Core Earnings Ratio Stable In 2011

Credit unions reported a two-basis-point decline in core earnings last year.

With the combined factors of structural changes inNCUAreporting and accounting, ongoing TCCUSF assessments, and a record-low interest rate environment expected to continue throughlate 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 unions 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 ratiodeclined during 2011 primarily due to lower levels of interestincome 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 toprovisions for loan losses remaining above historical norms, and the ongoing stabilization expenses.

Core Earnings Ratio
Data as of December 31, 2011 for Selected Peer Groups
Source: Callahan & Associates CUAnalyzer Software.

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.

March 25, 2014

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