bank will consider factors such as:

• The Seattle Bank's credit exposure to the member, excluding credit exposure that is covered by marketable securities or certificates of deposit held by the Seattle Bank. Members with high borrowings, including letters of credit and other commitments that exceed $100 million, will be asked to complete collateral verifications more frequently, regardless of their financial condition or collateral coverage.
  
  
• The excess collateral coverage provided by pledged loans. High reliance on loans that are pledged as eligible collateral under a blanket pledge arrangement increases the probability that the member will be asked to complete a collateral verification.
  
  
• Member's financial condition. The Credit Department monitors the financial condition and credit-risk considerations of all members. Generally, a member that is in strong financial condition will be asked to complete a collateral verification less frequently than a member that is in weak financial condition.
  
  
• Support from assets covered by the member's blanket pledge that are not used for purposes of calculating the member's borrowing capacity.
  
  
• Collateral value of pledged loans obtained from call reports or collateral certifications. This collateral verification program is applicable to members that are not required to deliver loan documents to the Seattle Bank. Collateral verification is used to determine the percentage of the member's total loan portfolio, as reported to its regulator, that is eligible as collateral for the Seattle Bank.
  

Some of the other factors that the Seattle Bank may consider when determining if a collateral verification is appropriate include: changes in the mix of loans pledged as collateral, increased credit risk associated with specific types of loans, changes in the member's organizational structure, and economic decline or an increase in credit risk factors in the member's marketplace.