Early Adoption of FASB Rules Ripples SW Corporate Losses Back to '08
The corporate said that because it had to record U.S. Central capital losses per NCUA instruction, it decided to also adopt FASB staff positions earlier than required, record impairment charges, recognize the impact of troubled monoline insurers and take an additional Lehman Bros. write-down.
Southwest Corporate Chief Financial Officer Melissa Wardell said she didn't have any communication with other corporates regarding the decisions to early adopt FASB rules. U.S. Central and WesCorp led the way in adopting the rules early, and other retail corporates have announced they've followed suit since.
For the month of April, the corporate turned a $9.8 million net profit. When the effects from investment losses and rule changes are figured in, however, Southwest was left with $1.3 billion in accumulated other comprehensive losses as of April 30.
The new FASB rules spurred adjustments to year-end 2008 financials, swelling Southwest's month-end report far beyond April numbers.
Included in the financial reports was a 2008 year-end adjustment that resulted in a $624 million net loss. Of that, $480 million were OTTIs due to losses on mortgage-backed securities, $127 million from U.S. Central-related losses and an additional $10 million write-down on Lehman Bros. corporate bonds, now valued at only 20%.
Because the revised 2008 numbers are still based on previous FASB positions, Southwest will reverse out $300 million in noncredit losses as of March 1. The end result will be a $180 million net write-down in mortgage-backed securities, leaving the investment portfolio in better shape than the year-end $480 OTTI suggests.
That being said, some of the write-downs were the result of investments backed by monoline insurer Syncora Guarantee, The New York Insurance Department announced it would suspend the insurer's claim payments, effective April 29, unless Syncora restored regulatory surplus by June 2. Southwest recorded OTTIs on securities backed by Syncora as a result.
Though it assured members that three other monoline insurers will continue to meet future obligations, Southwest also acknowledged recording OTTIs on investments backed by the New York-based Financial Guaranty Insurance Co., which represents about 22% of Southwest's insured investments.
"Southwest Corporate has placed a 70% reliance on FGIC for future interest and principal shortfalls," the corporate wrote in financial statement notes. "Even though FGIC is currently timely paying 100% of all principal and interest claims, all three rating agencies have withdrawn external ratings for FGIC."
Remaining insurers FSA, Ambac and MBIA are also currently paying principal and interest claims timely, and Southwest said it currently believes they will continue to do so. However, the corporate cautioned members that further deterioration among insurers could result in additional OTTIs.
As of April 30, Southwest reported a 4.08% capital ratio, below the NCUA's minimum of 5%. However, per temporary NCUA regulations, Southwest reports its November 2008 capital ratio, which was 6.46%.
Southwest said it won't complete its year-end audit until U.S. Central releases its own audited 2008 financial statements, which are due in mid-June.