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2001 Financial Analysis
 

2001 Financial Analysis

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    2001 Financial Analysis 2001 Financial Analysis Document Transcript

    • 2001 Financial Analysis
    • Table of Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Asset/Liability Management Overview ...................... 7 Interest-Rate Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Credit Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Liquidity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Financial Performance Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Consolidated Statements of Financial Condition . . . . . . . . . . . . . . 35 Consolidated Statements of Income and Comprehensive Income . 37 Key Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Key Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
    • Introduction Expect more from us. We do. Credit unions searching for value in today’s financial marketplace can be assured that at WesCorp, our commitment to their success is paramount in our business strategy. That’s why we developed an infrastructure consisting of experienced professionals with specialized expertise in their fields and operat- INTRODUCTION ing systems unparalleled in the industry. Our economies of scale give us unique strengths, which we pass on to our members. These strengths result in highly competitive yields and value-based products and services. Our commit- ment to continually “raise the bar” on the expectations we have set for our- selves defines the approach we take in living our service quality process. WesCorp carefully WesCorp’s financial performance over the first six months of 2001 gives testi- manages its port- folio to increase mony to this successful business model and to the value WesCorp is posi- its strength and maximize member tioned to offer our member/owners in the credit union community. After earnings. careful examination, this report will underscore what we mean when we say, “Expect more from us. We do.”
    • Dedicated to Strength and Safety from earnings on RUDE and fee income, WesCorp member shares totaled $12.7 billion WesCorp can pay back nearly all investment on June 30, 2001. Far more important than the earnings to its member/owners in the form of size of this number is the fact that, as of high yields on investments, lower loan rates and December 31, 2000, WesCorp held approxi- lower fees on products and services. mately 35 percent of member investments, roughly 20 percent more than the next largest However, the true validation of WesCorp’s suc- investment vehicle and 40 percent more than cess over this period comes from the due dili- that typically experienced by other corporate gence performed on WesCorp by its own mem- credit unions. As proprietor of these invest- ber/owners. Their investments lie with WesCorp, ments, WesCorp has prepared the following dis- and their success is contingent upon WesCorp’s cussion and analysis, which reviews the first six performance, strength and safety. Recognizing months of 2001. the tremendous trust placed in WesCorp as an investment vehicle, it encourages credit unions WesCorp carefully manages its portfolio to to verify its capabilities and performance, criti- increase its strength and maximize member cally assess WesCorp’s risk exposure as of June earnings. WesCorp holds all expanded invest- 30, 2001, and review and judge the adequacy of ment authorities allowed under NCUA Rules the methodologies used to measure and man- and Regulations. The corporate has built $434.9 age risk. The WesCorp team invites your feed- million in reserves and undivided earnings back, questions and concerns. (RUDE). These achievements point to the safety that resides with WesCorp and to its ongoing Why Should Credit Unions Perform a ability to enhance the investment products and Credit Analysis of WesCorp? services it provides. Furthermore, WesCorp can The National Credit Union Administration continue to maintain its goal of self-sufficiency. (NCUA) does not prescribe portfolio composi- By paying 95.9 percent of operating expenses tion for federally insured credit unions. As a 2
    • result, it allows credit unions to place 100 Is the institution growing? Can the institution percent of their surplus funds in their corporate sustain its performance, or is income primarily credit union. In the course of managing a port- from extraordinary gains? The investor should folio, however, NCUA expects all but the small- then determine the risks inherent in an invest- est credit unions to perform an appropriate ment vehicle as a function of its features. To credit analysis at least annually. According to what degree will income or principal vary with “Section B, Credit Analysis,” provided in the interest rates? What is the prepayment penalty? supplementary information to NCUA Regulation, Is the instrument marketable if liquidity is Part 703: “A credit union should review the cor- required? Next, the investor should assess an porate credit union’s earnings performance, investment vehicle’s credit risks through a review capital level, and investment portfolio. A credit of the issuer’s portfolio management policies union also should be aware of the corporate’s and practices. Is debt serviced from current or operating level under Part 704 and its exposure recurring income? To what extent does the to a 300-basis-point shift in interest rates.” issuer measure or manage interest-rate risk? To what extent is the issuer subject to credit risk? Most member credit unions’ deposits in Finally, an investor should assess whether the WesCorp are well above the NCUSIF-insured instrument’s yield sufficiently compensates the limit of $100,000; therefore, the amounts over credit union for the risk it has taken. $100,000 are “exposed” to risk if WesCorp should ever be unable to meet its obligations. A careful review of the following discussion and For this reason alone, it is a prudent business analysis will provide the information a credit practice for uninsured depositors to perform a union needs to make this detailed assessment. credit analysis of any institution in which they The discussion speaks to WesCorp’s perform- invest. Specifically, an investor should assess an ance and the internal factors that contribute to institution’s current performance. Does the insti- WesCorp’s credit risk. tution have sufficient income to pay liabilities? 3
    • Performance Review acquire and maintain sufficient capital for Earnings absorbing the interest-rate risk inherent in the WesCorp’s net income through the second balance sheet and to allow for future growth. quarter of 2001 was $22.7 million. This figure WesCorp’s capital structure consists of three represents a 9.3 percent decrease over the major components: Member Capital Accounts same period in 2000. Net interest income (NII) (MCAs), WesCorp Permanent Capital, and during the first six months of 2001 remained reserves and undivided earnings (RUDE). Total similar to the levels achieved during the same capital at June 30, 2001, was 7.76 percent of net period in 2000. The decrease in net income was assets, well above the 6 percent minimum primarily a result of increases in operating required by regulation. expenses amounting to $3.1 million year-over- year and a one-time transition adjustment The corporate’s investment strategy has recorded as a result of implementing SFAS 133, enabled it to earn a spread sufficient to increase “Accounting for Derivative Instruments and primary capital (retained earnings) without sacri- Hedging Activities” in January 2001, which ficing the rates paid to credit unions. In June reduced income by $1.3 million. Costs related to 1997, WesCorp became the first corporate cred- building a strong infrastructure to support prod- it union to raise additional primary capital ucts and services as well as enhancements to through the issuance of WesCorp Permanent our technology framework accounted for the Capital, Series I. A second issuance—WesCorp increased operating expenses. Partially offset- Permanent Capital, Series II—took place in April ting these expenses were increases in fee 1999. This additional capital has allowed income of $737,000 and increases in gains on WesCorp to continue to provide its member sales of securities of $1.2 million. credit unions with the value-added services and competitive interest rates they have come to Capital Level expect from their corporate. WesCorp has structured its capital program to 4
