LENEXA, Kan. (2/14/08)--In a letter to trade press, the president/CEO of U.S. Central (USC) outlined factors that affected the corporate's 2007 performance and led to debt rating change from a rating agency, and concluded USC is still among the top-rated depository institutions in the country, with strong capital and ample resources for liquidity. Francis Lee, president/CEO, noted in the letter that as "an effective buffer to our corporates from much of the disruption in the credit markets," the Lenexa, Kan.-based corporate has "not been immune to the impact of the market dislocation." He addressed the debt rating changes by Standard & Poor's (S&P), Moody's and Fitch. S&P moved its rating from the top rating of "AAA"--which U.S. Central shared with one other depository institution, Wells Fargo--to the second-highest "AA+" rating, shared with two other domestic institutions, Bank of America and U.S. Bank. The high ratings validate U.S. Central's strength and stability, Lee said. Lee also clarified events that occurred in 2007, when the currently unaudited year-end financials showed net income substantially below 2006. He attributed the reduction to $96 million in "unusual investment-related charges, some realized and some unrealized." The charges were partially offset by an additional $40 million in net interest income, compared with 2006. The unusual investment charges consisted of three components:
* An isolation strategy was implemented at the beginning of the market's dislocation, after USC detected "abnormal deterioration in collateral performance of securities in our $40 billion portfolio," said Lee. USC projected likely permanent impairment for 19 bonds and recognized through income a loss of $38 million, leaving a remaining principal balance of $66 million of these bonds. * "U.S. Central had established an Asset Backed Commercial Paper (ABCP) conduit, for the purpose of generating fee income as well as adding an additional source of liquidity. In 2007, that market dried up. Like most conduits, it was required to be consolidated onto the balance sheet. Upon consolidation onto U.S. Central’s balance sheet, these assets were recorded at their fair market value with a charge against U.S. Central’s earnings equal to their unrealized loss, or $31 million. This loss will be accreted to income over the remaining life of the securities (approximately five years) in a similar manner as an investment security purchased at a discount." * USC recorded a $27 million unrealized loss from declining market values of securities classified for accounting purposes as trading. Market value changes on trading are recorded as income or loss immediately (unlike securities classified as available-for-sale).
Of the total unusual charges of $96 million, only $38 million in write- downs represent permanent losses, Lee said. The other $58 million are unrealized losses. USC believes those will be recovered as markets stabilize or as assets approach maturity. "U.S. Central remains one of the most highly rated depository institutions in the U.S. by the three most prominent rating agencies," Lee said. "It has a strong capital level of approximately $2.4 billion and ample resources to provide liquidity to its members--with approximately $3.5 billion in cash and equivalents available and access to more than $20 billion in liquidity," he said. For more detail, see Lee's full letter by using the resource link.