Option ARM Securities Helped Hit WesCorp With a $538 Million Net Loss for June
However, U.S. Central's announcement that it will write off nearly half a billion dollars in OTTIs won't affect WesCorp, as the seized corporate wrote off all of its PIC I and PIC II investments-about $114.8 million-as of December 2008.
NCUA Director of Pubic and Congressional Affairs John McKechnie confirmed WesCorp had previously converted all its existing membership capital shares to PIC II when U.S. Central issued it this past December. As such, WesCorp no longer has any exposure to U.S. Central capital, he said.
However, option ARM-backed securities are costing WesCorp and are responsible for the majority of the $541 million OTTI discovered during its second-quarter portfolio review.
"The vast majority came from securities that had already experienced prior credit impairment and had further credit deterioration," WesCorp said in its summary statement. Of the $541 million OTTI, $519 million was recorded on previously impaired securities; only $22 million represented newly impaired bonds.
In total, WesCorp's option ARM investments have resulted in OTTIs worth nearly $4.7 billion, the vast majority of a total $6.1 billion in credit losses recorded as of June 30. Option ARMs originated in 2007 are faring the worst, responsible for nearly half of June's losses.
On the bright side, the permanent credit losses decreased WesCorp's looming unrealized losses, which decreased to $5.8 billion, down from $6.5 billion as of May 31.
WesCorp reported its liquidity remains stable. However, the seized corporate will eventually have to deal with $8 billion in liquidity loans, with the majority obtained through NCUA programs: $5 billion is owed to the Central Liquidity Facility, with another $2.5 billion contributed from CU SIP term notes. McKechnie said the CLF loan is approved through the end of 2009 but can be extended. CU SIP notes expire in early 2010.
WesCorp does have an untapped line of credit available at U.S. Central worth $40 million. However, its $350 million credit line at the Federal Home Loan Bank of San Francisco is maxed out. McKechnie also said the corporate is "pursuing medium-term notes to provide external funding from NCUA and credit unions."
WesCorp is also dependent upon the NCUSIF to guarantee a nearly $4.3 billion undivided earnings deficit. All paid-in capital and member capital accounts were derecognized as of March 31 through retained earnings, leaving the bankrupt corporate with a negative 18.83% regulatory capital ratio.
Member shares have held comparatively steady, at $20.4 billion, compared to $20.7 billion same period last year. In fact, last year's deposit figures included $1 billion in MCAs that has since been depleted.
Despite dismissing 30 employees at WesCorp headquarters and announcing the gradual reduction of another 60 staff, the corporate recorded an increase in employee benefits: nearly $7 million year-to-date compared to $5.4 million same period last year. McKechnie said the increased benefits payout was due to severance packages. Salaries and wages decreased, down to $15.6 million year-to-date compared to $17.4 million for the same period last year, and overall operating expenses decreased more than $2 million compared to June 2008 year-to-date.