Investment Services
December 2008 Financials
Through year-end 2008, WesCorp continued to record strong earnings that exceed planned levels. WesCorp’s net income for the year of 2008 totaled $57.8 million.On a year-to-date basis, WesCorp’s increase to retained earnings is $50.6 million, which is well ahead of budgeted amounts.
For the month ended December 31, retained earnings declined by $2.6 million. Several factors contributed to the overall decline for the month, which include lower than expected net spreads for the month, guarantee fees of nearly $800 thousand incurred as a result of participation in the NCUA guaranteed borrowing program. Additionally, the Federal Home Loan Bank of San Francisco unexpectedly announced that they suspended dividend payments effective the fourth quarter of 2008, which resulted in a reversal of accrued dividend income of $1.4 million in December.
What is not yet reflected in December’s financials statements is the effect of other-than temporary impairment (OTTI)—if any—exists at year end. The detailed analyses that are performed on our collateralized debt obligation (CDO) holdings are complex and utilize data and performance trends that are not published until later in the first quarter of 2009. Further, additional analysis is pending on the entire portfolio.
As soon as these analyses have been completed, WesCorp will make a determination of whether OTTI exists, and that determination will be further validated by WesCorp’s external auditing firm. At that time, there will be a subsequent posting of the December financials. Until the analysis is completed we are unable to estimate what WesCorp’s potential exposure to OTTI might be.
It should be noted, also, that the financials presented do not reflect any impairment that might need to be recognized as a result of US Central’s recent announcement concerning their earnings.
SECURITY PORTFOLIO
The month of December saw aggregate unrealized losses in WesCorp’s securities portfolio and hedge positions increase only slightly to $2.5 billion from $2.4 billion at the end of December.
The depressed fair values of these investments are largely attributable to the dislocation in the securities market caused by the ongoing illiquidity and credit conditions, and do not accurately reflect the underlying credit quality and expected performance of our holdings. WesCorp’s securities portfolio continues to perform well and the majority of holdings have retained their high ratings. As WesCorp has the ability and intent to hold its securities until a price recovery occurs or until maturity, those holdings are not considered by management to be other-than-temporarily impaired.
Of the $2.5 billion of unrealized losses contained in other comprehensive income at December 31, $612 million of that amount was related to $9.2 billion in held-to-maturity securities. These securities represent WesCorp’s entire holdings of mortgage securities backed by Alt-A collateral and the bulk of WesCorp’s CDO holdings. Both of these markets remain highly illiquid and this reclassification from available-for-sale to held-to-maturity (in March 2008) more accurately reflects WesCorp’s intent and ability to hold the securities to maturity.
As the housing market and economic expectations continue to deteriorate, modeling assumptions have been adjusted accordingly. While the most recent analysis performed by RiskSpan and by major Wall Street dealers on our CDO holdings still has them returning principal and interest in full, the credit support continues to decline.
To put this into perspective with relation to WesCorp’s entire balance sheet, we own a total of ten CDO securities that total $544 million, just slightly more than two percent of our entire portfolio.
LEVEL 3 PRICING
WesCorp moved to Level 3 pricing in 2008 on certain sectors of our portfolio. The Level 3 pricing schema is based on the actively traded ABX and CMBX indexes and on observable inputs for credit spreads based on Bloomberg Loss Coverage Ratios. Loss coverage ratios are widely used by investors to evaluate existing holdings and potential acquisitions. They are the predominant driver of prices in today’s markets.
CAPITAL
WesCorp’s capital totaled slightly less than $2 billion at December 31, 2008, and is comprised of Member Capital Accounts, Permanent Capital and Reserves and Undivided Earnings. In addition, Base Net Economic Value (NEV) increased by $271 million in December to negative $1.9 billion.
LIQUIDITY
Member support is the driving force behind WesCorp’s primary liquidity. Additional external funding sources include Federal Home Loan Bank borrowing programs, Global Commercial Paper/Medium Term Note programs, and access to the Federal Reserve Bank Discount Window, and an advised line from U.S. Central, repurchase agreements, and various federal funds lines.
In addition, to ensure that adequate liquidity is available to the credit union system, the NCUA announced on October 16, 2008, the creation of a guarantee program for new unsecured borrowings for corporate credit unions. This program, similar in nature to the program the FDIC launched for banks, will protect various forms of debt issued between October 16, 2008 and June 30, 2009. Any debt issued under this program will be insured by the NCUSIF until June 30, 2012.
WesCorp has proactively positioned ourselves to maintain sufficient liquidity during the market uncertainty. Our role is to be the “buffer” between our members and the market, so liquidity continues to be a number one priority.
You can find an online copy of WesCorp's financial statement for December here.
For more information, call a WesCorp account executive today at (800) 442-4366, ext. 6307.