One of the most frequently discussed issues in the credit union industry in 2009 was the NCUSIF Stabilization Expense. Whether it was the amount of the assessment, where on the call report to adjust for it, or what quarter to record the expense, there was always uncertainty in trying to track this detail. Although the initial assessment is now behind us, these questions remain due to the potential for another premium expense.
Many Credit Unions Planning for a Second Assessment
Although there has been no official word, many credit unions are anticipating another NCUSIF premium assessment in 2010. In order to avoid being caught off guard, some are accruing a monthly expense for this potential assessment to help minimize its impact on their bottom line. There were numerous ways that credit unions accounted for the original stabilization expense, and we are seeing the same thing again in 2010.
According to a recent survey of 200 credit unions that was shared with Callahan & Associates, 50% are setting aside expenses for the potential future assessment. Of that group, only 25% of them are utilizing the NCUSIF Stabilization Expense line item on the call report. Of the remaining credit unions, 67% are setting aside their funds in Member Insurance Expenses, and the rest are utilizing either Misc. Operating Expenses, or another item on the call report entirely. Clearly the confusion that followed the stabilization expense in 2009 has yet to be remedied.
Stabilization Expense Impacts Key Performance Ratios
This confusion creates difficulty for credit unions as they monitor their own performance. With dual earnings and capital pressures, credit unions are critically evaluating expenses. However, with many accounting for the expense in the Member Insurance Expense line item, this one-time premium is being included as though it were part of a credit union’s operations. In addition, many key performance metrics annualize a credit union's operating expenses, which can greatly overstate the impact of the stabilization expense.
Through the end of 2009, the average operating expense ratio for the credit union industry was 3.21%, a vast improvement from the 3.38% reported in 2008, and the lowest credit unions have seen this ratio in more than five years. Credit unions have made strides in managing expense levels, notably decreasing travel and conference expenses and marketing expenses. Including the NCUSIF Stabilization Expense, however, drastically changes the trend. The operating expense calculation with the stabilization expense included is 3.56% in December, a record high for the industry. This has also caused some debate, as the stabilization expense is not technically a component of a credit union's expenses from operations. This debate will likely continue, as the NCUA has revised their Financial Performance Report (FPR) to include the NCUSIF Stabilization Expense in their operating expense ratio calculation.
The Need for Meaningful Comparisons
The discrepancies in accounting methods have created problems for a credit union tracking its own performance, and for those institutions conducting peer group analysis. For example, if a credit union sets aside expenses for a potential assessment and wants to compare another institution not reserving additional funds, the comparison may not be valid. Additionally, the analysis or trends may reverse entirely if the second credit union accounts for a future expense in one lump sum.
While there is additional complexity to the comparison process, there are ways to make the analysis meaningful (this links to a free CUtv event discussing how to do the steps mentioned below). The first step is to determine how comparison credit unions are accounting for the expense. Check for a balance in the credit union’s Stabilization Expense line item or extreme growth rates in Member Insurance. From this initial step you can begin segmenting a group of credit unions that are adjusting for this expense in a fashion similar to your own institution.
To ensure accurate comparisons, focus on metrics that either include all of the common accounts used for the expense or use none of them. Focusing on these ratios allows the analyst to either capture or avoid the impact of the stabilization expense completely. One metric that excludes the expense is the Core Earnings Ratio. This ratio measures earnings from operations and provides an accurate gauge for the credit union’s core business model. It can be more useful than ROA in certain situations, as ROA can be artificially deflated by the stabilization expense. This is especially important in the first quarter, as annualizing the stabilization expense in the first quarter can vastly overstate the impact that expense will have on the credit union’s income statement.