Central 1 Credit Union reported on Friday that its net income fell to $18.2 million in the third quarter of 2010 from $35.5 million the same period last year, partly due to mark-to-market losses.

Central 1 provides liquidity management, payments, Internet banking and trade association services to member credit unions in B.C. and Ontario, and banking and transaction services to customers in the corporate and public sectors.

It reported that bond credit spreads narrowed in the third quarter ended Sept. 30, primarily due to increased demand from international investors. This had a negative effect on its interest margin, but led to mark-to-market gains on held for trading securities relative to interest rate swaps.

However, swap spreads declined in the quarter and together with the flattening of the yield curve, led to mark-to-market losses on the derivatives portfolio and securitization derivatives.

Net operating income in the B.C. system was $102.8 million, down from $126 million last year. In the Ontario system, net operating income was $27.2 million, up from $25.3 million last year.

Deposits and loans increased in both provinces, with strong gains in commercial loans offsetting declines in personal loan growth.

Credit 1’s assets slipped by 2.9% to $10 billion.

“We expected that net income would revert closer to historical levels this year as financial market conditions returned toward normal,” said Don Rolfe, president and CEO. “Our results to date for 2010 are in line with those expectations.”

In the first nine months of 2010, Central 1 posted net income of $30.9 million, compared with $88.7 million in the same period last year.

It experienced higher financial margin and larger trading gains during the nine-month period, but net income was adversely affected by mark-to-market losses due to continuing volatility in the financial markets.

In contrast, in the first nine months of 2009, Central 1 benefited from a highly unusual combination of events in financial markets, including declining interest rates and shrinking bond spreads, resulting in very strong mark-to-market gains that generated record net income.

“We expected that net income would revert closer to historical levels this year as financial market conditions returned toward normal,” said Don Rolfe, president and chief executive officer. “Our results to date for 2010 are in line with those expectations.”

Central 1’s return on equity for the first nine months of 2010 was 7.4%, compared with 24.2% a year earlier.

IE