LENEXA, Kan. — Like other corporates, U.S. Central rode the crest of the Fed funds-Libor ratespread, posting a net income of $30 million forOctober 2008 and increasing year-to-date earnings to nearly $80 million.However, the corporate also reported $4.6 billion in unrealized losses, with investment values losing $800 million during just the month of October. Securities backed by credit cards, auto and student loans accounted for $600 million of the downward adjustment, with the balance in non-agency residential mortgage backed securities.An out-of-whack securities market is to blame, and it affects all financial institutions, not just U.S. Central; however, $4.6 billion is hardly chump change. How long is U.S. Central planning to hold onto its securities portfolio, which has shrunk assets and grown in unrealized losses this year?Executive Vice President of Asset Liability Management Dave Dickens said despite the market value disparity, there are still plenty of reasons to keep those investments on the books. Three hundred and fifty million reasons, to be exact; and, Dickens counts them every month."They are still paying on par every single month to the tune of around $350 million, so what would be the economic reason to sell those loans at 70 cents on the dollar? It makes more sense for us to continue to receive those payments every month, at par, until they're paid off," Dickens said.The ALM exec said there isn't much demand for whole loans, either, but a natural person credit union wouldn't sell off an undervalued loan portfolio if members are paying principle and interest as promised.U.S. Central isn't looking at current and future economic conditions through rose-colored glasses, as Dickens has said he's prepared for another 12 months of recession and a slow recovery."That doesn't mean we won't recover, and that doesn't mean all consumers will stop paying their bills," Dickens said, adding that prudent underwriting and strong member relationships will give credit unions an advantage over other financial institutions, no matter how bad the economy gets.But what about those who can't or won't repay? Certainly, those folks will make the recoverytough, but Dickens said he thinks many overleveraged consumers have already washed throughthe system."A lot of those folks have already toppled some pretty big companies like WaMu, Wachovia, Merrill Lynch, Lehman Bros., Bear Stearns; and, to a lesser extent, Fannie Mae and Freddie Mac," he said. "So a lot of that damage has already occurred. I don't think we can extrapolate the damage that has occurred over the last 12 to 18 months and say the same amount is going to occur over next 18 months."The corporate fully expects to receive $5 billion in revenues from investments during 2009, but as they mature, U.S. Central isn't replacing them with new securities. Instead, the corporate is allowing assets to shrink, providing an extra layer of protection to its capital ratio, Dickens said."That's the deleveraging we've been talking about for the last year," he said. "And, that's part of our strategy going forward. Those securities are on our books at say, roughly 70 cents on the dollar, but the day those repayments come in, they're worth 100% of the dollar. So that, by definition, will reduce our unrealized losses as those payments are received."However, Dickens said the securities that will remain on the balance sheet-U.S. Central's securities have an average weighted life of a little more than four years-will make or break the unrealized loss numbers next year."Determining when the markets will return to normal is the most difficult part, and certainly why we're seeing the Treasury and the Fed continue to come out with all these new programs to try to unfreeze the capital markets," he said. "It's certainly not a corporate credit union problem, it's causing wide spread difficulties, even for schools and municipalities. That's why the government is investing so much money into this, because we need to unfreeze those markets."–[email protected]