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U.S. Central 2008 financial statement released

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WASHINGTON (9/14/09)—When assessing the December 2008 U.S. Central FCU financial statement released Friday, interested parties should remember that the reporting was completed under a since revised accounting standard that forced the corporate credit union to record a larger other than temporarily impairment (OTTI) charge than current accounting rules require, the Credit Union National Association (CUNA) said upon the release of the statement. U.S. Central's auditors report that as of Dec. 31, 2008, U.S. Central incurred an OTTI charge of $4.9 billion on its investments. Under the old rule, whenever a security faced an expected credit loss, an OTTI charge had to be taken, not on the amount of the expected credit loss, but on the difference between the market or “fair” value of the security and its book value. As of December 2008, the expected credit losses on the portfolio were $1.2 billion. Thus, the OTTI charge of $4.9 billion, representing the difference between fair and book value, exceeded the expected credit losses by $3.7 billion. “Following criticism from many members of Congress and financial institutions that the OTTI standard was exacerbating the financial crisis, the Financial Accounting Standards Board (FAS B) changed the OTTI rule (FSP 115-2) so that going forward, in similar situations, only the expected credit loss would have to be expensed.” said CUNA Chief Economist Bill Hampel. In U.S. Central’s case, the $3.7 billion of market loss would only be recorded as an unrealized loss, netted against capital, and adjusted in future periods as the market value of the securities changed. “Unfortunately, the rule was not made retroactive,” Hampel said. Information issued by the National Credit Union Administration when it released the U.S. Central financial statement indicated that as a result of FASB adopting FSP-115-2 this April, U.S. Central reclassified $3.7 billion of non-credit losses included in the $4.9 billion of 2008 OTTI charges from retained earnings to accumulated other comprehensive loss (AOCL), a component of equity. “What we’ve learned from US Central’s 2008 audited financial statements is more or less in line with expectations. Credit losses of $1.2 billion at US Central over the next several years might even be less than what NCUA had in mind when it estimated the cost of guaranteeing credit union deposits in corporates at $5.9 billion. "Of course, no one knows what those credit losses will end up being, but if they are indeed in the neighborhood of $1.2 billion, and it US Central holds on to the securities, the $3.7 billion of so-called 'market loss' will not be incurred," Hampel said. For an NCUA Frequently Asked Questions (FAQ) regarding the U.S. Central financial statement, use the resource link below.