    • WesCorp, like all corporates, experiences signif- including $1.9 billion held at U.S. Central, $1.8 icant competition for credit union investments billion in federal funds sold, $2.6 billion in inter- and loans. Credit union deposits in WesCorp est-bearing Eurodollar deposits, and $7.9 billion have significantly increased in 2001 as member in term and other securities. credit unions have enjoyed high liquidity levels. This growth was fueled, in part, by increasing Full Expanded Authorities volatility in the stock market combined with WesCorp applied for Parts I, II, III and IV weakening economic data as investors chose to expanded authorities under NCUA Corporate move money into credit unions. At the same Rules and Regulations, Part 704. Following a rig- time, demand for loans declined steadily during orous review by NCUA, WesCorp was deemed the first half of 2001. Today, WesCorp can oper- to have the financial strength and management ate successfully in environments of relatively expertise to earn the maximum authority avail- tight interest margins because it has been build- able for investment activities in the domestic ing core reserves for nearly three decades. financial markets. Parts I, II and IV expanded authorities were granted in 1998 and Part III in Investment Portfolio 2000. These authorities allow WesCorp to oper- WesCorp’s investment portfolio is composed ate with the maximum amount of flexibility largely of overnight investments placed in U.S. needed to serve members’ investment needs. Central Credit Union, federal funds sold, inter- est-bearing Eurodollar deposits, and a well- Accordingly, WesCorp operates under Parts II, III diversified securities portfolio consisting of and IV expanded authorities of NCUA corporate agency securities, mortgage-backed securities regulation, Part 704. Part II authority allows and asset-backed securities. All term invest- WesCorp to set its own limits on investments ments carry AAA ratings or are backed by the and to invest in non-secured obligations, long- full faith and credit of the U.S. government. The term investments, asset-backed securities, and portfolio totaled $14.2 billion at June 30, 2001, others. In recognition of WesCorp’s ability to 5
    • measure and manage the increased risk inher- the potential decline in WesCorp’s net econom- ent in these vehicles, Part II allows the net eco- ic value was 17.8 percent, as indicated by a 300 nomic value (NEV) to decline as much as 50 basis point interest-rate increase. In the unlikely percent as measured by a ±300 basis point event of this major rate increase and assuming shock test. Part III allows WesCorp to further the loss in economic value is fully realized, diversify its investment portfolio into highly capi- WesCorp capital would be reduced to 6.66 talized non-U.S. banking institutions. Part IV percent, well above the regulatory minimum of 6 authority allows WesCorp to engage in deriva- percent. This means that even in the most unlikely tive transactions specifically approved by NCUA. interest-rate scenario, WesCorp’s total capital would remain intact. More importantly, it demon- Derivative-Based Hedging strates the safety and valuation stability of mem- In February 2000, the NCUA board granted ber investments in a volatile rate environment. authority to WesCorp under a provision of NCUA Rules and Regulations, Part 703, to pro- vide financial derivative transactions to federally chartered credit unions to help them manage the interest-rate risk inherent in their balance sheets. WesCorp is the only institution sanc- tioned to provide derivative-based hedging solutions to credit unions. The alternative is for a credit union to undergo its own rigorous review and approval process with NCUA. Exposure WesCorp’s interest-rate risk position is well with- in internal and external limits. At June 30, 2001, 6
    • Asset/Liability Management Overview Strategies WesCorp’s asset/liability strategies maximize net economic value (NEV), subject to risk constraints. The preservation of capital drives the strategic design. In addition, changes in net income (NI) and net interest income (NII) ASSET/LIABILITY MANAGEMENT are important short-term measures of WesCorp’s performance. WesCorp’s board of directors has established a comprehensive set of policies that encompass the overall management of WesCorp’s balance sheet in relation to the management of interest-rate risk, credit risk, liquidity risk, and related operational risk. These policies provide explicit limits, requirements and guidelines in the functional areas of risk assessment and reporting, the WesCorp provides management of purchased funds, the management of investment assets, its members with an optimum combina- and the use of derivative instruments. tion of safety and competitive yields. WesCorp’s strategies recognize that prudent asset/liability management requires the consideration of many factors, which must be coordinated and
    • evaluated from a broad perspective. The provi- WesCorp to provide its members with an opti- sion of investment products to member/owners mum combination of safety and competitive is, however, WesCorp’s historical role and one of yields. WesCorp manages its investment portfo- its principal objectives. This drives both the size lio to achieve a high level of diversification of and composition of WesCorp’s balance sheet. credit exposure to individual issuers, broad WesCorp has a long history of attracting a size- market sectors, and industry and geographic able portion of members’ investable funds. In concentrations. WesCorp also avoids undue addition, WesCorp has a philosophy of consis- concentrations in the aggregate risk characteris- tently paying fair market rates comparable to tics of its portfolio, notably cash flow, repricing, those available on high-quality investments with spread, basis, volatility, and prepayment risks. similar structural and repricing characteristics. The added capabilities provided by Part III WesCorp’s track record demonstrates consider- expanded authorities allow WesCorp to diversify able expertise in this intermediation, and it has even further. pioneered ways to add value to the process. Credit unions do not subsidize the corporate Liabilities through reduced yields. Instead, the income WesCorp segregates its offsetting liabilities into derived from reinvesting these funds reflects the homogeneous groups, referred to as “books- capture of yields due to inefficiencies in the of-business.” Investment policies require each term structure of interest rates, inefficiencies book-of-business to be managed according to within the capital markets, and the assumption risk-and-return benchmarks established by man- of modest amounts of interest-rate risk, credit agement. This asset/liability philosophy pro- risk and liquidity risk. vides for proactive management of WesCorp’s investments and results in maximization of earn- Investments ing capabilities. WesCorp selects investments with strong credit quality and short effective duration, allowing Interest-rate risk strategies are designed to 8
