Investment Services
A Dialogue on OTTI
The accounting term "other-than-temporary-impairment," or OTTI, certainly has been in the news a lot lately. But just how much do you know about this controversial and often confusing subject?Recently, Overland Studios recorded a conversation explaining OTTI with Dr. Harold M. Sollenberger, Accounting Professor, Michigan State University, and Michael J. Sacher, CPA, Sacher Consulting.
Click here to listen in on their 14-minute presentation.
January 2009 Financials
WesCorp reported a net loss for January 2009 of $224,000 due to the affect of the unfavorable shape of the yield curve. After subsequent paid-in-capital payments to members, retained earnings decreased by $506,000 for the month. The adverse affect of the yield curve was partially offset by favorable variances in expense control and fee income.WesCorp is in the process of revising its 2009 Plan for the Board of Directors, which will focus on tightened expense control across all levels of the organization.
LIQUIDITY
WesCorp has proactively positioned itself to maintain sufficient liquidity during the market uncertainty. Member support continues to be the primary driver behind WesCorp’s liquidity. Average member shares increased by nearly $650 million in January versus December 2008. Additional external funding sources include the Federal Home Loan Bank, Global Commercial Paper/Medium Term Note programs, various federal funds lines, and access to the Federal Reserve Bank Discount Window.
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.
Additionally, in accordance with the NCUA and its recent series of actions designed to enhance and support the corporate credit union system, WesCorp has agreed to participate in the voluntary guarantee program. Effective immediately, the NCUSIF has extended its guarantee of member shares in WesCorp through December 31, 2010. (This guarantee is in addition to the temporary corporate credit union liquidity guarantee program announced on October 16, 2008.)
CAPITAL
WesCorp’s capital totaled slightly less than $2 billion at January 31, which equates to a regulatory total capital ratio of 6.94 percent. Retained earnings was $803 million, or 2.87 percent retained earnings ratio at the end of January.
In addition, Base NEV decreased by $318 million in January to negative $2.2 billion primarily due to further price deterioration in the securities portfolio.
SECURITY PORTFOLIO
The month of January saw aggregate unrealized losses in WesCorp’s securities portfolio and hedge positions increase to $2.6 billion from $2.5 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 ongoing illiquidity and credit conditions, and do not accurately reflect the underlying credit quality and expected performance of WesCorp’s holdings.
The securities portfolio continues to perform as expected. Additionally, WesCorp maintains the ability and intent to hold its securities until a price recovery occurs or until maturity. What is not reflected in the financial statements is a determination of OTTI—if any—which may exist at year end 2008. The detailed analyses performed on the securities portfolio are complex and utilize data and performance trends that were not immediately available after year-end. WesCorp is actively working toward completing these analyses. As soon as they are completed, WesCorp will make a determination of whether OTTI exists, and that determination will be further validated by its external auditing firm. If it is determined that OTTI exists, there will be a subsequent re-posting of the December financials.
The financials presented also do not reflect any impairment in equity investments that WesCorp has in U.S. Central. An assessment of potential impairment is being performed and such impairment amounts may need to be recognized as a result of U.S. Central’s announcement concerning its earnings. This may also result in an adjustment to the December 2008 financials.
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.
You can find an online copy of WesCorp's financial statement for January here.
For more information, call a WesCorp account executive today at (800) 442-4366, ext. 6307.