What took so long to release the final numbers, and why the big adjustments by external auditors?

A sinking securities market made it difficult to pinpoint the exact value of U.S. Central's investments, forcing accountants to announce a number they knew would likely change, said Kathy Brick, U.S. Central senior vice president and chief financial officer. U.S. Central was expecting to take a hit on some of its residential mortgage-backed securities, she said, but wanted to make sure it accurately determined their value in today's turbulent market.

"A lot more information relative to the numbers was published after year-end, as compared to the information we had available in December," Brick said. "For example, studies by Moody's and S&P this spring gave us information we didn't have a few months earlier."

U.S. Central has used Ernst & Young as its external auditor for the past five years and also brought in a third party for additional portfolio evaluation.

"Relatively speaking, compared to numbers published by other financial institutions, our adjustments were surprisingly small compared to our size, and we feel that is actually a validation of our quality portfolio," Brick said. "I don't want to say we were pleased with the results, but we feel it was a fair outcome and a relatively small number compared to our balance sheet and capital. In fact, we've already recouped half of that loss during first half of 2008."

David Dickens, executive vice president of asset-liability management, said that although U.S. Central doesn't consider any loss to be small, in relation to the corporate's $2.6 billion in capital, $51 million is "extremely manageable," especially considering U.S. Central ended June with $30 million net income on the books.

Ken Ritz, senior director of Fitch Ratings' banking group, said the dislocation in the credit markets, which have caused very wide spreads on U.S. Central's securities, are to blame for the losses, not bad investment decision making.

"These securities are still double and triple A rated securities and have little risk of default," Ritz said. "It's not that corporate credit unions are holding a lot of problematic securities. Even in U.S. Central's case, where they've experienced sizeable losses, the majority of their holdings are still triple A rated securities."

Additionally, Ritz said, corporates operate on thin margins and are set up primarily to provide liquidity and services, not generate profits.

"When we evaluate corporates, while they do have thin capital, they are also very riskless entities, and to the extent that incremental risk is added to the balance, it will have a negative effect on their ratings," he said.

And, even on ratings watch negative, at a downgraded AA+ long-term debt rating, U.S. Central is among only a handful of institutions to be rated that high, Ritz pointed out. Though he said it's unlikely U.S. Central will re-gain a AAA rating in the current securities market, the corporate is still a comparatively strong institution.

NAFCU President Fred Becker said he wasn't surprised to hear of U.S. Central's revised numbers and corresponding losses, and in the grand picture of things, it's not as tragic as a $51 million net loss may sound.

"They've already made half of that back in income this year, and they have exceptional liquidity. And, I think it's important to note that the money might come back. The value of its investments is a picture at this point in time, not a final answer," Becker said.

"Yes, credit unions are having an increase in delinquencies, charge offs and bankruptcies, but if you compare us to the banks, the sun is really shining in credit union land," Becker continued. "The rest of the financial services industry is on its heels, but credit unions are anything but on their heels."

Despite the fact that corporates invest so heavily in mortgage-backed securities, and the investment vehicles have produced losses and plenty of bad press, NAFCU Chief Economist Tun Wai said those bonds aren't as bad as they seem.

"If you look at U.S. Central's portfolio, the quality is excellent, even with all the downgrades that occurred last year," Wai said. "I'm very confident in terms of the quality U.S. Central's portfolio. Just because you're associated with mortgage-backed securities, they're not all bad. You have to look at quality as well."

Wai said he thinks the housing market is experiencing a temporary phenomenon and in the long run, homes make great assets.

"There's only so much land out there and prices will definitely go back up. Another thing is, in the mortgage business, these are long-term cycles we're talking about, so it's pointless to panic," Wai said.

In fact, Dickens said that although mortgage-backed securities make up about half of U.S. Central's investment portfolio, he doesn't expect to take another big loss in his 2008 numbers.

"At this point, based on the work we've done internally, as well as that done by the outside third party, we don't expect to take any additional losses, other than temporary impairments," Dickens said.

Dickens said his numbers include the assumption that the mortgage market will get worse before it gets better.

"The analysis that went into deciding how our bonds will perform certainly builds in expectations of continued falling home values over the next two to three years, so we're not looking at today's data as static," Dickens said. "That's our analysis, as well as the analysis of the outside third party, and it's also similar to the three ratings agencies, as they apply new ratings to a lot of these outstanding mortgage-backed securities."

And, the country's largest financial cooperative won't delay final year-end numbers six months next year, Brick said.

"Going forward, we don't plan on waiting this long, and if we experience any further impairments, we'll take them as they happen, and we will know them with our own processes. Overall, through this experience, we're better poised going into 2008," Brick said of the 2008 reporting cycle.

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