Credit unions have managed to weather a storm in the third quarter of 2007. While most major headlines painted a bleak picture for financial institutions, credit unions were not subject to near as much volatility as their for-profit cousins. On the banking side, the FDIC reports that over half of all banking institutions reported lower profits in the third quarter. Similarly, the Office of Thrift Supervision reported that overall thrift net income was down 84% from the third quarter of 2006. Although the credit union industry did not go unaffected, the 10.6% annual decline in net income reported in September shows the strength of the cooperative model in times of turbulence.
With a challenging interest rate environment and intense competition, all financial institutions have been struggling to maintain margins and ROA. When viewed on a year over year basis from the third quarter, both net interest margin and ROA have been trending downward for credit unions. Net interest margin is down 27 basis points over the past four years. ROA has been following a similar path as margins tighten, down 31 basis points over the same time frame.
Although these measures are down on an annual basis, when tracked quarterly, they show relative stability in 2007. On a year-to-date basis ROA and net interest margin posted practically no vertical movement, providing credit unions with flexibility as they consider pricing strategies.
On an annual basis, both banks and thrifts have seen a much more volatile path in tracking net interest margin and return on assets. Average ROA from the banking sector fell to 0.92%, down sharply from the 1.21% posted at mid-year and the 1.31% value a year ago. The thrift industry posted a similar drop in the third quarter with average ROA reported at 0.18%, down substantially from the 1.08% average ROA in the previous third quarter.
Third quarter credit union net interest margin averaged 3.14%, up 5 basis points from first quarter. Average bank net interest margins have remained relatively similar to changes in credit union net interest margins. The average bank NIM held steady at 3.3% from the second quarter, although it was down from 3.4% the year before. Changes on the thrift side were again slightly more volatile as NIM in September was 2.6%, down 16 basis points from midyear.
In the third quarter banks increased their loan loss provisions by 120%, versus the 28% increase in credit unions, as the impact of the credit crunch and subprime mortgages was realized. With credit unions focusing on providing members with manageable debt, the impact was not nearly as severe. As competitors struggle with earnings and balance sheet management, credit unions remain in the market for their members due to sound financial management that results from doing right by members.