Investment Services
Two NCUA Programs Seek to Add Liquidity, Mortgage Assistance
WesCorp is an active participant in two new initiatives for Central Liquidity Facility (CLF) extensions of credit to credit unions for system liquidity needs. The NCUA announced the two initiatives on December 9, 2008. The two initiatives are known as the Credit Union System Investment Program (CU SIP), and the Credit Union Homeowners Affordability Relief Program (CU HARP). Funds for both programs come from the Federal Financing Bank (FFB), which is operated by the Treasury Department.CU SIP Program Highlights
The CU SIP program provides a new earnings opportunity for credit unions. The program is designed such that a credit union receives a loan from the CLF and simultaneously reinvests the proceeds in a CU SIP Note issued by a corporate credit union and guaranteed by the credit union share insurance fund. The program is expected to approach $8 billion or more in the initial issuance.
The credit union earns a guaranteed 25 basis point spread no matter the level of interest rates. The CLF loan and the CU SIP Note have matched terms of one year. The CLF loan is 200 percent collateralized, the first 100 percent being the CU SIP note and the second 100 percent coming from other available collateral. The minimum participation amount is $1 million, and the credit union must maintain a minimum net-worth-ratio of six percent. The NCUA intends to hold six monthly issuances from January through June 2009.
CU HARP Program Highlights
The CU HARP is a two-year, $2 billion program designed to assist homeowners facing delinquency, default or foreclosure on their mortgages in the face of diminished home values. The program had a one-time application deadline of December 29, 2008. The credit union receives a loan from the CLF and simultaneously reinvests the proceeds in a CU HARP note issued by a corporate credit union and guaranteed by the credit union share insurance fund. The CLF loan is for an initial period of one year while the HARP Note is for two years; the CLF intends to rollover the loan but has not guaranteed this due to limitations in its authority from the Treasury. The CLF loan is 200 percent collateralized, the first 100 percent being the CU HARP note and the second 100 percent coming from other available collateral.
Unlike the CU SIP program, the CU HARP program does not pay a spread between the borrowing and note rates. Instead, credit unions can earn “bonus interest” of up to one percent per year on the HARP note. They use this as a 50 percent match to offset their cost of lost interest from modifying loans. Example: The CU borrows and invests $10 million. It can earn up to $100K each year, or $200K in total, if it demonstrates at least $400,000 in realized borrower interest savings on modified loans.
The “bonus interest” matching is limited to eligible loans. An eligible loan must have been on the books of the credit union as of December 9, 2008 and must be modified by the credit union before June 30, 2009. The loan must be at least 60 days delinquent or the credit union must document borrower distress due to job loss or distress. There are significant other eligibility criteria.
Credit union eligibility for CU HARP was limited by the NCUA to credit unions with at least $1 million in delinquent residential first mortgage loans as of the third-quarter 2008 call report. The minimum participation level is $1 million, and the credit union must maintain a minimum net-worth-ratio of six percent.
Additional information on the CU SIP and CU HARP programs is available on our Web site. We encourage you to contact your relationship manager or WesCorp’s Funding Desk at (800) 442-4366, ext 6307 to learn more about each plan.
Third Quarter 2008 Portfolio Update Now Available
Click here for an in-depth look at WesCorp's Third Quarter 2008 Investment Portfolio.
November 2008 Financials
WesCorp’s net income for the eleven months of 2008 totaled $60.0 million. For the month ended November 30, an overall increase to retained earnings was recorded amounting to $10.9 million, which represents the strongest increase to retained earnings ever recorded by WesCorp in a single month. This increase to retained earnings was comprised of net interest income of $17.6 million and other operating income of $2.4 million offset by other operating expenses of $8.6 million and PIC dividends of $.4 million. This was $6.9 million above budgeted levels.On a year-to-date basis, WesCorp’s increase to retained earnings is $53.2 million, which is ahead of budgeted amounts by $35.3 million. Net interest income continues to show a positive trend, and we expect the fourth quarter to be our strongest quarter for earnings in 2008. Average member balances were down $308.8 million from October to an average $17.7 billion in November.
MARKETS REMAIN IN TURMOIL
Despite continued efforts by the Federal Reserve and the Treasury Department to restore a sense of normalcy to the markets, investor confidence remained fragile throughout the month of November. With continuing news of major problems in mortgage loans, the viability of FNMA and FHLMC came under severe scrutiny. Their stock dropped precipitously, causing the government to implement a rushed support plan. Despite the passage of this support plan, pressure continued and, although both agencies were able to issue debt, their spreads to Treasury widened. As concern grew for the ability of consumers to service their debt, it was reported that more than 66 percent of banks tightened credit availability on all credit products including mortgages and credit cards.
All the adverse news, coupled with continued forced liquidations by leverage funds, continued to make markets nervous, prompting them to react negatively to any bad news that surfaced. Given these conditions, the month of November saw aggregate unrealized losses in WesCorp’s securities portfolio and hedge positions increase to $2.4 billion from $1.7 billion at the end of October.