    • coordinate maturity, rate and volume character- interest-rate risk, WesCorp’s board of directors istics of WesCorp’s asset and liability portfolios. has established interest-rate risk, investment, These strategies are developed within estab- and funds-management policies. These policies, lished risk parameter constraints to achieve collectively defined as the asset/liability man- WesCorp’s net income and valuation objectives. agement policies, delineate the maximum allowable changes in WesCorp’s earnings, net Liquidity interest income, net income, and net economic WesCorp actively manages liquidity to meet the value, or, simply, the net worth under various daily cash-flow requirements of member/own- interest-rate scenarios. The policies are ers, investment purchases, advances on reviewed and approved on an annual basis and WesCorp credit lines, and other operational are commensurate with the scope and complex- needs such as internal operating expenses. ity of the risks being assumed. Asset/liability Consumer activity, member credit union actions, and related policies comply with relevant laws economic events and money market trends and regulations. directly affect WesCorp’s cash flow require- ments. Therefore, WesCorp actively monitors WesCorp board members participate in ongo- the impact of economic developments on ing educational activities to better understand market conditions and reviews its balance sheet the nature and potential impact of the asset/lia- so that various actions can be considered to bility risks assumed by the corporate and the ensure the availability of adequate liquidity. prescribed responses controlled by its policies. Because of the complex nature of these activi- Board Oversight ties, the board periodically employs outside The board of directors reviews and approves consultants to confirm the integrity and appro- WesCorp’s strategic business plans, comprehen- priateness of the systems, policies and proce- sive operating policies and risk limits. To meas- dures. ure, monitor and manage prudent levels of 9
    • ALCO tion prior to submission to the board of direc- WesCorp has established a board of directors’ tors for approval. Asset and Liability Committee (ALCO), designed to act as a forum for presenting and discussing Segregation of Responsibilities relevant economic information related to Responsibility for the implementation of the asset/liability management. The committee pro- asset/liability policies, as well as the develop- vides overall management direction, in keeping ment and implementation of management with WesCorp’s strategic and business objec- strategies, has been delegated to the presi- tives and regulatory parameters. Significant dent/chief executive officer (CEO). The CEO has decisions made by ALCO, such as changes to established the Asset and Liability Staff simulation parameters, are subject to board Committee (ALSC) to oversee the day-to-day approval. Board-approved changes are incorpo- management of the balance sheet and to review rated into the applicable policies and proce- the current and prospective financial perform- dures. The committee is composed of three ance of the company. The chief investment offi- board members and members of executive cer (CIO) serves as chairman of the ALSC and staff. ALCO is responsible for ensuring that has been designated as the principal officer sources and uses of funds are priced in a man- responsible for the development and implemen- ner consistent with the asset/liability mandate tation of asset/liability management strategies. for NII. Rates paid by WesCorp on interest-bear- ing liabilities are reviewed to ensure they are The Investments division has principal responsi- competitive in the marketplace and fall within bility for the implementation of asset/liability the guidelines of safe and sound practices. management strategies, pricing of member Proposed changes to the asset/liability policy investment products, execution of investment and periodic reviews concerning settlement, transactions, execution of derivative transactions, counterparty selection and issuer limits are sub- and negotiation of wholesale borrowings. mitted to ALCO for review and recommenda- 10
    • WesCorp is committed to maintaining its com- remain impartial, Risk Assessment personnel are prehensive risk-management capabilities. This not involved in the development or implemen- entails the retention of qualified professional tation of asset/liability management strategies. staff combined with the systems, procedures and controls required to safely manage the bal- A review every other year of the adequacy and ance sheet for the benefit of member/owners. effectiveness of WesCorp’s risk management infrastructure, systems and strategies is per- Given the trust and the concentration of assets formed by an external organization chosen by member/owners have placed in WesCorp, risk ALCO. This review includes, but is not limited assessment is a critical function. Accordingly, to, the effectiveness of the existing committee WesCorp pioneered the creation of an and staff organizational structure and the appro- autonomous Risk Assessment division, inde- priateness of risk-measurement tools and mod- pendent of all other divisions and charged with eling assumptions. measuring and reporting risk directly to execu- tive management, ALCO and the board of Internal Audit directors. The group functions in a manner anal- WesCorp’s Internal Audit Department employs a ogous to WesCorp’s internal audit group and is risk-based auditing plan and schedule governed charged with measuring interest-rate and credit by general auditing standards and principles. risk and reporting the results to executive man- agement, ALSC, ALCO, and the board of WesCorp’s certified professionals perform risk directors. Risk Assessment is responsible for analysis of the corporate’s operational areas risk-assessment-related processes, systems and and, based on the associated risk, prioritize our procedures. It is also responsible for the timely audit schedule and frequency. They conduct production of internal risk-assessment reports, financial, compliance and control reviews to the reporting of policy exceptions, and the man- ensure that all financial statements and disclo- agement of escalation procedures. In order to sures are accurate and reasonably reflect 11
    • WesCorp’s working results. Internal Audit also ensures that WesCorp is in compliance with internal policies, procedures and NCUA rules and regulations. 12
    • Interest-Rate Risk Management Interest-rate risk provides the largest single risk exposure to WesCorp in terms of potential impact on capital and income. The board of directors has estab- lished maximum risk-exposure limits and mandated minimum measurement and reporting requirements. Interest-rate risk is defined as exposure to signifi- cant declines in current and future earnings, as well as exposure to significant INTEREST-RATE RISK MANAGEMENT declines in net worth or primary capital arising from changes in interest rates. Policies are designed to ensure that WesCorp’s balance sheet can always be fully liquidated with a cash surplus. At WesCorp, interest-rate risk arises prima- rily from the cash flow and repricing “mismatches” between the investment instruments WesCorp owns and the deposit products issued to members. This “mismatch,” or managed approach to WesCorp’s balance sheet, is common WesCorp’s substan- among successful institutions that seek to build primary capital. tial investment in a strong infrastructure enables WesCorp to measure, monitor WesCorp maintains a highly qualified staff of asset/liability and investment and manage its multibillion-dollar management personnel, supported by state-of-the-art risk analytics systems. portfolio of fixed- income investments. These systems include the Quantitative Risk Management (QRM) asset/liability
