Investment Services
August Financials Exceeding Planned Levels
On a cumulative basis, through the first eight months of 2008, WesCorp continues to record strong earnings well exceeding planned levels. For the month ended August 31, an overall increase to retained earnings was recorded amounting to $5.3 million, comprised of net interest income of $10.6 million (which includes $376.1 thousand of gain on financial assets) and other operating income of $2.5 million offset by other operating expenses of $7.2 million and PIC dividends of $.6 million.
The increase to retained earnings for August 31 was $5.3 million (after distribution of PIC dividends), which is above plan by $2.8 million. On a year-to-date basis WesCorp’s increase to retained earnings was $35.4 million, which is ahead of budgeted amounts by $25.6 million. Average member balances declined $1.4 billion from July to an average of $18.7 billion for August. This decline is in line with normal seasonal patterns for this time of year.
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 August. With continuing news of major problems in mortgage loans, the viability of FNMA and FHLMC came under severe scrutiny. Their stock dropped precipitously causing a rushed Governmental support plan to be implemented. Despite passing of the support plan, pressure continued and, although both agencies were able to issue debt, their spreads to Treasury widened. As concern for the ability of the consumer 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. This only adds to the problems when willing house buyers with good credit standings are not able to raise financing. All the adverse news coupled with continued forced liquidations by leveraged funds, has continued to make markets nervous and react negatively to any bad news that comes along.
Given these conditions, the month of August saw aggregate unrealized losses in WesCorp’s security portfolio and hedge positions increase to $1.7 billion from $1.6 billion at the end of July. WesCorp believes the depressed fair values are attributable to the dislocation in the securities market caused by the current illiquidity and credit conditions and not the underlying credit quality of our holdings. Although the majority of the securities we hold in our portfolio continue to perform well and retain their high ratings, the portfolio continues to be impacted by the overall mentality that’s been paralyzing the markets for some time. As WesCorp has the ability and intent to hold these investments until a price recovery occurs or maturity, these investments are not considered by management to be other-than-temporarily impaired.
In March, WesCorp re-designated $9.7 billion in securities, formerly classified as “Available-for-Sale” to “Held-to-Maturity.” At August 31, these securities amounted to $9.4 billion. 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 re-classification more accurately reflects WesCorp’s intent and ability to hold them to maturity.
SECURITY HOLDINGS EXPECTED TO PERFORM
WesCorp remains very confident that the majority of our security holdings will continue to perform to expectations, and return principal and interest in full. We continue to perform, internally, extensive cash-flow analysis on a monthly basis using some of the most comprehensive and sophisticated cash-flow modeling available. WesCorp’s 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 very proactive in seeking external validation of our own due diligence. As the credit crisis began to accelerate last Fall, we had 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 over 139 securities. Given the results of our internal analysis and the external independent validations, to date WesCorp has not had to recognize anything as “other-than-temporarily-impaired” (OTTI) in our income statement, in accordance with FASB Staff Position Nos. FAS 115-1 and FAS 124-1.
LEVEL 3 PRICING
WesCorp moved to Level 3 pricing, in accordance with SFAS 157, on parts of our portfolio at the end of March because market conditions caused some of the external pricing services that were in use to become unreliable, as evidenced by erratic and inconsistent pricing among similar securities. Those conditions persist today. The Level 3 pricing schema was discussed with NCUA and our 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.
LIQUIDITY
WesCorp’s liquidity is derived from our strong relationships with our member/owners and access to the wholesale funding markets. At the end of August, WesCorp held $3.8 billion in cash equivalents invested in short-term (seven-day or less) investments, predictable runoff from existing term investments and access to external sources of funding.
We have a $1.2 billion advised line of credit from U.S. Central, a $2-billion Global Medium Term Note Program, access to the Federal Home Loan Bank, and a large number of Federal Funds lines from a wide range of global financial institutions in addition to ongoing support from our members and securities available for collateralized borrowing purposes.
EXTENSIVE EXPERTISE
The extensive expertise of our portfolio managers and investment professionals are bringing added value not only to our strength but also to our team effort, day in and day out. At a time when all financial institutions find their investment portfolios to be saddled by market volatility, WesCorp is tapping into its experience and expertise, managing our portfolio, continually applying shock tests along with analytics, and having our findings confirmed by independent, third-party companies such as RiskSpan and the large Wall Street investment banks. After all, the trust you place in us requires that we do no less.
You are our strength, and the solidarity you show by your continued confidence and trust in WesCorp will ultimately be seen as the defining edge of success for our financial cooperatives during this market dislocation.
You can find an online copy of WesCorp's financial statement for August here.
For more information, call a WesCorp account executive today at (800) 442-4366, ext. 6307.