The Real Story Behind the Decline in Net Income

As earnings have been a major focus in the credit union media, the cause for the decline in net income may not be what you think. Two CUs also share their thoughts on the current environment.


In a recent Washington Post article, several D.C.-area community banks discussed the shrinking margins they were seeing due to the Fed's rate cuts. The rates charged on loans fell as deposit rates remained high since the market is slower to react to rate drops on the deposit side. The same is holding true for credit unions as the net interest margin fell 5 basis points over the past year to 3.12 percent, as the cost of funds increased.

The Real Story: Dividends up $4.1 billion
The 45 percent jump in the provision expense at year-end 2007 made headlines in the credit union press but income after the provision and before dividends actually increased 14.4 percent. The real factor in the earnings decline is not the $1 billion increase in the provision but rather the $4.1 billion increase in dividend expense. Although net income declined by 16.8 percent, the cause of the decline is primarily due dividend increases, highlighting the industry focus on returning value to members at a time when they needed it most.

Return on assets finished 2007 at 65 basis points. The result is down 17 basis points from 2006 and 10 basis points from third quarter. The fourth quarter drop is due to both an increase in the provision expenses and record patronage dividends by credit unions at year-end.

2 Credit Unions Share Their Thoughts
These credit unions approach the margin squeeze in different ways. One looks to improve the bottom line by offering more services that will benefit members, while the other returns more to their members with higher dividends and lower rates, while not putting as high a focus on a high ROA.

"A few lessons – or more accurately, reminders – that we have taken away are that expense control and operating efficiency remain key to financial strength and stability during economic downturns. Also, with narrower spreads, we can't rely so heavily on interest income. Rather, we need to focus on revenues from services like investments, auto services, and insurance products, with the added benefit of deepening relationships with our 140,000 members." - Brett Martinez, President & CEO/Redwood Credit Union

"Our 2007 results were very much in line with our goals for the year. Considering the projected economic conditions and the fact that we consider ourselves to be adequately-to-well capitalized, we set our ROA goal at 0.66%, a level to cover projected share growth. We planned to give more back to our members in the form of dividends, lower loan rates and reduced fees." - John Fiore, MECU (IL)

While responses to the current environment may vary, the fact remains that credit unions are still focused on giving their members the best rates and services possible at the expense of the bottom line.




April 14, 2008


  • Mike compliments the movement with paying dividends at a time members need the money; We must also recognize that increasing dividends is a strategy employed by many to fuel member and share growth, a cost of chasing market share.
    Dan Clark
  • While your insight to the shrinking margin being the culprit to the decline in net earnings is correct, the provision for loan loss remains the story. Most of us budgeted for increased dividends, but not for the losses.