    • system, Salomon YieldBook, Savid International result of WesCorp’s mortgage-backed securities Derivatives System, Bloomberg, and Intex (MBS) portfolio, which carries prepayment or call Solutions. WesCorp’s substantial investment in risk, as well as embedded interest-rate caps. this infrastructure enables it to measure, monitor Simply put, as interest rates decline and mort- and manage its multibillion-dollar portfolio of gage holders refinance their mortgage loans, fixed-income investments. The risk analytics sys- WesCorp’s MBS balances are significantly tems collectively measure the historical return reduced by principal paydowns. The MBS’s price performance in terms of income and market price will not appreciate because it is rapidly being and the prospective returns under a multitude of paid off. In contrast, as interest rates rise, mort- potential interest-rate scenarios. In addition, gage holders are unlikely to refinance their WesCorp is able to “stress” certain investment mortgage loans, lengthening the average life of and share assumptions to reveal potential expo- MBSs. This scenario, combined with the embed- sure to modeling errors and unexpected changes ded interest-rate cap on WesCorp’s floating-rate in modeling assumptions. Examples of these MBSs, results in declines in the MBS’s market assumptions include mortgage prepayments, value. Even though the interest income on the volatility, and changes in the spread relationships floating-rate MBSs does not stop rising in each between different market indexes. of the tested scenarios, it is increasingly more likely that the interest income will stop rising Interest-Rate Risk Limits with increases in interest rates. This causes the WesCorp’s Net Economic Value (NEV) exhibits MBS’s market value to decline and act similarly negative convexity or non-linear changes in net to fixed-rate MBSs. worth between rising and declining interest-rate scenarios. The decrease in NEV in declining WesCorp operates with Part II expanded author- interest-rate scenarios is significantly less than ities under NCUA Regulation, Part 704, which the decline in NEV witnessed in rising interest- would allow WesCorp’s NEV to decline as much rate scenarios. This negative convexity is the as 50 percent as the result of a rate-stress test of 14
    • ±300 basis points (bp). WesCorp’s board of To offset much of the interest-rate cap risk directors has approved limits included in inter- embedded in WesCorp’s MBSs, WesCorp owns nal interest-rate risk policies that allow for a $1.25 billion in interest-rate cap options. These maximum decline in NEV of 40 percent, provid- interest-rate cap options effectively “un-cap” ing a necessary cushion to regulatory limits. much of the current floating-rate MBS portfolio held by WesCorp. The interest income from On June 30, 2001, WesCorp’s maximum net floating-rate MBSs ceases to rise as they reach economic value (NEV) volatility in a +300 bp their lifetime cap, and the interest-rate cap interest-rate increase was -17.8 percent. The options then begin to pay interest income. results of WesCorp’s NEV volatility are shown in the charts below: To mitigate the variety of interest-rate risk inher- Changes in Net Economic Value (NEV) (figures 1 & 2) -300 bp 3 Base +300 bp NEV ($ in millions) $638 $620 $509 NEV (% of change) +3.0 -17.8 1 $700 %5 $600 $638 $620 +3.0 0 $500 %0 $509 $400 %-5 $300 %-10 $200 $100 %-15 -17.8 $0 %-20 -300 bp Base +300 bp -300 bp Base +300 bp NEV ($ in millions) NEV (% of change) 15
    • ent in the balance sheet, WesCorp had approximately $3.0 billion notional amount of interest-rate swaps outstanding as of June 30, 2001. To measure interest-rate risk during a short-term horizon (12 months), WesCorp’s board has estab- lished limitations on the maximum percentage decline of NII of 60 percent and the maximum percentage and dollar decline in NI resulting from a rate stress of ±300 bp of 75 percent and $20 million, respectively. The results of WesCorp’s NII and NI volatility are: Changes in Income (figures 3 & 4) -300 bp 3 Base +300 bp NII ($ in millions) $41.6 $54.9 $57.4 NII (% in change) -24.2 2 +4.5 -300 bp 3 Base +300 bp NI ($ in millions) $15.4 $28.7 $31.2 NI ($ change in millions) NI (% of change) -46.4 4 8.7 %10 $60 0 0 4.5 8.7 $57.4 %0 $50 $54.9 -24.2 -46.4 %-10 $40 $41.6 %-20 $30 $31.2 $28.7 %-30 $20 $15.4 %-40 $10 %-50 $0 -300 bp Base +300 bp -300 bp Base +300 bp NII (% of change) NII ($ in millions) NI (% of change) NI ($ in millions) 16
    • Credit Risk Management Credit risk is the possibility of loss from the failure of a financial asset or instru- ment, counterparty or borrower to fully perform under a credit-related con- tract. At WesCorp, credit risk arises primarily from the potential deterioration in the performance of credit-related financial instruments in its investment portfolio. These instruments primarily consist of asset-backed securities and CREDIT RISK MANAGEMENT mortgage-backed securities collateralized by residential whole mortgage loans. Counterparty credit risk arises from direct extensions of credit, pre- settlement risk on traditional securities transactions, as well as the failure of a counterparty to fulfill its obligations under an off-balance-sheet derivative con- tract. To a lesser degree, WesCorp also is exposed to credit risk from its mem- ber loan portfolio. WesCorp allows investment only in Credit risk is quantified and monitored on a day-to-day basis by the Credit those securities with the highest credit Services division. As a part of the Risk Assessment division, Credit Services ratings from nation- ally recognized regularly reports activities impacting WesCorp’s credit exposure. Reports are statistical rating organizations. made to WesCorp’s ALCO and board of directors, who oversee implementation
    • of the credit policy relating to the investment organizations, such as Standard & Poor’s and portfolio and approve the extension of credit to Moody’s Investors Service. Investments must be various financial institutions with which WesCorp rated AAA, AA, or equivalent. A rigorous, struc- transacts business. Credit matters relating to tured credit analysis is performed both before WesCorp’s member loan portfolio are handled and after purchase of these instruments to by WesCorp’s Credit Committee, which meets at proactively determine if there is deterioration in least monthly and is composed of members of credit quality. WesCorp believes that by remain- WesCorp’s executive staff. ing constantly apprised of the credit quality of its investments, it will be able to identify deteri- Credit Oversight of Credit-Related orating credits before they are subsequently Investment Security Holdings downgraded by rating agencies, and before To mitigate credit risk from its portfolio of cred- they significantly impact profitability. it-related financial instruments, WesCorp’s credit policies place limitations on the amount and Oversight of Counterparty Exposure types of credit risk WesCorp will assume at any WesCorp expects performance by transaction given time. These limitations address credit con- counterparties. However, in the event of nonper- cerns from a variety of perspectives. They formance, it is WesCorp’s policy to monitor include maximum levels of secured and unse- market exposure and counterparty risk through cured assets, permissible concentrations of a variety of control procedures, including mortgage-backed and asset-backed securities, approval of limits for credit-sensitive activities, maximum limitations on issuer types, geograph- mark-to-market securities, and adjustments of ic concentration of credit-sensitive investments, collateral levels, as considered appropriate. as well as limitations on investments in individ- WesCorp’s credit policies require that WesCorp ual issues. WesCorp allows investment only in review the creditworthiness of each counterpar- those securities with the highest credit ratings ty with which it conducts business. Accordingly, from nationally recognized statistical rating WesCorp believes it has effective procedures for 18
