A
Quiz - 9-11-08
I would like to begin this letter with a quiz.
QUESTION:
How do over 800 community banks and credit unions, who DID
NOT
participate in the heady and risky sub-prime lending of the past
several years, become financially impacted as a result of sub-prime?
ANSWER:
Freddie Mac and or Fannie Mae!
In
today’s financial climate, it is impossible to pick up a
trade journal,
your hometown newspaper, or turn on a radio or television set
and
not have the first bit of news be about these two quasi government
agencies that have just been taken over, rescued, nationalized (I am
unsure which) by our federal government. So, how could these
800+
small conservative and successful community banks and credit unions get
hurt by this government action? The answer is that we all
owned
either common or preferred stock in these organizations as part of our
investment portfolio. As a consequence of the
government action this past Sunday, the common stock has been
essentially wiped out and the preferred stock has a value of
less
than 5% of its original value.
I cannot comment if these
actions were warranted by our government, as my vision of the world is
somewhat smaller. However, I can tell you that our financial
world has changed and we must be very cautious and prudent in all
future transactions. What we used to
rely on cannot
be trusted and must be tested.
How does this affect United Labor Bank?
Last
year, United Labor Bank purchased $1 million of Fannie Mae preferred
stock, with a dividend coupon of 8.25% as part of our $75+
million securities investment portfolio representing less than 1.5% of
the total portfolio. At the time of the purchase it was
considered a “high grade” investment. As
a result of this recent
government action, United Labor Bank will write the investment down to
zero value as a prudent action. We will take a one
time
charge to income in September, the last month of our fiscal year.
We will reduce our annual estimated net income by
approximately
50% for the 2008.
On the positive side, we will remain
well capitalized and still have a net income for 2008.
Additionally, we have reserves established for events such as
these for both the bank and the parent company. We remain a strong
and a viable enterprise serving our clients
and shareholders.
Next Steps for United Labor Bank
We
have completed a review of the balance of our investment portfolio.
Management and the Board believe we are in a strong financial
condition with the balance of the portfolio represented by U.S.
Government Securities and mortgage backed obligations.
As a
result of our strong lending activity in the last 6 months, we look
forward to the 2009 business year to exceed the 2008 projected earnings
(prior to the write down) by 18% to 20%.
In closing, I would
like to assure you that Management and the Board of Directors will
continue to make every effort to provide a safe environment for our
Depositors, Shareholders and Team Members to INVEST,
BANK & WORK at United Labor Bank.
With regards,
Malcolm F. Hotchkiss
President and Chief Executive Officer
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