The $7.4 billion Members United Corporate FCU found a way around accounting rules that prevent investors from recovering bond losses once they are written down as OTTI: sell it rather than hold it to maturity.
According to August financial reports posted online Sept. 22, Members United recorded a $7.5 million profit on a Syncora Guaranty-insured bond that had been previously been written down to a book value of zero after the monoline insurer had suspended claims payments earlier this year. When SGI announced it would resume making claims payments in July, the value of the bond jumped from zero to $7.5 million.
"SGI's financial condition remains weak and uncertain, therefore, a decision was made to accept the offer and lock in $7.5 million of value," said the corporate.
Total net income for August was $11.2 million, which includes core earnings of $1.8 million, $1.7 million of cash recoveries on OTTI bonds and $0.2 million of other favorable investment and derivative accounting adjustments.
August's gains resulted in positive year-to-date net income of $63,000. A $2.6 million year-to-date operating expense reduction from same period 2009 also contributed significantly to net income, the corporate said. In July financial reports, Members United said it expects to realize favorable net interest income relative to budget for the remainder of 2010, thanks to improving OTTI loss projections.
Retained earnings increased to $15.1 million as of Aug. 31, up from $3.8 million as of July 31, boosting the corporate's retained earnings ratio further into the black, currently at 0.18%. Total net worth increased to 0.36%, up 14 basis points from the previous month.
Members United's assets dropped significantly in August, primarily due to a nearly 50% reduction in cash and cash equivalents. As of Aug. 31, the corporate held $1.47 billion worth of cash, compared to $2.9 billion as of July 31.