    • evaluating and limiting exposure to credit risks of reverse-repurchase agreements. These arising from changes in the market value of transactions are fully collateralized by mar- securities transacted. WesCorp considers the ketable securities. Credit Services establishes credit risks posed by its transaction activities with the required margin levels in accordance with counterparties to be well within acceptable levels. prevailing market conditions and prudent lending considerations. As with transaction In the normal course of business, WesCorp counterparties, counterparties in repurchase enters into securities transactions. In the event agreements periodically undergo credit analyses that a purchase or sale did not settle because of and are approved by the board of directors. the failure of a counterparty to perform, Credit policy requires third-party custodians to WesCorp could incur a loss of anticipated furnish daily market prices on collateral held for income if the market value of the security is sig- WesCorp. WesCorp monitors the market value nificantly higher than the contract price of the of securities held for collateral and obtains addi- transaction. To mitigate this risk, WesCorp trans- tional securities as necessary to ensure that such acts business only with the most creditworthy transactions are adequately collateralized. banks and broker/dealers, as determined by rig- orous credit analyses performed by Credit Under Part III expanded authorities, WesCorp Services. WesCorp is currently placing excess can enter into Eurodollar and derivative short-term liquidity with domestic and interna- transactions with foreign banking/financial tional financial institutions. The board of direc- counterparties. As the U.S. banking system tors approves all counterparties and establishes has consolidated through mergers and acqui- aggregate exposure limits designed to minimize sitions, the number of highly rated counter- the risk to any single counterparty. parties has diminished. Many of the largest and most highly capitalized banking institu- WesCorp also enters into collateralized, short- tions are non-U.S. entities. Part III permits term financing agreements, primarily in the form WesCorp to diversify potential credit expo- 19
    • sure among these stronger foreign institutions. Oversight of Member Borrowing Activity WesCorp’s lending program features various cred- WesCorp was granted Part IV expanded authori- it products to meet members’ liquidity needs. ties under NCUA Regulation, Part 704, that per- WesCorp also makes loans available to mem- mit the use of financial derivative transactions. bers for general purposes, with fixed rates and WesCorp enters into financial derivative fixed terms ranging from two days to ten years. transactions as a normal part of its business for These loans are secured by WesCorp certifi- managing balance-sheet risk to modify the cates, U.S. Treasury and agency securities, a lien interest-rate characteristics of assets and liabili- on specific assets, or a general lien on all assets. ties and to provide attractive investment alter- natives for members. WesCorp is subject to To minimize the risk of loan loss, regulations potential credit risk on these transactions. In the restrict lending to member credit unions and event that a counterparty were unable to fulfill credit union service organizations (CUSOs). its obligations under a contract, WesCorp would Loans are not made to natural-person members. be required to replace that contract at the pre- vailing market rates. The potential credit risk is WesCorp maintains standard member credit the differential between the original contracted policies to closely monitor credit unions with rate and the prevailing replacement rate. It loan accounts. Thorough analysis is performed should be noted that payments are interest only, regularly to evaluate members’ creditworthiness and no principal balances are exchanged in and financial strength. Reviews range from these transactions. Again, WesCorp transacts monthly to once every 18 months. WesCorp’s financial derivative contracts only with the most Credit Committee, consisting of seven staff creditworthy banks and broker/dealers, follow- members appointed by the board of directors, ing a full credit review and board approval. oversees member credit issues in accordance with member loan policy. 20
    • WesCorp has had no credit losses in the past 20 subject to counterparty nonperformance. years. Based on WesCorp’s policies, procedures WesCorp considers the credit risks posed by and loss experience, the board of directors has its transaction activities with counterparties determined it unnecessary to have a provision to be well within acceptable levels. for loan loss. As of June 30, 2001, the total dol- lar amount of loans outstanding was $46.1 million. • As of June 30, 2001, WesCorp had no coun- terparty exposure as a result of securities Asset Quality repurchase activities. • WesCorp’s investment portfolio is composed of $1.4 billion in overnight investments • As of June 30, 2001, the market value of out- placed in U.S. Central Credit Union, $487.7 standing financial derivative transactions million in term investments at U.S. Central, shows that the resultant potential credit risk $1.8 billion in federal funds sold, $2.6 billion from these instruments is negligible. in interest-bearing Eurodollar deposits, and $7.9 billion in a well-diversified securities portfolio consisting of mortgage-backed securities, asset-backed securities and other investments. • As of June 30, 2001, credit-sensitive securi- ties were rated AAA and were performing as expected. The credit ratings of WesCorp invest- ments are depicted on the following page. • As of June 30, 2001, WesCorp had no unset- tled securities transactions that would be 21
    • Term Investments (figure 5a) As of 6/30/2001 Agency CMO 21.9% Agency ARM 3.6% Agency Notes 0.4% U.S. Central 1.9% ABS—Credit Card 8.9% ABS—Student Loans 2.1% ABS—MH 0.3% ABS—Auto 11.5% Private Label MBS 20.8% ABS—HEL 28.6% Total Term Investments $7.99 billion Portfolio Composition (figure 5b) As of 6/30/2001 Govt/Agency 26% AAA 74% Total Term Investments $7.99 billion 22
    • Liquidity Management Strategic Overview The nature of WesCorp’s liability structure requires that a high level of liquidity be maintained in order to meet potential member demands. The monitoring and modeling of WesCorp’s liquidity position is the responsibility of Treasury Operations. The Risk Assessment division is responsible for ensuring that the LIQUIDITY MANAGEMENT models used by Treasury Operations and the various sources of data con- tained in those models provide meaningful results. Risk Assessment is also responsible for ensuring that the contingency funding plan is appropriate for WesCorp’s needs and takes into account potential areas of systematic risk. The key to managing liquidity at WesCorp is measuring, monitoring and antic- WesCorp’s balance ipating changes in member credit union deposit activity, in concert with sheet is driven by the excess liquidity maintaining adequate credit facilities, a ready supply of short-term liquid positions and investment needs of investments and marketable securities. its members. Short-term liquid investments are composed of overnight investments at U.S.
