Corporates Report Double-Whammies
None of the five, among the first to release financials reflecting U.S. Central capital losses, had to dip into paid-in capital or member capital accounts to cover the losses.
Not yet, anyway. For some, the remaining margins are so thin that last month's positively revised U.S. Central loss estimates by the NCUA were a saving grace. And, the NCUA has said it anticipates additional losses on U.S. Central's mortgage-backed securities portfolio.
Southwest Corporate's May 2009 financial statements were down $127 million in depleted U.S. Central PIC and member capital shares, and an additional $190 million in other-than-temporary impairments on other investments, notably mortgage-backed securities.
That left the Plano, Texas-based corporate with $13.7 million in retained earnings, which means no requirement yet to deplete member capital accounts.
However, Southwest management warned in notes that accompanied the May financials that such a low retained earnings balance "represents a relatively small buffer to absorb additional investment losses before depletion of MCA would be necessary."
The corporate recorded a full U.S. Central PIC impairment, but only a 23% hit to MCS as per NCUA's direction. U.S. Central's final 2008 audit is expected July 10, which could alter the MCS impairment. Southwest said it will issue its own audited numbers three to four weeks after receiving U.S. Central's audited numbers.
Some of Southwest Corporate's securities write-downs were due to the inability of some struggling monoline insurers to pay claims. Syncora Guarantee and Financial Guaranty Insurance Company both resulted in OTTIs for Southwest in May. In step with other FGIC clients, Southwest placed a 70% reliance on FGIC for future interest and payment claims, even though the insurer is still paying both on time. The New York Insurance Department threatened to suspend claims payments for Syncora unless it improved its net worth.
Southwest Corporate also has placed reliance on FSA, Ambac, and MBIA. These three insurers are currently paying principal and interest claims, and the corporate said it currently believes that they will continue to make future claims. However, Southwest warned further deterioration of monoline insurers could result in additional OTTIs.
Even in a worse-case loss scenario, the Columbus, Ohio-based Corporate One Federal Credit Union will not impair paid-in capital or membership capital shares, President/CEO Lee Butke told members July 1. The $4 billion corporate wrote off nearly $40 million in U.S. Central capital investments as of May 31, representing 100% of PIC and 23% of MCS. Corporate One also recorded a $17.1 million OTTI on its own investment portfolio related to 30 mortgage-backed securities.
Like Southwest, some of the investment losses were due to monoline insurers, namely FGIC. Corporate One also assumed a 70% reliance on FGIC. In addition, Corporate One has exposure to Syncora, but did not take OTTIs on those bonds because "the underlying credit enhancement within the securities is sufficient," Butke said.
Despite the losses, Corporate One still has $78 million remaining in reserves and undivided earnings, as well as $25.7 million in PIC, $116.5 million in MCS and a 5.52% regulatory capital ratio as of May 31.
Corporate One still has $34 million worth of MCS left at U.S. Central, and like Southwest, anticipates it may have to write the investment down further when the seized corporate releases audited 2008 financial statements.
Corporate One must also continue to manage losses related to its own portfolio. It reported unrealized losses worth $334 million as of May 31 on its $2.3 billion securities portfolio.
The $3.2 billion Southeast Corporate FCU took its U.S. Central lumps in April, depleting 100% of PIC, nearly $70 million, and another $14 million in U.S. Central MCS that represents 23% impairment. Despite a negative $4.6 million undivided earnings line item as of April 30, $23 million is available in the Tallahassee, Fla.-based corporate's reserves, and $20 million in PIC and $90 million in MCS remains untouched.
The Westbrook, Maine-based TriCorp Federal Credit Union also wrote down its U.S. Central capital impairments in April, extinguishing $16 million worth of undivided earnings and reserves. The losses leave just $5.5 million in reserves, keeping the $811 million corporate's $29 million in MCS safe for now.
The $329 million Treasure State Corporate recorded U.S. Central-related losses in March and also narrowly avoided dipping into MCS. Treasure State wrote almost $7 million in U.S. Central PIC and MCS, representing a 100% impairment, which left $554,136 in retained earnings and 100% of its $10.85 million in membership capital accounts intact.