With the combined factors of structural changes in NCUA reporting and accounting, ongoing TCCUSF assessments, and a record-low interest rate environment expected to continue through late 2014, credit unions are increasingly looking to measure and benchmark their core operating earnings.
The core earnings ratio looks at net interest income, non-interest income and other operating income, less daily operating expenses as a percentage of average assets. The metric uses this formula to examine credit union’s core business by eliminating extraordinary gains or losses, stabilization expenses, and the provision for loan losses. The average core earnings ratio for credit unions in the U.S. was 1.37% in the fourth quarter of 2011, down two basis points from 1.39% in the fourth quarter of 2010. The ratio declined during 2011 primarily due to lower levels of interest income because of the continued record-low rate environment.
At a national level, the core earnings ratio in recent quarters has proven to be a more stable metric for evaluating credit unions’ performance rather than ROA. This is due to provisions for loan losses remaining above historical norms, and the ongoing stabilization expenses.
While in the short-term a high core earnings ratio may be good for a credit union, keeping it elevated in the long-term won’t allow members to benefit from the earnings. Instead, credit unions should look to balance this number and return value to members, such as through better rates or lower fees.