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U.S. Central investments strategy firm
LENEXA, Kan. (12/5/08)--U.S. Central has a strategy firmly in place for weathering the economic downturn’s impact on its balance sheet. While patience is a key part of that, it is not a “wait and see” strategy. “The Fed and the Treasury are consistently introducing new programs because the market continues to be frozen. As a result, U.S. Central is still reluctant to sell its securities while the market value is dislocated or not rational,” said David Dickens, executive vice president of asset liability management at U.S. Central. “This is evidenced by the continual rollout of new programs from the Fed and Treasury.” As of Oct. 31, U.S. Central had $37 billion of assets on its balance sheet. That’s off by $9 billion compared with October 2007, which had $46 billion on the balance sheet, Dickens told News Now. “We have let the investments mature off at 100 cents on the dollar. We can sell them early for 60 cents to 85 cents on the dollar, but we’re being very patient, letting the investments mature off instead,” he said. U.S. Central is making a “conscious decision not to reinvest so we can shrink our balance sheet. We’re projecting over the next 12 months additional maturities of about $5 billion more. That’s assuming we don’t sell bonds in addition to what matures. If we sell them, the reductions would be larger.” So what is U.S. Central telling credit unions and corporates to do to ease the impact of the economy on their own balance sheets? Individual, natural-person-based credit unions are making a lot of loans to their members, who can’t get them from other financial institutions in a tightening credit market. “Credit unions have a long history of making high-quality loans,” Dickens said. Corporate credit unions make few loans, but “they are very attuned to the liquidity environment,” Dickens said, adding, “They have a similar strategy (to U.S. Central’s). They are holding their balance sheet size steady or shrinking it.” The advantage of shrinking the balance sheet is that it raises capital ratios because there are fewer assets supported by capital. The past year has seen “a significant reduction in balance sheet size,” Dickens said. “But, we talk about the patience involved with investments we have that are good. It would be a very bad financial decision to sell into a dislocated market. A more prudent move is to let good investments pay down as they are scheduled to do,” Dickens said. The $9 billion reduction in the investment portfolio is not all due to repayments and paydowns. “We’ve also sold about $1 ½ to $2 billion in bonds, so we’re not just taking a passive strategy. We’re actively reducing holdings as opportunities allow. It’s not a wait-and-see approach,” he told News Now. And next year, it will be $5 billion smaller than today’s asset size. That’s part of our strategy. We have enough liquidity to weather through until the economic recovery arrives,” he added. U.S. Central’s financials for the month of October recorded net income of nearly $30 million, with year-to-date earnings at $75.9 million, according to the monthly financials report on its website. Net losses for the month totaled $1.4 million, with net unrealized losses on securities classified as trading, jumbo mortgage loans held for sale and SFAS 133 hedge ineffectiveness comprised most of the loss.


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