We believe the depressed fair values of these investments are largely attributable to the dislocation in the securities market caused by the current illiquidity and credit conditions, and do not accurately reflect the underlying credit quality and likely performance of our holdings. Although the majority of WesCorp’s portfolio continues to perform well and retain its high ratings, the overall mentality that has been paralyzing the markets for months continues to exert a negative impact. Since WesCorp has the ability and intent to hold those investments most impacted until a price recovery occurs or until maturity, those investments are not considered by management to be other-than-temporarily impaired (OTTI). Of the $2.4 billion of unrealized losses contained in other comprehensive income at November 30, $633 million of that amount was related to $9.3 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 well as the lack of an active market in these sectors.
SECURITY HOLDINGS PERFORMANCE
WesCorp continues to perform extensive cash flow analysis on the majority of our holdings on a monthly basis using some of the most comprehensive and sophisticated cash flow modeling available.
Additional impairment testing is carried out on a quarterly basis. Our Investment Credit department, which reports directly to the Supervisory Committee, also monitors and evaluates the credit performance of each security on an ongoing basis. In addition, WesCorp has been extremely proactive in seeking external validation of our own due diligence. As the credit crisis began to accelerate last Fall, we utilized both major Wall Street dealers and a company called RiskSpan to perform independent analysis on our most credit-sensitive holdings.
RiskSpan is a provider of leading-edge analytics to sophisticated investors, and its models provide highly differentiated analysis based on individual loan characteristics. Modeling factors are based on empirical performance data and take into account individual borrower characteristics, regional home price variations and the impact of mortgage insurance. RiskSpan has provided WesCorp with both initial evaluations and ongoing monthly analysis on more than 139 securities representing $3.67 billion of WesCorp’s total investment portfolio of $21.48 billion.
As the housing market and economic expectations continue to deteriorate, the modeling assumptions have been adjusted accordingly. While the most recent analysis performed by RiskSpan on our collateralized debt obligations (CDO) holdings still has them returning principal and interest in full, the credit support has been eroded. As a result, we may record other-than-temporary impairment (OTTI) related to certain of our CDO holdings at some point in the future.
Performance analysis of a single CDO is extremely time consuming due to the depth of detail we require. Within a single CDO we hold between 80 and 100 Residential Mortgage Backed Securities (RMBS) and within each RMBS there are typically 10,000 – 12,000 individual mortgages used as collateral for the security. WesCorp analysis evaluates the payment history and other factors for each mortgage.
We own a total of ten CDO securities that total $544 million, just slightly more than two percent of our entire portfolio. As the current market dislocation drags on, we may find it necessary to recognize the potential for future losses in certain CDOs we have been monitoring. In the event WesCorp does take an OTTI charge, accounting rules require we write down the value of the CDO to current market value even when the anticipated loss is significantly lower.
LEVEL 3 PRICING
WesCorp moved to Level 3 pricing on certain sectors of our portfolio at the end of March, in accordance with SFAS 157. The Level 3 pricing schema was discussed with NCUA and WesCorp’s external auditors, and 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 appear to be the predominant driver of prices in today’s markets.
During September, we engaged an outside consulting firm, Protiviti, to perform a review of the methodology and process used to determine Level 3 valuations for WesCorp’s portfolio, and based upon the draft report received from Protiviti, the process was found to be reasonable and could be independently validated.
CAPITAL
WesCorp’s capital totaled slightly less than $2 billion at November 30, 2008, and is comprised of Member Capital Accounts, Permanent Capital and Reserves and Undivided Earnings. Member Capital Accounts (MCA) are the basic component of WesCorp membership and are adjusted twice a year (on May 31 and on November 30), based upon average member deposits held at WesCorp. The most recent adjustment was recorded on November 30 and resulted in a decline of approximately $83.8 million to MCA balances, based solely on the decreased average balances during the previous six months.
In addition, Base Net Economic Value (NEV) decreased by $2 billion in November to negative $2.2 billion. The value of the investment portfolio decreased by $1.6 billion ($708 million for available-for-sale securities and $887 million for held-to-maturity securities), and CMBS swaps decreased by $334 million.
LIQUIDITY
WesCorp’s primary liquidity comes from the ongoing support of our members. Additional external funding sources include Federal Home Loan Bank borrowing programs, Global Commercial Paper/Medium Term Note programs, access to the Federal Reserve Bank Discount Window, 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, 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.
EXTENSIVE EXPERTISE
At a time when all financial institutions find their investment portfolios saddled by market volatility, we at WesCorp continue to draw on our extensive experience and expertise. We consistently apply shock tests along with the most advanced analytics in managing our portfolio. Independent, third-party companies such as RiskSpan and the large Wall Street investment banks are also tapped to confirm our findings and conclusions. The trust you place in us at WesCorp requires no less dedication from our team of seasoned professionals.
You are the strength of WesCorp. The solidarity you show by your continued confidence, trust and support of us—your corporate credit union, our financial cooperative—will ultimately be seen as the defining measure of success for WesCorp and all our member credit unions in weathering the current market dislocation.
You can find an online copy of WesCorp's financial statement for November here.
For more information, call a WesCorp account executive today at (800) 442-4366, ext. 6307.