    • Central Credit Union and other short-term com- quickly utilize on-balance-sheet investments by mitments such as federal funds sold and inter- selling securities to meet actual deposit outflows. est-bearing Eurodollar deposits. The type and amount of member and non-member credit WesCorp has established several external (non- union deposits in WesCorp dictate the type and member) sources of funding, in case on-balance- amount of these investments. WesCorp’s ALSC sheet liquidity does not provide the cash establishes the required minimum amount of necessary to meet deposit outflows or credit short-term liquid investments as a percentage of union borrowing. WesCorp has one committed short-term deposits. WesCorp’s board of direc- line of credit totaling $25 million. It also has one tors monitors it monthly. $510 million advised line of credit and several non-committed reverse-repurchase lines. While the limitations are sufficiently broad to WesCorp also established a $1 billion global allow for the effective use of short-term funds, medium-term note program on Aug. 25, 1999. operating targets are influenced by natural- To date, WesCorp has issued $250 million person credit union loan and share growth, against the $1 billion program. There is also a changes in non-credit union business relation- board-approved $1 billion limit on commercial- ships, and general economic conditions. paper issuance subject to certain conditions, which could be activated if needed. WesCorp invests in mature sectors of the capital markets and in investment instruments and Liquidity Benchmarks issuers that exhibit consistency and marketability. WesCorp maintains several sources of liquidity, Often, certain investments considered less both on- and off-balance-sheet. By policy, marketable carry increased returns. WesCorp’s WesCorp’s minimum flash liquidity ratio is 25 strategy calls for a clear prioritization of percent. The current high level of flash liquidity increased market liquidity over increased is appropriate in light of potential demands on returns. This allows WesCorp the flexibility to funds resulting from increased consumer 24
    • borrowing at member credit unions. Corporate Structure Investment Infrastructure When viewing the longer-term liquidity picture, The regulatory and competitive environment the gap ratio must be at least 20 percent in corporate credit unions face today makes it accordance with policy. At the end of June 2001, necessary to have an organizational culture that the gap ratio was 77 percent. An additional form prudently accepts reasonable credit and inter- of liquidity comes from WesCorp’s Available-for- est-rate risk and manages them proactively. Sale (AFS) portfolio, which could be sold to cover additional liquidity demands. WesCorp’s Risk Management Division liquidity ratios as of June 30, 2001, are depicted a) Portfolio Management in figure 6. WesCorp’s balance sheet is driven by the excess liquidity positions and investment Liquidity Ratios (figure 6) needs of its members. Consequently, WesCorp Avg. Flash Liquidity (with PUF) 73% segregates its liabilities into books-of-business. Gap Liquidity (with PUF) 77% Each book is allocated to a portfolio manager in the Portfolio Management group, who prices Monitoring and Assessment and manages specific member investment To remain fully prepared to meet member products and invests those funds in suitable demands for liquidity, WesCorp has committed money market instruments or investment secu- staff and resources to the development, opera- rities. The establishment of specific risk and tion and continued enhancement of a Liquidity return targets for each book facilitates this Planning Model (LPM) that tracks current liquidi- “bottom-up” approach. ty levels and tests “what-if” scenarios of interest- rate shock and unexpected deposit withdrawals. b) Asset/Liability Management The Asset/Liability Management group is responsible for the overall management of 25
    • WesCorp’s balance sheet and hedging activities. d) Broker/Dealer Investment Services By overlaying a “top-down” methodology to As member investment requirements became the micro-management process employed at more complex, WesCorp established a dedicat- the book-of-business level, WesCorp is able to ed group within the Investment Services division ensure that its balance sheet is managed effi- to act as the principal contact with members for ciently and that NII is maximized for the desired credit- and investment-related products and level of interest-rate risk. The Asset/Liability services. The group, composed of Investment Management group is also charged with the Services consultants, provides a conduit for execution of derivative transactions and any hedg- members to access WesCorp’s wide range of ing activities required to keep the overall interest- asset/liability management and capital market rate risk of the company at the desired level. capabilities, expertise and systems. As licensed representatives, the Investment Services consult- c) WesCorp Investment Services, LLC ants also provide direct access to the securities In January 2000, WesCorp established an institu- market for both market intelligence and transac- tional broker/dealer subsidiary, WesCorp tion execution. Investment Services, LLC. This subsidiary was granted membership in the National e) Financial Solutions Association of Securities Dealers (NASD) and In March 2000, WesCorp introduced a general formally began operating in March 2000. The consulting and balance-sheet-management con- broker/dealer underwrites and distributes quasi- sulting service, the Financial Solutions Group. federal agency securities to credit unions The service is designed to help members identi- nationwide, and makes secondary markets in fy and quantify potential problems or opportuni- Treasury, agency and corporate-debt securities. ties that may be inherent in their operations and WesCorp Investment Services also offers invest- to provide practical solutions, including the ment advisory and fixed-income-asset manage- appropriate use of financial derivative ment services. transactions to mitigate unwanted interest-rate 26
    • risk. The Financial Solutions Group provides Data Corp. (IDC). credit unions with access to the resources of WesCorp’s state-of-the-art analytical systems QRM Asset/Liability Model and highly qualified professional staff. QRM provides a proprietary MBS prepayment model, which is segmented by collateral type, f) Investment Operations origination year and gross coupon. QRM also The Investment Operations group provides provides a four-factor template based on a user- credit unions with an outsourcing alternative for defined formula with additional factors covering investment-related functions. It provides policy burnout, seasoning, seasonality and interest-rate and procedure reviews and the 703 compliance incentives. There is also provision for access to service. In support of other initiatives, Invest- prepayment models from outside vendors. ment Operations plans to offer Internet-based bond accounting and derivatives accounting QRM handles most commonly used derivative services in the fourth quarter of 2001. instruments, including futures, options, caps/floors, interest-rate swaps and swaptions. Risk Management Systems The balance sheet optimizer module is used to WesCorp leased the Quantitative Risk analyze the risk profile of particular sectors of Management (QRM) “option-based” asset/lia- the balance sheet, in conjunction with alterna- bility model to perform more detailed and fre- tive hedge instruments to identify the optimal quent portfolio interest-rate-risk analyses. To hedge position. monitor derivatives activity, WesCorp purchased the Savid International Derivatives System. QRM WesCorp’s risk-analytics systems are able to and Savid are further supported by analytics sys- measure exposure to interest-rate risk outside tems such as the Salomon YieldBook and the standard ±300 bp parallel shift in the yield Bloomberg, as well as data and market informa- curve. WesCorp routinely performs additional tion vendors Intex Solutions and Interactive shock tests that include: 27
    • • Ramping interest rates during distinct time horizons • Twisting the yield curve around various term points • Increasing/decreasing prepayment rates • Increasing/decreasing interest-rate volatilities • Increasing/decreasing credit spreads The objective of these additional risk tests is to isolate, quantify and manage various compo- nent risks in WesCorp’s balance sheet. 28
    • Capital Structure WesCorp’s capital structure consists of three major components: Member Capital Accounts (MCAs), WesCorp Permanent Capital, and reserves and undi- vided earnings (RUDE). Financial Statements CAPITAL STRUCTURE MCAs and WesCorp Permanent Capital represent uninsured, long-term own- ership investments and are classified as equity in WesCorp’s published finan- cial statements to denote the ownership interest of WesCorp’s members. This presentation conforms to the statutory definition of the Federal Credit Union Act, as well as the regulatory requirements of NCUA. On Nov. 23, 1999, WesCorp’s board of directors approved a new MCA funding WesCorp’s internal policy calls for a requirement of 5 percent of average non-capital shares held at WesCorp over minimum capital ratio of 6 percent, the previous six months, with a minimum of 1/8 of 1 percent of the credit reflecting manage- ment’s intention to union’s most recently reported assets. Initial funding for a new credit union operate at the high- est authority level admitted to membership was set at the minimum. In addition, all existing available.
