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March 31, 2009 Financials and OTTI Estimate
As of March 31, 2009, WesCorp posted a credit loss of $5,566,184,000 related to its securities portfolio. Of that, $390,516,000 came from recognizing credit losses in the CDO positions. The $5,175,668,000 remainder came from the rest of the securities portfolio, mostly from the Alt-A and particularly the Pay-Option Arm collateral portions. This amount represents an unaudited estimate of future credit losses and is considered to be an other-than-temporary impairment (OTTI) in accordance with accounting guidelines. Additional unrealized losses related to the securities portfolio, recorded as of March 31, 2009, were $6,034,336,000.
WesCorp estimated these future credit losses by comparing its own internal analysis with the analysis of third-party provider Clayton IPS, LLC, and choosing the more conservative of the two. In total, 782 separate securities were analyzed and compared, and once our internal estimates were vetted, almost all of the OTTI numbers resulted from the Clayton estimates for each security.
WesCorp is operating with a Prior Undivided Earnings Deficit of $3,745,155,078, guaranteed by the National Credit Union Share Insurance Fund (NCUSIF). The NCUSIF is the federal fund created by Congress in 1970 to insure member's deposits in federally insured credit unions. The insurance limit was temporarily increased from $100,000 to $250,000 per individual depositor on October 3, 2008. Administered by the National Credit Union Administration, the NCUSIF is backed by the "full faith and credit" of the U.S. Government. Member deposits are also fully guaranteed, as WesCorp is participating in the corporate credit union share guarantee program, the details of which are outlined at the NCUA's web site.
Conservatorship
On March 20, 2009, in accordance with the Federal Credit Union Act, the National Credit
Union Administration Board (the NCUA board) placed WesCorp into conservatorship
and appointed itself as conservator. The NCUA board, in its role as conservator, has
overall management authority over WesCorp's business, and has subsequently
delegated the authority to conduct day-to-day operations to the CEO and management of
WesCorp, so that WesCorp may continue to operate in the ordinary course of business.
Basis of Presentation
In an effort to release March financial information as soon as possible, WesCorp has
recorded its estimates of other-than-temporary impairment as of March 31, 2009 prior to
the completion of its December 31, 2008 audited financial statements. This required that
all of the impact of other-than-temporary impairment be recorded through the income
statement during March 31, 2009, even though the majority of the other-than-temporary
impairment expense is attributable to the period ending December 31, 2008. As a result,
March financial statements are not presented in accordance with generally accepted
accounting principles due to the fact that net losses are materially overstated in March
2009 for amounts that should be recorded as of December 2008 and adjustments to
interest income on securities that are impaired as of December 31, 2008. Once the
December 31, 2008, audited financials have been completed and issued, we will correct
and restate January, February and March 2009 financial statements as appropriate.
Estimates of future impairment are dependent upon assumptions used in the models, and actual losses incurred could be higher or lower than those projected. In addition, our external auditors have not yet completed their review of the models and assumptions used in the projection of future losses by our third-party providers. However, we do not expect that the completion of the audit will result in any significant differences in the amount of other-than-temporary impairment recorded in our March 2009 financial statements apart from the misstatement of net income (loss) as previously discussed.
WesCorp has elected to early-adopt the provisions of FASB Staff Position No. FAS 115- 2 and FAS 124-2 effective March 31, 2009, as permitted. This new guidance modifies how other-than-temporary impairment is measured and recorded. In those instances where other-than-temporary impairment exists, the impairment is separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of the impairment related to all other factors. WesCorp has calculated the amount of credit loss at March 31, 2009, by taking estimated cash flows provided by Clayton IPS based upon the current yield for fixed rate securities and using forward yield curve assumptions for adjustable rate securities, and has discounted those expected cash flows based upon the same forward yield curve discount assumptions that were used to generate the expected cash flows. WesCorp’s external auditors have not yet completed their review of these credit loss calculations in accordance with SFAS 115-2. The other-than-temporary impairment related to credit losses is recorded as a reduction to earnings while the amount of impairment related to all other factors is recorded as an unrealized loss in other comprehensive income.
We hope to complete the audit of our December 31, 2008 financials very soon. The 2008 financial statements will be adjusted to reflect the same methodology of taking the most conservative result derived from our external or internal analysis, but under the FASB guidelines in effect at the time related to the measurement and recording of other-than temporary impairment. The December 31, 2008 audited financials are expected to show a much larger other-than-temporary impairment charge based upon the prior accounting guidance in effect at the time. As we work our way through 2009 financials now that we have recast our 2008 final numbers, expect some slight changes to our month end 2009 financials, however, the other-than-temporary impairment amount recorded of more than $5 billion is not expected to change materially as of March 31, 2009.
Transfer from Held-to-Maturity to Available-for-Sale
During March 2008, WesCorp transferred all of its Alt-A securities and all but two of its
CDOs into the held-to-maturity classification from the available-for-sale classification in
accordance with SFAS 115. The March 20, 2009 conservatorship of WesCorp represented a significant change in
circumstances that was isolated, nonrecurring and unusual that could not have been
reasonably anticipated when the securities were initially classified as held-to-maturity.
As a result, in accordance with the applicable provisions of SFAS 115, WesCorp has reclassified its held-to-maturity portfolio back to the available-for-sale classification. This accounting classification change will be made effective December 21, 2008 as, at the date of the conservator event, WesCorp had not yet issued its 2008 financial statements. As NCUA has previously stated, it is our intent to hold these securities to maturity.
Member Capital and Paid In Capital Accounts
In accordance with the definitions of membership capital and paid-in capital under Part
704.2 of the Rules and Regulations of the National Credit Union Administration, capital
is available to cover losses that exceed retained earnings. Wescorp’s terms of accounts
for Paid-in Capital (PIC) and Membership Capital Accounts (MCA) also establish
priority for application of losses against the Member Capital Accounts. According to the
terms of accounts, losses that exceed retained earnings must be applied first to PIC and
last to MCA. By application of the terms of account, your MCAs and PIC have been
depleted to cover losses that exceed retained earnings, as mandated by Part 704.2.
WesCorp has derecognized MCA and PIC as of March 31, 2009 through retained
earnings.
NCUA Guarantee
All credit union deposits in WesCorp are guaranteed by the NCUSIF through September
30, 2011. Further, the NCUA has extended that guarantee to accommodate a two-year
rolling expiration date with the option of quarterly extensions through December 2012. If
the option to extend each quarter is fully utilized, the final guarantee would expire
December 31, 2014. Please see the NCUA's web site for further details on the share
guarantee.
Transparency
WesCorp will continue to assess projected losses every 90 days, as well as monitor
projections against actual losses and will report those results to our members. Other
information available for WesCorp members regarding its financials and securities
portfolio are already available on the
WesCorp Member Center—-a secure, online
portal—-in the “Due Diligence” section. Included there are all of the CUSIP numbers of
the securities held in WesCorp’s investment portfolio. Also included is WesCorp’s Term
Investment Portfolio by Asset Group. This document breaks down the entire investment
portfolio by asset class and shows the vintage (the year) of the securities’ issuance and
the amounts held in each class. This document is updated monthly and will be
accompanied by investment staff commentary.
You can find an online copy of WesCorp's financial statement for March here.
For more information, call a WesCorp account executive today at (800) 442-4366, ext. 6307.