“…while it remains a challenging year, we are still financially strong and expect to remain that way.”

Over the last several months, we have really felt the impact of the struggling economy. Despite this, we are still in great financial shape.

In the month of September, we examined our portfolio of mortgage loans and decided to record “impairment. ‘ Impairment is recorded when you come to the conclusion that the decline in housing values may result in an eventual loss on a loan. We decided to get many of these potential losses behind us by recording a large expense in the month of September.

Many of our members are understandably under financial stress due to job loss and declining income. Our financial counselors have been busy helping these members develop plans so that they can meet their financial obligations to the greatest extent possible. Sometimes, these plans include a modification to their mortgage or other loans with Verity. When this occurs, we record impairment when the amount of the loan exceeds that value of the property. Only after the member has demonstrated the ability to make the new payments do we reverse the impairment.

The extra expense for September due to impairment in our mortgage portfolio was a little over $1.7 million. For the month of September, we show a net loss of over $1.6 million. For the first nine months of 2009, we show a net loss of $1.1 million. This has been an unusual year. In addition to the high loan losses, credit unions were assessed a premium by the National Credit Union Share Insurance Fund to cover the losses at two large corporate credit unions. We do not receive a bailout. We actually fund the bailout for other credit unions.

By taking a proactive stance now, we get a lot of the loan losses behind us. We do expect to continue to experience higher than normal loan losses into 2010, but with the belt-tightening that we are doing, the worst should be behind us.

As of September 30th, our reserve ratio is at 7.76%. The standard for being considered “well-capitalized” is 7.00%, so we have a nice cushion.

In summary, while it remains a challenging year, we are still financially strong and expect to remain that way.

William R. Hayes

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4 Responses

  1. MikeB says:

    I want to believe you, but I’m starting to get nervous. It doesn’t help that today, when I went to my local branch, I saw an advertisement for Verity’s latest 100% financing offer: an 80/20 loan, where the first mortgage is a 5/1 ARM and the 2nd mortgage is a 30-year with a 15-year balloon payment. I couldn’t believe you were offering this. How can you consider that prudent lending? Loans like those caused this mess in the first place!

    So, truthfully, it’s hard for me to see how your balance sheet can be really be so solid if you are still making loans like these. Haven’t we learned our lessons?

  2. Bill Hayes says:

    Great question. We have learned our lesson. Making a mortgage loan where the loan amount is greater than 80% of the appraised value is definitely riskier these days. We only approve a mortgage loan for more than 80% loan-to-value if we have insured the loan. To get insurance, the borrower must be well qualified. We underwrite the loan to our qualifications. The insurance company does the same. We only make the loan if we have confirmation of insurance coverage. Verity pays the insurance premium. To cover the cost of the insurance, we charge a higher interest rate. We actually have not done many of these loans in the last year, probably due to the higher interest rate.

    The risk on our balance sheet is due mainly to the second mortgage loans made in 2006 and 2007. While we have purchased insurance on most of these loans, on a certain percentage of them, we were not able to get insurance. These are the ones that we took impairment on. We have decreased our risk significantly on both the loans in our portfolio and on the loans that we may do in the future.

  3. q8dhimmi says:

    Is that why you have instituted all of these new fees and charges for services that used to be free?

    Where can I see a list outlining total compensation for Verity senior officers?

    I believe credit unions have devolved to be very similar the nefarious savings and loans of the ‘80’s.

  4. Bill Hayes says:

    Thanks for your response.

    Income from fees has become an important source of revenue for all financial institutions, including Verity. Before we institute a new fee or increase an existing fee, we consider the cost of providing the service, fees charged at other institutions, and the expected impact on the volume of the activity. If our analysis leads us to conclude that charging a fee for a service makes good sense, we will do it. We do not expect members to enjoy paying fees, but many of our services provide significant value to our members. The cost of providing services has also increased significantly over the years. We have not recently added or increased fees to any significant extent, however.

    We are required to submit an IRS Form 990 each year. Included on this form is information on compensation to executives. For a copy of this form, you can contact the State of Washington, Department of Financial Institutions.

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