    • members at the time of this change were given plus three-year MCAs, plus the non-amortized until Nov. 23, 2002, to initiate and maintain portion of any three-year MCAs which have funding under the new requirement. This provi- given notice of intent to withdraw. (See figure 7.) sion allows existing member credit unions to continue to maintain MCA funding at current Regulatory Compliance levels for a period of three years. Effective Jan. 1, 1998, NCUA Regulation, Part 704, set forth various levels of capital adequacy, Policy Compliance based on the level of investment authority NCUA Regulation, Part 704, defines the regula- sought by the corporate and authorized by the tory capital ratio as month-end capital divided NCUA board. They are 4 percent for base level by 12-month moving-average net assets. This authority, 5 percent for level I authorities, and 6 differs from WesCorp’s internal policy, which percent for level II authorities. Effective June calculates capital ratio using average monthly 1997, WesCorp’s internal policy called for a min- capital divided by average monthly assets. Both imum capital ratio of 6 percent, reflecting man- calculations, however, use the same definition of agement’s intention to operate at the highest capital: RUDE plus WesCorp Permanent Capital, authority level available. Capital Ratios (figure 7) As of 6/30/2001 Actual Minimum Level Primary Capital (per policy) 4.38% 4% Total Capital (per policy) 6.64% 6% Primary Capital (per NCUA Regulation, Part 704) 5.08% 4% Total Capital (per NCUA Regulation, Part 704) 7.76% 6% 30
    • Financial Performance Review Summary of First Half of 2001 WesCorp realized net income of $22.7 million through the second quarter of 2001. Earnings were derived primarily from $34 million in net interest income. Fee-based income continued a historical growing trend and contributed an additional $12.5 million to revenues. Member service-related expenses make FINANCIAL PERFORMANCE up most of the $22.5 million in operating expenses. (See figure 8.) Earnings Ratios (figure 8) As of 6/30/2001 Return on Assets .22% Net Return on Investments (NII) .41% Return on RUDE-Equity E 7.49% Earnings Assets/Total Assets 96.30% Moody’s and Net Interest Income (NII) Standard & Poor’s long-term debt rat- Net interest income (NII) remained fairly stable during the first six months of ings of Aa3 and AA-, respectively, place 2001 compared to the same period in 2000, declining by only $169,000. Figure WesCorp among the highest rated 9 depicts WesCorp’s earnings for the most recent six months and the six U.S. financial institu- tions. months ended June 30, 2000, and June 30, 1999. All figures are in thousands.
    • Net Interest Income (NII) (figure 9) 2001 2000 1999 Total interest income and dividends 376,477 365,019 314,749 Net interest income and dividends 33,997 34,166 29,351 Total non-interest income i 12,533 10,266 8,569 Total operating expenses 22,470 19,355 16,289 Net income 22,736 25,077 21,631 Fee Income from ties safekeeping. While these products and Correspondent Services services are fee-based, many other services (for Item Processing Services example, same-day settlement services) are Through June 2001, WesCorp’s Item Processing offered at no charge. EPS revenue was $1.2 mil- Services (IPS) volumes increased 8.7 percent lion through June 2001, compared to $1.1 mil- over the same period in 2000, and management lion in the same period in 2000. expects growth to continue. IPS income reflect- Comparative Financial ed similar growth with revenues of $9.5 million, Statements a 9 percent increase. Revenues are expected to General continue to grow in 2001, but increased expen- The consolidated financial statements include ditures in item processing services due to imple- the accounts of WesCorp and its wholly owned mentation of image processing will impact subsidiaries, WesCorp Capital Corporation and product profit margins. WesCorp Investment Services, LLC. Electronic Payment Services Income Statement WesCorp’s Electronic Payment Services (EPS) Net income for the first six months of 2001 was provides a wide array of products, including wire $22.7 million, reflecting a decrease of $2.3 million transfers, ACH services, cash orders and securi- 32
    • or 9.3 percent, compared to the same period in by the Federal Reserve Bank regarding the tim- 2000. The decline in earnings is due predomi- ing of available funds. Member Capital nantly to increased operating expenses amount- Accounts increased by $55.6 million. ing to $3.1 million, resulting from WesCorp’s continued commitment to building a strong Derivatives infrastructure, as well as enhancements to its WesCorp implemented SFAS 133, Accounting for technology framework. The decline in earnings Derivative Instruments and Hedging Activities, on was partially offset by increases in fee income of Jan. 1, 2001. As a result, derivative instruments $737,000. previously accounted for off-balance-sheet were measured at their fair values and recorded on the Balance Sheet balance sheet as either assets or liabilities. WesCorp’s balance sheet has grown by 23.7 Adoption of the new accounting standard result- percent year-over-year. On a comparative basis, ed in a cumulative-effect transition adjustment total member share balances increased dramati- being recorded on Jan. 1, 2001, which reduced cally by $4.6 billion, or 56.8 percent. This growth net income by $1.3 million and other comprehen- was a result of increased liquidity levels at mem- sive income by $523,000. ber credit unions as individual investors chose to move money into credit unions. This was par- WesCorp uses selected off-balance-sheet deriv- tially offset by a decrease of $1.3 billion, or ative financial instruments to manage its expo- almost 100 percent, from 2000 levels in public- sure to interest-rate risk. At June 30, 2001, the unit shares, due in part to a reduction in the notional amounts of outstanding interest-rate cap maximum amount that could be deposited in contracts and interest-rate swap agreements WesCorp. WesCorp sets this maximum amount were $1.3 billion and $3.0 billion, respectively. based upon excess capital levels available and reduced it during the early part of 2001 in Ratios response to new processing rules established WesCorp’s capital ratios continue to be healthy in 33
    • 2001. Capital levels are composed of WesCorp’s reserves and undivided earnings (RUDE) of $434.9 million, MCAs of $342.6 million, and WesCorp Permanent Capital of $213 million. WesCorp’s capital ratio exceeds the NCUA Regulation, Part 704, minimum capital level for expanded authori- ties. Total capital ratio (per WesCorp policy) is 6.64 percent as of June 30, 2001, compared to 7.60 percent as of June 30, 2000. Financial ratings Moody’s Investors Service and Standard & Poor’s Corporation continue to grant extremely high rat- ings (P-1 and A-1+, respectively) to WesCorp’s authorized commercial-paper program. Moody’s and Standard & Poor’s long-term debt ratings of Aa3 and AA-, respectively, place WesCorp among the highest rated U.S. financial institutions. 34
    • Consolidated Statements of Financial Condition Unaudited (dollars in thousands) June 30, 2001 2000 Assets Cash and due from banks $ 134,732 $ 121,161 Short-term investments: Daily shares with U.S. Central 1,362,371 2,579,959 Overnight investments with U.S. Central 9,052 35,000 Federal funds sold 1,750,000 800,000 Interest-bearing Eurodollar deposits 2,600,000 - Trading securities (12) 1,000 Securities available-for-sale 7,987,227 6,336,644 Investments held-to-maturity - 719,516 Other investments: Share certificates with U.S. Central 128,444 334,912 Central Liquidity Facility (CLF) shares with U.S. Central 167,167 156,071 Membership Capital Shares with U.S. Central 147,048 175,953 Other 50,616 48,517 Loans to members 46,137 295,399 Interest and dividends receivable 56,388 58,638 Premises and equipment, net 21,205 22,213 Other assets 13,864 13,689 Total assets $ 14,474,239 $ 11,698,672 35
    • Liabilities and Equity Liabilities: Securities sold under agreements to repurchase $ 203,902 $ - Certificates of indebtedness with non-members - 910,765 Federal funds purchased 18,000 - Notes payable to U.S. Central (secured by CLF shares) 167,167 156,071 Medium-term notes 249,031 248,716 Interest payable 3,644 18,273 Dividends payable 26,357 46,364 Accounts payable and accrued expenses 115,057 110,303 Derivative liabilities 13,855 - Total liabilities 797,013 1,490,492 Equity: Shares: Member shares: Market shares 6,540,299 2,669,841 Daily shares 195,858 151,135 Share certificates 5,931,538 5,259,911 Total members’ shares 12,667,695 8,080,887 Public-unit shares 129 1,248,643 Member Capital Accounts 342,628 287,032 Total shares 13,010,452 9,616,562 Permanent Capital 213,074 213,074 Retained earnings, substantially restricted Corporate reserve 93,474 93,474 Contingency reserve for market fluctuations 341,382 312,542 Undivided earnings 35 35 Total retained earnings 434,891 406,051 Accumulated other comprehensive income (loss) 18,809 (27,507) Total equity 13,677,226 10,208,180 Total liabilities and equity $ 14,474,239 $ 11,698,672 36
    • Consolidated Statements of Income and Comprehensive Income Unaudited (dollars in thousands) For the six months ended June 30, 2001 2000 Interest income and dividends: Daily shares with U.S. Central $ 67,578 $ 113,766 Short-term investments 81,840 2,856 Trading securities 7 - Securities available-for-sale 210,810 198,560 Investments held-to-maturity - 24,251 Other investments 13,155 18,389 Loans to members 3,087 7,197 Total interest income and dividends 376,477 365,019 Interest expense and dividends: Securities sold under agreements to repurchase and other 18,193 1,535 liabilities Certificates of indebtedness with non-members - 26,136 Notes payable to U.S. Central (secured by CLF shares) 3,469 4,711 Unsecured certificates of indebtedness with other credit - 24 unions Medium-term note 7,348 8,373 Total interest expense and dividends on borrowings 29,010 40,779 Dividends on shares: Market shares 140,586 81,739 37
    • Daily shares 1,799 1,958 Share certificates 142,453 159,217 Public-unit shares 19,632 38,466 Member Capital Accounts 9,000 8,694 Total dividends on shares 313,470 290,074 Total interest expense and dividends 342,480 330,853 Net interest income and dividends 33,997 34,166 Non-interest income: Fee income 10,659 9,922 Gain on sale of securities available-for-sale 1,283 136 Gain on sale of fixed assets - (1) Other fee and operating income 591 209 Total non-interest income 12,533 10,266 Total operating income 46,530 44,432 Operating expenses: Salaries and employee benefits 11,599 10,000 Office operating expenses 8,015 6,902 Other 2,856 2,453 Total operating expenses 22,470 19,355 Net income before cumulative effect of change in accounting 24,060 25,077 for derivatives Cumulative effect of change in accounting for derivatives (1,324) - Net income $ 22,736 $ 25,077 continued on next page 38
    • Unaudited (dollars in thousands) For the six months ended June 30, 2001 2000 Other comprehensive income: Unrealized net gains on securities available-for-sale $8,416 $16,300 Less: reclassification adjustment for gains included in (1,283) (136) income Other comprehensive income 7,133 16,164 Comprehensive income $ 29,869 $ 41,241 39
    • Key Ratios June 30, 2001 2000 (%) (%) Capital Adequacy Primary capital (per policy) 4.38 5.19 Total capital (per policy) 6.64 7.60 Primary capital (per revised NCUA Reg., Part 704) 5.08 5.32 Total capital (per revised NCUA Reg., Part 704) 7.76 7.78 Net Worth NEV/assets (base case) 4.28 4.93 NEV/assets (300 bp shock) 3.57 4.28 Net Worth/assets (book value) 3.12 3.11 Loans Loans/assets 0.36 2.63 Earnings Ratios (YTD averages) Return on assets 0.22 0.29 Net return on investments (NII) 0.41 0.46 Return on RUDE-Equity 7.49 8.89 Earnings assets/Total assets 96.30 96.40 Liquidity Gap (with public-unit shares) 77 99 Gap (without public-unit shares) 77 99 Avg. flash liquidity (with public-unit shares) 73 93 Avg. flash liquidity (without public-unit shares) 71 88 40
    • Key Management Richard M. Johnson President and chief executive officer Kuppusamy (Sam) Arjunan Director, Internal Audit Robert J. Burrell KEY MANAGEMENT Senior vice president and chief investment officer Edwin Hada Vice president, Investment Operations Dietmar Huesch Vice president, Portfolio Management Dwight Johnston Vice president, Capital Markets Todd M. Lane Senior vice president and chief financial officer Steven M. Powell Senior vice president, Strategic Services
    • Kenneth Shoga Senior vice president, Correspondent Services Timothy T. Sidley Vice president, Risk Assessment David W. Trinder Vice president, Asset/Liability Management 42
    • Definitions Balance sheet ratios – Based on average balances, with the following excep- tions: primary risk-adjusted capital, total risk-adjusted capital, and gap ratios are based on month-end balances; YTD ratios for these categories are based on average month-end data. Capital ratios – Per WesCorp policy, capital ratios are measured on the basis of average monthly capital divided by average monthly assets; capital ratios DEFINITIONS per revised NCUA Reg. 704 are measured on the basis of month-end capital divided by rolling 12-month average net assets. Flash liquidity – The ratio of overnight financial assets to overnight financial liabilities. Gap – The ratio of financial assets maturing in the next six months to financial liabilities maturing in the next six months. Gap ratio – Assets maturing in the next six months as a percent of liabilities maturing during the same period. Net Worth (book value) – Reserves and Undivided Earnings; SFAS 115 adjust- ment is included. NEV – Net Economic Value (the difference of the fair value of assets and liabilities).
    • NEV (300 bp shock) – Net Economic Value in a +300 bp shock environment. The difference of the fair values of assets and liabilities, both measured where the interest rate used in the fair value calculation has been increased by 300 bp from the value used in the base case. Primary Capital – Reserves, Undivided Earnings, WesCorp Permanent Capital (paid-in capital); SFAS 115 adjustment excluded. PUF – Public Unit Funds Total Capital – Primary Capital and three-year MCAs, excluding unamortized portion of three- year MCAs that have given notice. 44
    • 924 Overland Court, San Dimas, California 91773-1750 (800) 442-4366 • www.wescorp.org